CONTENT

Sl. No. Particulars Page No.

Syllabus 3
Unit - 1 Introduction and Concept 5
1. Company - Concept 5
2. Historical development 7
3. Nature and characteristics of company 15
4. Kinds of company 23
5. Corporate personality 38
6. Limited liability 39
7. Lifting of corporate veil 44
8. Promoters – duties and liability of promoters 51
Unit - 2 Incorporation 60
1. Procedure of incorporation 60
2. Certificate of incorporation 70
3. Memorandum of Association (MOA) 71
4. Articles of Association (AOA) 87
5. Doctrine of indoor management 94
6. Prospectus 96
Unit - 3 Management and Control of Companies 103
1. Board of Directors 104
2. Meetings 109
3. Resolutions 116
4. Distribution of powers between Board of Directors and general meeting 117
5. Directors 118
6. Corporate social responsibility 124
7. Prevention of oppression and Mismanagement 126
Unit - 4 Financial structure of company 133
1. Shares 134
2. Dividends 145
3. Buy back 150
4. Debentures 160
5. Acceptance of Deposit by Companies 166
Unit - 5 Reconstruction and amalgamation and winding up 175
1. Reconstruction, rehabilitation, and amalgamation 175
2. Winding up 179
3. Modes of winding up 200
4. Who can apply 201
5. Procedure under different modes 202
Bibliography 204

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 SYLLABUS
Objectives:

In view of the important developments that have taken place in the corporate sector, the
course is designed to understand the formation, management and other activities of the companies.
Important regulations pertaining to the issue of shares and the capital raising have come into force.
This course aims to impart the students, the corporate management, control, possible abuses, the
remedies, and government regulation of corporate business and winding up of companies.
Course contents:
UNIT – I
Introduction and Concept
Company – historical development – nature and characteristics of company – kinds of company –
Corporate personality – limited liability – lifting of corporate veil – promoters – duties and liability
of promoters
UNIT – II
Incorporation
Procedure of incorporation – certificate of incorporation – MOA – AOA – Doctrine of indoor
management – prospectus
UNIT – III
Management and Control of Companies
Board of Directors – powers and functions: Distribution of powers between Board of Directors
and general meeting
Directors: appointment – qualification – position of directors – types of directors – powers and
duties of directors – remuneration – removal
Meetings: Meetings of Board and Committees – kinds of meetings – procedure relating to
convening and proceedings at General and Other meetings – resolutions – Prevention of oppression
and Mismanagement
Corporate social responsibility
UNIT – IV
Financial structure of company
Sources of capital: Shares – types – allotment – transfer of shares – rights and privileges of
shareholders – dividends – declaration and payment of dividends, prohibition of buy back – private
placement –

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Debentures – floating charge – appointment of debenture trustees and their duties – kinds –
remedies of debenture holders – redemption
Acceptance of Deposit by Companies, charge on assets
UNIT – V
Reconstruction and amalgamation and winding up
Reconstruction, rehabilitation and amalgamation: concept – jurisdiction and powers of courts and
NCLT – vesting of rights and transfer of obligations – takeover and acquisition of minority interest
Winding up: concept – modes of winding up – who can apply – procedure under different modes.
Prescribed Books:
1. Taxman, Companies Act 2013.
2. Singh, Avtar, Company Law, (Lucknow: Eastern Book Company,2007)
Reference Books:
1. Ramaiah,A, Guide to Companies Act, (Nagpur: Wadhwa, 1998)
2. Shah, S.M., Lectures on Company Law, (Bombay: Tripathi, 1988)
3. Kuchal, S.C, Corporation Finance: Principles and problems, 10th Edition, (Chaitanya
Publishing House, 1973)
4. Y. D. Kulshreshta, Government regulation of financial management of private corporate
sector in India, Indian Law Institute, (1986)
5. S. K. Roy, Corporate Image in India A Study of Elite Attitudes towards Public and Private
Industry, (Shri Ram Centre for Industrial Relations and Human Resources ,1974)
6. Gower, L.C.B, Principles of Modern Company Law, (London: Sweet & Maxwell, 1997)
7. D. L. Majumdar, Towards a philosophy of Modern Corporation. (Asia Publishing House,
1967)
8. Pennington, Robert R., Pennington’s Company Law, (U.K: Oxford University Press, 2001)
9. Rajiv Jain, Guide on foreign collaboration – Policies & Procedures (Vidhi Publication,
2007).
10. C. Singhania, Foreign collaborations and Investments in India – Law and procedures,
(Fred B. Rothman & Co, 1999)
11. Joyant M Thakur, Comparative Analysis of FEMA – FEMA Act, 1999 with FERA.
12. Sanjiv Agarwal, Bharat’s guide to Indian capital, 2nd Edition, (New Delhi: Bharat Law
House Pvt Ltd, 2001)
Note: The course teachers have to keep track of the notification regarding enforcement of the
Companies Act, 2013 and teach the provisions enforced. For the provisions not enforced, the
parallel provisions from the Act of 1956 are to be taught.

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 UNIT – 1

INTRODUCTION AND CONCEPT

Synopsis

 Introduction
 Meaning of a Company
 Definition of Company
 Historical Development
 Nature and Characteristics of a Company
 Kinds of Company
 Corporate Personality
 Limited Liability
 Lifting of corporate veil
 Promoters
 Duties of Promoter
 Liabilities on Promoter

Introduction

The concept of ‘Company’ or ‘Corporation’ in business is not new but was dealt with, in 4th
century BC itself during ‘Arthashastra’ days. Its’ shape got revamped over a period according to
the needs of business dynamics. Company form of business has certain distinct advantages over
other forms of businesses like Sole Proprietorship/Partnership etc. It includes features such as
Limited Liability, Perpetual Succession etc.

After reading this lesson, you would be able to understand the historical development in the
evolution of corporate law in India and England, emerging regulatory aspects including Companies
Act, 2013, besides dealing with basic characteristics of the company and how it differs from other
forms of businesses.

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Meaning of a Company

The word ‘company’ is derived from the Latin word (Com=with or together; panis =bread), and it
originally referred to an association of persons who took their meals together. In the leisurely past,
merchants took advantage of festive gatherings, to discuss business matters.

Nowadays, business matters have become more complicated and cannot be discussed at festive
gatherings. Therefore, the company form of organization has assumed greater importance. It
denotes a joint-stock enterprise in which the capital is contributed by several people. Thus, in
popular parlance, a company denotes an association of likeminded persons formed for the purpose
of carrying on some business or undertaking.

A company is a corporate body and a legal person having status and personality distinct and
separate from the members constituting it.

It is called a body corporate because the persons composing it are made into one body by
incorporating it according to the law and clothing it with legal personality. The word ‘corporation’
is derived from the Latin term ‘corpus’ which means ‘body’. Accordingly, ‘corporation’ is a legal
person created by a process other than natural birth. It is, for this reason, sometimes called an
artificial legal person. As a legal person, a corporation can enjoy many of the rights and incurring
many of the liabilities of a natural person.

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.

Definition of Company

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)].

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In common law, a company is a “legal person” or “legal entity” separate from, and capable of
surviving beyond the lives of its members. However, an association formed not for profit also
acquires a corporate character and falls within the meaning of a company by reason of a license
issued under Section 8(1) of the Act.

A company is not merely a legal institution. It is rather a legal device for the attainment of the
social and economic end. It is, therefore, a combined political, social, economic and legal
institution. Thus, the term company has been described in many ways. “It is a means of cooperation
and organization in the conduct of an enterprise”.

It is “an intricate, centralized, economic and administrative structure run by professional managers
who hire capital from the investor(s)”.

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.

The persons who contributed in it or form it, or to whom it belongs, are members. The proportion
of capital to which each member is entitled is his “share”. The shares are always transferable
although the right to transfer them may be restricted.”

From the foregoing discussion, a company has its own corporate and legal personality distinct
which is separate from its members. A brief description of the various attributes is given here to
explain the nature and characteristics of the company as a corporate body.

Historical Development

As we all know that India has drawn a lot of legislation from England. Similarly, in the case of
Companies law, India enacted company law based upon the company law enacted in England. The
three phases which influenced the Company legislations may be divided as i) Colonization era; ii)
Period after World War II & iii) the Opening up of Indian markets in the year 1990.

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Legislation Enacted

In the year 1850, the first Company enactment for the registration of the joint-stock company was
introduced in India. This enactment as mentioned before was based upon the English Companies
Act, 1844.

Later in the year 1857, the concept of limited liability was recognized in the companies legislation
but the said limited liability was not extended to the banking company. The concept of limited
liability into the Companies Act was introduced earlier in the English Companies Act of 1856. But
by the year of 1858, the concept of limited liability was extended to banking company even in
India.

In the year 1866 Companies Act was yet again passed for consolidating and amending the laws
relating to incorporation, regulation and winding up of trading companies and other associations.
This Act was based upon the Companies Act 1862 of England. This Act was recast in the year
1882 and was in use until 1913.

In the year 1913 another Indian Companies Act was enacted based upon English Companies
Consolidation Act, 1908. Companies Act of 1913 was amended in the year 1914, 1915, 1920,
1926, 1930 and 1932. But the major amendment to the Companies Act of 1913 who was made in
the year 1936 this amendment was based upon the English Companies Act. 1929. The act of 1913
regulated the Indian business company until 1956.

By the end of 1950, Bhabha committee was set up under the chairmanship of H. C. Bhabha. For
the difference of Indian Companies Act with reference to the development of Indian trade and
industry.

The committee submitted its report on 1952, this report of Bhabha committee was accepted
Companies (Amendment) Act, 1956. This legislation was made keeping in mind the English
legislation of Companies Act in 1948.

Act of 1956

The period of the Second World War and the post-war years witnessed an upsurge of Industrial
and commercial activity on an unprecedented scale in India and large profits were made by
businessmen through incorporated companies. The Government of India took up the revision of

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Company Law immediately after the termination of the last war. Two company lawyers— one
from Bombay and the other from Madras— were successively appointed to advise Government
on the broad lines on which, the Indian Companies Act, 1913, should be revised and recast in the
light of the experience gained during the war years. Their reports were considered by Government
and a memorandum embodying its tentative views was circulated towards the end of 1949 for
eliciting an opinion.

On 28th October 1950, the Government of India appointed a Committee of twelve members
representing various interests under the chairmanship of Shri H. C. Bhabha, to go into the entire
question of the revision of the Companies Act, with particular significance to the development of
trade and industry of India. This Committee, popularly known as the Bhabha Committee,
submitted its report in March, 1952, recommending comprehensive changes in the Companies Act
of 1913. The report of the Bhabha Committee was again the subject of discussion and comment
by Chambers of Commerce, Trade associations, professional bodies, leading industrialists,
shareholders and representatives of labour. The Bill, which eventually emerged as the Companies
Act, 1956, was introduced in Parliament on 2nd September 1953. IT was a comprehensive and
consolidating as well as amending piece of legislation. The Bill was referred to a Joint Committee
of both Houses of Parliament in May 1954. The Joint Committee submitted its report in May 1955,
making some material amendments to the Bill. The Bill, as amended by the Joint Committee,
underwent some further amendments In Parliament and was passed in November 1955. The new
Companies Act (I of 1956) came into force from 1st April 1956.

Major Changes brought forth by the Companies Act 1956

 Promotion and growth of Companies.

 Capital structure of the Companies.
 Company meetings and procedures.
 Company accounts and its presentation & powers and duties of the auditors of the
company.
 Inspection and investigations of the affairs of the Company.
 The constitution of the Board of Directors, Powers and functions of directors, Managing
Directors and Managers; and
 Administration of the Company Law.

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The Amendments in the Companies Act, 1956

As any other legislation various amendments were made to the Companies Act 1956 as mentioned
below:

Timeline of Amendments

1960 1962 1963 1964 1965 1966 1967 1969 1974 1977 1985 1988 1991

Opening of the market gates to the Globe-1990

The Era of liberalisation, privatization and globalisation saw the anachronistic Companies
legislation made in time of closed market and hence inadequate to handle the global entry. This
non-conducive legislation would have obstructed the Indian Corporate Sector. In pursuance to this
necessity the Companies Bill, 1993 was formed but was later withdrawn. The Depositories Act,
1996 was introduced in India and later a working Group was constituted to rewrite the Companies
Act, 1956. In pursuance to above made effort the Companies Bill, 1997 was introduced in Rajya
Sabha on August 14, 1997 in order to replace the prior legislation.

The President of India promulgated the Companies (Amendment) Ordinance, 1998 on October 31,
1998. But this promulgated the Companies (Amendment) Ordinance, 1998 was soon replaced by
the Companies (Amendment) Act, 1999.

The objectives of the Companies (Amendment) Act, 1999:

 To surge the capital market by boosting the morale of the National business houses.
 Fostering the FITs and Foreign Direct Investments in the country.

The changes brought by the Companies (Amendment) Act, 1999 are:

 A facility was introduced to allow the Corporate Sector to buy-back company’s own share.
 Provisions relating to investments and loans were liberalised and rationalised.
 Requirement of prior approval of the Central Government on investment decisions was
done away with and companies were allowed to issue “sweat equity” in lieu of the
intellectual property.
 The compliance of the Indian Accounting Standard was made mandatory and the National
Committee on Accounting Standard was also incorporated.

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  The benefit of the investors was looked into by setting up “Investor Education and
Protection Fund”.
 Introduction of the nomination to shareholders, debenture holders, etc.

Later, the Companies (Amendment) Act, 2000 was enacted, which was followed by the Companies
(Amendment) Act, 2001 wherein the Section 77A was introduced in relation to buy-back of the
shares. This amendment allowed the Board of Directors to buy-back the shares upto 10% of the
paid-up capital and free reserves provided not more than one such buy-back is made during the
period of 365 days. Then, the Companies (Amendment) Act, 2002 was enacted which was
followed by the Companies (Second Amendment) Act, 2002. The first amendment introduced the
setting-up and regulation of the Cooperatives as a body corporate under the Companies Act, 1956
to be called ‘Producer companies. The Second Amendment was to expedite the winding-up
process of the companies to facilitate rehabilitation of the sick companies and protection of
workers interest.

The Companies (Amendment) Act, 2006, was brought into force on 1.11.2006 wherein it
introduced the Director Identification Number (DIN) and also introduced electronic filing of
various returns and forms.

The New Enactment of the New Society

The Companies Act, 2013 replaced the Companies Act, 1956. The legislators introduced ideas of
the likes of:

 Corporate Social Responsibility (CSR)

 Class action suits
 Fixed term for the Independent Directors
 The provision of raising money from the public was made little stringent
 Prohibition on insider trading by company directors or key managerial personnel by
declaring such activities as a criminal offence
 It permits shareholder agreements providing for the ‘Right of First Offer’ or ‘Right of first
Refusal’ even in the case of Public Companies

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The Companies (Amendment) Act, 2015: It received the presidential assent on May 2015 and
became operate on 29th May 2015. It is designed to address the issues of the stakeholders such as
Chartered Accountants and other professionals.

Key Amendments brought in by the Companies (Amendment) Act, 2015 may be explained as
follows:

No minimum Paid-up share Capital

No minimum paid-up share Capital requirements will now apply for incorporating private as well
as Public Companies in India.

Relaxation in relation to related party transaction

In the case of related party transactions which requires stake-holders approval relaxation has been
given wherein earlier required special resolution has been replaced by the ordinary resolution.

Inspection of the resolution filed with the Registrar

This Act has limited public access of such resolutions relating mainly to the strategic business
matters. Such documents will no longer be available for the public to review or permitted to take
copy of.

Common Seal Optional

Under the Act of 2013 it was required to affix common seal on certain documents but, now after
the Act of 2015, the use of the common Seal has been made optional although the common seal is
one of the integral characteristics of a Company.

Violations of Acceptance of Deposits

Companies Act of 2013 provisions in relation to the Acceptance/ renewal/ repayment of deposits.
However no specific penalty prescribed for the new compliance with the relevant provision
i.e. Section 13 and Section 76.

A new Section 76A has been introduced for these non-compliances. The defaulting company will
be liable for a minimum fine of INR 1 crore and maximum amount of INR 100 crore in addition
to the amount of deposit or part thereof along with interest.

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Dividend

The Companies Act, 2015 has introduced a proviso which states that a company must set-off the
losses and depreciation carried over from past years against the profits of the company before
declaring dividend for a financial year.

The Companies (Amendment) Act, 2017

The Companies (Amendment) Bill, 2016 was intended to be passed by the legislature, but after
referring it to the Committee this Bill went through a lot of corrections and metamorphosed into
The Companies (Amendment) Bill, 2017 which was then passed as the Companies (Amendment)
Act, 2017. The salient features of the amendments brought by this Act are:

 Synergy with SEBI and RBI Rules: For the first time, several provisions have been
amended to align the Act with various rules and regulations of the SEBI (Security
Exchange Board of India) and the RBI (Reserve Bank of India). For example, Sections 194
and 195 of the Act, which was dealing with the offence of insider trading and forward
dealing, have now been omitted since the SEBI regulations were succinct to cover all.
 The instances of such frauds. Further disclosures to be made in the prospectus have also
been aligned with the SEBI’s power to regulate IPOs (Initial Public Offering). The
definition of ‘debenture’ has been amended to permit RBI to disqualify certain instruments
as debentures.
 Proportionality of penalties: The quantum of penalty will now be levied taking into
consideration the size of the company, nature of business, injury to public interest, nature
and gravity of default, repetition of default, etc. which is one of the most appreciated
amendments. Two new provisions regarding the determining of the level of punishment
have been freshly introduced and lesser penalties for one person companies and small
companies were inserted. Provisions for small companies and penal vigour has been
reduced.
 Placement process made easier in Private Sector: The placement process is rationalised by
doing away separate offer letter details to be kept in the records of the Company and hence
reducing the number of filings to Registrar. The company is not allowed to use money from
private placement unless allotment made and the return of the same filed with the

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 registrar To make sure that an investors are informed, the disclosures are made under
Explanatory Statement as provided in Rule 13(2)(d) of Companies (Share Capital and
Debenture) Rules, 2014, embodied in the Private Placement Application Form. Change in
definition of private placement is proposed to umbrella all securities offers and invitations
other than rights. The Companies would be allowed to make an offer of multiple security
instruments simultaneously.
 Standards for Independent Director : Section 149 of the Act deals with the qualifications
and disqualifications of independent directors. Sub-Section (6) provides for various
disqualifications for becoming an independent director, one of which is, such a person
having “pecuniary relationship” with “the company, its holding, subsidiary or associate
company, or their promoters, or directors”. The amendment clarified that ‘pecuniary
relationship’ excluded the remuneration of director having transaction not exceeding 10%
of his total income or such amount as may be prescribed.

Nature and Characteristics of a Company

Since a corporate body (i.e. a company) is the creation of law, it is not a human being, it is an
artificial juridical person (i.e. created by law); it is clothed with many rights, obligations, powers,
and duties prescribed by law; it is called a ‘person’.

Being the creation of law, it possesses only the powers conferred upon it by its Memorandum of
Association which is the charter of the company. Within the limits of powers conferred by the
charter, it can do all acts as a natural person may do.

