Companies Act 2013:

Module 2

SYLLABUS

1. Characteristics and types of companies,

2. Formation of companies: documents and registration process,

3. Directors: Appointment, Powers, Duties and Liabilities,

4. Company Meetings,

5. oppressions and Mismanagement

TIMSR MBA I-Sem No

An Introduction of Company under the Companies Act 2013

Introduction:
There are many different forms of businesses like Sole Proprietorship, Partnership Firm, Hindu
Undivided Family Business, Limited Liability Partnership, etc. But Company form of business has
certain advantages over another form of business like limited liability, perpetual succession,
Separate legal identity, etc.
Meaning and Definition of Company under Companies Act 2013:

The word ‘Company’ has been derived from the Latin word made from two words i.e. Com
and panies. The word ‘com’ in Latin means ‘with or together’ and the word ‘panies’ in Latin
means ‘bread’. Hence, a company meant an association of persons who took their meal
together.
In common parlance, the meaning of company form of business can be understood as an
association of persons formed for the purpose of carrying on some business or undertaking. A
company is a body corporate having separate legal identity having status separate from
members constituting it.
As per Section 2(20) of the Companies Act, 2013, the term “Company has been defined as a
company incorporated under this Act or under any previous company law.” The definition
of the company under this Act can be more clarify as below:
The persons who form the company and contribute money or money’s worth for the business of
the company are called ‘Members’. They get ‘shares’ in the company in the Proportion of their
contribution in the company.

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 The contribution made by members of the company is the ‘Capital’ of the company.
Nature and Characteristics of a Company:

The company is a legal person created by a process of law other than natural birth. For this
reason, a company is also called as an artificial legal person. As a natural person, a company also
enjoys many rights and incurred many liabilities of a natural person.

Following are the characteristics of the company:

1. Separate Legal Entity: Unlike other forms of business e.g. Partnership Firm, Association of
Persons, etc., the company has an entity separate from its members constituting it. Once a
company is incorporated under the case of Shiromani Gurudwara Prabandhak Committee vs.
Shri Sham Nath Das, it was held that Company acts like a natural person but only through its
designated persons, whose acts are proceeded within the ambit of the law.

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2.Artificial Person: The Company is called an Artificial Legal Person because it is invisible,
intangible and cannot be touched, but existing in the contemplation of law, hence, it has rights
and liabilities same as a natural person.

Has Nationality and Residence but no citizenship A company has the nationality of a nation
where it is incorporated and has a residence where it has established its Registered Office.
However, Company cannot be a citizen under the Citizenship Act, 1955 or the Constitution of
India. Section 2(f) of the Citizenship Act, 1955, expressly excludes a company or association or
body of individuals from citizenship.

3.Limited Liability The principal advantage of doing business under Company form of
business is Limited Liability of its members towards the debts of the company. The liability of
the company is limited to the extent of the amount not paid on the shares held by them and in
case of a company limited by guarantee, members of such company are also liable to the
amount guaranteed to be paid by them in the Memorandum of the company at the time of
winding up.

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 For Example, if a person holds shares of a company having a nominal value of Rs.1,00,000/- out
of which it has paid to the company only Rs.75,000/-, then he cannot be called upon to pay more
than balance unpaid amount i.e. Rs.25,000/- in this case. However, if he has paid the full amount
on his shares, he will not be further liable to pay, even if the company is in liquidation.

4.Perpetual Succession Perpetual succession means membership and directorship of the

company keep changing but that doesn’t affect the continuity of the company In the words of
Professor L.C.B. Gower, Members may come and go, but the company can go on forever.

During a war, all members of one private company were killed by a bomb, but the company
survived-not even hydrogen bomb could have destroyed it.

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5. Capacity to sue and be sued A company is a legal entity in the eyes of law and hence, has
the capacity to sue and be sued in its own name. Legal action or proceeding can be instituted
against a company in its own name and similarly, a company in its own name file suit against any
company in the court of law.
6. Profit is object: A company is formed for the purpose of earning a profit, which is further
divided among the members or saved for the expansion of the business. Section 8 company is the
exception to this characteristic because Section 8 Company is formed with no profit motive.
7. Separate Management: A company is an artificial legal person in the eyes of law, but it cannot
carry its activities on its own. The company is administered and managed by its managerial
personnel. Members who form and contribute to the company, do not carry corporate function,
rather they appoint their representatives as directors of the company to conduct its activities.
8. Limitation of Power: A company is formed for the objects specified in the
Memorandum of Association of the company. Memorandum of Association is the principal
document of the company which provides the objects which can carry by the company. A
company cannot go beyond its powers mentioned under its Memorandum of Association.
9. CAN be Termination by winding up: A company is a perpetual entity, which cannot be
died or dissolved except by the procedure of law. Hence, the company is terminated by means
of winding up
Kinds of Companies

1. Chartered companies:

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 These companies are incorporated under a special charter granted by the King on Queen of
England. Such a company is given the exclusive powers, rights and privileges under the royal
charter which gives restricted power to the company. Members of such company are not liable
for the debts of a company. Example of such companies are "The East India Company" "The Bank
of England" etc. This type of a company does not exist in India after the independence. They are
rarely formed in any country nowadays.

2. Statutory Companies:
A company formed by a special Act passed either by the Central or State Legislature is called a
statutory company or a statutory corporation. Such companies or corporations are governed by
their respective Acts, and are not required to have any Memorandum or Articles of Association.
Changes in their structure are possible only by legislative amendments. An Annual Report on the
working of each such company is required to be placed on the table of Parliament.
The audit of such company is conducted under the supervision, control and guidance of the
auditor General of India. These companies are usually formed to carry out some special public
undertakings requiring extraordinary powers and privileges. The object of such companies is not
so much to earn profit but to serve people. Though the liability of the members of such
companies is limited, yet in most of the cases, they may not be required to use the word 'limited'

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as a part of their manes. Some of the important

Statutory companies are the Reserve Bank of India, The State Bank of India, Nationalized banks, etc.

1. Registered Companies:
The most common type of companies are the registered companies. These companies are formed
and registered under Indian Companies Act. The registered companies are divided into following
categories

A. Companies Limited by Shares.

B. Companies Limited by Guarantee,

C. Unlimited Companies.

2. Foreign Company:

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 Company's Act defines a Foreign Company as "A Company which is incorporated is incorporated
outside India and employs agents in India but has no office or does not establish a place of
business in India, will not be a foreign company. A company shall be said to have a place of
business such as an office, store house, or other premises having some concrete connection
between locality and its business. Company's Act lays down that within 30 days of the
establishment of the business in India, a Foreign Co. must submit the following documents to the
Registrar of Companies. Outside India but has a place of a business in India." Accordingly, a
company, which

A. A certified copy of the charter. Status memorandum and article of the co. in English.

B. The full address of the registered office of the company abroad.

C. A list of directors and secretary of the co.

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2. Companies limited by Guarantee:

These companies are usually formed to set up non-trading organizations like schools, hospitals,
charitable institutions, chamber of commerce etc. the liability of each member in such a company
is limited to the amount he has guaranteed to contribute in the event of the winding up of the
company. The amount of guarantee is fixed at the time of formation of the company but no
member is required to pay it till the winding up. These companies have to use the word "limited"
or "private limited" as the last word in their names unless exempted by the govt.

