COMPANY LAW

MODULE 1

Definition of company
According to Black law’s dictionary, the definition of company is “a voluntary association of a
certain number of people having some common interests united by some commercial or
industrial undertaking to carry out legitimate business.”
The Companies Act of 2013 in India defines company in the Section 2(20) as “a company
incorporated under this actor under any previous company law”. This means that any
corporation which is incorporated and registered under this Act or under other previous
company Act will be called as a company.
A company is considered to be an artificial legal person according to Indian Constitution which
have an independent legal entity and a common legal seal for its signatures.

Nature of a Company
A company, in its ordinary, non-technical sense, means a body of individuals associated for a
common objective, which may be to carry on business for gain or to engage in some human
activity for the benefit of the society.
Accordingly, the word ‘company’ is employed to represent associations formed to carry on
some business for profit or to promote art, science, education or to fulfill some charitable
purpose. This body of individuals may be incorporated or unincorporated.
The concept of ‘Company’ or ‘Corporation’ in business is not new but was dealt with, in 4th
century BC itself during ‘Arthashastra’ days. The nature of company 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.

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.

Historical Development of the Nature of Company law in India

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.
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.
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. 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.
Recently, 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

Characteristics and Nature 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, the nature of the company is that 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.
The most striking characteristics and nature of a company are:
• 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.
• Artificial Person
A company is created with the sanction of law and is not itself a human being, it is therefore,
called artificial; and since it is clothed with certain rights and obligations, it is called a
person. A company is accordingly, an artificial person thereupon the nature of company is
artificial too.
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.
• Limited Liability
The company being a separate person, its members are not as such liable for its debts. Hence,
in the case of a company limited by shares, the liability of members is limited to the nominal
value of shares held by them. Thus, if the shares are fully paid up, their liability will be nil. So
the nature of company is that its members have limited liability.
However, companies may be formed with unlimited liability of members or members may
guarantee a particular amount. In such cases, liability of the members shall not be limited to
the nominal or face value of the shares held by them. In case of unlimited liability companies,
members shall continue to be liable till each paise has been paid off. In case of companies
limited by guarantee, the liability of each member shall be determined by the guarantee
amount, i.e., he shall be liable to contribute up to the amount guaranteed by him.
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.
• Perpetual Succession
An incorporated company never dies, except when it is wound up as per law. A company,
being a separate legal person is unaffected by death or departure of any member and it
remains the same entity, despite the total change in the membership. A company’s life is
determined by the terms of its Memorandum of Association.
The nature of a company 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.
• 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. So one of
the nature of company is that it has separate property from its members.
Lord Macnaghten in the famous case of Salomon v. Salomon & Co. Ltd. (1897) AC
22 observed that:
“A company is at law a different person altogether from the subscribers…..; and though it may
be that after incorporation the business is precisely the same as it was before and the same
persons are managers and the same hands receive the profits, the company is at law not the
agent of the subscribers or trustee for them. Nor are the subscribers as members liable, in any
shape or form, except to the extent and in the manner provided by the Act”.
The facts of the famous Salomon’s case were as follows:
Salomon carried on business as a leather merchant. He sold his business for a sum of £30,000
to a company formed by him along with his wife, a daughter and four sons. The purchase
consideration was satisfied by allotment of 20,000 shares of £1 each and issue of debentures
worth £10,000 secured by floating charge on the company’s assets in favour of Mr Salomon.
All the other shareholders subscribed for one share of £1 each. Mr Salomon was also the
managing director of the company. The company almost immediately ran into difficulties and
eventually became insolvent and winding up commenced. At the time of winding up, the total
assets of the company amounted to £6,050; its liabilities were £10,000 secured by the
debentures issued to Mr Salomon and £8,000 owing to unsecured trade creditors. The
unsecured sundry creditors claimed the whole of the company’s assets, viz. £6,050 on the
ground that the company was a mere alias or agent for Salomon.
Held: The contention of the trade creditors could not be maintained because the company
being in law a person quite distinct from its members, could not be regarded as an ‘alias’ or
agent or trustee for Salomon. Also the company’s assets must be applied in payment of the
debentures as a secured creditor is entitled to payment out of the assets on which his debt is
secured in priority to unsecured creditors.
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.
• 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].
Since business is separate from its members in a company form of organisation, it facilitates
the transfer of member’s interests. The shares of a company are transferable in the manner
provided in the Articles of the company. However, in a private company, certain restrictions
are placed on such transfer of shares but the right to transfer is not taken away absolutely
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.
• 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.
Seal of company when to be used – The articles of association of the company provide for
putting the seal of the company on documents. Apart from those documents, the company
seal is to be put on power of attorney, deed of lease, share certificates, debentures,
debenture trust deed, deed of mortgage, promissory notes, negotiable instruments (except
cheques), agreement of hypothecation, loan agreements with banks and financial
institutions, contract of employment, guarantees issued by the company and all formal
documents and documents executed on stamp papers.
• 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].
In Rajendra Nath Dutta v. Shibendra Nath Mukherjee (1982) (52 Comp. Cas. 293 Cal.), a lease
deed was executed by the directors of the company without the seal of the company and
later a suit was filed by the directors and not the company to avoid the lease on the ground
that a new term had been fraudulently included in the lease deed by the defendants.
Held that a director or managing director could not file a suit, unless it was by the company
in order to avoid any deed which admittedly was executed by one of the directors and
admittedly also the company accepted the rent. The case as made out in the plaint was not
made out by the company but by some of the directors of the company and the company was
not even a plaintiff. If the company was aggrieved, it was the company which was to file the
suit and not the directors. Therefore, the suit was not maintainable.
• 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.
L ikewise, a shareholder cannot be sued on contracts made by his company . The distinction
b etween 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 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.
• 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.
• 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.
• 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.