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The most striking characteristics of a company are:

(i) Corporate personality

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.

Its members are its owners however they can be its creditors simultaneously. A shareholder cannot
be held liable for the acts of the company even if he holds virtually the entire share capital.

A Company is an artificial person created by law. It is not a human being, but it acts through human
beings. It is considered as a legal person which can enter contracts, possess properties in its own
name, sue and can be sued by others etc. It is called an artificial person since it is invisible,
intangible, existing only in the contemplation of law. It can enjoy rights and being subject to duties.

(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. There are various
exceptions to the principle of limited liability.

In other words, a shareholder is liable to pay the balance, if any, due on the shares held by him,
when called upon to pay and nothing more, even if the liabilities of the company far exceed its
assets. This means that the liability of a member is limited.

(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

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entity, despite the total change in the membership. A company’s life is determined by the terms of
its Memorandum of Association.

It may be perpetual, or it may continue for a specified time to carry on a task or object as laid down
in the Memorandum of Association. Perpetual succession, therefore, means that the membership
of a company may keep changing from time to time, but that shall not affect its continuity.

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.

Thus, perpetual succession denotes the ability of a company to maintain its existence by the
succession of new individuals who step into the shoes of those who cease to be members of the
company. Professor L.C.B. Gower rightly mentions,

“Members may come and go, but the company can go on forever. During the war, all the members
of one private company, while in general meeting, were killed by a bomb, but the company survived
— not even a hydrogen bomb could have destroyed it”.

(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.

Their Lordships of the Madras High Court in R.F. Perumal v. H. John Deavin, A.I.R. 1960 Mad.
43 held that “no member can claim himself to be the owner of the company’s property during its
existence or in its winding-up”. A member does not even have an insurable interest in the property
of the company.

(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, [In Re.
Balia and San Francisco Rly., (1968) L.R. 3 Q.B. 588].

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Section 44 of the Companies Act, 2013 enunciates the principle by providing that the shares held
by the members are movable property and can be transferred from one person to another in the
manner provided by the articles.

If the articles do not provide anything for the transfer of shares and the Regulations contained in
Table “F” in Schedule I to the Companies Act, 2013, are also expressly excluded, the transfer of
shares will be governed by the general law relating to the transfer of movable property.

A member may sell his shares in the open market and realize the money invested by him. This
provides liquidity to a member (as he can freely sell his shares) and ensures stability to the
company (as the member is not withdrawing his money from the company). The Stock Exchanges
provide adequate facilities for the sale and purchase of shares.

Further, as of now, in most of the listed companies, the shares are also transferable through
Electronic mode i.e. through Depository Participants in dematerialized form instead of physical
transfers. However, there are restrictions with respect to transferability of shares of a Private
Limited Company which are dealt in chapter 2.

(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.

A rubber stamp does not serve the purpose. A document not bearing a common seal of the
company, when the resolution passed by the Board, for its execution requires the common seal to
be affixed is not authentic and shall have no legal force behind it.

However, a person duly authorized to execute documents pursuant to a power of attorney granted
in his favour under the common seal of the company may execute such documents and it is not
necessary for the common seal to be affixed to such documents.

The person, authorized to use the seal, should ensure that it is kept under his personal custody and
is used very carefully because any deed, instrument or a document to which seal is improperly or
fraudulently affixed will involve the company in legal action and litigation.

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(vii) Capacity to sue or be sued

A company is a body corporate, can sue and be sued in its own name. To sue means to institute
legal proceedings against (a person) or to bring a suit in a court of law. All legal proceedings
against the company are to be instituted in its name. Similarly, the company may bring an action
against anyone in its own name.

A company’s right to sue arises when some loss is caused to the company, i.e. to the property or
the personality of the company. Hence, the company is entitled to sue for damages in libel or
slander as the case may be [Floating Services Ltd. v. MV San Fransceco Dipaloa (2004) 52 SCL
762 (Guj)].

A company, as a person distinct from its members, may even sue one of its own members. A
company has a right to seek damages where a defamatory material published about it, affects its
business.

Where video cassettes were prepared by the workmen of a company showing, their struggle against
the company’s management, it was held to be not actionable unless shown that the contents of the
cassette would be defamatory. The court did not restrain the exhibition of the cassette. [TVS
Employees Federation v. TVS and Sons Ltd., (1996) 87 Com Cases 37].

The company is not liable for contempt committed by its officer. [Lalit Surajmal
Kanodia v. Office Tiger Database Systems India (P) Ltd., (2006) 129 Com Cases 192 Mad].

(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.

Likewise, a shareholder cannot be sued on contracts made by his company. The distinction
between a company and its members is not confined to the rules of privity but permeates the whole
law of contract. Thus, if a director fails to disclose a breach of his duties towards his company, and
in consequence, a shareholder is induced to enter into a contract with the director on behalf of the

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company which he would not have entered into had there been disclosure, the shareholder cannot
rescind the contract.

Similarly, a member of a company cannot sue in respect of torts committed against the company,
nor can he be sued for torts committed by the company. [British Thomson-Houston Company v.
Sterling Accessories Ltd., (1924) 2 Ch. 33]. Therefore, the company as a legal person can take
action to enforce its legal rights or be sued for breach of its legal duties. Its rights and duties are
distinct from those of its constituent members.

(ix) Limitation of Action

A company cannot go beyond the power stated in its Memorandum of Association. The
Memorandum of Association of the company regulates the powers and fixes the objects of the
company and provides the edifice upon which the entire structure of the company rests.

The actions and objects of the company are limited within the scope of its Memorandum of
Association.

In order to enable it to carry out its actions without such restrictions and limitations in most cases,
sufficient powers are granted in the Memorandum of Association. But once the powers have been
laid down, it cannot go beyond such powers unless the Memorandum of Association, itself altered
prior to doing so.

(x) 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.

(xi) Voluntary Association for Profit

A company is a voluntary association for profit. It is formed for the accomplishment of some stated
goals and whatsoever profit is gained is divided among its shareholders or saved for the future
expansion of the company. Only a Section 8 company can be formed with no profit motive.

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(xii) Termination of Existence

A company, being an artificial juridical person, does not die a natural death. It is created by law,
carries on its affairs according to law throughout its life and ultimately is effaced by law. Generally,
the existence of a company is terminated by means of winding up. However, to avoid winding up,
sometimes companies adopt strategies like reorganization, reconstruction, and amalgamation.

Distinction between Company and Partnership

The principal points of distinction between a company and a partnership firm are as follows:

A company is a distinct legal person. A partnership firm is not distinct from the several persons
who form the partnership.

In a partnership, the property of the firm is the property of the individuals comprising it. In a
company, it belongs to the company and not to the individuals who are its members.

Creditors of a partnership firm are creditors of individual partners and a decree against the firm
can be executed against the partners jointly and severally. The creditors of a company can proceed
only against the company and not against its members.

Partners are the agents of the firm, but members of a company are not its agents. A partner can
dispose of the property and incur liabilities as long as he acts in the course of the firm’s business.
A member of a company has no such power.

A partner cannot contract with his firm, whereas a member of a company can.

A partner cannot transfer his share and make the transferee a member of the firm without the
consent of the other partners, whereas a company’s share can ordinarily be transferred.

Restrictions on a partner’s authority contained in the partnership contract do not bind outsiders
whereas such restrictions incorporated in the Articles are effective because the public is bound to
acquaint themselves with them.

A partner’s liability is always unlimited whereas that of a shareholder may be limited either by
shares or a guarantee.

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A company has perpetual succession, i.e. the death or insolvency of a shareholder or all of them
does not affect the life of the company, whereas the death or insolvency of a partner dissolves the
firm, unless otherwise provided.

A company may have any number of members except in the case of a private company which
cannot have more than 200 members (excluding past and present employee members). In a public
company, there must not be less than seven persons in a private company not less than two. Further,
a new concept of one-person company has been introduced which may be incorporated with only
one person.

A company is required to have its accounts audited annually by a chartered accountant, whereas
the accounts of a firm are audited at the discretion of the partners.

A company, being a creation of law, can only be dissolved as laid down by law. A partnership
firm, on the other hand, is the result of an agreement and can be dissolved at any time by agreement
among the partners.

Distinction between Company and Hindu Undivided Family Business

A company consists of heterogeneous (varied or diverse) members, whereas a Hindu Undivided

Family Business consists of homogenous (unvarying) members since it consists of members of the
joint family itself.

In a Hindu Undivided Family business, the Karta (manager) has the sole authority to contract debts
for the purpose of the business, other coparceners cannot do so. There is no such system in a
company.

A person becomes a member of a Hindu Undivided Family business by virtue of birth. There is no
provision to that effect in the company.

No registration is compulsory for carrying on a business for gain by a Hindu Undivided Family
even if the number of members exceeds twenty [Shyamlal Roy v. Madhusudan Roy, AIR 1959
Cal. 380 (385)]. Registration of a company is compulsory.

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Kinds of Company

The Companies Act, 2013 provides for the types of companies that can be promoted and registered
under the Act. The three basic types of companies which may be registered under the Act are:

 Private Companies.
 Public Companies; and
 One Person Company (to be formed as Private Limited).

Section 3 (1) of the Companies Act 2013 states that a company may be formed for any lawful
purpose by—

 seven or more persons, where the company to be formed is to be a public company.

 two or more persons, where the company to be formed is to be a private company; or
 one person, where the company to be formed is to be One Person Company, that is to say,
a private company, by subscribing their names or his name to a memorandum and
complying with the requirements of this Act in respect of registration

(2) A company formed under sub-section (1) may be either—

 a company limited by shares; or

 a company limited by guarantee; or
 an unlimited company.

There are three ways in which companies may be incorporated.

Statutory Companies: These are constituted by a special Act of Parliament or State Legislature.
The provisions of the Companies Act, 2013 do not apply to them. Examples of these types of
companies are Reserve Bank of India, Life Insurance Corporation of India, etc.

Registered Companies: The companies which are incorporated under the Companies Act, 2013
or under any previous company law, with ROC fall under this category.

Types of Company on the basis of Liability

Under this category there are three types of companies:

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Unlimited Liability Companies: In this type of company, the members are liable for the
company’s debts in proportion to their respective interests in the company and their liability is
unlimited. Such companies may or may not have share capital. They may be either a public
company or a private company.

Companies limited by guarantee: A company that has the liability of its members limited to such
amount as the members may respectively undertake, by the memorandum, to contribute to the
assets of the company in the event of its being wound-up, is known as a company limited by
guarantee. The members of a guarantee company are, in effect, placed in the position of guarantors
of the company’s debts up to the agreed amount.

Companies limited by shares: A company that has the liability of its members limited by the
memorandum to the amount, if any, unpaid on the shares respectively held by them is termed as a
company limited by shares. For example, a shareholder who has paid `75 on a share of face value
` 100 can be called upon to pay the balance of `25 only. Companies limited by shares are by far
the most common and may be either public or private.

Other Types of Company

Associations not for profit having a license under Section 8 of the Companies Act, 2013 or under
any previous company law; Private Company, Public Companies; and One Person Company

 Government Companies.
 Foreign Companies.
 Holding and Subsidiary Companies.
 Associate Companies/Joint Venture Companies
 Investment Companies
 Producer Companies.
 Dormant Companies

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A. Private Companies; Public Companies; and One Person Company

Private Company

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

 restricts the right to transfer its shares.

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

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

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

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

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

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

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

A private company can only accept deposit from its members in accordance with section 73 of the
Companies Act, 2013.

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The words ‘Private Limited’ must be added at the end of its name by a private limited company.
As per section 3 (1), a private company may be formed for any lawful purpose by two or more
persons, by subscribing their names to a memorandum and complying with the requirements of
this Act in respect of registration.

Section 149(1) further lays down that a private company shall have a minimum number of two
directors. The only two members may also be the two directors of the private company.

One Person Company (OPC)

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

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

The concept of One-person company is quite revolutionary. It gives the individual entrepreneurs
all the benefits of a company, which means they will get credit, bank loans, access to the market,
limited liability, and legal protection available to companies.

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

Further, the amount of compliance by a one-person company is much lesser in terms of filing
returns, balance sheets, audit etc. Also, rather than the middlemen usurping profits, the one-person
company will have direct access to the market and the wholesale retailers. The new concept would
also boost the confidence of small entrepreneurs.

Small Company

As recommended by the Dr JJ Irani Committee, the concept of small companies has been
introduced in the Companies, Act, 2013. The recommendation of the Irani committee in this regard
was as under:

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The Committee sees no reason why small companies should suffer the consequences of regulation
that may be designed to ensure balancing of interests of stakeholders of large, widely held
corporates.

Company law should enable simplified decision-making procedures by relieving such companies
from select statutory internal administrative procedures. Such companies should also be subjected
to reduced financial reporting and audit requirements and simplified capital maintenance regimes.

Essentially the regime for small companies should enable them to achieve transparency at a low
cost through simplified requirements. Such a framework may be applied to small companies
through exemptions, consolidated in the form of a Schedule to the Act.

A small company is a new form of a private company under the Companies Act, 2013. A
classification of a private company into a small company is based on its size i.e. paid-up capital
and turnover. In other words, such companies are small-sized private companies.

As per section 2(85) ‘‘small company’’ means a company, other than a public company, —

 paid-up share capital of which does not exceed fifty lakh rupees, or such higher amount as
may be prescribed which shall not be more than five crore rupees: or
 turnover of which as per its last profit and loss account does not exceed two crore rupees
or such higher amount as may be prescribed which shall not be more than twenty crore
rupees:

Provided that nothing in this definition shall apply to—

 a holding company or a subsidiary company.

 a company registered under section 8; or
 a company or body corporate governed by any special Act.

Public Company

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

 is not a private company;

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

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

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

A public company may be said to be an association consisting of not less than 7 members, which
is registered under the Act. In principle, any member of the public who is willing to pay the price
may acquire shares in or debentures of it. The securities of a public company may be quoted on a
Stock Exchange.

The number of members is not limited to two hundred. It may be noted that in the case of a public
company, the articles do not contain the restrictions provided in Sections 2(68) of the Act.

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

The concept of free transferability of shares in public and private companies is very succinctly
discussed in the case of Western Maharashtra Development Corpn. Ltd. V. Bajaj Auto
Ltd [2010] 154 Com Cases 593 (Bom).

It was held that the Companies Act, makes a clear distinction in regard to the transferability of
shares relating to private and public companies. By definition, a “private company” is a company
which restricts the right to transfer its shares. In the case of a public company, the Act provides
that the shares or debentures and any interest therein, of a company, shall be freely transferable.

The provision contained in the law for the free transferability of shares in a public company is
founded on the principle that members of the public must have the freedom to purchase and, every
shareholder the freedom to transfer.

The incorporation of a company in the public, as distinguished from the private, realm leads to
specific consequences and the imposition of obligations envisaged in law. Those who promote and

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manage public companies assume those obligations. Corresponding to those obligations are rights,
which the law recognizes as inherent in the members of the public who subscribe to shares.

Limited Company

As per section 3(2), a company formed under this Act may be either (a) a company limited by
shares; or (b) a company limited by guarantee or (c) an unlimited company.

The term ‘Limited Company’ means a company limited by shares or by guarantee.

The liability of the members, in the case of a limited company, may be limited with reference to
the nominal value of the shares, respectively held by them or to the amount which they have
respectively guaranteed to contribute in the event of winding up of the company.

Accordingly, a limited company can be further classified into: (a) Company limited by shares, and
(b) Company limited by guarantee.

a. Companies Limited by Shares

As per section 2(22), “company limited by shares” means a company having the liability of its
members limited by the memorandum to the amount, if any, unpaid on the shares respectively held
by them.

Accordingly, no member of a company limited by shares can be called upon to pay more than the
nominal value of the shares held by him. If his shares are fully paid-up, he has nothing more to
pay.

But in the case of partly paid shares, the unpaid portion is payable at any time during the existence
of the company on a call being made, whether the company is a going concern or is being wound
up. This is the essence of a company limited by shares and is the most common form in existence.

b. Companies Limited by Guarantee

As per section 2(21) “company limited by guarantee” means a company having the liability of its
members limited by the memorandum to such amount as the members may respectively undertake
to contribute to the assets of the company in the event of its being wound up. Clubs, trade
associations and societies for promoting different objects are examples of such a company.

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It should be noted that a special feature of this type of company is that the liability of members to
pay their guaranteed amounts arises only when the company has gone into liquidation and not
when it is a going concern. A guarantee company may or may not have a share capital.

As regards the funds, a guarantee company without share capital obtains working capital from
other sources, e.g. fees or grants. But a guarantee company having a share capital raises its initial
capital from its members, while the normal working funds would be provided from other sources,
such as fees, charges, subscriptions, etc.

The Memorandum of Association of every guarantee company must state that every member of
the company undertakes to contribute to assets of the company in the event of its being wound up
while he is a member for the payment of the debts and liabilities of the company contracted before
he ceases to be a member, and of the charges, costs and expenses of winding up, and for adjustment
of the rights of the contributories among themselves, such amount as may be required, not
exceeding a specified amount.

The Memorandum of a company limited by guarantee must state the amount of guarantee. It may
be of different denominations.

Unlimited Company

As per section 2(92), “unlimited company” means a company not having any limit on the liability
of its members. Thus, the maximum liability of the member of such a company, in the event of its
being wound up, might stretch up to the full extent of their assets to meet the obligations of the
company by contributing to its assets. However, the members of an unlimited company are not
liable directly to the creditors of the company, as in the case of partners of a firm.

The liability of the members is only towards the company and in the event of its being wound up,
only the Liquidator can ask the members to contribute to the assets of the company which will be
used in the discharge of the debts of the company.

An unlimited company may or may not have share capital. Under Section 18, a company registered
as an unlimited company may subsequently re-register itself as a limited company, by altering its
memorandum and articles of the company in accordance with the provisions of Chapter II of the
Companies Act subject to the provision that any debts, liabilities, obligations or contracts incurred

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or entered into, by or on behalf of the unlimited company before such conversion are not affected
by such changed registration.

B. Government Companies

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

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

Since employees of Government companies are not Government servants, they have no legal right
to claim that the Government should pay their salary or that the additional expenditure incurred
on account of revision of their pay scales should be met by the Government. It is the responsibility
of the company to pay them the salaries [A.K. Bindal v. Union of India (2003) 114 Com Cases
590 (SC)].

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

C. Foreign Companies

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

 has a place of business in India whether by itself or through an agent, physically or through
electronic mode; and
 conducts any business activity in India in any other manner

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

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The filing must include:

 a certified copy of the charter, statutes or memorandum and articles, of the company or
other instrument constituting or defining the constitution of the company and, if the
instrument is not in the English language, a certified translation thereof in the English
language.
 the full address of the registered or principal office of the company.
 a list of the directors and secretary of the company containing such particulars as may be
prescribed.
 the name and address or the names and address of one or more persons resident in India
authorised to accept on behalf of the company service of process and any notices or other
documents required to be served on the company.
 the full address of the office of the company in India which is deemed to be its principal
place of business in India.
 particulars of opening and closing of a place of business in India on earlier occasion or
occasions.
 a declaration that none of the directors of the company or the authorised representative in
India has ever been convicted or debarred from the formation of companies and
management in India or abroad; and
 any other information as may be prescribed.