3. Companies limited by shares:

A company, in which the liability of each member is limited up to the nominal or face value of the
shares held by him, is known as a company limited by shares. This type of co. is commonly
formed to undertake manufacturing, trading or other business activities.

Companies limited by shares may again be of two types

(1) Public Companies & (2) Private Companies.

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 ON THE BASIS OF OWNERSHIP

1.One Person Companies (OPC)

These kinds of companies have only one member as their sole shareholder. They are separate from
sole proprietorships because OPCs are legal entities distinct from their sole members. Unlike other
companies, OPCs don’t need to have any minimum share capital.

2,Private Company: It means a company, which by its article

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(a) Restricts the right to transfer its share

(b) Restricts the number of its members to 200

(c) Prohibits any invitation to the public to subscribe for any shares in, or debentures of the
company. There must be at least two members in a private company.

Features of Private Companies

These are some features that distinguish private companies from other types of companies:

i. No minimum capital required: There was a minimum paid-up share capital requirement
of Rs. 1 lakh previously, but that is omitted now.

ii. Minimum 2 and maximum 200 members: A private company can have a minimum of
just two members (but just one is enough if it a One Person Company), and a maximum of
up to 200 members.

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 iii. Transferability of shares restricted: Private companies cannot freely transfer their
shares to the public like public companies. This is why stock exchanges never list private
companies.

iv. “Private Limited”: All private companies must include the words “Private Limited” or
“Pvt. Ltd.” in their names.

v. Privileges and exemptions: Since private companies do not freely transfer their shares
and involve limited interest by members, the law has granted them several exemptions
that public companies do not enjoy.

3.Public Company:

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It is defined as one, which is not a private company. There must be at least 7 members while there
is no maximum limit of members. Each member is free to transfer his shares to anyone he likes.
Such company can also issue prospectus to the public, inviting them to purchase its shares and
debentures.
Some examples of public companies are, Reliance Industries, Tata Motors, Bharti Airtel,
Larsen & Tourbo, etc

Government Company:

Companies Act 1956 defines Government Companies as "Any company in which not less than
fifty one percent of the share capital is held by the Central Government or by any State
Government or partly by Central Government and partly by one or more State Governments."
The Companies Act contains the provisions for the formation of two types of govt. companies:

1. A Government Company, in which the entire capital is supplied by Government. 2. A

Government Company in which the government holds not less than 51% of the share
capital and the remaining capital is furnished by the members of the public. Such
company is also called as "Mixed Economic Enterprise" or Mixed Ownership

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 Corporation" Some examples of Government companies are Hindustan Machine Tools
Ltd., Hindustan Antibiotics Ltd. Characteristics of a Government Company:
4. Holding Company:

A holding company means a company holding more than

A. 50% of the issued share capital or more than 50% of voting power,
B. Having power to appoint the majority of the directors of the other company.

5. Subsidiary Company:

There two companies are under terms that one controls the other, the controlling company is
called "Holding Company" and the controlled one is the "Subsidiary Company" Thus
Subsidiary Company is a company whose shares are purchased by other big company
(holding company) and it is managed and controlled by Holding Company

Chart of Difference Between Public Company and Private Company: –

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Basis of Difference
Public Company Private Company

A Public company is the one that is registered

A privateincompany
the is the one that has the minimum
share market of the country to issue shares
paid-up
forshare
the capital as prescribed in the Articles of
public to subscribe to them.
Meaning

Number of minimum of 7 and no maximum limit

minimum
on of 2 and a maximum of 200
the number of owners/ members. owners/ members.
member

ShareRights of share capital and profits areRights

distributed
of share capital and profits are distributed
among all owners/members are per article
amongofall owners/members are as per the article of
capital association and the number of shares owned by

Transfer of Owners/Members
share are free to transfer
Astheir
per the
share
terms
to and conditions decided in the article
the other person in the market. . many types of restrictions are imposed

Share The prospectus must be issued to invite

Thethe
prospectus
public does not need to be issued.
to subscribe to shares of the company.

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Prospectus

Number of at least 3 Directors and it can have aat least 2 Directors and it can have a
maximum of 15 Numbers of Directors.maximum of 15 Numbers of Directors.

directors

Name of ‘Limited’ is used as part of the name of

‘Private
the Limited’ is used as part of the name
of the company.

FundsFor public companies, it is very easy Possible

to raise to
funds
raise funds by issuing shares of the company
by issuing shares to the public in the share market.
mutual consent of all members of the

TIMSR MBA I-Sem No

easily subscribe to the share of the
can’t subscribe to the share of the company.

bscribe the shares

STAGES OF FORMATION OF A COMPANY

Company formation is the term for the process of starting of a company.Generally a company

comes into existence by a process referred to as incorporation. Once a company has been legally

incorporated, it becomes a separate legalentity from those who invest their capital and labour to

run the company. The persons who wish to start a company is called promoters. They take

necessary steps to form a company. The whole process of formation of a company is divided into

four stages. They are:

A. Promotion of Company

B. Incorporation or Registration of Company

C. Subscription of Capital

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 D. Commencement of Business

PROMOTION OF COMPANY

Promotionis a term of business and not of law as it is frequently used in business. The

term Promotion refers to the process of by which a company is ‘incorporated’ or brought into

existence. Usually ‘promotion’ is the first step to form a company.

Haney defines promotion as “the process of organizing and planning the finances of a

business enterprise under the corporate form”.

Gerstenberg has defined promotion as “the discovery of business opportunities and the

subsequent organization of funds, property and managerial ability into a business concern for the

purpose of making profits therefrom.”

Very first the idea of forming a company is conceived by promoters. They are persons

engaged in the formation of a company. Before a company is actually being started (i.e., formed

TIMSR MBA I-Sem No

and registered under the Companies Act), first they have to decide about the following issues

such as

(a) Which business to start,

(b) Whether to form a new company or take over the business of existing company,

(c) If new company is to be formed, whether it should be a private company or pubic company,

(d) What should be the amount capital of the company etc.

After deciding the above issues, promoters take necessary steps, for assembling the

business elements and making provision of the funds required to launch the business enterprise.

INCORPORATION

It is the second stage in the company formation. It is the incorporation or registration that

brings a company into existence. A company is legally formed only on being registered under the

Act and after the issue of Certificate of Incorporation by the Registrar of Companies. For the

incorporation of a company the promoters take the following preparatory steps:

1. Application for Availability of Name: To find out whether the name by which the new

company is to be started is available or not, an application has to be made in the prescribed

form along with requisite fee. Because company cannot be registered in the name of an

existing company. It also cannot be registered in a name, which is undesirable in the opinion

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 of the Central Government. Therefore, it is necessary for the promoters to find out the

availability of the name of the company from the Registrar of Companies. 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.