1.2 Theory of corporate personality; Lifting of the corporate veil ; statutory

exceptions to limited liability.

Comprehensively Corporate Personality is of two sorts –

• Corporation Aggregate
• Corporation Sole

1. Corporation Aggregate
There are a number of individuals where we make a section outside individuals which means
making a group as a solitary unit. In basic words, company total is a gathering or relationship
of individuals joined for specific interests. It was at first made by the Royal Charter in England
later it was enrolled under the organizations’ act.
The organization is fundamentally made by advertisers. Production of the organization
incorporates different exercises like enrollment of organizations, arrangement of the
directorate, making an outline and so forth. At long last when the entire system of enlistment
is finished then the organization is treated as a legitimate character.
Such an organization is framed by various people who as investors of the organization
contribute or guarantee to add to the capital of the organization for the assistance of normal
target. The property of the organization is treated as unmistakable from its individuals if there
should be an occurrence of death and bankruptcy of individuals if it doesn’t influence the
organization, it might keep on prospering the business. The organization has separate
legitimate substance and restricted obligation.
On account of Salmon v. Salmon that a corporate body has its own reality or character
independent and unmistakable from its individuals and thus an investor can’t be expected to
take responsibility for the demonstrations of the organization despite the fact that he holds
the whole offer capital.
On account of Tata Engineering and Locomotive Company Ltd. V. Province of Bihar the Court
noticed the organization in law is equivalent to a characteristic individual and has its very own
legitimate element’. The substance of the enterprise is totally isolated from that of its
investors and its resources are discrete from those of its investors.
1.1 Utility of Corporation Aggregate
The different purposes which counterfeit enterprise total might advance and protect may
momentarily be expressed as follows-
• Help and aid the administration of the country through Municipal partnerships, Local
Bodies, Panchayats, Welfare Organizations. and so forth
• Promote demonstrable skills through foundations, schools giving specialized, logical,
designing, clinical law, and other particular courses.
• Preserve and advance strict amicability by comprising strict trusts, sheets, learning
focuses, altruistic homes, etc.
• Advancement of logical and imaginative fever through suitable trusts, associations,
establishments, and so on
• General public help, through Medical clinics, Trusts, halfway houses, salvage homes,
etc.
• Promote exchange, trade, and enterprises through Corporate houses, Public area
utility foundations, Private business houses, etc.

2. Corporation sole
An organization sole is a legitimate substance consisting of a single sole in a corporate office,
involved by a single (sole) regular individual. The most remarkable illustration of partnership
sole is the crown (in England) It basically implies that there is a solitary individual who is
represented and viewed by law as a legitimate individual.
Single individual in his legitimate limit has a few rights and obligations while holding the
workplace or capacity. The fundamental point of organization sole is to guarantee the
coherence of an office so the inhabitant can gain property to serve his replacements or he
might agree to tie or help them and can sue for wounds to the property while it was in the
possession of his archetype.
Holders of public office are referred to by law as enterprises. The principal trademark is its
consistent element supplied with a limit with respect to perpetual length.
2.1 Model
In India, different workplaces like the Prime Minister Office, Governor of Reserve bank of
India, The State Bank of India, The Post Master General, the General Manager of the rail line,
the Registrar of Supreme Court, Comptroller and Auditor-General of India and so forth are
made under various sculptures are the instances of enterprise sole.