Every foreign company has to ensure that the name of the company, the country of incorporation,
the fact of limited liability of members is exhibited in the specified places or documents as required
under Section 382.

Section 381 requires a Foreign Company to maintain books of Account and file a copy of the
balance sheet and profit and loss account in the prescribed form with ROC every calendar year.
These accounts should be accompanied by a list of places of business established by the foreign
company in India.

Section 376 of the Companies Act, 2013 provides further that when a foreign company, which has
been carrying on business in India, ceases to carry on such business in India, it may be wound up

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as an unregistered company under Sections 375 to 378 of the Act, even though the company has
been dissolved or ceased to exist under the laws of the country in which it was incorporated.

D. Holding and Subsidiary Company

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

Holding company

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

Subsidiary company

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

 controls the composition of the Board of Directors; or

 exercises or controls more than one-half of the total share capital either at its own or
together with one or more of its subsidiary companies:

Provided that such class or classes of holding companies, shall not have layers of subsidiaries
beyond the prescribed limit. (Proviso to be notified)

For the above purpose, —

 a company shall be deemed to be a subsidiary company of the holding company even if the
control referred to in sub-clause (i) or sub-clause (ii) is of another subsidiary company of
the holding company.
 the composition of a company’s Board of Directors shall be deemed to be controlled by
another company if that other company by the exercise of some power exercisable by it at
its discretion can appoint or remove all or a majority of the directors;
 the expression “company” includes any body corporate.

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E. Associate Company

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

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

To add more governance and transparency in the working of the company, the concept of the
associate company has been introduced. It will provide a more rational and objective framework
of the associated relationship between the companies.

Further, as per section 2 (76), Related party includes ‘Associate Company’. Hence, contract with
Associate Company will require disclosure/approval/entry in the statutory register as is applicable
to contract with a related party.

F. Investment Companies

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

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

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

But investment companies in actual practice earn their income not only through the acquisition
and holding but also by dealing in shares and securities i.e. to buy with a view to sell later on at
higher prices and to sell with a view to buying later on at lower prices.

If a company is engaged in any other business to an appreciable extent, it will not be treated as an
investment company.

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The following two sets of legal opinions are quoted below as to the meaning of an investment
company:

 According to one set of legal opinion, an “investment company” means a company which
acquires and holds shares and securities with an intent to earn income only from them by
holding them. On the other hand, another school of legal opinion holds that “an Investment
Company means a company, which acquires shares and securities for earning income by
holding them as well as by dealing in such shares and other securities”.
 According to Section 2(10A) of the Insurance Act, 1938, an investment company means a
company whose principal business is the acquisition of shares, stocks, debentures or other
securities.

G. Producer Company

Section 465(1) of the Companies Act, 2013 provides that the Companies Act, 1956 and the
Registration of Companies (Sikkim) Act, 1961 (hereafter in this section referred to as the repealed
enactments) shall stand repealed.

However, the proviso to section 465(1) provides that the provisions of Part IX-A of the Companies
Act, 1956 shall be applicable mutatis mutandis to a Producer Company in a manner as if the
Companies Act, 1956 has not been repealed until a special Act is enacted for Producer Companies.

In view of the above provision, Producer Companies are still governed by the Companies Act,
1956. Companies (Amendment) Act, 2002 had added a new Part IXA to the main Companies Act,
1956 consisting of 46 new Sections from 581A to 581ZT.

According to the provisions as prescribed under Section 581A(l) of the Companies Act, 1956, a
producer company is a body corporate having objects or activities specified in Section 581B and
which is registered as such under the provisions of the Act.

The membership of producer companies is open to such people who themselves are the primary
producers, which is an activity by which some agricultural produce is produced by such primary
producers.

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Objects of Producer Companies

In terms of Section 581B (1) of the Companies Act, 1956, the objects of a producer company
registered under this Act may be all or any of the following matters:

 production, harvesting, procurement, grading, pooling, handling, marketing, selling, the

export of primary produce of the Members or import of goods or services for their benefit.
 processing including preserving, drying, distilling, brewing, venting, canning and
packaging of the produce of its members.
 manufacturing, sale or supply of machinery, equipment or consumables mainly to its
members.
 providing education on the mutual assistance principles to its members and others.
 rendering technical services, consultancy services, training, research and development and
all other activities for the promotion of the interests of its members.
 generation, transmission and distribution of power, revitalisation of land and water
resources, their use, conservation and communications relatable to primary produce.
 insurance of producers or their primary produce.
 promoting techniques of mutuality and mutual assistance.
 welfare measures or facilities for the benefit of the members as may be decided by the
Board.
 any other activity, ancillary or incidental to any of the activities referred to in clauses (a)
to (i) above or other activities which may promote the principles of mutuality and mutual
assistance amongst the members in any other manner.
 financing of procurement, processing, marketing or other activities specified in clauses (a)
to (j) above, which include extending of credit facilities or any other financial services to
its members. Further, under Section 581B (2) it has also been clarified that every producer
company shall deal primarily with the production of its active members for carrying out
any of its objects specified above.

H. Dormant Companies

The Companies Act, 2013 has recognized a new set of companies called as dormant companies.

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As per section 455 (1) where a company is formed and registered under this Act for a future project
or to hold an asset or intellectual property and has no significant accounting transaction, such a
company or an inactive company may make an application to the Registrar in such manner as may
be prescribed for obtaining the status of a dormant company.

Explanation appended to section 455(1) says that for the purposes of this section, —

 “inactive company” means a company which has not been carrying on any business or
operation, or has not made any significant accounting transaction during the last two
financial years, or has not filed financial statements and annual returns during the last two
financial years;
 “significant accounting transaction” means any transaction other than—
 payment of fees by a company to the Registrar.
 payments made by it to fulfil the requirements of this Act or any other law.
 allotment of shares to fulfil the requirements of this Act; and
 payments for maintenance of its office and records.

As per section 455(2), the Registrar on consideration of the application shall allow the status of a
dormant company to the applicant and issue a certificate in such form as may be prescribed to that
effect.

Section 455(3) provides that the Registrar shall maintain a register of dormant companies in such
form as may be prescribed.

According to section 455(4), in case of a company which has not filed financial statements or
annual returns for two financial years consecutively, the Registrar shall issue a notice to that
company and enter the name of such company in the register maintained for dormant companies.

Further, a dormant company shall have such minimum number of directors, file such documents
and pay such annual fee as may be prescribed to the Registrar to retain its dormant status in the
register and may become an active company on an application made in this behalf accompanied
by such documents and fee as may be prescribed. [Section 455(5)]

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Corporate Personality

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
(3) 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. Besides, corporations the banks, railways,
universities, colleges, church, temple, hospitals etc. are also conferred legal personality. Union of
India and States are also recognized as legal or juristic persons.

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’.

Corporations are of two kinds:

1. Corporation Aggregate: Is an association of human beings united for the purpose of forwarding
their certain interest. A limited Company is one of the best examples. Such a company is formed
by a number of persons who as shareholders of the company contribute or promise to contribute
to the capital of the company for the furtherance of a common object. Their liability is limited to
the extent of their shareholding in the company. A limited liability company is thus formed by the
personification of the shareholders. The property is not that of the shareholders, but its own
property and its assets and liabilities are different from that of its members. The shareholders have

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a right to receive dividends from the profits of the company but not the property of the company.
The principle of corporate personality of a company was recognized in the case of Saloman v.
Saloman & Co.

2. Corporation Sole: Is an incorporated series of successive persons. It consists of a single person

who is personified and regarded by law as a legal person. In other words, a single person, who is
in exercise of some office or function, deals in legal capacity and has legal rights and duties. A
corporation sole is perpetual. Post – Master- General, Public Trustee, Comptroller and auditor
general of India, the Crown in England etc. are some examples of a corporation sole. Generally,
corporation sole are the holders of a public office which are recognized by law as a corporation.
The chief characteristic of a corporation sole is its “continuous entity endowed with a capacity for
endless duration”. A corporation sole is an illustration of double capacity. The object of a
corporation sole is similar to that of a corporation aggregate. In it a single person holding a public
office holds the office in a series of succession, meaning thereby that with his death , his property
, right and liabilities etc., do not extinguish but they are vested in the person who succeeds him.
Thus, on the death of a corporation sole, his natural personality is destroyed, but legal personality
continues to be represented by the successive person. In consequence, the death of a corporation
sole does not adversely affect the interests of the public in general.

Limited Liability

Limited liability is the extent to which a company shareholder or director is financially responsible
for their company’s debts.

To benefit from limited liability, a business must be incorporated at Companies House to become
a private limited company (LTD), public limited company (PLC) or limited liability partnership
(LLP).

Once it has been incorporated, the business becomes a separate legal entity from its owners. That
means the finances and assets of the individual and the finances and assets of the company are
completely separate. If the company is sued or cannot pay its debts, the owners are only liable for
the debt to the value of the money they have already invested in the business.

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What Does Limited Liability Mean?

The clear separation between individuals and their companies is a pivotal aspect of corporate law.

In the case of limited companies, this means that shareholders can only be held liable for company
debts up to the value of their shares.

Directors cannot be held personally liable for company debts (unless they are shareholders in
which cases the rules already explained apply)

The same goes for legal threats. When a company is sued, it is the legal structure that is the
company which is being sued, not the individuals involved.

The same rules apply for members of LLP’s (Limited Liability Partnerships) or Limited
Partnerships.

Advantages of a Limited Liability Company

There are a number of compelling advantages associated with a limited liability company. That
includes:

No personal liability for company debts

One of the primary reasons the owners choose to incorporate their business is to avoid personal
liability for company debts.

This allows the directors to trade without putting their personal property, cash and other assets at
risk. As long as they adhere to their duties and responsibilities as directors then in the case of
insolvency, the creditors will only be able to recover money they are owed from the bank account
and assets of this business.

Tax efficiency

Limited companies are taxed on their profit at a rate of 19 percent. They are not subject to the
personal tax rates placed on sole traders and partnerships (unlimited companies) which can be as
high as 45 percent.

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Directors of limited companies can pay themselves a salary at the personal allowance level and
take the rest of their pay as dividends, which are taxed at a lower rate. This will reduce the tax
burden and keep more money in their pocket.

Succession planning

As a limited liability company is deemed to be a separate legal entity from its owners, the company
will continue to exist beyond the life of its members. That means, if directors or members retire or
experience ill-health, the company will continue to exist and operate. This can provide security for
employees and other company members.

Employee buy-in

Another benefit of a limited liability company is the ability for key employees to be granted shares
via a company share scheme. This can boost employee motivation and provide a monetary reward
beyond a mere salary. Having a vested interest in the company’s success can also improve
employee loyalty.

Protection of the company name

As part of the process of registering a limited liability company, a company name must be chosen.
Company names can become valuable assets. Registering a name at Companies House prevents
other businesses from using the same name. However, Companies House will accept the
registration of a name which is very similar, so it may be worth registering alternative spellings or
versions of the same name and keeping those as dormant companies.

Limited Liability Company Agreement

As part of the limited liability company registration process, by law, you have to create certain
documents. That includes the Articles of Association, which sets out the rules company officers
have to follow in the running of the company, and a Memorandum of Association, which gives
notice of an individual’s intention to become a company shareholder.

Another document that isn’t required by law is a limited liability company agreement.

Also known as a shareholders’ agreement or an LLP agreement, this document intends to formalise
the relationship between shareholders or partners. It formalises what will happen when there are

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differing opinions about the direction the company will take, establishes how the business will be
run and sets the ground rules for the relationship.

A simple way to think of a limited liability company agreement is as the terms & conditions for
company directors.

Although similar to the Articles of Association in its content, the main difference is that the
Articles of Association has to be made public, while the limited liability company agreement is a
private contract between shareholders.

Private Company Limited by Guarantee

Companies limited by guarantee are usually not-for-profit organisations like charities, sports clubs,
societies and community projects. They are not set up to make a profit for the shareholders. Instead,
any money they make is retained within the organisation or used for some other purpose.

A private company limited by guarantee is a separate legal entity that’s responsible for its own
income, assets, debts and liabilities, just like any other limited liability company.

However, instead of issuing shares, the company is owned by guarantors. Their personal liability
for the debts of the organisation is limited to a fixed amount of money called a guarantee. This
guarantee is written into the company’s Memorandum of Association and requires the guarantors
to pay the company’s debts up to a fixed sum, which is usually £1.

A company limited by guarantee must have at least one director, although most have several. The
directors may also be given some other name like trustees, governors, the board of managers or
the management committee. Whatever their title, they are responsible for the day-to-day running
of the organisation.

Liability of a Limited Liability Company

The basis of a limited liability company is that all debts incurred are the debts of the company and
are not the responsibility of the shareholders or directors. In a company that’s limited by shares,
the shareholders’ obligation is to pay the company for the shares they have. Once those shares
have been paid for in full then no further money is payable.

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In the case of a company that’s limited by guarantee, each guarantor will be liable for the
company’s debts up to the value written into the Memorandum of Association.

The only way a director or shareholder can become liable for company debts over the value of
their original shareholding holding or guarantee is where personal liability is imposed by the court.
This can be the case in instances of wrongful or fraudulent trading.

Some creditors such as banks and other finance providers may ask directors to give personal
guarantees for loans, overdrafts and a lease of premises. If the business does fail, then the director
will be obliged to pay those debts from their personal funds.

Directors Personal Liability in a Limited Company

Although limited liability provides a great deal of protection for company shareholders and
directors, there are some circumstances when they can become personally liable for business debts.
That includes:

 If they sign a personal guarantee.

 If they continue to trade in the interest of shareholders (instead of the creditors) despite
knowing the business is insolvent.
 If they dispose of assets at less than market value.
 If they overpay themselves from the company’s account creating an overdrawn director’s
loan.
 If funds are raised to repay creditors via fraudulent means.

Limited Liability Company Debt Obligations

Despite the protection of limited liability, company debts can still be very stressful and worrying
for the directors. Not only is their livelihood at risk, but they also have to be aware of their changing
obligations.

Once cash-flow is compromised, a business can decline very quickly. Directors then have to
monitor their financial position very carefully. If the business becomes insolvent (you can check
using this free insolvency test) then they must prioritise the creditors’ interests. Failure to do so
could lead to personal liability for a proportion of the company’s debts further down the line.

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Company debts can include unpaid supplier invoices, unpaid rent and even wages owing to
employees. However, one of the most worrying debts of limited liability companies are those
owing to HMRC. VAT, PAYE and corporation tax debts are a common issue for company
directors. HMRC has its own range of powers to pursue arrears aggressively which can make this
situation incredibly stressful.

Obtaining help and support to deal with limited liability company debts, and specifically tax debt,
is essential. Being proactive about controlling cash-flow and putting a firm plan in place is an
important first step, as is identifying areas of the business where money is being wasted.

Company debt experts can help struggling directors to explore debt refinancing and consolidation
options which could provide the working capital required to repay creditors and drive the business
forward.

Lifting of corporate veil

Company enjoys a separate position from that of position of its owners. It is artificial but yet a
person in eyes of law. Problems arise when this position of the company is misused. It is not
incorrect to say that, though the company is an unreal person, but still it cannot act on its own.
There has to be some human agency involved so that company is able to perform its functions.
When this human agency is working, in the name of the company, for achieving goals approved
by law, the social order is not disturbed. But when this medium of operations begins to be tainted,
conflicts arise. This authority rather becomes firing of bullets from someone else’s gun.

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.
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.

In the case United States v. Milwaukee Refrigerator Transit Company, it was stated “A corporation
will be looked upon as a legal entity, as a general rule, and until sufficient reason to the contrary

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appears; but, when the notion of legal entity is used to defeat public convenience, justify wrong,
protect fraud, or defend crime, the law will regard the corporation as an association of persons.”
Supreme Court of India had adopted the similar thinking in the case Tata Engineering and
Locomotive Co. Ltd. vs. State of Bihar & Ors. where the corporations petitioning had joined
together and claimed protection under Article 286 of Constitution of India for non-imposition of
taxon the sale or purchase of goods, the Apex Court held that “If their contention is accepted, it
would really mean that what the corporations or companies cannot achieve directly, they can
achieve indirectly by relying upon the doctrine of lifting the veil.”

When can be the veil lifted?

The doctrine, though one of the most used doctrines by Courts, is still, however, not running upon
a hard-and-fast rule. The basis for invoking such operations does not follow a laid down policy.
Howsoever, over the period of time, Courts and Legislatures throughout the globe have attempted
to narrow down scope and applicability of the doctrine under following two heads: -

1) Statutory Provisions

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.

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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
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

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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.

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.

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2) Judicial Pronouncements: -

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.

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

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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.

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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.

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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 newfound company was mere cloak
or sham, for 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.

Promoters

When an individual has an idea for a new business venture, he or she may set about interesting
others in the venture and persuade them to contribute capital to a company to be incorporate for
the purpose of carrying on the venture. The individual will then be described as ‘promoter’ of the
company. A person who acts in a professional capacity is not a promoter. A company is born only
when it is duly incorporated. For incorporating a company various documents are to be prepared
and other formalities are to be complied with. All this work is done by promoters.

Then the question arises that who really are promoters of a company, 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.

The expression ‘promoter’ has been defined under Section 2(69) in the Companies Act, 2013 as:

“promoter” means a person—

 who has been named as such in a prospectus or is identified by the company in the annual
return referred to in section 92; or

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  who has control over the affairs of the company, directly or indirectly whether as a
shareholder, director or otherwise; or
 in accordance with whose advice, directions or instructions the Board of Directors of the
company is accustomed to act:

Provided that nothing in sub-clause (c) shall apply to a person who is acting merely in a
professional capacity.

The term is used expressly in sections 35, 39, 300 and 317.

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.”

“A promoter is one who undertakes to form a company with reference to a given project and to set
it going, and who takes the necessary steps to accomplish that purpose.”

L.J. Brown in the case of Whaley Bridge printing Co. observed that the term promoter is “a term
not of law but of business”.

To be a promoter one need not necessarily be associated with the initial formation of the company;
one who subsequently helps to arrange floating of its capital will equally be regarded as a promoter.
However, a person assisting the promoters by acting in a professional capacity do not thereby
became promoters themselves. The relationship between a promoter and the company that he has
floated must be deemed to be fiduciary relationship from the day the work of floating the company
starts and continues up to the time that the directors take into their hands what remains to be done
in the way of forming the company.

The status of the promoter is generally terminated when the Board of Directors has been formed
and they start governing the company. Chronologically, the first persons who control or influence
the company’s affairs are its promoters. It is they who conceive the idea of forming the company,
and it is they who take the necessary steps to incorporate it, to provide it with share and loan capital
etc. when these things have been done, they handover the control of the company to its directors,
who are often themselves under a different name. on handling over the control of the company the

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promoter’s fiduciary and common law duties cease, and he is thereafter subject to no more
extensive duties in dealing with the company than a third person who is unconnected with it.