2. Filing an application: By filing an application with the Registrar of Companies of the State

in which the registered office of the company is to be situated, registration of a company can

be obtained.

The application should be accompanied by the following documents:

a. Memorandum of association properly stamped, duly signed by the signatories of the

memorandum and witnessed.

b. Articles of Association, if necessary.

TIMSR MBA I-Sem No

c. A copy of the agreement, if any, which the company proposes to enter into with any

individual for his appointment as managing or whole-time director or manager.

d. A written consent of the directors to act in that capacity, if necessary.

e. A statutory declaration stating that all the legal requirements of the Act prior

toincorporation have been complied with.

3. Payment of Stamp Duty and Filing Fee: The Company has to pay the necessary stamp

duty and filing fee, according to the authorized share capital of the company.

4. Declaration of Compliance of Act and Rules: A declaration that the requirements of the

Act and the rules framed there under have been complied. This declaration is to be signed

by an advocate of the Supreme Court or High Court or attorney or a pleader having the

right to appear before High Court. Alternatively, this declaration can be signed by a Company

Secretary or Chartered Accountant in whole time-practice, who is engaged in the formation

of a company or a person named in the articles as a director. This declaration is also to be

filed with the Registrar of Companies, where the registered office of the company would be

located. - Section 33(2).

5. Other documents: In case of a Public Companythe following documents s are to be

complied with:

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 (i) A list of persons who have consented to act as directors.

(ii) Written consent of the directors to act in that capacity.

(iii) An undertaking by the directors to take up and pay for the qualification shares.

6. Certificate of Incorporation or Registration: After receiving all the required documentsthe

Registrar will scrutinize these documents. If the Registrar finds the document to be

satisfactory, he registers them and enters the name of the company in the Register of

Companies and issues a certificate called the certificate of incorporation (Section 34).

The certificate of incorporation is the birth certificate of a company. The company comes

into existence from the date mentioned in the certificate of incorporation. Once the company

is created it cannot be got rid-off except by resorting to provisions of the Act which provide

for the winding up of company. The certificate of incorporation, even if it contains

irregularities, cannot be cancelled

TIMSR MBA I-Sem No

STAGES OF FORMATION OF A COMPANY

Company formation is the term for the process of starting of a company.Generally a company

comes into existence by a process referred to as incorporation. Once a company has been legally

incorporated, it becomes a separate legalentity from those who invest their capital and labour to

run the company. The persons who wish to start a company is called promoters. They take

necessary steps to form a company. The whole process of formation of a company is divided into

four stages. They are:

A. Promotion of Company

B. Incorporation or Registration of Company

C. Subscription of Capital

D. Commencement of Business

PROMOTION OF COMPANY

Promotionis a term of business and not of law as it is frequently used in business. The

term Promotion refers to the process of by which a company is ‘incorporated’ or brought into

existence. Usually ‘promotion’ is the first step to form a company.

Haney defines promotion as “the process of organizing and planning the finances of a

business enterprise under the corporate form”.

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 Gerstenberg has defined promotion as “the discovery of business opportunities and the

subsequent organization of funds, property and managerial ability into a business concern for the

purpose of making profits therefrom.”

Very first the idea of forming a company is conceived by promoters. They are persons

engaged in the formation of a company. Before a company is actually being started (i.e., formed

and registered under the Companies Act), first they have to decide about the following issues

such as

(a) Which business to start,

(b) Whether to form a new company or take over the business of existing company,

(c) If new company is to be formed, whether it should be a private company or pubic company,

(d) What should be the amount capital of the company etc.

After deciding the above issues, promoters take necessary steps, for assembling the

TIMSR MBA I-Sem No

business elements and making provision of the funds required to launch the business enterprise.

INCORPORATION

It is the second stage in the company formation. It is the incorporation or registration that

brings a company into existence. A company is legally formed only on being registered under the

Act and after the issue of Certificate of Incorporation by the Registrar of Companies. For the

incorporation of a company the promoters take the following preparatory steps:

1. Application for Availability of Name: To find out whether the name by which the new

company is to be started is available or not, an application has to be made in the prescribed

form along with requisite fee. Because company cannot be registered in the name of an

existing company. It also cannot be registered in a name, which is undesirable in the opinion

of the Central Government. Therefore, it is necessary for the promoters to find out the

availability of the name of the company from the Registrar of Companies. 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.

2. Filing an application: By filing an application with the Registrar of Companies of the State

in which the registered office of the company is to be situated, registration of a company can

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 be obtained.

The application should be accompanied by the following documents:

a. Memorandum of association properly stamped, duly signed by the signatories of the

memorandum and witnessed.

b. Articles of Association, if necessary.

c. A copy of the agreement, if any, which the company proposes to enter into with any

individual for his appointment as managing or whole-time director or manager.

d. A written consent of the directors to act in that capacity, if necessary.

e. A statutory declaration stating that all the legal requirements of the Act prior

toincorporation have been complied with.

3. Payment of Stamp Duty and Filing Fee: The Company has to pay the necessary stamp

duty and filing fee, according to the authorized share capital of the company.

TIMSR MBA I-Sem No

4. Declaration of Compliance of Act and Rules: A declaration that the requirements of the

Act and the rules framed there under have been complied. This declaration is to be signed

by an advocate of the Supreme Court or High Court or attorney or a pleader having the

right to appear before High Court. Alternatively, this declaration can be signed by a Company

Secretary or Chartered Accountant in whole time-practice, who is engaged in the formation

of a company or a person named in the articles as a director. This declaration is also to be

filed with the Registrar of Companies, where the registered office of the company would be

located. - Section 33(2).

5. Other documents: In case of a Public Companythe following documents s are to be

complied with:

(i) A list of persons who have consented to act as directors.

(ii) Written consent of the directors to act in that capacity.

(iii) An undertaking by the directors to take up and pay for the qualification shares.

6. Certificate of Incorporation or Registration: After receiving all the required documentsthe

Registrar will scrutinize these documents. If the Registrar finds the document to be

satisfactory, he registers them and enters the name of the company in the Register of

Companies and issues a certificate called the certificate of incorporation (Section 34).

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 The certificate of incorporation is the birth certificate of a company. The company comes

into existence from the date mentioned in the certificate of incorporation. Once the company

is created it cannot be got rid-off except by resorting to provisions of the Act which provide

for the winding up of company. The certificate of incorporation, even if it contains

irregularities, cannot be cancelled

STAGES OF FORMATION OF A COMPANY

Company formation is the term for the process of starting of a company.Generally a company

comes into existence by a process referred to as incorporation. Once a company has been legally

incorporated, it becomes a separate legalentity from those who invest their capital and labour to

run the company. The persons who wish to start a company is called promoters. They take

necessary steps to form a company. The whole process of formation of a company is divided into

four stages. They are:

TIMSR MBA I-Sem No

A. Promotion of Company

B. Incorporation or Registration of Company

C. Subscription of Capital

D. Commencement of Business

PROMOTION OF COMPANY

Promotionis a term of business and not of law as it is frequently used in business. The

term Promotion refers to the process of by which a company is ‘incorporated’ or brought into

existence. Usually ‘promotion’ is the first step to form a company.