Meaning of Promoter

A promoter is a generic term associated with the person who starts a business. In common parlance,
this person is also referred to as the founder of the business. A promoter typically is responsible
for raising capital, targeting initial leads and chasing initial business opportunities, entering into
the initial contracts for the business formation and incorporating the company.

The Substantial Acquisition of Shares Takeovers (SEBI) Regulation states that the promoter is:

(a) any person who is in control of the target company

(b) any person named as promoter in any offer document of the target company or any
shareholding pattern filed by the target company with the stock exchanges pursuant to the
listing agreement, whichever is later.

In the old Companies Act, 1956 there was no static definition of promoter although it was
mentioned in various section, but in the new Companies Act, 2013 Section 2(69) defines promoter.

Position of promoter in Companies Act, 1956 and in different Statues

The expression ‘promoter’ has not been defined under the Companies Act, 1956, although the term
is used expressly in sections 62, 69, 76, 478 and 519. Section 62 of Companies Act, 1956 defines
‘promoter’ for the limited purpose of that section only. Section 62(6)(a) defines the expression
‘promoter’ to mean a promoter who was a party to the preparation of the prospectus or of a portion
thereof containing the untrue statement, but does not include any person by reason of his acting in
a professional capacity in procuring the formation of the company.

In Twycross v. Grant promoter was described as “one who undertakes to form a company with
reference to a given project, and to set it going, and who takes the necessary steps to accomplish
that purpose.”

In USA, the Securities Exchange Commission Rule 405(a) defines promoter as a person who,
acting alone or in conjunction with other persons directly or indirectly takes the initiative in
founding or organizing the business enterprise.

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In Lagunas Nitrate Co. v. Lagunas Syndicate [1889] 2 Ch. 392 (p. 428, C.A.), it was stated that
“to be a promoter one need not necessarily be associated with the initial formation of the company;
one who subsequently helps to arrange floating of its capital will equally be regarded as a promoter.

The difficulties in defining the term led the judges to state that the term promoter is not a term of
art, nor a term of law, but of business.

Position of promoters in Companies Act, 2013

The new Companies Act, 2013 has defined promoter in Section 2(69) as;

“promoter” means a person—

a) who has been named as such in a prospectus or is identified by the company in the annual
return referred to in section 92; or
b) who has control over the affairs of the company, directly or indirectly whether as a
shareholder, director or otherwise; or
c) in accordance with whose advice, directions or instructions the Board of Directors of the
company is accustomed to act:

Provided that nothing in sub-clause (c) shall apply to a person who is acting merely in a
professional capacity.

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 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 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.

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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:

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.

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.

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

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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.

Termination of Promoter’s Duties

A promoter’s duties do not come to an end on the incorporation of the company, or even when a
Board of directors in appointed. They continue until the company has acquired the property or
business which it was formed to manage and has raised its initial share capital and the Board of
directors has taken over the management of the company’s affairs from the promoters. When these
things have been done, the promoter’s fiduciary and contractual duties cease.

Remedies available to the company against the promoter for breach of his duties

Since a promoter owes a duty of disclosure to the company, the primary remedy in the event of
breach is for the company to bring proceedings for rescission of any contract with him or for the
recovery of any secret profits which he has made.

Rescission of contract

So far as the right to rescind is concerned, this must be exercised on normal contractual principles,
that is to say, the company must have done nothing to show an intention to ratify the agreement
after finding breach involving non-disclosure or misrepresentation.

To recover secret profit

If a promoter makes a secret profit or does not disclose any profit made, the company has a remedy
against him.

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

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 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.

Status of pre-incorporation of contracts

The promoter is obligated to bring the company in the legal existence and to ensure its successful
running and in order to accomplish his obligation he may enter into some contract on behalf of
prospective company. These types of contract are called ‘Pre-incorporation Contract.

Nature of Pre-incorporation contract is slightly different to ordinary contract. Nature of such

contract is bilateral; be it has the features of tripartite contract. In this type of contract, the promoter
furnishes the contract with interested person and it would be bilateral contract between them. But
the remarkable part of this contract is that, this contract helps the perspective company, who is not
a party to the contract.

One might question that ‘why is company not liable, even if it a beneficiary to contact' or one
might also question that ‘doesn't promoter work under Principal-Agent relationship. Answer to
these entire questions would be simple. The company does not in legal existence at time of pre-
incorporation contract. If someone is not in legal existence, then he cannot be a party to contract.

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Before the passing of the Specific Relief Act 1963, the position in India, regarding pre-
incorporation contract, was similar to the English Common Law. This was based on the general
rule of contract where two consenting parties are bound to contract, and third party is not connected
with the enforcement and liability under the terms of contract. And because company does not
come in existence before its incorporation, so the promoter signs contract on behalf of company
with third party, and that is why the promoter was solely liable for the pre-incorporation contract.

However, the provisions of the specific relief Act, 1963 makes the pre-incorporation contracts
valid. Section 15(h) and Section 19 (e) of the Specific Relief Act of 1963, deviate from the
common law principles to some extent,

Under section 15 (h) of the Specific Relief Act, 1963,

Except as otherwise provided by this Chapter, the specific performance of a contract may be
obtained by--

(a) any party thereto;

(b) the representative in interest or the principal, of any party thereto

Provided that where the learning , skill, solvency or any personal quality of such party is a material
ingredient in the contract, or where the contract provides that his interest shall not be assigned, his
representative in interest or his principal shall not be entitled to specific performance his part of
the contract, or the performance thereof by his representative in interest, or his principal, has been
accepted by the other party; when the promoters of a company have, before its incorporation,
entered into a contract for the purposes of the company, and such contract is warranted by the
terms of the incorporation, the company.

Under Section 19 (e) of the Specific Relief Act, 1963,

Except as otherwise provided by this Chapter, specific performance of a contract may be enforced
against the company, when the promoters of a company have, before its incorporation, entered into
a contract for the purpose of the company and such contract is warranted by the terms of the
incorporation.

In Weavers Mills Ltd. v. Balkies Ammal [AIR 1969 Mad 462], the Madras High Court extended
the scope of this principle through its decision. In this case, promoters had agreed to purchase

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some properties for and on behalf of the company to be promoted. On incorporation, the company
assumed possession and constructed structures upon it. It was held that even in absence of
conveyance of property by the promoter in favor of the company after its incorporation, the
company’s title over the property could not be set aside.

Promoters are generally held personally liable for pre-incorporation contract. If a company does
not ratify or adopt a pre-incorporation contract under the Specific Relief Act, then the common
law principle would be applicable, and the promoter will be liable for breach of contract.

In Kelner v Baxter, where the promoter in behalf of unformed company accepted an offer of Mr.
Kelner to sell wine, subsequently the company failed to pay Mr. Kelner, and he brought the action
against promoters. Erle CJ found that the principal-agent relationship cannot be in existence before
incorporation, and if the company was not in existence, the principal of an agent cannot be in
existence. He further explain that the company cannot take the liability of pre-incorporation
contract through adoption or ratification; because a stranger cannot ratify or adopt the contract and
company was a stranger because it was not in existence at the time of formation of contract. So,
he held that the promoters are personally liable for the pre-incorporation contract because they are
the consenting party to the contract.

In Newborne v Sensolid (Great Britain) Ltd, Court of Appeal interpreted the finding of Kelner v
Baxter in a different way and developed the principle further. In this case an unformed company
entered into a contract, the other contracting party refused to perform his duty. Lord Goddard
observed that before the incorporation the company cannot be in existence, and if it is not in
existence, then the contract which the unformed company signed would also be not in existence.
So, company cannot bring an action for pre-incorporation contract, and also the promoter cannot
bring the suit because they were not the party to contract.

This case created some amount of confusion that, if the contract was sign by the agent or promoter,
then he will be liable personally and he has the right to sue or to be sued. But if a person
representing him as director of unformed company enters into the contact then the contact would
be unenforceable.

These principles were found applicable in Indian case.

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In Seth Sobhag Mal Lodha v Edward Mill Co. Ltd., the High Court of Rajasthan followed the
approach of Common Law regarding liability of pre-incorporation contract. This case was
criticized by A. Ramaiya in Guide to Companies Act (Sixth Edition), he found that learned judges
did not noticed the Specific Relief Act.

Although under common law promoter is personally liable for the pre-incorporation contract, but
there is some scope where the promoter can shift his liability to company. He can shift to company
his liability under the Specific Relief Act 1963 or he can go for novation under contract law. In
Howard v Patent Ivory Manufacturing, the English Court accepted the novation of contract.

A promoter is personally liable for the pre-incorporation contract, because at the time of formation
of pre-incorporation contract, the company does not come in existence, so neither the principle
agent relationship exist not the company become the party. Company is not liable for the pre-
incorporation contract when it come in existence, but under the arrangement of section 15(h) and
19(e) of the Specific Relief Act 1963, company can take the rights and liability of promoter. It is
also found that promoter is personally liable for the pre-incorporation contract in American Law,
English Law and Indian Law.

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 UNIT – 2

INCORPORATION
Synopsis

 Procedure of Incorporation
 Certificate of Incorporation
 Memorandum of Association
 Doctrine of Ultra Vires
 Articles of Association
 Provisions for Entrenchment
 Alteration of Articles of Association
 Binding effect of Memorandum and Articles of Association
 The doctrine of Constructive Notice
 Distinction Between Memorandum and Articles of Association
 The doctrine of Indoor Management
 Exceptions to the Doctrine of Indoor Management
 Prospectus

Procedure of Incorporation

The Companies Act of 1956 sets down rules for the establishment of both public and private
companies. The most commonly used corporate form is the limited company, unlimited companies
being relatively uncommon. A company is formed by registering the Memorandum and Articles
of Association with the State Registrar of Companies of the state in which the main office is to be
located.

Foreign companies engaged in manufacturing and trading activities abroad are permitted by the
Reserve Bank of India to open branch offices in India for the purpose of carrying on the following
activities in India:

 To represent the parent company or other foreign companies in various matters in India,
for example, acting as buying/selling agents in India, etc.

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  To conduct research work in which the parent company is engaged provided the results of
the research work are made available to Indian companies
 To undertake export and import trading activities
 To promote possible technical and financial collaboration between Indian companies and
overseas companies.

Application for permission to open a branch, a project office or liaison office is made via the
Reserve Bank of India by submitting form FNC-5 to the Controller, Foreign Investment and
Technology Transfer Section of the Reserve Bank of India. For opening a project or site office,
application may be made on Form FNC-10 to the regional offices of the Reserve Bank of India. A
foreign investor need not have a local partner, whether or not the foreigner wants to hold full equity
of the company. The portion of the equity thus not held by the foreign investor can be offered to
the public.

Approval of Name

The first step in the formation of a company is the approval of the name by the Registrar of
Companies (ROC) in the State/Union Territory in which the company will maintain its Registered
Office. This approval is provided subject to certain conditions: for instance, there should not be an
existing company by the same name. Further, the last words in the name are required to be "Private
Ltd." in the case of a private company and "Limited" in the case of a Public Company. The
application should mention at least four suitable names of the proposed company, in order of
preference. In the case of a private limited company, the name of the company should end with
the words "Private Limited" as the last words. In case of a public limited company, the name of
the company should end with the word "Limited" as the last word. The ROC generally informs the
applicant within seven days from the date of submission of the application, whether or not any of
the names applied for is available. Once a name is approved, it is valid for a period of six months,
within which time Memorandum of Association and Articles of Association together with
miscellaneous documents should be filed. If one is unable to do so, an application may be made
for renewal of name by paying additional fees. After obtaining the name approval, it normally
takes approximately two to three weeks to incorporate a company depending on where the
company is registered.

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Memorandum and Articles

The Memorandum of Association and Articles of Association are the most important documents
to be submitted to the ROC for the purpose of incorporation of a company. The Memorandum of
Association is a document that sets out the constitution of the company. It contains, amongst
others, the objectives and the scope of activity of the company besides also defining the
relationship of the company with the outside world.

The Articles of Association contain the rules and regulations of the company for the management
of its internal affairs. While the Memorandum specifies the objectives and purposes for which the
Company has been formed, the Articles lay down the rules and regulations for achieving those
objectives and purposes.

The ROC will give the certificate of incorporation after the required documents are presented along
with the requisite registration fee, which is scaled according to the share capital of the company,
as stated in its Memorandum. A private company can commence business on receipt of its
certificate of incorporation.

A public company has the option of inviting the public for subscription to its share capital.
Accordingly, the company has to issue a prospectus, which provides information about the
company to potential investors. The Companies Act specifies the information to be contained in
the prospectus.

The prospectus has to be filed with the ROC before it can be issued to the public. In case the
company decides not to approach the public for the necessary capital and obtains it privately, it
can file a "Statement in Lieu of Prospectus" with the ROC.

On fulfillment of these requirements, the ROC issues a Certificate of Commencement of Business

to the public company. The company can commence business immediately after it receives this
certificate.

Miscellaneous Documents

The documents/forms stated below are filed along with Memorandum of Association and Articles
of Association on payment of filing fees (depending on the authorised capital of the company):

 Declaration of compliance, duly stamped

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  Notice of the situation of the registered office of the company
 Particulars of Directors, Manager or Secretary
 Authority executed on a non-judicial stamp paper, in favour of one of the subscribers to
the Memorandum of Association or any other person authorizing him to file the documents
and papers for registration and to make necessary corrections, if any
 The ROC's letter (in original) indicating the availability of the name.

Tax Registration

Businesses liable for income tax must obtain a tax identification card and number [known as
Permanent Account Number (PAN)] from the Revenue Department. In addition to this, businesses
liable to withhold tax must necessarily obtain a Tax Deduction Account Number (TAN). Both the
PAN and the TAN must be indicated on all the returns, documents and correspondence filed with
the Revenue Department. The PAN is also required to be stated in various other documents such
as the documents pertaining to sale or purchase of any immovable property (exceeding Rs. five
lakh), sale or purchase of a motor vehicle, time deposit (exceeding Rs. 5 lakh), contract for sale or
purchase of securities (exceeding Rs. 10 lakh), to name a few.

Rules Applicable

 Companies (Central Governments') General Rules and Forms,1956

 Filing Registering/Approving Authority
 One copy has to be submitted along with a forwarding letter addressed to the concerned
Registrar of Companies.

Enclosures

The declaration must be submitted with the following annexure

 Document evidencing payment of fee

 Memorandum and Articles of Association
 Copy of agreement if any, which the proposed company wishes to enter into with any
individual for appointment as its managing or whole-time director or manager
 Form 18
 Form 32 (except for section 25 company)

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  Form 29 (only in case of public companies)
 Power of Attorney from subscribers
 Letter from Registrar of Companies making names available
 No objection letters from directors/promoters
 Requisite fees either in cash or demand draft

Fees

Fee payable depends on the nominal capital of the company to be registered and may be paid in
one of the following modes. Cash/postal order (upto Rs.501-), demand draft favouring Registrar
of Companies/Treasury Challan should be payable into specified branches of Punjab National
Bank for credit

Time-Limit

It should be submitted before incorporation or within 6 months of the name being made available.
Top

Requirements

The declaration has to be signed by an advocate of Supreme Court or High Court or an attorney or
pleader entitled to appear before the High Court or a secretary or chartered accountant in whole-
time practice in India who is engaged in the formation of the proposed company or person named
in the articles as director, manager or secretary.

The Registrar of Companies has to be satisfied that not only the requirements of section 33(1) and
(2) have been complied with but be also satisfied that provisions relating to number of subscribers,
lawful nature of objects and name are complied with.

The Registrar will check whether the documents have been duly stamped and also whether the
requirements of other laws are met.

Any defect in any of the documents filed has to be rectified either by all the subscribers or their
attorney, or by any one subscriber holding the power of attorney on behalf of other subscribers.

This form is to be presented to the Registrar of Companies within three months from the date of
letter of Registrar allowing the name.

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This declaration is to be given on a non-judicial stamp paper of the requisite value. The stamp
paper should be purchased in the name of the person signing the declaration.

This declaration is to be given by all the companies at, the time of registration, public or private.

The place of Registration No. of the company should be filled up by mentioning New Company
therein.

The Registrar of Companies will now accept computer laser printed documents for purposes of
registration provided the documents are neatly and legibly printed and comply with the other
requirements of the Act. This will be an additional option available to the public to use laser print
besides offset printing for submitting the memorandum and articles for the registration of
companies.

Where the executants of a memorandum of association is illiterate, he shall give his thumb
impression or marks which should be described as such by the subscriber or person writing for
him.

An agent may sign a memorandum on behalf of a subscriber if he is authorised by a power-of-

attorney to do so. In the case of an illiterate subscriber to the memorandum and articles of
association, the thumb impression or mark duly attested by the person writing for him should be
given. The person attesting the thumb mark should make an endorsement on the document to the
effect that it has been read and explained to the subscriber. The Registrar of Companies will not
accept zerox copies of the memorandum and articles of association for the purposes of registration
of companies.

This declaration is to be presented by the person signing the declaration or by his bearer at the
counter of the Registrar of Companies office.

Managerial Remuneration

 Any person in order to be appointed as the Managing Director of the company should be a
resident of India. Any person, being a non-resident in India, must obtain an Employment
Visa from the concerned Indian mission abroad at the time of their appointment as the
Managing Director.

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  Whereas private companies are free to pay any remuneration to its directors, public
companies can remunerate their directors only within the specified limits.
 In case of public companies, in the event of absence or inadequacy of net profits in any
financial year, managerial remuneration is limited to amounts varying from Rs 75,000 to
Rs 2,00,000 per month, depending on the effective capital of the company. In case of an
expatriate managerial person, perquisites in the form of children's education allowance,
holiday passage money and leave travel concession provided to him would not form part
of the said ceiling of remuneration.
 In case of a managerial position in two companies, remuneration can be drawn from one
or both companies provided that the total remuneration drawn from the companies does
not exceed the higher maximum limit admissible from any one of the companies of which
he is a managerial person.

With whom to be filed

With the Registrar of Companies of the State in which the company is to be registered.

Documents required to be submitted

 A printed copy each of the Memorandum and Articles of Association of the proposed
company filed along with the declaration duly stamped with the requisite value of adhesive
stamps from the State/ Union Territory Treasury (For value of stamps to be affixed see
Schedule printed in Part III Chapter 23). Below the subscription clause the subscribers to
the Memorandum should write in his own handwriting his full name and father's, or
husband's full name in block letters, full address, occupation, e.g., ‘business executive,
engineer, housewife, etc. and number of equity shares taken and then put his or her
signatures in the column meant for signature. Similarly, at the end of the Articles of
Association the subscriber should write in his own handwriting: his full name and father's
full name in block letters, full address, occupation. The signatures of the subscribers to the
Memorandum and the Article of Association should be witnessed by one person preferably
by the person representing the subscribers, for registration of the proposed company before
the Registrar of Companies. Under column 'Total number of equity shares' write the total

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 of the shares taken by the subscribers e.g., 20 (Twenty) only. Mention date e.g. 5th day of
August 1996. Place-e.g., 'New Delhi'.
 With the stamped copy, one spare copy each of the Memorandum and Articles of
Association of the proposed company.
 Original copy of the letter of the Registrar of Companies intimating the availability of
name.
 Form No. 18 - Situation of registered office of the proposed company.
 Form No. 29-Consent to act as a director etc. Dates on the consent Form and the
undertaking letters should be the same as is mentioned in the Memorandum of Association
signed by the director himself. A private company and a wholly owned Government
company are not required to file Form No. 29.
 Form No. 32 (in duplicate). Particulars of proposed, directors, manager or secretary.
 Power of attorney duly typed on a non-judicial stamp paper of the requisite value. The
stamp paper should be purchased in the name of the persons signing the authority.
 No objection letter from the persons whose name has been given in application for
availability of name in Form No. 1-A as promoters/directors but are not interested at a later
stage should be obtained filed with the Registrar at the time of submitting documents, for
registration
 The agreements, if any, which the company proposes to enter with any individual for,
appointment as managing or whole-time director or manager are also to be filed.

Fee payable

Cash or a bank draft/ pay order treasury challan should be drawn in the name of the Registrar of
Companies of the State in which the Company is proposed to be registered as per Schedule X.

Reporting Requirements

Annual Accounts

The Indian company law does not prescribe the books of accounts required to be maintained by a
company. It, however, provides that the same should be kept on accrual basis and according to the
double entry system of accounting and should be such as may be necessary to give a true and fair
state of affairs of the company.

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The Indian company law requires every company to maintain proper books of account with respect
to the following:

 All sums of money received and expended and the matters in respect of which the receipt
and expenditure take place
 All sales and purchases of goods by the company
 The assets and liabilities of the company
 In case of companies engaged in manufacturing, processing, mining etc., such particulars
relating to utilization of material or labour or other items of cost.

The first annual accounts of a newly incorporated company should be drawn from the date of its
incorporation upto to the day not preceding the AGM date by more than 9 months. Thereafter, the
accounts should be drawn from date of last account upto the day not preceding the AGM date by
more than 6 months subject to the extension of the time limit in certain cases. The accounts of the
company must relate to a financial year (comprising of 12 months) but must not exceed 15 months.
The company can obtain an extension of the accounting period to the extent of 18 months by
seeking a prior permission from the ROC.

The annual accounts must be filed with the ROC within 30 days from the date on which the Annual
General Meeting (AGM) of the company was held or where the AGM is not held, then within 30
days of the last date on which the AGM was required to be held.

Books of accounts to be kept by company

Every company is required to maintain proper books of account with respect to all sums of money
received and expended, all sales and purchases of goods, the assets and liabilities. Central
Government may also specifically require the maintenance of certain additional particulars with
respect to certain classes of Companies. The books of account relating to eight years immediately
preceding the current year together with supporting vouchers are required to be preserved in good
order. Every profit and loss account and balance sheet of the company (together referred to as
financial statements) is required to comply with the accounting standards issued by the Institute of
Chartered Accountants of India. Any deviations from the accounting standards, including the
reasons and consequent financial effect, is required to be disclosed in the financial statements.

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The responsibility for the preparation of financial statements on a going concern basis is that of
the management. The management is also responsible for selection and consistent application of
appropriate accounting policies, including implementation of applicable accounting standards
along with proper explanation relating to any material departures from those accounting standards.
The management is also responsible for making judgements and estimates that are reasonable and
prudent so as to give a true and fair view of the state of affairs of the entity at the end of the
financial year and of the profit or loss of the entity for that period.

Annual Return

Every company having a share capital is required to file an annual return with the ROC within 60
days from the date on which the AGM of the company was held or where the AGM is not held,
then within 60 days of the last date on which the AGM was required to be held.

Certain Accounting related issues

Depreciation

The company law in India permits the use of depreciation rates according to the nature of the
classes of assets. Assets can be depreciated either on the basis of straight-line method (based on
the estimated life of the asset) or on the basis of reducing balance method. The law prescribes the
minimum rates of depreciation. A company may, however, provide for a higher rate of
depreciation, based on a bonafide technological evaluation of the asset. Adequate disclosure in the
annual accounts must be made in this regard.

Dividend

There is no limit on the rate of dividend but there are certain conditions prescribed with regard to
computation of profits that can be distributed as dividend. Generally, no dividend can be paid for
any financial year except out of the profits of that year after making an adequate provision for
depreciation subject to certain conditions. Dividends may also be distributed out of accumulated
profits.

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Repatriation of profits

A company has to retain a maximum of 10% of the profits as reserves before the declaration of
dividends. These reserves, inter alia, can be subsequently converted into equity by way of issue of
bonus shares. Dividends are freely repatriable once the investment approval is granted.

Imposition of taxes

Currently, domestic companies are taxable at the rate of 35.875% (inclusive of surcharge of 2.5%)
on its taxable income. Foreign companies are taxed at a marginally higher rate of 41% (including
surcharge of 2.5%). However, in case where the income tax liability of the company under the
provisions of the domestic tax laws works out to less than 7.5% of the book profits (derived after
making the necessary adjustments), a Minimum Alternate Tax of 7.6875% (including a surcharge
of 2.5%) on the book profits, would be payable. Domestic companies are required to pay a dividend
distribution tax of 12.8125% (including surcharge of 2.5%) on the dividends distributed during the
year.

Companies are required to withhold tax under the domestic law from certain payments including
salaries paid to employees, interest, professional fee, payments to contractors, commission,
winnings from games / lottery / horse races etc. Moreover, taxes have to be withheld from all
payments made to non-residents at the lower of rates specified under the domestic law or under
the applicable tax treaty, if any.

Penalty

 Imprisonment up to two years and fine

 Person liable for default
 Person signing the declaration

Certificate of Incorporation

After the duly stamped Memorandum of Association and Articles of Association, documents and
forms are filed and the filing fees are paid, the ROC scrutinizes the documents and, if necessary,
instructs the authorised person to make necessary corrections. Thereafter, a Certificate of
Incorporation is issued by the ROC, from which date the company comes into existence. It takes
one to two weeks from the date of filing Memorandum of Association and Articles of Association

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to receive a Certificate of Incorporation. Although a private company can commence business
immediately after receiving the certificate of incorporation, a public company cannot do so until
it obtains a Certificate of Commencement of Business from the ROC.

Memorandum of Association

A company is formed when a number of people come together for achieving a specific purpose.
This purpose is usually commercial in nature. Companies are generally formed to earn profit from
business activities. To incorporate a company, an application has to be filed with the Registrar of
Companies (ROC). This application is required to be submitted with a number of documents. One
of the fundamental documents that are required to be submitted with the application for
incorporation is the Memorandum of Association.

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.

The section also states that the alterations must be made in pursuance of any previous company
law or the present Act.

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.

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Meaning of 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.

Object of registering a Memorandum of Association or MOA

Memorandum of Association is an essential document that contains all the details of the company.
It governs the relationship between the company and its stakeholders. Section 3 of the Companies
Act, 2013 describes the importance of memorandum by stating that, for registering a company,

(a) In case of a public company, seven or more people are required.

(b) In case of a private company, two or more people are required.
(c) In case of a one-person company, only one person is required.

In all the above cases, the concerned people should first subscribe to a memorandum before
registering the company with Registrar.

Thus, Memorandum of Association is essential for registration of a company. Section 7(1)(a) of

the Act states that for incorporation of a company, Memorandum of Association and Articles of

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Association of the company should be duly signed by the subscribers and filed with the Registrar.
In addition to this, a memorandum has other objects as well. These are,

1. It allows the shareholders to know about the company before buying it shares. This helps
the shareholders determine how much capital will they invest in the company.
2. It provides information to all the stakeholders who are willing to associate with the
company in any way.

Format of Memorandum of Association

Section 4(5) of the Companies Act states that a memorandum should be in any form as given in
Tables A, B, C, D, and E of Schedule 1. The Tables are of different kinds because of different
kinds of companies.

Table A – It is applicable to a company limited by shares.

Table B – It is applicable to a company limited by guarantee and not having a share capital.

Table C – It is applicable to a company limited by guarantee and having a share capital.

Table D – It is applicable to an unlimited company not having a share capital.

Table E – It is applicable to an unlimited company having a share capital.

The memorandum should be printed, numbered and divided into paragraphs. It should also be
signed by the subscribers of the company.

Content 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.

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.

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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 are Section 8 companies?

Section 8 Company is named after Section 8 of the Companies Act,2013. It describes companies
which are established to promote commerce, art, sports, education, research, social welfare,
religion etc. Section 8 companies are similar to Trust and Societies, but they have a better
recognition and legal standing than Trust and Societies.

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.

Illustration: Precious Technology Limited is same as Precious Technology Company.

 If plural or singular forms are added to differentiate between names.

Illustrations: Greentech Solution is same as GreenTech Solutions.

 If type, and case of letters, or punctuation marks are added.

Illustration: Wework is same as We.work.

 Different tenses are used in names.

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Illustration: Ascend Solution is same as Ascended Solutions.

 If there is an intentional spelling mistake in the name or phonetic changes in the name.

Illustrations: Greentech is same as Greentek.

 Internet related designations are used like .org, .com, etc.

Illustration: Greentech Solution Ltd. is same as Greentech Solutions.com Ltd.

Exception: The name will not be disregarded if the existing company by a board of resolution
allows it.

 Change in order of combination of words.

Illustration: Shah Builders and Contractors is same as Shah Contractors and Builders.

Exception: The name will not be disregarded if the existing company by a board of resolution
allows it.

 Addition of a definite or indefinite article.

Illustration: Greentech Solutions Ltd is same as The Greentech Solutions Ltd.

Exception: The name will not be disregarded if the existing company by a board of resolution
allows it.

 Slight variation in spelling of two names, including a grammatical variation.

Illustration: Colours TV Channel is same as Colors TV Channel.

 Translation of a name, from one language to another.

Illustration: Om Electricity Corporation is same as Om Vidyut Nigam.

 Addition of the name of a place to the name.

Illustration: Greentech Solutions Ltd. Is same as Greentech Mumbai Solutions Ltd.

Exception: The name will not be disregarded if the existing company by a board of resolution
allows it.

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  Addition, deletion or modification of numericals in the name.

Illustration: Greentech Solutions Ltd. Is same as 5 Greentech Solutions Ltd.

Exception: The name will not be disregarded if the existing company by a board of resolution
allows it.

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:

1. Prohibited under the Provisions of Section 3 of Emblems and Names (Prevention and
Improper Use) Act, 1950.
2. Names which resemble each other, which are chosen to deceive.
3. The name includes a registered trademark.
4. The name includes any word or words which are offensive to a section of people.
5. 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.

Reservation of a Name

Section 4(5)(i) of the Act states that for formation of the Company, the Registrar on receiving the
required documents can reserve a name for 20 days. If the application is made by an existing
company, then once the application is accepted, the name will be reserved for 60 days from the
date of application. The company should get incorporated with the reserved name in these 60 days.

If after making the reservation of a name, it is found that some wrong information is given. Then
two cases arise.

 In case the company has not been incorporated. In this case, the Registrar can cancel the
reservation of the name and impose a fine of Rupees 1,00,000.

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  In case the company has been incorporated. In this case, after hearing the reasons of the
company, the Registrar has 3 options. These are,
o On being satisfied, he can give 3 months’ time to the company to change the name
by passing an ordinary resolution.
o He can strike off the name from the Register of Companies.
o He can file a petition of winding up of the company.

Rule 8 and 9 of the Company (Incorporation) Rules, 2014 state that the application for reservation
of name under section 4(4) should be filed on Form INC – 1.

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.

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.

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By limiting the scope of powers of the company. The object clause provides protection to:

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.

Creditors – It ensures the creditors that capital is not at risk and the company is working within the
limits as stated in the clause.

Public Interest – The object clause limits the number of matters the company can deal with thus,
prohibiting diversification of activities of the company.

Doctrine of Ultra Vires

If the company operates beyond the scope of the powers stated in the object clause, then the action
of the company will be ultra vires and thus void.

Consequences of Ultra Vires

1. 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.
2. 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.
3. Ultra Vires Lending by the Company: If the company lends money for an ultra vires
purpose, then the lending would be ultra vires.
4. Void ab initio – Ultra Vires acts of the company are considered void from the beginning.
5. Injunction – Any member of the company can use the remedy of injunction to prevent the
company from doing ultra vires acts.

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:

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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.

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.

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.

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.

Memorandum of Association for One-Person-Company

A one-person company is called so because it can be formed by one person. The minimum capital
required to form a one-person company is 1,00,000 Rupees.

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It is a new concept which has been introduced to promote entrepreneurship. All the laws which
are applicable on private companies will be applicable on one-person company.

Section 2(62) of the Companies Act, 2013 defines one-person company.

A one-person company is a separate legal entity from its owner. It is mandatory for the company
to be converted into a private limited company in case its annual turnover crosses the 2 Crore mark.

In case of one-person-company, in addition to all the other clauses, the Memorandum of

Association contains a clause called the Nomination Clause. This clause mentions the name of an
individual who will become the member in case the subscriber dies or becomes incapacitated. The
nominee must be an Indian citizen and resident of India i. e. he must have been living in India for
at least 182 days in the preceding year. A minor cannot be a nominee.

The individual whose name is mentioned should give his consent in written form and it is required
to be filed with the Registrar of Companies at the time of incorporation.

If the nominee wants to withdraw, he shall give it in writing and the owner of the company will
have to nominate a new person within 15 days.

What’s the use of Memorandum of Association?

1. It defines the scope & powers of a company, beyond which the company cannot operate.
2. It regulates company’s relation with the outside world.
3. It is used in the registration process; without it the company cannot be incorporated.
4. It helps anyone who wants to enter into a contractual relationship with the company to gain
knowledge about the company.
5. It is also called the charter of the Company, as it contains all the details of the company,
its members and their liabilities.

Subscription of Memorandum of Association

Subscribers are the first shareholders of the company. They are the people who agreed to come
together and form the company. The name of each subscriber along with their particulars are
mentioned in the memorandum.

Different kinds of companies require different number of subscribers for incorporation.

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  Private Company: In case of a private company, the minimum number of subscribers
required are 2.
 Public Company: In case of a public company, 7 or more subscribers are required.
 One-Person-Company: In case of one-person-company, only one person is required.

Who can Subscribe?

Rule 13 of the Companies (Incorporation) Rules, 2014 describes the provisions of subscribing to
the memorandum.

There are specific kinds of persons (natural or artificial) who can subscribe to the memorandum.
These are:

 Individuals – An individual or a group of individuals can subscribe to the memorandum.

 Foreign citizens and Non-Resident Indians – Rule 13(5) of the Companies (Incorporation)
Rules, states that for a foreign citizen to subscribe to a company in India, his signature,
address and proof of identity will need to be notarized.

The foreign national must have visited India and should have a Business Visa.

For a Non-Resident Indian, the photograph, address and identity proof should be attested at the
Embassy with a certified copy of a passport. There is no requirement of Business Visa.

1. Minor – A minor can only be a subscriber through his guardian.

2. Company incorporated under the Companies Act – The company can be a subscriber to the
memorandum. The Director, officer or employee of the company or any other person
authorized by the board of resolution.
3. Company incorporated outside India – Foreign Company is defined in Section 2(42) of the
act; it states that a foreign company is a company incorporated outside India. A company
registered outside India can also subscribe to the memorandum by fulfilling the additional
formalities.
4. Society registered under the Societies Registration Act, 1860.
5. Limited Liability Partnership – A partner of a limited liability partnership can sign the
memorandum with the agreement of all the other partners.

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 6. Body corporate incorporated under an Act of Parliament or State Legislature can also be a
subscriber to the memorandum.

Subscription to Memorandum of Association

Every subscriber should sign the memorandum in presence of at least one witness. The following
particulars of the witness should also be mentioned.

1. Name of the witness

2. Address
3. Description
4. Occupation

If the signature is in any other language then, then an affidavit is required that declares that the
signature is the actual signature of the person.

According to Circular No. 8/15/8, dated 1-9-1958. The subscriber can also authorize another
person to affix the signature by granting a power of attorney to the person. Department Circular
No. 1/95, dated 16th February 1995 states that only one power of attorney is required.

The person who is granted the power of attorney may be known as an agent.

He should also state the following particulars in the memorandum:

1. Name of the agent

2. Address
3. Description
4. Occupation

Particulars to be Mentioned in Memorandum of Association

Rule 16 of the Companies (Incorporation) Rules, 2014 details the particulars that are to be
mentioned in the memorandum.

Every Subscriber’s following details should be mentioned.

1. Name (includes last name and family name), a photograph should be affixed and scanned
with the memorandum.
2. Father’s Name and Mother’s Name
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 3. Nationality
4. Date of Birth
5. Place of Birth
6. Qualifications
7. Occupation
8. Permanent Account Number
9. Permanent and Current Address
10. Contact Number
11. Fax Number (Optional)
12. 2 Identity Proofs in which Permanent Account Number is mandatory.
13. Residential Proof (not older than 2 months)
14. Proof of nationality, if subscriber is a foreign national
15. If the subscriber is a current director or promoter, then his designation along with Name
and Company Identity Number

If a body corporate is subscribing to the memorandum then the following particulars should be
mentioned.

1. Corporate identity number of the company or registration number of the body corporate.
2. Global location number, which is used to identify the location of the legal entity. (Optional)
3. The name of the body corporate.
4. The registered address of the business.
5. Email address.

In case the body corporate is a company, then a certified copy of Board resolution which authorizes
the subscription to the memorandum. The particulars required in this case are,

1. Number of shares to be subscribed by a body corporate.

2. Name, designation and address of the authorized person.

In case the body corporate is a limited liability partnership. The particulars required are,

1. A certified copy of the resolution.

2. The number of shares that the firm is subscribing to.
3. The name of the authorized partner.

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In case the body corporate is registered outside the country. The particulars required are,

1. The copy of certificate of incorporation.

2. The address of the registered office.

Printing and Signing of Memorandum of Association

Section 7(1)(a) states that the memorandum should be duly signed by all the subscribers and should
be in a manner prescribed by the Act.

Rule 13 of the Company (Incorporation) Rules, 2014 describes the manner in which the
memorandum should be signed.