Haney defines promotion as “the process of organizing and planning the finances of a

business enterprise under the corporate form”.

Gerstenberg has defined promotion as “the discovery of business opportunities and the

subsequent organization of funds, property and managerial ability into a business concern for the

purpose of making profits therefrom.”

Very first the idea of forming a company is conceived by promoters. They are persons

engaged in the formation of a company. Before a company is actually being started (i.e., formed

and registered under the Companies Act), first they have to decide about the following issues

such as

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 (a) Which business to start,

(b) Whether to form a new company or take over the business of existing company,

(c) If new company is to be formed, whether it should be a private company or pubic company,

(d) What should be the amount capital of the company etc.

After deciding the above issues, promoters take necessary steps, for assembling the

business elements and making provision of the funds required to launch the business enterprise.

INCORPORATION

It is the second stage in the company formation. It is the incorporation or registration that

brings a company into existence. A company is legally formed only on being registered under the

Act and after the issue of Certificate of Incorporation by the Registrar of Companies. For the

incorporation of a company the promoters take the following preparatory steps:

1. Application for Availability of Name: To find out whether the name by which the new

TIMSR MBA I-Sem No

company is to be started is available or not, an application has to be made in the prescribed

form along with requisite fee. Because company cannot be registered in the name of an

existing company. It also cannot be registered in a name, which is undesirable in the opinion

of the Central Government. Therefore, it is necessary for the promoters to find out the

availability of the name of the company from the Registrar of Companies. 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.

2. Filing an application: By filing an application with the Registrar of Companies of the State

in which the registered office of the company is to be situated, registration of a company can

be obtained.

The application should be accompanied by the following documents:

a. Memorandum of association properly stamped, duly signed by the signatories of the

memorandum and witnessed.

b. Articles of Association, if necessary.

c. A copy of the agreement, if any, which the company proposes to enter into with any

individual for his appointment as managing or whole-time director or manager.

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 d. A written consent of the directors to act in that capacity, if necessary.

e. A statutory declaration stating that all the legal requirements of the Act prior

toincorporation have been complied with.

3. Payment of Stamp Duty and Filing Fee: The Company has to pay the necessary stamp

duty and filing fee, according to the authorized share capital of the company.

4. Declaration of Compliance of Act and Rules: A declaration that the requirements of the

Act and the rules framed there under have been complied. This declaration is to be signed

by an advocate of the Supreme Court or High Court or attorney or a pleader having the

right to appear before High Court. Alternatively, this declaration can be signed by a Company

Secretary or Chartered Accountant in whole time-practice, who is engaged in the formation

of a company or a person named in the articles as a director. This declaration is also to be

filed with the Registrar of Companies, where the registered office of the company would be

TIMSR MBA I-Sem No

located. - Section 33(2).

5. Other documents: In case of a Public Companythe following documents s are to be

complied with:

(i) A list of persons who have consented to act as directors.

(ii) Written consent of the directors to act in that capacity.

(iii) An undertaking by the directors to take up and pay for the qualification shares.

6. Certificate of Incorporation or Registration: After receiving all the required documentsthe

Registrar will scrutinize these documents. If the Registrar finds the document to be

satisfactory, he registers them and enters the name of the company in the Register of

Companies and issues a certificate called the certificate of incorporation (Section 34).

The certificate of incorporation is the birth certificate of a company. The company comes

into existence from the date mentioned in the certificate of incorporation. Once the company

is created it cannot be got rid-off except by resorting to provisions of the Act which provide

for the winding up of company. The certificate of incorporation, even if it contains

irregularities, cannot be cancelled

(CA)]. But a misstatement as to purposes for which the money to be raised and is to be applied is

a misrepresentation of a present fact. [Edgington v. Fitzmaurice, (1885) 29 Ch D 459: (1991-5)

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 All ER Rep 59 (CA)].

9. Misstatements of Names of directors: If a director's name is misstated in the prospectus, it is an

important misrepresentation and the promoter can be held to be liable, [Metropolitan

Coal

Consumer's Association Ltd., Karberg's case, (1892) 3 Ch 1 (CA)].

10. Representation true only at time of issue: Sometimes representations which were true when the

prospectus was issued, become false before the allotment is made. In such cases, the fact ought

to be communicated to the applicant otherwise the applicant will not be able to rescind the

contract. A promoter/director who knows that a statement has become false is under a duty to

disclose the truth and if he fails, he may be guilty of fraud. [Brownliey v. Campbell, (1880) 5

App. Cas 925; RajagopalaIyer v. The South Indian Rubber Works, AIR 1942 Mad 656; (1942) 12

Com Cases 203].

11. Pre-Incorporation Contracts: It is the promoter’s duty is to bring the company in the

TIMSR MBA I-Sem No

legal

existence and to ensure its successful running, and in order to accomplish this 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. 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.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.

STAGES OF FORMATION OF A COMPANY

Company formation is the term for the process of starting of a company.Generally a company

comes into existence by a process referred to as incorporation. Once a company has been legally

incorporated, it becomes a separate legalentity from those who invest their capital and labour to

run the company. The persons who wish to start a company is called promoters. They take

…………………………………… (Module …) – Compiled by Prof. ………………… 18

 necessary steps to form a company. The whole process of formation of a company is divided into

four stages. They are:

A. Promotion of Company

B. Incorporation or Registration of Company

C. Subscription of Capital

D. Commencement of Business

PROMOTION OF COMPANY

Promotionis a term of business and not of law as it is frequently used in business. The

term Promotion refers to the process of by which a company is ‘incorporated’ or brought into

existence. Usually ‘promotion’ is the first step to form a company.

Haney defines promotion as “the process of organizing and planning the finances of a

business enterprise under the corporate form”.

TIMSR MBA I-Sem No

Gerstenberg has defined promotion as “the discovery of business opportunities and the

subsequent organization of funds, property and managerial ability into a business concern for the

purpose of making profits therefrom.”

Very first the idea of forming a company is conceived by promoters. They are persons

engaged in the formation of a company. Before a company is actually being started (i.e., formed

and registered under the Companies Act), first they have to decide about the following issues

such as

(a) Which business to start,

(b) Whether to form a new company or take over the business of existing company,

(c) If new company is to be formed, whether it should be a private company or pubic company,

(d) What should be the amount capital of the company etc.

After deciding the above issues, promoters take necessary steps, for assembling the

business elements and making provision of the funds required to launch the business enterprise.

INCORPORATION

It is the second stage in the company formation. It is the incorporation or registration that

brings a company into existence. A company is legally formed only on being registered under the

Act and after the issue of Certificate of Incorporation by the Registrar of Companies. For the

…………………………………… (Module …) – Compiled by Prof. ………………… 19

 incorporation of a company the promoters take the following preparatory steps:

1. Application for Availability of Name: To find out whether the name by which the new

company is to be started is available or not, an application has to be made in the prescribed

form along with requisite fee. Because company cannot be registered in the name of an

existing company. It also cannot be registered in a name, which is undesirable in the opinion

of the Central Government. Therefore, it is necessary for the promoters to find out the

availability of the name of the company from the Registrar of Companies. 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.