1. The Memorandum of Association should be signed by each subscriber to the memorandum.

The subscriber shall mention his name, address, occupation and the number of shares he is
subscribing to. The documents should be signed in the presence of at least one witness.
The witness would also mention his name, address, and occupation. By signing the
memorandum, the witness states that, “I witness to subscriber/subscriber(s)who has/have
subscribed and signed in my presence (date and place to be given); further I have verified
his or their Identity Details (ID) for their identification and satisfied myself of his/her/their
identification particulars as filled in.”
2. If the person subscribing to the document is illiterate, he can either authorize an agent to
sign the document through Power of Attorney or he can put his thumb impression on the
column for signatures. The person’s name, address, occupation and the number of shares
he is subscribing to should be written by a person who has been allowed to write for him.
The person who is writing for the illiterate person should read and explain the contents of
the document to an illiterate person.
3. Where the person subscribing to the memorandum is an artificial person i. e. a body
corporate the memorandum shall be signed by the employee, officer or any person
authorized by the Board of Resolution.
4. Where the person subscribing to the memorandum is a foreign national who does not reside
in India but in a country,

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  in any part of the Commonwealth, his signatures and address on the memorandum and
proof of identity shall be notarized by a Notary (Public) in that part of the
Commonwealth.
 in a country which is a signatory to the Hague Apostille Convention, 1961, his signature
and proof of identity and address on the memorandum shall be notarized before the
Notary (Public) of the country of his origin and be duly approved in accordance with
the said Hague Convention.
 in a country outside the Commonwealth and which is not a party to the Hague Apostille
Convention, 1961, his signatures and address on the memorandum and proof of
identity, shall be notarized before the Notary (Public) of such country and the certificate
of the Notary (Public) shall be authenticated by a Diplomatic or Consular Officer
empowered in this behalf under section 3 of the Diplomatic and Consular Officers
(Oaths and Fees) Act, 1948 (40 of 1948).

Section 3 of the Diplomatic and Consular Officers states that, every Diplomat or any officer in a
foreign country can perform the functions of a notary public.

 Where there is no Diplomatic or Consular officer by any of the officials mentioned in

section 6 of the Commissioners of Oaths Act, 1889.
 If the foreign national visited India and intended to incorporate a company, in such a case
the incorporation shall be allowed if, he is having a valid Business Visa.

Section 15 of the Companies Act, 2013 states that the memorandum should be in printed form.

The Ministry of Corporate Affairs has clarified that a document printed in form laser printers will
be considered valid provided it is legible and fulfills other requirements as well.

The submission of xerox copies is not allowed. The xerox copies can be submitted to the members
of the company.

Alteration, Amendment & Change in Memorandum of Association under Companies Act, 2013

The term “alter” or “alteration” is defined in Section 2(3) of the Act, as any additions, omissions
or substitutions. A company can alter the memorandum only to the extent as permitted by the Act.

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According to Section 13, the company can alter the clauses in the memorandum by passing a
special resolution.

A resolution is a formal decision taken in a meeting. There are two kinds of resolutions, ordinary
and special. A special resolution is one which requires at least 2/3rd majority to be effective. The
alteration to the clauses also requires the approval of the Central Government in writing.

The alteration of memorandum can happen for a variety of reasons. The alteration can be made if,

1. Enables the company to carry its business more effectively.

2. Helps to achieve the objectives.
3. Helps the company to amalgamate with another company.
4. Helps the company dispose off any undertaking.

Alteration of Memorandum

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.

 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.

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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.

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

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.

Articles of Association

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

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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.

Nature and Content of Articles of Association

As per the Companies Act, 2013, the articles of association of different companies are supposed
to be framed in the prescribed form, since the model form of articles is different for companies
limited by shares, companies limited by guarantee having share capital, companies limited by
guarantee not having share capital, an unlimited company having share capital and an unlimited
company not having share capital.

The signing of the Articles of Association

The Companies (Incorporation) Rules, 2014 prescribes that both the Memorandum and the Articles
of a company are to be signed in a specific manner.

 Memorandum and Articles of a company, are both required to be signed by all subscribers,
who are further required to add their names, addresses and occupation, in the presence of
at least one witness, who must attest the signatures with his own signature and details.
 Where a subscriber is illiterate, he must affix a thumb impression in place of his signature
and appoint a person to authenticate the impression with his signature and details. This

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 appointed person should also read out the content of the documents to the illiterate
subscriber for his understanding.
 Where a subscriber is a body corporate, the memorandum and articles must be signed by
any director of the body corporate who is duly authorised to sign on behalf of the body
corporate, by a passing a resolution of the board of directors of the body corporate.
 Where the subscriber is a Limited Liability Partnership, the partner of the LLP who is duly
authorised to sign on the behalf of the LLP by a resolution of all the partners shall sign.

Provisions for Entrenchment

The concept of Entrenchment was introduced in the Companies Act, 2013 in Section 5(3) which
implies that certain provisions within the Articles of Association will not be alterable by merely
passing a special resolution and will require a much more lengthy and elaborate process. The literal
definition of the word “entrench” means to establish an attitude, habit, or belief so firmly that
bringing about a change is unlikely. Thus, an entrenchment clause included in the Articles is one
which makes certain changes or amendments either impossible or difficult.

Provisions for entrenchment can only be introduced in the articles of a company during its
incorporation, or an amendment to the articles brought about by a special resolution in case of a
public company, and an agreement between all the members in case of a private company.

Alteration of Articles of Association

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 company may alter its
articles to the effect that would turn:

A public company into a private company

For a company wanting to convert itself from public to a private company simply passing a special
resolution is not enough. The company will have to acquire the consent and approval of the
Tribunal. Further, a copy of the special resolution must be filed with the Registrar of Companies
within 30 days of passing it. Further, a company must then file a copy of the altered, new articles

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of association, as well as the approval order of the Tribunal with the Registrar of Companies within
15 days of the order being received.

A private company into a public company

For a company wanting to convert from its private status to public, it may do so by
removing/omitting the three clauses as per section 2(68) which defines the requisites of a private
company. Similar to the conversion of the public to a private company, a copy of the resolution
and the altered articles are to be filed with the Registrar within the stipulated period of time.

Limitations on power to alter articles

 The alteration must not contravene provisions of the memorandum, since the memorandum
supersedes the articles, and the memorandum will prevail in the event of a conflict.
 The alteration cannot contravene the provisions of the Companies Act, or any other
company law since it supersedes both the memorandum and the articles of the company.
 Cannot contravene the rules, alterations or suggestions of the Tribunal.
 The alteration cannot be illegal or in contravention with public policy. Further, it must be
for the bona fide benefit and interest of the company. The alterations cannot be an effort to
constitute a fraud on the minority and must be for the benefit of the company as a whole.
 Any alteration made to convert a public company into a private company, cannot be made
until the requisite approval is obtained from the Tribunal.
 A company may not use the alteration to cover up or rectify a breach of contract with third
parties or use it to escape contractual liability.
 A company cannot alter its articles for the purpose of expelling a member of the board of
directors is against company jurisprudence and hence cannot occur.

Binding effect of Memorandum and Articles of Association

After the Articles and the Memorandum of a company are registered, they bind the company and
its members to the same extent as if they had been signed by each of the members of the company.
However, while the company’s articles have a binding effect, it does not have as much force as a
statute does. The effect of binding may work as follows:

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Binding the company to its members

The company is naturally completely bound to its members to adhere to the articles. Where the
company commits or is in a place to commit a breach of the articles, such as making ultra vires or
otherwise illegal transaction, members can restrain the company from doing so, by way of an
injunction. Members are also empowered to sue the company for the purpose of enforcement of
their own personal rights provided under the Articles, for instance, the right to receive their share
of declared divided.

It should be noted, however, that only a shareholder/member, and only in his capacity as a member,
can enforce the provisions contained in the Articles. For instance, in the case of Wood v. Odessa
Waterworks Co., the articles of Waterworks Co. provided that the directors can declare a dividend
to be paid to the members, with the sanction of the company at a general meeting. However, instead
of paying the dividend to the shareholders in cash a resolution was passed to give them debenture
bonds. It was finally held by the court, that the word “payment” referred to payment in cash, and
the directors were thus restrained from acting on the resolution so passed.

Members bound to the company

Each member of the company is bound to the company and must observe and adhere to the
provisions of the memorandum and the articles. All the money that may be payable by any member
to the company shall be considered as a debt due. Members are bound by the articles just as though
each and every one of them has signed and contracted to conform to their provisions. In Borland’s
Trustees v. Steel Bros. & Co. Ltd., the articles the company provided that in the event of
bankruptcy of any member, his shares would be sold at a price affixed by the directors. Thus, when
Borland went bankrupt, his trustee expressed his wish to sell these shares at their original value
and contended that he could do so since he was not bound by the articles. It was held, however,
that he was bound to abide by the company’s articles since the shares were bought as per the
provisions of the articles.

Binding between members

The articles create a contract between and amongst each member of the company. However, such
rights can only be enforced by or even against a member of the company. Courts have been known
to make exceptions and extend the articles to constitute a contract even between individual

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members. In the case of Rayfield v Hands Rayfield was a shareholder in a particular company.,
who was required to inform directors if he intended to transfer his shares, and subsequently, the
directors were required to buy those shares at a fair value. Thus, Rayfield remained in adherence
to the articles and informed the directors. The directors, however, contended that they were not
bound to pay for his shares and the articles could not impose this obligation on them. The courts,
however, dismissed the directors’ argument and compelled them to buy Rayfield’s shares at a fair
value. The court further held that it was not mandatory for Rayfield to join the company to be
allowed to bring a suit against the company’s directors.

No binding in relation to outsiders

Contrary to the above conditions, neither the memorandum nor the articles constitute a contract
between the company and any third party. The company and its members are not bound to the
outsiders with respect to the provisions of the memorandum and the articles. For instance, in the
case of Browne v La Trinidad, the articles of the company included a clause that implied that
Browne should be a director that should not be removed or removable. He was, however, removed
regardless and thus brought an action to restrain the company from removing him. Held that since
there was no contract between Browne and the company, being an outsider, he cannot enforce
articles against the company even if they talk about him or give him any rights. Therefore, an
outsider may not take undue advantage of the articles to make any claims against the company.

The doctrine of Constructive Notice

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.

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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.

Distinction Between Memorandum and Articles of Association

Sl.No. Memorandum of Association Articles of Association

Contains fundamental conditions upon Contain the provisions for internal

1
which the company is incorporated. regulations of the company.

Meant for the benefit and clarity of the Regulate the relationship between the
2 public and the creditors, and the company and its members, as well
shareholders. amongst the members themselves.

Lays down the area beyond which the Articles establish the regulations for
3
company’s conduct cannot go. working within that area.

Memorandum lays down the parameters Articles prescribe details within those
4
for the articles to function. parameters.

Can only be altered under specific

circumstances and only as per the
Articles can be altered a lot more easily,
5 provisions of the Companies Act, 2013.
by passing a special resolution.
Permission of the Central Government is
also required in certain cases.

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 Memorandum cannot include provisions Articles cannot include provisions contrary
contrary to the Companies Act. to the memorandum. Articles are
6
Memorandum is only subsidiary to the subsidiary to both the Companies Act and
Companies Act. the Memorandum.

Acts done beyond the memorandum Acts done beyond the Articles can be
7 are ultra vires and cannot be ratified ratified by the shareholders as long as the
even by the shareholders. act is not beyond the memorandum.

The doctrine of Indoor Management

The concept of the Doctrine of Indoor Management can be most elaborately explained by
examining the facts of the case of Royal British Bank v. Turquand, which in fact, first laid down
the doctrine. It is due to this that the doctrine of indoor management is also known as the
“Turquand Rule”.

The directors of a particular company were authorised in its articles to engage in the borrowing of
bonds from time to time, by way of a resolution passed by the company in a general meeting.
However, the directors gave a bond to someone without such a resolution being passed, and
therefore the question that arose was whether the company was still liable with respect to the bond.
The company was held liable, and the Chief Justice, Sir John Jervis explained that the
understanding behind this decision was that the person receiving the bond was entitled to assume
that the resolution had been passed, and had accepted the bond in good faith.

However, the judgement, in this case, was not fully accepted into in law until it was accepted and
endorsed by the House of Lords in the case of Mahony v East Holyford Mining Co.

Therefore, the primary role of the doctrine of indoor management is completely opposed to that of
constructive notice. Quite simply, while constructive notice seeks to protect the company from an
outsider, indoor management seeks to protect outsiders from the company. The doctrine of
constructive notice is restricted to the external and outside position of the company and, hence,
follows that there is no notice regarding how the internal mechanism of the company is operated
by its officers, directors and employees. If the contract has been consistent with the documents on

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public record, the person so contracting shall not be prejudiced by any and all irregularities that
may beset the inside, or “indoor” operation of the company.

This doctrine has since then been adopted into Indian Law as well in cases such as Official
Liquidator, Manabe & Co. Pvt. Ltd. v. Commissioner of Police and more recently, in M. Rajendra
Naidu v. Sterling Holiday Resorts (India) Ltd. wherein the judgment was that the organizations
lending to the company should acquaint themselves well with the memorandum and the articles,
however, they cannot be expected to be aware of every nook and corner of every resolution, and
to be aware of all the actions of a company’s directors. Simply put, people dealing with the
company are not bound to inquire into every single internal proceeding that takes place within the
company.

Exceptions to the Doctrine of Indoor Management

Where the outsider had knowledge of the irregularity— Although people are not expected to know
about internal irregularities within a company, a person who did, in fact, have knowledge, or even
implied notice of the lack of authority, and went ahead with the transaction regardless, shall not
have the protection of this doctrine. Illustration: In Howard v. Patent Ivory Co. (38 Ch. D 156),
the articles of a company only allowed the directors to borrow a maximum amount of one thousand
pounds, however, they could exceed this amount by obtaining the consent of the company in a
general meeting. However, in this case, without obtaining this requisite consent, the directors
borrowed a sum of 3,500 Pounds from one of the directors in exchange for debentures. The
company then refused to pay the amount. It was eventually held that the debentures were only
good to the extent of one thousand pounds since the director had full knowledge and notice of the
irregularity since he was a director himself involved in the internal working of the company.

Lack of knowledge of the articles— Naturally, this doctrine cannot and will not protect someone
who has not acquainted himself with the articles or the memorandum of the company for example
in the case of Rama Corporation v. Proved Tin & General Investment Co. wherein the officers of
Rama Corporation had not read the articles of the investment company that they were undertaking
a transaction with.

Negligence— This doctrine does not offer protection to those who have dealt with a company
negligently. For example, if an officer of a company very evidently takes an action which is not

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within his powers, the person contracting should undertake due diligence to ensure that the officer
is duly authorized to take that action. If not, this doctrine cannot help the person so contracting,
such as in the case of Al Underwood v. Bank of Liverpool.

Forgery— Any transaction which involves forgery or is illegal or void ab initio, implies the lack
of free will while entering into the transaction, and hence does not invoke the doctrine of indoor
management. For example, in the case of Ruben v. Great Fingal Consolidated, the secretary of a
company illegally forged the signatures of two directors on a share certificate so as to issue shares
without the appropriate authority. Since the directors had no knowledge of this forgery, they could
not be held liable. The share certificate was held to be in nullity and hence, the doctrine of indoor
management could not be applied. The wrongful an unauthorized use of the company’s seal is also
included within this exception.

Further, this doctrine cannot include situations where there was third agency involved or existent.
For example, in the case of Varkey Souriar v. Keraleeya Banking Co. Ltd. this doctrine could not
be applied where there was any scope of power exercised by an agent of the company. The doctrine
cannot be implied even in cases of Oppression

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.

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Statement in lieu of prospectus

Every public company either issue a prospectus or file a statement in lieu of prospectus. This is
not mandatory for a private company. But when a private company converts from private to public
company, it must have to either file a prospectus if earlier issued or it has to file a statement in lieu
of prospectus.

The provisions regarding the statement in lieu of prospectus have been stated under section 70 of
the Companies Act 2013.

Advertisement of prospectus

Section 30 of the Companies Act 2013 contains the provisions regarding the advertisement of the
prospectus. This section states that when in any manner the advertisement of a prospectus is
published, it is mandatory to specify the contents of the memorandum of the company regarding
the object, member’s liabilities, amount of the company’s share capital, signatories and the number
of shares subscribed by them and the capital structure of the company. Types of the prospectus as
follows.

 Shelf Prospectus
 Red Herring Prospectus
 Abridged prospectus
 Deemed Prospectus

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.

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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. The obligations carried by a red herring prospectus are same

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as a prospectus. If there is any variation between a red herring prospectus and a prospectus then it
should be highlighted in the prospectus as variations.

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

The applicant or subscriber has right under Section60B (7) to withdraw the application on any
intimation of variation within 7 days of such intimation and the withdrawal should be
communicated in writing.

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.

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

Process for filing and issuing a prospectus

Application forms

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

The exceptions to this rule are:

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

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

Contents

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.

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 11. Particulars related to risk factors of the specific project, gestation period of the project, any
pending legal action and other important details related to the project.
12. Minimum subscription and what amount is payable on the premium.
13. Details of directors, their remuneration and extent of their interest in the company.
14. Reports for the purpose of financial information such as auditor’s report, report of profit
and loss of the five financial years, business and transaction reports, statement of
compliance with the provisions of the Act and any other report.

Filing of copy with the registrar

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

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

Delivery of copy of the prospectus to the registrar

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

Registration of prospectus

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

 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.

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Contravention of section

If a prospectus is issued in contravention of the provision under section 26 of the Companies Act
2013, then the company can be punished under section 26(9). The punishment for the
contravention is:

 Fine of not less than Rs. 50,000 extending up to 3,00,000.

If any person becomes aware of such prospectus after knowing the fact that such prospectus is
being issued in contravention of section 26 then he is punishable with the following penal
provisions.

 Imprisonment up to a term of 3 years, or

 Fine of more than Rs. 50,000 not exceeding Rs. 3,00,000.

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 UNIT – III

MANAGEMENT AND CONTROL OF COMPANIES

Synopsis

 Introduction to Company Meetings

 Board of Directors
 Committee Meetings
 Members’ meetings
 Distribution of powers between Board of Directors and Shareholders
 Directors
 Corporate Social Responsibility
 Oppression and Mismanagement
 Class Actions

Introduction to Company Meetings

A number of meetings are convened in a company and are generally classified as members’
meetings, directors’ meetings and other meetings. Members’ meetings include the annual general
meeting, which is the mandatory meeting of the members that every company is required to
convene each year. However, there exists no embargo on holding more than one general meeting
of the members, which are called the extra-ordinary general meetings. The meetings of the
directors are called the Board meetings and the meetings of the committees of the directors are the
Committee meetings. Other meetings include creditors meetings and class meetings.

The focus of the Companies Act, 2013 has been on enhancing transparency, shareholders’
democracy and protection of the interest of the investors. It has made few changes for regulating
meetings for example, the requirement of holding a statutory meeting of members at the time of
commencement of business of a company for any public company (required under the Companies
Act, 1956) has been done away with, the concepts of video-conferencing and e-voting have been
introduced.

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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.

Directors’ Meetings

Board Meetings [Section 173 read with Rules 3 and 4 of the Companies (Meetings of Board
and its Powers), 2014]

The Board of directors of a company are responsible for overseeing the management of the
company and thereby exercise their power of day-to-day decision making by convening and
holding Board meetings.

Within 30 days of their incorporation, the companies must hold their first board meeting.
Thereafter, the companies must hold at least four board meetings in a year, where there must not
be more than 120 days’ gap between two consecutive meetings.

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One of the striking features of the present legislation is that it allows the directors to take part in
the board meeting through videoconferencing or any other audio-visual means. However, there is
an embargo from dealing certain matters through the video-conferencing or audio-visual mode.