2. Filing an application: By filing an application with the Registrar of Companies of the State

in which the registered office of the company is to be situated, registration of a company can

TIMSR MBA I-Sem No

be obtained.

The application should be accompanied by the following documents:

a. Memorandum of association properly stamped, duly signed by the signatories of the

memorandum and witnessed.

b. Articles of Association, if necessary.

c. A copy of the agreement, if any, which the company proposes to enter into with any

individual for his appointment as managing or whole-time director or manager.

d. A written consent of the directors to act in that capacity, if necessary.

e. A statutory declaration stating that all the legal requirements of the Act prior

toincorporation have been complied with.

3. Payment of Stamp Duty and Filing Fee: The Company has to pay the necessary stamp

duty and filing fee, according to the authorized share capital of the company.

4. Declaration of Compliance of Act and Rules: A declaration that the requirements of the

Act and the rules framed there under have been complied. This declaration is to be signed

by an advocate of the Supreme Court or High Court or attorney or a pleader having the

right to appear before High Court. Alternatively, this declaration can be signed by a Company

Secretary or Chartered Accountant in whole time-practice, who is engaged in the formation

…………………………………… (Module …) – Compiled by Prof. ………………… 20

 of a company or a person named in the articles as a director. This declaration is also to be

filed with the Registrar of Companies, where the registered office of the company would be

located. - Section 33(2).

5. Other documents: In case of a Public Companythe following documents s are to be

complied with:

(i) A list of persons who have consented to act as directors.

(ii) Written consent of the directors to act in that capacity.

(iii) An undertaking by the directors to take up and pay for the qualification shares.

6. Certificate of Incorporation or Registration: After receiving all the required documentsthe

Registrar will scrutinize these documents. If the Registrar finds the document to be

satisfactory, he registers them and enters the name of the company in the Register of

Companies and issues a certificate called the certificate of incorporation (Section 34).

TIMSR MBA I-Sem No

The certificate of incorporation is the birth certificate of a company. The company comes

into existence from the date mentioned in the certificate of incorporation. Once the company

is created it cannot be got rid-off except by resorting to provisions of the Act which provide

for the winding up of company. The certificate of incorporation, even if it contains

irregularities, cannot be cancelled

STAGES OF FORMATION OF A COMPANY

Company formation is the term for the process of starting of a company. Generally a company
comes into existence by a process referred to as incorporation. Once a company has been legally
incorporated, it becomes a separate legal entity from those who invest their capital and labour to
run the company. The persons who wish to start a company is called promoters. They take
necessary steps to form a company. The whole process of formation of a company is divided into
four stages.

They are:
A. Promotion of Company
B. Incorporation or Registration of Company
C. Subscription of Capital
D. Commencement of Business

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 PROMOTION OF COMPANY

Promotions a term of business and not of law as it is frequently used in business. The term
Promotion refers to the process of by which a company is ‘incorporated’ or brought into existence.
Usually ‘promotion’ is the first step to form a company.

Haney defines promotion as “the process of organizing and planning the finances of a
business enterprise under the corporate form”.

Gerstenberg has defined promotion as “the discovery of business opportunities and the
subsequent organization of funds, property and managerial ability into a business concern for the
purpose of making profits therefrom.”
Very first the idea of forming a company is conceived by promoters. They are persons
engaged in the formation of a company. Before a company is actually being started (i.e., formed and
registered under the Companies Act), first they have to decide about the following issues such as

(a) Which business to start,

TIMSR MBA I-Sem No

(b) Whether to form a new company or take over the business of existing company,

(c) If new company is to be formed, whether it should be a private company or pubic company,

(d) What should be the amount capital of the company etc.

After deciding the above issues, promoters take necessary steps, for assembling the business
elements and making provision of the funds required to launch the business enterprise.

INCORPORATION

It is the second stage in the company formation. It is the incorporation or registration that
brings a company into existence. A company is legally formed only on being registered under the
Act and after the issue of Certificate of Incorporation by the Registrar of Companies. For the
incorporation of a company the promoters take the following preparatory steps:
1. Application for Availability of Name: To find out whether the name by which the new
company is to be started is available or not, an application has to be made in the prescribed
form along with requisite fee. Because company cannot be registered in the name of an
existing company. It also cannot be registered in a name, which is undesirable in the opinion
of the Central Government. Therefore, it is necessary for the promoters to find out the
availability of the name of the company from the Registrar of Companies. This approval is

…………………………………… (Module …) – Compiled by Prof. ………………… 22

 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.
2. Filing an application: By filing an application with the Registrar of Companies of the State in
which the registered office of the company is to be situated, registration of a company can be
obtained.

The application should be accompanied by the following documents:

a. Memorandum of association properly stamped, duly signed by the signatories of the

memorandum and witnessed.

b. Articles of Association, if necessary.

c. A copy of the agreement, if any, which the company proposes to enter into with any
individual for his appointment as managing or whole-time director or manager.

TIMSR MBA I-Sem No

d. A written consent of the directors to act in that capacity, if necessary.

e. A statutory declaration stating that all the legal requirements of the Act prior to
incorporation have been complied with.

3. Payment of Stamp Duty and Filing Fee:

The Company has to pay the necessary stamp duty and filing fee, according to the authorized
share capital of the company.
4. Declaration of Compliance of Act and Rules:

A declaration that the requirements of the

Act and the rules framed there under have been complied. This declaration is to be signed by an
advocate of the Supreme Court or High Court or attorney or a pleader having the right to appear
before High Court. Alternatively, this declaration can be signed by a Company Secretary or
Chartered Accountant in whole time-practice, who is engaged in the formation of a company or a
person named in the articles as a director. This declaration is also to be filed with the Registrar of
Companies, where the registered office of the company would be

located. - Section 33(2).

5. Other documents: In case of a Public Company the following documents s are to be complied
with:
(i) A list of persons who have consented to act as directors.
(ii) Written consent of the directors to act in that capacity.

…………………………………… (Module …) – Compiled by Prof. ………………… 23

 (iii) An undertaking by the directors to take up and pay for the qualification shares.
6. Certificate of Incorporation or Registration: After receiving all the required documents
the Registrar will scrutinize these documents. If the Registrar finds the document to be
satisfactory, he registers them and enters the name of the company in the Register of
Companies and issues a certificate called the certificate of incorporation (Section 34).
The certificate of incorporation is the birth certificate of a company. The company comes
into existence from the date mentioned in the certificate of incorporation. Once the company is
created it cannot be got rid-off except by resorting to provisions of the Act which provide for the
winding up of company. The certificate of incorporation, even if it contains irregularities, cannot
be cancelled.
MEMORANDDUM OF ASSOCIATION:

Q.. What do you mean by Memorandum of Association?

TIMSR MBA I-Sem No

Ans.: Memorandum of Association is one of the documents, which has to be filed with the
Registrar of Companies at the time of incorporation of company. Thus the first step in the
formation of a company is to prepare Memorandum of Association, which is the fundamental
document of the company

Ans.: It is the charter of the company and defines its power. It contains the fundamental
conditions on which the company is incorporated. It defines the relationship of the company
with the outside world. Its purpose is to enable shareholders and creditors and those who deal
with the company to know what is permitted range of company for business. Memorandum of
Association is the area beyond which the action of the company cannot go. This document
cannot be altered easily.

IMPORTANCE OF MEMORANDUM OF ASSOCIATIAN

1. Memorandum of Association of a company is its charter and defines the limitation of the
power of the company, established under the Act.
2. The Memorandum of Association contains the fundamental conditions upon which alone the
company is allowed to be incorporated.
3. The Memorandum of Association is the most important documents with regards to its
constitution.

…………………………………… (Module …) – Compiled by Prof. ………………… 24

 4. It is the foundation on which the whole super structure of the company is built up.
5. It has two fold objects, the first is prospective investor knows within what field his money
is to be risked. Secondly, outsiders also know the nature of the activities of the company and
their rights against the company at the time of breach of contract.
6.Memorandum of Association is the basis of the company on which its existence depends.

CONTAINS OF MEMORANDUM OF ASSOCIATION:

1. NAME CLAUSE:

Name clause states about the name of the company. The company is always registered with its
name which gives the company an identity and existence. The following points should be noted
in connection with name clause.
(a) Name of the company should not be undesirable according to central government and
should not be similar to the name of another company. (b) The name of the company must end

TIMSR MBA I-Sem No

with the word "limited" if it is public limited
Company and in the case of private company, the name must end with the word"Pvt. LTD".

2. DOMICILE CLAUSE:

A Memorandum of Association must state the name of the state where the registered office of the
company is to be situated. All the communications and notices of the company must be addressed
to its registered office. The various registers, books and other records of the company are kept
here. The companies are required to communicate to the Registrar of Companies within 30 days
of the date of incorporation,

with complete address of its registered office.

3. OBJECT CLAUSE:
The third clause in the Memorandum of Association states the objects of company. It is the most
important clause since it defines the area of operation of the company. A company engages itself
in only those types of business, which are expressly included in the objects clause. It cannot carry
another business, which is beyond the objects clause. Any act beyond the power of the company
is ultra- vires and void. As per the provision of company act, object clause of every company
must be divided into two parts which are below.
(a) MAIN OBJECTS: This sub clause contains the main object of the company, to be pursued on
its incorporation. (b) OBJECTS INCIDENTAL OR ANCILLARY TO MAIN OBJECTS: It covers the
objects which are incidental or ancillary to the attainment of the main object.

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 4. LIABILITY CLAUSE:

The liability clause states the nature of liability of the members. Memorandum of Association
must specify in this clause that the liability of the member is limited by shares or limited by
guarantee. In case the company is limited by shares then the liability clause must state that the
member's liability is limited to the face value of shares. If the company is limited by guarantee
then the liability clause shall state the guaranteed amount, which each member undertakes to
contribute to the assets of the company at the event of its winding up.

5. CAPITAL CLAUSE

This clause states the amount of share capital with which the company is to be registered and its

TIMSR MBA I-Sem No

subdivision into shares of fixed amount. The shares capital so stated in the memorandum is usually
called the authorized or nominal shares capital of the company. The authorized shares capital is the
maximum limit of share capital, which a company is authorized to raise. If company wants to raise
share capital in excess of this limit, the company will have to alter the capital clause

6. SUBSCRIPTION CLAUSE:

The Memorandum of Association concludes with this clause. It contains a declaration by the
subscribers to the memorandum that they are desirous of forming themselves into a company
and that they agree to take up shares stated against their names. Each subscriber must take at
least one share. There must be at least seven subscribers in the case of public company and at
least two in the case of a private company. At least one witness who is not a subscriber must
attest the signatures of each subscriber

Articles of Association

The articles of association is a very important document for a company as it holds the rules,
regulations and bye-laws for internal administration and management of the company. The articles
are basically for the internal management of the company.

…………………………………… (Module …) – Compiled by Prof. ………………… 26

 All the powers of directors and other officials are described in the articles. All the rights and
obligations are prescribed under the articles of association. In the articles of a private company, all
the restrictions are also laid down. All the provisions regarding the shares are also mentioned
under the articles of association. In a matter of internal conflict, it is the article of association what’s
referred to.

There are several rules, rights and provisions which leads to the importance of an article of
association such as:

1. The valuation of intellectual rights and assets are done in accordance with the
articles.

2. The appointment of directors and other key personnel are done in accordance with
the articles.

3. All the meetings either board meetings, annual meeting or a general meeting or any
type of meetings are conducted in accordance with the articles.

4. The managerial operations are dealt with the articles.

TIMSR MBA I-Sem No

5. The voting rights and other rights of shareholders are dealt with the articles of
association.

6. The audit and accounts are managed through the articles.

7. The appointment, removal and remunerations are managed by the articles.

8. The borrowing power is decided by the articles.

9. The winding of the company is done according to the articles.

10. The dividend policy is decided by the articles.

So, the articles of association hold key importance in any company or organisation as whole
internal management is done in accordance with it.

Features of Articles of Association

The features of Article of Association are:

1. It is a part of the constitution of an organization.

2. It is a contract between the members and among the members themselves.

3. It lays down the duties of stockholders also.

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 4. Some statutory clauses should be included in the article of associations and other
clauses can be chosen by the stockholders to make them the by-laws of the
organization.

5. The Court can declare a clause ultra vires if it is unreasonable.

6. Article of associations can be inspected by anyone as they are a public document.

7. Special interest in the provision of Articles of Association is taken by the lender of the
organization.

Prospectus

A prospectus is defined as a legal document describing a company’s securities that have been put on sale.
The prospectus generally discloses the company’s operations along with the purpose of the securities being
offered. As per the Companies Act, 2013, a prospectus can include information such as advertisement,
circular or notice among other legal documents inviting the public for the offering. Also, the prospectus
should be issued only for the purchase of a company's securities.

TIMSR MBA I-Sem No

In order for a document to be considered a prospectus, it should act as an invitation for the public
to purchase of stocks/shares, debentures or other instruments. Also, the prospectus should be
issued by the company or an institution on behalf of the company and made solely for the public.

In case a private company wishes to convert to a public company, it is required to either issue a
prospectus or file a statement in lieu of prospectus of which the provisions are mentioned under
Section 70 of the Companies Act, 2013.

Essentials for a document to be called as a prospectus

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

1. The document should invite the subscription to public share or debentures, or it

should invite deposits.

2. Such an invitation should be made to the public.

3. The invitation should be made by the company or on the behalf company.

4. The invitation should relate to shares, debentures or such other instruments.

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.

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 A Company is an artificial person and hence, is not capable to work on its own. As a consequence
there is a need to appoint director in every Company. A Director is the person appointed to the
Board of a Company. Director is responsible for management of the Company of which he is a
director. Board of Directors refers to the collective body of directors who are in charge of smooth
running of business.