A notice of at least seven days must be given to each of the director for a board meeting. In case
of urgency a shorter notice may be given where at least one independent director is present at such
meeting.

The notice of a board meeting must be sent to all the directors, otherwise the proceedings of the
meeting and the resolution passed thereat may be declared as invalid by the Court of law.

Also, it has been held in the case of Dankha Devi Agarwal v. Tara Properties Private Limited that
a decision taken in a meeting without due notice of such meeting for removal or induction would
be instance of oppression and mismanagement.

At least two directors or one-third of the total strength (higher of the two) constitutes quorum for
a board meeting. Here the directors, both personally attending or through the audio-video means
would be counted for the purposes of the quorum (section 174).

Board Composition

Minimum/Maximum Number of Directors in a Company [Section 149(1)] Section 149(1) of the

Companies Act, 2013 requires that every company shall have a minimum number of 3 directors in
the case of a public company, two directors in the case of a private company, and one director in
the case of a One Person Company. A company can appoint maximum 15 fifteen directors 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.
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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. Section 8 company will not be counted for the purpose of maximum number of
Directorship

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.

Quorum for Board meeting Requirement

 Quorum for Board Meeting = 1/3rd of its Total strength or two directors, whichever is
higher
 A Director participating through video conferencing/audio visual modes will also be
counted for quorum
 Any fraction of a member will be rounded off as one
 Total strength shall not include directors whose places are vacant.

Power of Board [Section 179] Section 179 of the Act deals with the powers of the board; all
powers to do such acts and things for which the company is authorised is vested with board of
directors. But the board can act or do the things for which powers are vested with them and not
with general meeting.

The following [Section 179(3) read with Rule 8 of Companies (Management & Administration)
Rules, 2014] powers of the Board of directors shall be exercised only by means of resolutions
passed at meetings of the Board, namely :-

3. to make calls on shareholders in respect of money unpaid on their shares;

4. to authorise buy-back of securities under section 68;
5. to issue securities, including debentures, whether in or outside India;
6. to borrow monies;

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 7. to invest the funds of the company;
8. to grant loans or give guarantee or provide security in respect of loans;
9. to approve financial statement and the Board’s report;
10. to diversify the business of the company;
11. to approve amalgamation, merger or reconstruction;
12. to take over a company or acquire a controlling or substantial stake in another company;
13. to make political contributions; Lesson 15 Board Constitution and its Powers 533
14. to appoint or remove key managerial personnel (KMP);
15. to appoint internal auditors and secretarial auditor; The Board may, by a resolution passed
at a meeting, delegate to any committee of directors, the managing director, the manager
or any other principal officer of the company or in the case of a branch office of the
company, the principal officer of the branch office, the powers specified in (4) to (6) above
on such conditions as it may specify. The banking company is not covered under the
purview of this section.

Restriction on Powers of Board

[Section 180] The board can exercise the following powers only with the consent of the company
by special resolution, 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. (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

Contributions to Charitable Funds and Political Parties [Section 181] The power of making
contribution to ‘bona fide’ charitable and other funds is available to the board subject to certain
limits

Prohibitions and Restrictions Regarding Political Contributions [Section 182] According to

Section 182 of the Act, a company, other than a government company which has been in existence

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for less than three financial years, may contribute any amount directly to any political party.
Further, the limit of contribution to political parties is 7.5% of the average net profits during the
three immediately preceding financial years.

Power of Board and other Persons to make Contributions to National Defence Fund, etc.
[Section 183] The Board is authorised to contribute such amount as it thinks fit to the National
Defence Fund or any other fund approved by the Government for the purpose of national defence.
The company is required to disclose in its profit and loss account the total amount or amounts
contributed by it during the financial year.

In P.S Offshore Interland Services P Ltd v. Bombay Offshore Suppliers Ltd, it was held that
a closed or out of function unit of a company may be an undertaking. Also in Pramod Kumar
Mittal v. Andhra Steel Corpn Ltd, 11 it was held that an undertaking in a complete and complex
weft and the various types of business and assets are threads which cannot be taken a part from the
weft. ( b) To remit or give time for payment of any debt to the company by a director,12 except in
the case of renewal or continuance of an advance made by a banking company to its directors in
the ordinary course of business. (c) To invest (excluding trust securities) the amount of
compensation received in respect of the compulsory acquisition of any undertaking or property of
the company. (d) To borrow moneys and where the moneys to be borrowed (together with the
moneys already borrowed by the company) are more than paid up capital of the company and its
free reserves. That is to say reserves in the share premium account, general reserve, profit and a
loss account, and capital redemption account).The amount of temporary loans raised from banks
in the ordinary course of business is excluded. This, however, does not include loans raised for the
purpose of financing expenditure of a capital-' nature. (e) To contribute to charitable and other
funds not directly relating to the business of the company or the welfare of its employees, amounts
exceeding in any financial year, fifty thousand or 5 percent of the average net profits of the three
preceding financial years, whichever is greater.

Power of directors to allot the shares

Directors of a company have powers to allot shares but this power must be exercised bonafide for
the benefit of the company as a whole because this power is t / a fiduciary one. In Grant v. John
Grant& Sons Ltd, it was held that when the company not in need of further capital and the
directors issued shares only to maintain their control or for defeating the wishes of the existing

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majority of the shareholders, the allotment was improper. In another case of Punt v. Symons &Co
Ltd, the directors used the shares with the object of creating a sufficient majority to enable them
to pass a special resolution depriving other shareholders special rights conferred on them by the
company’s articles. It was held that when issue of shares to persons who are, obviously meant and
intended to secure the necessary statutory majority in a particular interest, it could not be fair and
bonafide exercise of the power.

Similarly, in the case of Pierey v. S Mills &Co Ltd, the directors had issued shares to enable them
to resist the election of three additional directors which would have put the existing directors in a
minority on the board. The issue was held to be improper.

Power of Directors to Make Calls on Shares

The Articles of Association of companies generally provide that the power to make calls in
advance from the shareholders in respect of unpaid amount on shares vest in the directors. The
power to make calls is a fiduciary one and shall not be used by the directors for their own benefit.
This power cannot be delegated by the directors to any committee of directors, the managing agent,
secretaries, treasurers or the manager, In Poiner Alkali Works Ltd v. Amiruddins. Tayyabji, it
was held that where the articles provide that every shareholder shall be liable to pay the amount of
every call to the persons and at the time and place appointed by the directors, the resolution should
specify the time, place and amount of the payment of the call. In East and West Insurance Co
Ltd v. Mrs. Kamla Jayanti Lsl Mehta, it was held that when the time for the payment of the call
is not fixed by the board of directors, the call is valid although there was an omission in specifying
the place and person whom the call is to be paid. A valid resolution making a call must state; (a)
The amount of the call, (b) The time when the call should be paid, (c) The person to whom the
payment is to be made and (d) The place where the payment is to be made.

Committee Meetings

The Companies Act, 2013 provides for four mandatory committees of the board of directors under
the Act which are namely, Audit Committee, Nomination & Remuneration Committee,
Stakeholders Relationship Committee and Corporate Social Responsibility Committee. The
committees so formulated are not to be appointed by every company but they get triggered or are
required to be formulated based on certain thresholds.

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i. Audit Committee meeting is required to be convened by every listed company and only those
public companies which have a paid up share capital of Rs. 10 crore or more or have a turnover of
Rs. 50 crore or more or have aggregate outstanding loan, debenture and deposit exceeding INR 50
Crore or more. The terms of reference of such a committee include monitoring auditor’s
appointment, remuneration and his performance etc. Every minutes of the meeting of the Audit
Committee shall be noted in the ensuing meeting of the Board of Directors and also, a distinct
minutes’ book shall be maintained for the meeting of the Committee. The Chairman of the Audit
Committee is required to address the concerns of the shareholders at the Annual General Meeting.

ii. Nomination and Remuneration Committee meeting are also a mandate for every listed
company and only those public company which have a paid-up share capital of Rs. 10 crore or
more or have a turnover of R. 100 crore or more having aggregate outstanding loan, debenture and
deposit exceeding INR 50 Crore or more. The committee is required to ensure that the level and
composition of remuneration is reasonable and sufficient to attract, retain and motivate directors
of the quality required to run the company successfully.

iii. Stakeholders Relationship Committee meetings are required to address the grievances of the
stakeholders of the company. This committee is to be constituted by every company which has the
strength of more than 1000 shareholders, debenture-holders, deposit-holders and any other security
holders at any time during the financial year.

iv. Corporate Social Responsibility Committee meeting shall take all decisions as regards the
CSR policy of the company in its meetings. Such committee shall consist of at least three directors,
of which at least one director shall be an independent director.

Members’ meetings

Annual General Meeting (Section 96): One of the opportunities annually given to the members
of a company is to take part in the business of the company by exercising their power to take
decisions. For this purpose, each year every company is required to hold at least one meeting of
its members’ which is known as an annual general meeting (AGM). An exemption from holding
an annual general meeting is only given to a one-person company.

The first general meeting of a company must be held within nine months from the date of closing
the financial year of the company, and then the company need not hold any annual general meeting

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in its year of incorporation. The subsequent annual general meetings shall take place within six
months of the date of closing of the financial year. The time prescribed for the first annual general
meeting cannot be extended, however, the time period for subsequent annual general meetings
may be extended to a maximum of three months with the leave of the Registrar of companies.

Following chart depicts the date, time and venue for holding an annual general meeting. Here the
Central Government is empowered to exempt, subject to conditions, any company from the
holding such meeting in accordance with the date, time and venue as prescribed.

When a company defaults in holding an annual general meeting as required, the Tribunal has the
power to call such meeting upon receipt of an application from any member of the company. The
Tribunal may even direct to hold a one-member meeting. Such meetings shall be deemed as an
annual general meeting as per provisions of this Act. Upon such default, the company and every
officer in default would be liable for punishment as prescribed.

Business to be transacted at an annual general meeting (section 102)

The business transacted at the annual general meeting is called the ordinary business (this is the
reason a general meeting is also referred to as an ordinary meeting). Items of ordinary business
constitutes consideration of financial statements, Board reports and auditor’s report, declaring

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dividends, appointment of directors and appointment and salary fixation of the auditors of the
company.

Extra-Ordinary general meeting (Section 100): All other general meetings convened and held
in a company besides the annual general meeting are regarded as extraordinary general meetings.
All the business transacted at an extra-ordinary general meeting is called special business (all other
businesses except ordinary business). The following diagram illustrates, who all can call an extra-
ordinary general meeting:

The shareholders making a requisition must possess at least one-tenth of the paid up share capital
of the company and where the company is without the share capital, the shareholders must possess
at least one-tenth of the voting powers of the company. Such share-holders, requisitioning a
general meeting, must sign upon the matters required to be addressed at the meeting. The Board
upon receipt of such valid requisition must call a general meeting within 21 days. The date of the
meeting in any case must not be later than 45 days from such requisition.

In case these dead-lines are not met by the Board, the shareholders making requisition may go
ahead to call and hold a general meeting themselves. They can do so within 3 months from the
requisition date. All the reasonable expenses incurred by the shareholders on holding such meeting,

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are to be reimbursed to them by the company by deducting such amounts from the fees of the
defaulting directors.

In LIC of India v. Escorts Ltd, the Supreme Court observed that every shareholder of a company
possesses a right to call/requisition an extra-ordinary general meeting, subject to the provisions of
the Act. Once the requisition is made in compliance of the prescribed law, the shareholder cannot
be restrained from calling such meeting.

In another case, Rathnavelu Chettiar v. M.Chettiar, the shareholders gave a requisition in

compliance of the provision of the Act for removing the MD of the company. Where the directors
failed to call a meeting within the prescribed time, the shareholders themselves requisitioned the
meeting. The venue of the meeting was decided as the registered office of the company. However,
on the day of the meeting, the registered office was locked, thus the meeting was held at some
other place. The court held such meeting to be a validly convened meeting.

The Tribunal may also, under certain circumstances order to hold and convene a meeting (other
than an annual general meeting). Here the Tribunal may on its own motion or upon the application
made by any director or members having voting rights may call such a meeting. The Tribunal may
give necessary directions for conduct of the meeting including the permission for holding one -
member meeting in person or through proxy (section 98).

Notice of the meeting (Section101)

For calling a general meeting a notice is required to be given to every member of the company or
to his legal representative (in case of a deceased member), every director and auditor of the
company. Such notice must be given to the aforesaid parties at least 21 clear days before the
meeting. The notice can be sent either in writing or through electronic means. The requirement of
21 days’ notice can be done away with, if at least 95 percent of the members voting at the meeting
agree to a shorter notice for such meeting.

The notice of a meeting must provide for the date, time and venue of the meeting along with the
statement of the business to be dealt at the meeting. It is necessary to send such notice of the
meeting as prescribed, however inadvertent failure to send notices or in case any member or other
persons do not receive the notice shall not per se affect the validity of the meeting.

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Quorum (Section 103)

For holding a valid meeting, a minimum requisite number of members must attend the meeting to
transact the business, which constitutes quorum of the meeting. Following charts, provides at a
glance, the quorum required to be present at general meetings:

Adjournment of a meeting

Where the requisite number of members are not present within half an hour of the allotted time of
the meeting, such meeting is adjourned to be held on the same day next week at same time and
venue or as scheduled by the Board. The only exception to the rule is, when the meeting is called
by the requisitionists, in such a case the meeting is not adjourned for the want of quorum and is
cancelled. In other cases, members present within half an hour of the adjourned meeting shall
constitute the quorum.

Chairman of a meeting (section 104)

A chairman is elected by the members personally present at a meeting by the show of hands. Such
chairman is required for orderly conduct of the meeting. In case a poll is demanded for electing a

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Chairman, the provisions of the Act shall apply and the earlier chairman shall continue unless a
new one is appointed.

Proxies (section 105)

Members entitled to attend and vote at the meeting, may participate in the decision making process
by voting in the meeting, either personally or through a duly appointed proxy. The proxy
is another person, whom a member appoints to attend and vote at the meeting on his behalf.
However, such a proxy does not possess the right to speak at such meeting on behalf of the
member, nor is he entitled to vote except in case of a voting by poll. Section 105 of the Act, further
deliberates upon the provisions for appointing a proxy. A member can revoke his proxy by a notice
in writing.

A member can appoint more than one proxies for the same meeting, in case he possesses different
shares of that company. But in case, the said member appoints more than one proxies for the same
bunch of shares, then all the proxies shall be jointly and severally liable.

Voting at a meeting (section106)

A member can participate in the decision-making process of the company by voting at the
meetings. Such a right to vote can only be restricted by the articles of a company, where it stipulates
that the shares in respect of which any call money or sums remains due or shares upon which the
company has exercised any lien, such shareholders do not have right to vote.

Voting by show of hands (Section 107)

When a resolution is to be passed at a general meeting, voting takes place by show of hands unless
the members ask for a poll or voting happens electronically. Such voting is evidenced though the
Chairman’s declaration and an entry to this effect in the minutes of the meeting.

Voting through electronic means [Section 108 read with Rule 20 Companies (Management
and Administration) Rules, 2014]

The Central Government may prescribe in accordance with the Rule 20, certain class or classes of
companies and also the manner in which a member may vote by the electronic means.

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Demand for a Poll (Section 109 read with Rule 21 Companies (Management and
Administration) Rules, 2014): A poll may be either ordered by the chairman suo moto or may be
demanded by such number of members prescribed under this section.

Where a resolution is to be passed through poll, the Chairman shall require the assistance of certain
persons for scrutinising the poll and the votes and to prepare a report in accordance with the Rule
21 of Companies (Management and Administration) Rules, 2014). The Chairman has the power
to regulate the poll in accordance with the said rules.

Postal Ballot (Section 110 read with Rule 22 Companies (Management and Administration)
Rules, 2014): A Central Government notification may declare certain business items (excluding
the items of ordinary business) to be dealt vide the postal ballot. A resolution passed by the required
majority by a postal ballot shall be deemed to be passed at a duly convened general meeting.

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
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.

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Resolutions requiring special notice (Section 115 read with Rule 23 Companies
(Management and Administration) Rules, 2014)

There are certain resolutions which require special notice. According to section 115, any such
notice required to be given shall be brought at the instance of member(s) holding not less than one
percent of total voting power (in case of company not having share capital) or member(s) holding
shares on which an aggregate sum of not exceeding five lakh rupees, paid up on the date of notice.
Rule 23 further provides the time and means of sending such special notice.

Minutes of the meeting (section 118 read with Rule 25 Companies (Management and
Administration) Rules, 2014)

Companies are required to maintain and keep the records of the proceedings of every meeting
called the minutes of the meeting, which are to be prepared according to the provisions of this Act
and the Secretarial Standards. The minutes of each of the meeting are to be recorded succinctly
including all the details like the new appointments made. The minutes prepared in the loose sheets
must be signed by the Chairman within 30 days of the meeting in the form of a book with pages
consecutively numbered. The minute book of each kind of company viz. the general meetings,
creditors’ meetings are to be kept separately.

The minutes of the meetings shall have an evidentiary value for the proceedings mentioned
therein.

Distribution of powers between Board of Directors and Shareholders

Company’s powers can be exercised by the board of directors and at meetings of members of a
company. Except for the powers which are expressly required to be exercised by the company in
general meeting, in all other cases the directors can exercise all the company’s powers. This
division of company’s powers has been dealt with Greer L J, in John Shaw and Sons {Salford Ltd),
v. Shaw, in the following words: “A company is an entity distinct from its shareholders and its
directors. Some of its powers may according to its articles, be exercised by directors, certain other
powers may be reserved for the shareholders in general meeting. If powers of management are
vested in the directors, they and they alone can exercise these powers. The only way in which the
general body of the shareholders can control the exercise of the powers vested by the articles, in

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the directors is by altering the articles, or if the opportunity arises under the articles by refusing to
re -elect the directors whose actions they disapprove.”

The shareholders cannot usurp the powers which by the articles are vested in the directors any
more than the directors can usurp the powers vested by the articles in general body of shareholders.
The powers of directors include to issue preference shares, borrow money by mortgaging the
company’s property and to do acts necessary for the management of the company. The power to
sell the assets of the company is vested in the board and if the board thinks that it is not for the
interest of the company to sell its assets, it is not bound to do so, notwithstanding a resolution to 2
contrary in the general meeting.

The directors are the only persons who can bring an action on behalf of the company. They may
also compromise a suit in the interest of the company. The directors cannot by contract deprive
themselves of the power to control a manager so as to confer powers on him to the exclusion of
himself. While the directors are to follow the directions given by the general meeting, they are not
bound to act or adopt a particular line of action at the instance of the shareholders. The exercise
by the directors of discretionary powers will not be interfered with unless it is proved that they
have acted for some improper motive or arbitrary or capriciously. The following are some of the
important powers of the board of directors of companies in India.

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

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Number to the Central Government along with the prescribed fees. Further, DINs to the proposed
first Directors in respect of new companies would be mandatorily required to be applied for in
SPICe forms (subject to a ceiling of 3 new DINs) only.

Types of Director

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

• 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 appointed.

• 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.

• Women Director

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.