Who can be a Director?

Managing a Business is not an easy task. Therefore there are eligibility criteria for a person to
become a Director.

· Only an Individual person can become a Director of the Company. A person other than
individual is not eligible to become a director.

· Furthermore, a minor individual cannot become director of Company as he is not eligible to

obtain DIN as well as cannot file a valid consent to act as director.

· At least one director of Company should be Resident of India.

TIMSR MBA I-Sem No

· Moreover the person acting as Director should be :-

o of sound mind

o capable to enter into a contract

o Not an insolvent person.

Powers and Duties of a Director

The Companies Act 2013 defines the powers and duties that a Director should take care of while
acting on behalf of the Company. Sections 179 and 166 of Companies Act 2013 prescribes the
powers and duties of a Company Director respectively.

Powers of Directors

According to Companies Act 2013, the Board of Directors of a Company has the following powers
in the Company.

· Power to make calls in respect of money unpaid on shares

· Call meetings on suo moto basis.

· Issue shares, debentures, or any other instruments in respect of the Company.

…………………………………… (Module …) – Compiled by Prof. ………………… 29

 · Borrow and invest funds for the Company

· Approve Financial Statements and Board Report

· Approve bonus to employees

· Declare dividend in the Company

· Power to grant loans or give guarantee in respect of loans

· Authorize buy back of securities

· Approve Amalgamation/Merger/ Takeover

· Diversify the business of the Company

Duties of Directors

The role and duties of a company director

TIMSR MBA I-Sem No

A company director is either appointed by shareholders or other directors, and plays a key role in

the management and strategic direction of the business. Major decisions will almost always be

taken by a vote of the board of directors, although there will be some delegated powers to, for

example, sales or finance director in their area of expertise.

Many of the key duties of the company director are codified in the Companies Act 2006, while

others will be set out in each company’s articles of association, which detail the limits of directors’

decision-making powers.

The Companies Act states that directors must:

· Promote the success of the company for the benefit of its shareholders, while considering the

impact of decisions on employees, suppliers, customers, communities and the environment

· Exercise independent judgement when making decisions

· Exercise reasonable care, skill and diligence

· Manage conflicts of interest appropriately

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 Directors are also responsible for keeping proper records, and there are restrictions on certain

transactions, for example, securing a loan from the company. A breach of these duties, plus a

number of other circumstances discussed below, could see a director held liable, either along with

their company or as an individual.

Board of Directors acts as agent of the Company. However while acting for Company, Director
Needs to take care of his duties which are as follows:-

· To act in good faith

· Act in accordance with the Articles of Association of the Company

· To act so as to promote the objects of the Company

TIMSR MBA I-Sem No

· Act in best interest of the Company and its stakeholders

· Exercise duties with due and reasonable care

· To exercise independent judgement

· Not to get involved in a situation where his interest conflicts with the interest of the
Company

· He cannot assign his office to any other person.

· Not to achieve undue gain or advantage

· Liabilities of Directors

· It is not easy to describe the liabilities of a director. The Director can’t delegate their
authority which is specifically imposed on them, and which involve the exercise of their own
judgment and discretion. However, General tort principles make the directors personally liable
if they have either intentionally or negligently caused harm to third parties. Here it is to be also
noted that the directors, who act in good faith and within the scope of their authority, will not be
held liable for the tortuous acts of the association. It is only when directors act in bad faith or
outside the scope of their authority, will they have a problem. For example, an employee may be
fired without just cause, but the dismissal may be in the best interests of the association.

· The liabilities of Directors can be considered under the following heads.

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 ·

· 1. Liability to the Company-

· The liability of directors to the company arises under few circumstances only for example
the directors have acted ultra vires the company.

· The liability of the Director to the company may arise from:

· (a) Breach of fiduciary duty.

· (b) Ultra Vires acts

· (c) Negligence, and

· (d) Mala fide Acts.

· (a) Breach of Fiduciary duty- whenever a director works dishonestly to the interest of

TIMSR MBA I-Sem No

company, he will be held liable for breach of fiduciary duty. Most of the powers of Directors are
‘powers in trust’ as explained above and therefore, should be exercised in the benefit of
company and not for their own benefit or for the benefit of other members.

· (b) Ultra vires acts- everybody in the company are supposed to work within the prescribed
limits or the provisions of Companies Act, Memorandum and Articles of association since these
lay down the limits to the activities of the company and consequently to the power of board of
Directors. If the Directors do anything which is beyond these prescribed limits it would be
considered as ultra vires and so he shall be made personally liable for this.

(c) Negligence- as long as the Directors Act within their powers, and exercise their duty with
reasonable care and skill as every prudent businessman is expected to take care of, they will not
be made liable. But where they fail to exercise reasonable care, skill and diligence, they shall be
deemed to have acted negligently in discharge of their duties and consequently shall be liable
for any loss or damage resulting therefrom. Although, there are no objective standards of skill
and care with the help of which we can decide whether a director has been negligent, instead,
there are only general principles which may be applied depending on the facts of each case. The
directors are not bound to bring any special qualification into their office. The mere omission to
take every possible care will not amount to negligence.

(d) Mala fide Acts- directors are the trustees of the assets of the company including money,
property and also exercise power over them. And If they exercise such power dishonestly or

…………………………………… (Module …) – Compiled by Prof. ………………… 32

 perform their duties in a malafide manner, they will be held liable for the breach of trust and
would be asked to reimburse the company of whatever the loss company has suffered of such
malafide act. It is the foremost duty of director to disclose all the facts to the company which is
known to him and so he could be made accountable to the company for any secret profits he
might have earned in the course of performing duties on behalf of the company. Directors can
also be made liable for the acts of Misconduct or wilful misuse of powers.

2. Liability to third parties:

In addition to the statutory duties, directors also owe common law duties. As a result of this,
they may often find themselves liable to third parties. If, for example, you assumed personal
responsibility for a misstatement to a customer, you could find yourself sued by that customer
alongside the company.

The directors are not personally liable to outsiders or third parties if they act within the scope

TIMSR MBA I-Sem No

of the powers vested in them. The directors are not personally liable to the third parties for any
contract on behalf of the company.

· The discussion on liabilities of Directors towards third parties may be grouped as

under:

(a) Liability under the provisions of Companies Act, 1956:

(i) Prospectus: in case of any omission to state any particulars as per the requirement of the
section 56 and Schedule II of the act or mis-statement of facts in prospectus renders a director
personally liable for damages to the third party. Also if the party subscribes for any shares or
debentures on faith of the prospectus then for any loss or damage he may sustain by reason of
any untrue or misleading statement included therein, director shall be made liable to pay
compensation, as it is given in the Section 62. He may, however, escape his liability, where he
proves his innocence.

Civil Liability to the Company:

Director’s liability to the Company may arise in either of the circumstances:

· The directors are guilty of negligence,

· The directors committed breach of trust,

· There has been misfeasance and

· The director has acted ultra vires and the funds of the company have been applied for such an act.