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All Listed Companies Public companies with paid up capital of `100 crore or more or with turnover
of `300 crore or more. Additionally for listed entities SEBI vide recent notification provides that
the Board of directors of the top 500 listed entities shall have at least one independent woman
director by April 1, 2019 and the Board of directors of the top 1000 listed entities shall have at
least one independent woman director by April 1, 2020. The top 500 and 1000 entities shall be
determined on the basis of market capitalisation, as at the end of the immediate previous financial
year.

• Alternate Director

Section 161(2) of the Act empowers the Board, if so authorized by its articles or by a resolution
passed by the company in general meeting, to appoint a director (termed as ‘alternate director) to
act in the absence of a original director during his absence for a period of not less than three months
from India.

• Additional Director

Section 161(1) of the Companies Act, 2013, provides that the articles of a company may confer on
its Board Lesson 16 Directors 569 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 appointed as a director
in a general meeting cannot be appointed as Additional Director. Section 161(1) of the Act applies
to all companies, whether public or private.

• 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 rupees or such other sum as may be prescribed.

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Rule 7 of Companies (Appointment and Qualification of Directors) Rules, 2014 laid down the
following terms and conditions for appointment of small shareholder’s director, which are as
under: (i) Election of small shareholders’ director: A listed company, may upon notice of not less
than (a) One thousand small shareholders; or (b) one-tenth of the total number of such
shareholders, whichever is lower; have a small shareholder’s director elected by the small
shareholder. A ‘Small Shareholders’ Director’ may be elected voluntarily by any listed company.
Thus, a listed company, may, on its own, act to appoint a Small Shareholders’ Director. In such a
case, no notice from small shareholder(s) is required.

• 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

• 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.

 Independent director

Section 149(4) read with Rule 4 of Companies (Appointment and Qualification of Directors)
Rules, 2014 provides the rules for companies to have specified number of independent directors.

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All listed public companies should have At least 1/3rd of total number directors as independent
Directors, Other public companies with paid up capital of `10 crore or more or with turnover of
`100 crore or more or with outstanding loans, debentures and deposits of `50 crore or more should
have At least 2 independent Directors

However, the following classes of unlisted public company shall not be covered under sub-rule as
above (a) a joint venture; (b) a wholly owned subsidiary; and (c) a dormant company as defined
under section 455 of the Act. In case a company covered under this rule is required appoint higher
number of independents directors due to composition of its audit committee and then they shall
appoint such higher number of independent directors. Further if there is any intermittent vacancy
of an independent director then it shall be filled up by the board of directors within 3 months from
the date of such vacancy or not later than immediate next board meeting, whichever is later. Once
the company covered under above sub-rule (i) to (iii) of Rule 4, ceases to fulfill any of three
conditions for three consecutive years then it shall not be required to comply these provisions until
such time as it meets any of such conditions. The definition of Independent directors is provided
in section 149(6).

Disqualifications for appointment of Director- Section 164

Section 164(1) Provides that a person shall not be eligible for appointment as a director of a
company, if –

(a) He is of unsound mind and stands so declared by a competent court;

(b) He is an undischarged insolvent;

(c) He has applied to be adjudicated as an insolvent and his application is pending;

(d) He has been convicted by a court of any offence, whether involving moral turpitude or
otherwise, and sentenced in respect thereof to imprisonment for not less than six months and a
period of five years has not elapsed from the date of expiry of the sentence. Provided that if a
person has been convicted of any offence and sentenced in respect thereof to imprisonment for a
period of seven years or more, he shall not be eligible to be appointed as a director in any company.

(e) An order disqualifying him for appointment as a director has been passed by a court or Tribunal
and the order is in force;

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(f) He has not paid any calls in respect of any shares of the company held by him, whether alone
or jointly with others, and six months have elapsed from the last day fixed for the payment of the
call;

(g) He has been convicted of the offence dealing with related party transactions under section 188
at any time during the last preceding five years; or

(h) He has not complied with sub-section (3) of section 152.

(i) if he accepts directorships exceeding the maximum number of directorships provided in section
165.

Whenever a company fails to file the financial statements or annual returns, or fails to repay any
deposit, interest, dividend, or fails to redeem its debentures, as specified in sub-section (2) of
section 164, the company shall immediately file Form DIR-9, to the Registrar furnishing therein
the names and addresses of all the directors of the company during the relevant financial years.
When a company fails to file the Form DIR-9 within a period of thirty days of the failure that
would attract the disqualification under sub-section (2) of section 164, officers of the company
specified in clause (60) of section 2 of the Act shall be the officers in default. Upon receipt of the
Form DIR-9 under sub-rule (2), the Registrar shall immediately register the document and place it
in the document file for public inspection. Any application for removal of disqualification of
directors shall be made in Form DIR-10. However, a private company may by its articles provide
for any disqualifications for appointment as a director in addition to those specified in sub-sections
(1) and (2).The disqualifications referred to in clauses (d), (e) and (g) of sub-section (1) shall
continue to apply even if the appeal or petition has been filed against the order of conviction or
disqualification.

Removal of Directors

Under section 169 of the Act, a company may, by ordinary resolution remove a director before the
expiry of the period of his office. The provisions of section 169 shall apply regardless of the way
in which the director concerned was appointed and notwithstanding anything contained in the
articles of the company or any agreement with the director concerned.

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Rights and duties of Directors

The duties of directors as contained in section 166 of the Companies Act, 2013 are described as
follows

1. Duty to act as per the articles of the company The director of a company shall act in accordance
with the articles of the company.

2. Duty to act in good faith A director of a company shall act in good faith in order to promote the
objects of the company for the benefit of its members as a whole, and in the best interests of the
company, its employees, the shareholders, the community and for the protection of environment.

3. Duty to exercise due care A director of a company shall exercise his duties with due and
reasonable care, skill and diligence and shall exercise independent judgment.

4. Duty to avoid conflict of interest A director of a company shall not involve in a situation in
which he may have a direct or indirect interest that conflicts, or possibly may conflict, with the
interest of the company.

5. Duty not to make any undue gain A director of a company shall not achieve or attempt to achieve
any undue gain or advantage either to himself or to his relatives, partners, or associates and if such
director is found guilty of making any undue gain, he shall be liable to pay an amount equal to that
gain to the company.

6. Duty not to assign his office A director of a company shall not assign his office and any
assignment so made shall be void.

Corporate Social Responsibility

India`s new Companies Act 2013 (Companies Act) has introduced several new provisions which
change the face of Indian corporate business" Companies Act 2013 (Companies Act) has
introduced several new provisions which change the face of Indian corporate business. One of
such new provisions is Corporate Social Responsibility (CSR). The concept of CSR rests on the
ideology of give and take. Companies take resources in the form of raw materials, human resources
etc. from the society. By performing the task of CSR activities, the companies are giving something
back to the society.

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Ministry of Corporate Affairs has recently notified Section 135 and Schedule VII of the Companies
Act as well as the provisions of the Companies (Corporate Social Responsibility Policy) Rules,
2014 (CRS Rules) which has come into effect from 1 April 2014.

Applicability: Section 135 of the Companies Act provides the threshold limit for applicability of
the CSR to a Company i.e. (a) net worth of the company to be Rs 500 crore or more; (b) turnover
of the company to be Rs 1000 crore or more; (c) net profit of the company to be Rs 5 crore or
more. Further as per the CSR Rules, the provisions of CSR are not only applicable to Indian
companies, but also applicable to branch and project offices of a foreign company in India.

CSR Committee and Policy: Every qualifying company requires spending of at least 2% of its
average net profit for the immediately preceding 3 financial years on CSR activities. Further, the
qualifying company will be required to constitute a committee (CSR Committee) of the Board of
Directors (Board) consisting of 3 or more directors. The CSR Committee shall formulate and
recommend to the Board, a policy which shall indicate the activities to be undertaken (CSR
Policy); recommend the amount of expenditure to be incurred on the activities referred and monitor
the CSR Policy of the company. The Board shall take into account the recommendations made by
the CSR Committee and approve the CSR Policy of the company.

Definition of the term CSR: The term CSR has been defined under the CSR Rules which includes
but is not limited to:

 Projects or programs relating to activities specified in the Schedule; or

Projects or programs relating to activities undertaken by the Board in pursuance of

recommendations of the CSR Committee as per the declared CSR policy subject to the condition
that such policy covers subjects enumerated in the Schedule.

This definition of CSR assumes significance as it allows companies to engage in projects or

programs relating to activities enlisted under the Schedule. Flexibility is also permitted to the
companies by allowing them to choose their preferred CSR engagements that are in conformity
with the CSR policy.

Activities under CSR: The activities that can be done by the company to achieve its CSR
obligations include eradicating extreme hunger and poverty, promotion of education, promoting

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gender equality and empowering women, reducing child mortality and improving maternal health,
combating human immunodeficiency virus, acquired, immune deficiency syndrome, malaria and
other diseases, ensuring environmental sustainability, employment enhancing vocational skills,
social business projects, contribution to the Prime Minister's National Relief Fund or any other
fund set up by the Central Government or the State Governments for socio-economic development
and relief and funds for the welfare of the Scheduled Castes, the Scheduled Tribes, other backward
classes, minorities and women and such other matters as may be prescribed.

Local Area: Under the Companies Act, preference should be given to local areas and the areas
where the company operates. Company may also choose to associate with 2 or more companies
for fulfilling the CSR activities provided that they are able to report individually. The CSR
Committee shall also prepare the CSR Policy in which it includes the projects and programmes
which is to be undertaken, prepare a list of projects and programmes which a company plans to
undertake during the implementation year and also focus on integrating business models with
social and environmental priorities and process in order to create share value.

The company can also make the annual report of CSR activities in which they mention the average
net profit for the 3 financial years and also prescribed CSR expenditure but if the company is
unable to spend the minimum required expenditure the company has to give the reasons in the
Board Report for non compliance so that there are no penal provisions are attracted by it.

Prevention of Oppression and Mismanagement

Shareholders and creditors are those two groups who has given or invested their money in
corporate bodies. However, it is not necessary that all the shareholders have the controlling power
in the company. The group of shareholders is divided into two parts i.e. Majority Shareholders and
Minority Shareholders. Minority shareholders are those who have invested their money in the
company but they are not holding so many shares that can give them controlling powers; and
because of this their interest in the company and its affairs sometimes get neglected. The first is
the positive acts done by the management which result in prejudice being caused to the company;
secondly, even where no action at all is taken by the management, such non-action results in
prejudice being caused to the company

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“The protection of the minority shareholders within the domain of corporate activity constitutes
one of the most difficult problems facing modern company law. The aim must be to strike a balance
between the effective control of the company and the interest of the small individual shareholders”

Rule of Foss v. Harbottle[(1843) 67 ER 189]

The basic rule laid down in this case was that “the courts will not, in general, intervene at the
instance of shareholders in matters of internal administration; and, will not interfere with the
management of a company, by its directors so long as they are acting within the powers conferred
on them under the articles of the company”. However, the Court has also given certain exceptions
to this rule, among which one is “oppression and mismanagement”. It has been stated by SINHA
J of the Calcutta High Court in Kanika Mukherji v. Rameshwar Dayal Dubey [(1966) 1 Comp LJ
65 Cal.] that the principle embodied in Sections 397 and 398 of the Indian Companies Act, 1956
which provide for prevention of oppression and mismanagement is an exception to the rule in Foss
v. Harbottle which lays down the sanctity of the majority rule.

Exceptions to the rule of Foss v. Harbottle

1. Act is Ultra vires

2. Fraud on minority

3. Acts requiring special Majority

4. Wrongdoers in control

5. Oppression and mismanagement

Meaning of ‘Oppression’ and ‘Mismanagement’

The meaning of the term ‘oppression’ as explained by Lord COOPER in the Scottish case of Elder
v. Elder & Watson Ltd [(1952) SC49 Scotland] was cited with approval by WANCHOO J of the
Supreme Court of India in Shanti Prasad Jain v. Kalinga Tubes Ltd. [1965) 1 Comp LJ 193],
“The essence of the matter seems to be that the conduct complained of should at the lowest involve
a visible departure from the standards of fair dealing, and a violation of the conditions of fair play
on which every shareholder who entrusts his money to the company is entitled to rely.”

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‘Mismanagement’ again is an atrocious act of the majority shareholders. An illustration explaining
the conduct of mismanagement is the case of Rajahmundry Electric Supply Corpn v. Nageshwara
Rao [AIR 1956 SC 213], in this, a petition was brought against a company by certain shareholders
on the ground of mismanagement by directors. The court found that the Vice Chairman grossly
mismanaged the affairs of the company and had drawn considerable amounts for his personal
purposes, that large amounts were owing to the Government for charges for supply of electricity,
that machinery was in a state of disrepair, that the directorate had become greatly attenuated and
“a powerful local junta was ruling the roost” and that the shareholders outside the group of the
Chairman were powerless to set matters right. This was held to be sufficient evidence of
mismanagement.

Remedies

Sec. 241 of the Companies Act, 2013 provides that, any member of a company who complains
regarding any oppression or mismanagement being occurred in a company, may apply to the
Tribunal. Moreover, even the Central Government, if of the opinion that the affairs of the company
are being conducted in a manner prejudicial to the public interest, then it may itself apply to the
Tribunal for an order.

S. 241 has been amended in 2019 and new sub-s (3), (4) and (5) have been newly inserted in the
section as given below:

S. 241 provides that

(1) Any member of a company who complains that-

(a) the affairs of the company have been or are being conducted in a manner prejudicial to public
interest or in a manner prejudicial or oppressive to him or any other member or members or in a
manner prejudicial to the interests of the company; or (b) the material change, not being a change
brought about by, or in the interests of, any creditors, including debenture holders or any class of
shareholders of the company, has taken place in the management or control of the company,
whether by an alteration in the Board of Directors, or manager, or in the ownership of the
company’s shares, or if it has no share capital, in its membership, or in any other manner
whatsoever, and that by reason of such change, it is likely that the affairs of the company will be
conducted in a manner prejudicial to its interests or its members or any class of members,

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may apply to the Tribunal, provided such member has a right to apply under section 244, for an
order under this Chapter.

Personal Action

In this, the shareholder claims their personal rights which arise from the constitution of the
company i.e. Memorandum of Association and Articles of Association. However, in Indian
Companies Law, personal actions of the shareholders aggrieved from the acts of oppression or
management do not possess any statutory provision.

Derivative Action

An interesting area of law is the law governing derivative action mechanism which enables the
shareholders of a company to bring an action on behalf of the company against a third party before
a regular civil court. Again, there is no specific statutory provision for derivative action in the
Indian companies law. However, the doctrine of derivative action is recognised by the Indian
courts. If a shareholder alleges that a wrong has been done to the company by persons in control
thereof, he may bring a derivative action where he derives the authority from his corporate right
to sue on behalf of the company. The premise on which the court entertains this extraordinary form
of action is upon the complaining shareholder’s assertion that the company cannot sue as the
persons in control would not bring an action on its behalf or for its benefit.

Derivative action is defined as an action by one or more shareholders of a company where the
cause of action is vested in the company and relief is accordingly sought on its behalf. Since the
company has a distinct legal personality with its own rights and liabilities which are different from
those personal rights of individual shareholders, this action is brought by a shareholder not to
enforce his or her own personal rights but, rather, the rights and liabilities of the company on its
behalf and for the benefit of the company; which the company cannot itself do, as it is controlled
by the 'wrong-doers'.

In order to be classified as a derivative action, the following aspects must be satisfied:

It must be brought in a representative form, even though it is the company, rather than the other
shareholders, whom the person initiating the legal action / proceedings seeks to represent. Thus,
by implication, all the other shareholders are bound by the result of the action.

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Although the action is brought on behalf of the company, the company appears as a defendant, so
that the action takes the form of a representative action by the initiating shareholder on behalf of
himself and all the other shareholders (other than the alleged 'wrong-doers'), against the alleged
'wrong-doers' (who are, in fact, in control of the company) and the company. Derivative claims
may be brought by a shareholder or shareholders in the following instances, as described as
follows:

Ultra Vires

A shareholder may bring an action against the company and its Directors in respect of matters
which are ultra vires the Memorandum or the Articles of the company and which no majority
shareholders can sanction. For example, Directors of the company sanctioning an action that is
contrary to the objects of the company.

Fraud on Minority

Directors and the company would also be liable if the conduct of the majority of the shareholders
constitutes a "fraud on minority", i.e., a

discriminatory action. For example, where the shareholders have passed a special resolution with
an effect of discriminating between the majority shareholders and minority shareholders, so as to
give the former an advantage of which the latter were deprived.

Required Resolution

Certain actions of the company can be approved only by passing a special resolution at a general
meeting of shareholders. If the majority seek to circumvent this legal requirement and pass only
an ordinary resolution, or do not pass such a special resolution in the manner required by law, any
member or members can bring an action to restrain the majority.

To safeguard Interests of the Company

For instance, an obvious wrong may have been done to the company by the Directors, but because
of the control of such Directors on the majority shareholders, such shareholders may not permit an
action to be brought against the 'wrong-doer' Directors. Therefore, to safeguard the interests of the
company, any member or members may bring a derivative action.

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Individual Membership Rights

As a general rule, personal rights per se are not to be enforced through derivative actions; however,
some exceptions have been recognized. These exceptions often arise in cases of rights that have
been conferred upon the shareholders by the Companies Act itself or the respective Articles
(commonly known as "individual membership rights"). For example, the right to vote, the right to
have one's vote recorded, or the right to be nominated as a candidate for the post of a Director
during the election of Directors at a general meeting of the shareholders.

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 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:

S. 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.

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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.

Class Actions

The provision for class actions was recommended in the Companies Bill, 2012. The J J Irani
committee recommended in its report as follows:

“In case of fraud on the minority by wrongdoers, who are in control and prevent the company itself
bringing an action in its own name, derivative actions in respect of such wrong non-rectifiable
decisions have been allowed by courts. Such derivative actions are brought out by shareholder(s)
on behalf of the company, and not in their personal capacity, in respect of wrong done to the
company. Similarly the principles of “Class/Representative Action” by one shareholder on behalf
of one or more of the shareholders of the same kind have been allowed by courts on the grounds
of persons having same locus standi.”

Class suit is not limited to corporate law but extends to the whole realm of civil procedures. In
fact, class suits are not so much a provision of law as a procedure. For example, Order 1 Rule 8 of
the Civil Procedure Code, 1908 provides that where there are numerous persons having the same
interest in a suit, one or more persons may, with the permission of the court, either sue, or defend
the suit, for the benefit of all interested. Sub-rule (2) provides for the power of the court to publicize
a representative suit either by service, or depending on the number of persons involved, by public
advertisement. The procedure has widely been used in India for what is commonly termed as public
interest litigation.

The Companies Act, 2013 in its Sec. 245 contains the provision with regard to ‘class actions’.

The concept of class actions and derivative actions are very close to each other. In fact, at the time
of proposing the addition of this provision in Companies Law Bill, it was not clear that whether
the Parliament was seeking to introduce the ‘class action’ provision or the ‘derivative action’
provision.

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