…………………………………… (Module …) – Compiled by Prof. ………………… 33

 A director is required to act honestly and diligently by applying his mind and discharging his duties
as a man of prudence of his ability and knowledge would do. It has been explained more precisely
in the duties of directors as to what is standard or due care and diligence expected from him as
explained by Justice Romer in Re City Aquintable Fire Insurance Company.

Any willful misconduct or culpable negligence falls within the category of misfeasance. It was held
in Re Duomatic Ltd,

“A director has to act in the way in which a man of affairs dealing with his own affairs with
reasonable care, and circumspection could reasonably be expected to act.....”

Therefore, Directors would decidedly be liable for omitting to do what the was supposed to do in
the

TIMSR MBA I-Sem No

Company Meetings | Essentials | Kinds of Company Meetings

Table of Contents

What is a Meeting?

In common parlance, the word meeting means an act of coming face to face, coming in company or
coming together.

Company meeting – Essentials, Kinds

The Oxford Dictionary defines a meeting as

An assembly of number of people for entertainment, discussion or the like.

A meeting therefore, can be defined as a lawful association, or assembly of two or more persons by
previous notice for transacting some business. The meeting must be validly summoned and
convened. Such gatherings of the members of companies are known as company meetings.

Essentials of Company Meetings

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

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

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

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

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

Kinds of Company Meetings

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

1.Meetings of the Shareholders.

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

3. Meetings of the Debenture Holders.

4. Meetings of the Creditors.

1. Meeting of the Share Holders

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

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

1. Statutory Meeting

This is the first meeting of the shareholders conducted after the commencement of the business of a
public company. Companies Act provides that every public company limited by shares or limited by
guarantee and having a share capital should hold a meeting of the shareholders within 6 months
but not earlier than one month from the date of commencement of business of the company.

Usually, the statutory meeting is the first general meeting of the company. It is conducted only once
in the lifetime of the company. A private company or a public company having no share capital need
not conduct a statutory meeting.

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 2. Annual General Meeting

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

3. Extra-ordinary General Meetings (EOGM)

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

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

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Persons Authorized to Convene the Meeting

The following persons are authorized to convene an extraordinary general meeting.

1. The Board of Directors.

2. The Requisitionists.
3. The National Company Law Tribunal.
4. Any Director or any two Members.

4. Class Meetings

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

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

For example, for cancelling the arrears of dividends on cumulative preference shares, it is necessary
to call for a meeting of such shareholders and pass a resolution as required by Companies Act. In
case of such a class meeting, the holders of other class of shares have no right to attend and vote.

2. Meetings of the Directors

Meetings of directors are called Board Meetings. These are the most important as well as the most
frequently held meetings of the company. It is only at these meetings that all important matters
relating to the company and its policies are discussed and decided upon.

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 Since the administration of the company lies in the hands of the Board, it should meet frequently for
the proper conduct of the business of the company. The Companies Act therefore gives wide
discretion to the directors to frame rules and regulations regarding the holding and conduct of
Board meetings.

The directors of most companies frame rules concerning how, where and when they shall meet and
how their meetings would be regulated. These rules are commonly known as Standing Orders.

3. Meetings of Debenture Holders

The debenture holders of a particular class conduct these meeting. They are generally conducted
when the company wants to vary the terms of security or to modify their rights or to vary the rate
of interest payable etc. Rules and Regulations regarding the holding of the meetings of the
debenture holders are either entered in the Trust Deed or endorsed on the Debenture Bond so that
they are binding upon the holders of debentures and upon the company.

4. Meetings of the Creditors

Strictly speaking, these are not meetings of a company. They are held when the company proposes
to make a scheme of arrangements with its creditors. Companies like individuals may sometimes

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find it necessary to compromise or make some arrangements with their creditors, In these
circumstances, a meeting of the creditors is necessary.

given circumstances.

Oppression and Mismanagement under Companies Act, 2013

A. Oppression

INTRODUCTION: Special powers have been vested in the National Company Law Tribunal
(NCLT)) for the protection of members against oppression by the majority of shareholders
and for intervention in case of mismanagement of a company's affairs.

It is a known fact that the management of a company is completely based on the majority rule,
however, at the same time the interests of the minority can’t be completely neglected. While
discussing with regard to majority and minority, let us be clear that we are discussing about
majority or minority voting strength. The reason for this distinction is that a small group of
shareholders may hold the majority shareholding whereas the majority of shareholders may,
among them, hold a very small percentage of share capital. Once they acquire control, the majority
can, for all practical purposes, do whatever they want with the Company with practically no control

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 or supervision, because even if they are questioned on their acts in the general meeting, they
always come out winners because of their greater voting strength. Once resolution is passed by
majority it is binding on all members. As a result, court will not ordinarily intervene to protect the
minority interest affected by resolution.

2.7.2. Meaning of Oppression [Section 397] The term oppression has not been defined in the Act.
According to Lord Cooper, "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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Prevention of Oppression

Section 397 of the Act deals with the concept of oppression. There are basically two very important
ingredients involved:

1) Affairs of the company are conducted in a manner prejudicial to the public at large, or oppressive
to any member therein; and

2) To wind up the company would result in unfairly prejudicing the members, but the facts and
circumstances otherwise suggest that winding up of the company would be the right course of
action?

Meaning of Mismanagement [Section 398]

The word "Mis" means "wrong or bad" Mismanagement is defined in Johnson's Dictionary as ill
management or ill conduct".

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 Section 398, in dealing with the concept of mismanagement also highlights two basic concepts that
the affairs of the company are being conducted or such affairs are likely to be conducted in a
manner which is:

1) Prejudicial to Public Interest: Conduction of the affairs of the company in a manner prejudicial
interest, and to public

2) Prejudicial to the Interest of the Company: Material alterations in the company, in whatever
manner, that would result in the affairs of the company being conducted in a manner prejudicial to
the public. 2.7.5. Prevention of Mismanagement [Section 398]

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Provides for relief against mismanagement. A requisite number of members (as laid down in
Section 399) of a company may apply to the Company Law Board for appropriate relief on the
ground of mismanagement of the company.

The Company Law Board may give relief if it is of opinion:

1) That the affairs of the company are being conducted in a manner prejudicial to the public
interest or the interests of the company, or

2) That by reason of a material change in the management or control of the company, the affairs of
the company is likely to be conducted in a manner prejudicial to the public interest or the interests
of the company.

On such application being made, the Company Law Board may make such order as it thinks fit to
prevent or bring an end to the matter complained of or apprehended. 2.7.6. Parties Entitled to
Apply [Section 399]

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 Requisite number of members should sign on the application:

1) Company having Share Capital

2)Not less than 100 members or 1/10 of the total number of its members, whichever is
less

3) By any member(s) holding not less than 1/10 of the issued share capital.

2) Company not having Share Capital: 1/5 of the total number of member of the company.

3) Besides members the following can also apply:

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1) The central government or any person authorised by the central government

ii) Trustees of a shareholder/member.

iii) A legal representative of a deceased member.

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