Theories of corporate personality

Different Jurists gave various perspectives and conclusions with respect to the idea of
corporate character. Changes have happened in the perspectives occasionally. However,
there are various hypotheses to clarify the idea of a corporate character yet none of them is
supposed to be prevailing. Comprehensively we have talked about five speculations of
corporate character.
Fiction Theory( outcome of fiction)
The law specialists who gave this hypothesis were Savigny, Salmond, Holland they expressed
a partnership with an imaginary characters. Company is treated as not quite the same as its
individuals The imaginary character is quality to the need for shaping an individual association
existing without anyone else and overseeing for its recipients ‘The persona ficta’- Savigny gave
the term juridical individual.
Partnership as an elite making of law having no presence separated from its individual
individuals who structure the corporate gathering and whose acts by fiction, are credited to
the corporate substance.
The Fiction hypothesis along these lines expresses that fuse is an invented expansion of
character depending on the motivation behind working with managing property claimed by a
huge assortment of individuals.( regular) this hypothesis neglects to answer the acceptably
the obligation of the corporation.
Realistic Theory( difference between artificial and natural person)
The hypothesis was given by Johannes Althusious, Gierke in German and Maitland in England.
As per this hypothesis, it declines the fiction hypothesis. The practical hypothesis keeps up
with that an organization has a genuine clairvoyant character perceived and not made by the
law. There is a genuine part in the partnership. The desire of many is not quite the same as
the desire of a person. A company subsequently has genuine presence, regardless of the
reality if it is perceived by the state.
The significant contrast between the fiction hypothesis and the pragmatist hypothesis lies in
the way that the previous rejects that the corporate character has any presence past what
the state decides to give it, the last hold that a company is a portrayal of actual real factors
which the law perceives. On account of dalme co. restricted v. mainland tire the choice was
made on the practical hypothesis where there was the upliftment of corporate cover.
Bracket Theory( created by its member and agent)
The section hypothesis was given by Ihering. The section hypothesis of the character of the
enterprise keeps up with the individuals from the organization itself essentially according to
the perspective comfort. The genuine idea of enterprise and its individuals are kept in section.
According to this hypothesis, juristic character is just an image to work with the working of
the corporate bodies. Just the individuals from the company are people in a genuine sense
and a section is put around them to show that they were treated as one single unit when they
structure themselves into a partnership.
Concession Theory( has been given a corporate personality)
Given by Savigny, Salmond and sketchy the concession hypothesis of the character of the
partnership which is a family to fiction hypothesis not indistinguishable says that lawful
character can adhere to from law alone. It is by elegance or concession alone that the
legitimate character is in all actuality, made or perceived.
According to this hypothesis, the juristic character is a concession allowed to an organization
by the state. It is completely at the prudence of the state to perceive if it is a juristic individual.
This hypothesis is not quite the same as the fiction hypothesis in however much it underlines
the optional force of the state in the issue of perceiving the corporate character of the
partnership. A few pundits consider this hypothesis perilous in view of its over-accentuation
on State caution in the issue of perceiving organizations that are non-living elements. This
choice might prompt discretionary caution.

CORPORATE VEIL

What is Corporate Veil ?

A company is composed of its members and is managed by its Board of Directors and its
employees. When the company is incorporated, it is accorded the status of being a separate
legal entity which demarcates the status of the company and the members or shareholders
that it is composed of. This concept of differentiation is called a Corporate Veil which is also
referred to as the ‘Veil of Incorporation’.
Meaning of Lifting of Corporate Veil
The advantages of incorporation of a Company like Perpetual Succession, Transferable
Shares, Capacity to Sue, Flexibility, Limited Liability and lastly the company being accorded
the status of a Separate Legal Entity are by no means inconsiderable, under no circumstance
can these advantages be overlooked and, as compared with them, the disadvantages are,
indeed very few.

Basics of Limited Liability

Organizations exist to a limited extent to shield the individual resources of investors or
shareholders from individual obligation for the obligations or activities of a company. Almost
opposite to a sole proprietorship in which the proprietor could be considered in charge of the
considerable number of obligations of the organization, a company customarily constrained
the individual risk of the investors. This is why Limited Liability as a concept is so popular.
Puncturing the Veil of Incorporation commonly works best with smaller privately held
companies in which the organization has few investors, restricted resources, and
acknowledgment of separateness of the partnership from its investors.
Yet some of them, which are immensely complicated deserve to be pointed out. The
corporate veil protects the members and the shareholders from the ill-effects of the acts done
in the name of the company. Let’s say a director of a company defaults in the name of the
company, the liability will be incurred by the company and not a member of the company
who had defaulted. If the company incurs any debts or contravenes any laws, the concept of
Corporate Veil implies that the members of the company should not be held liable for these
errors.
Development of the Concept of “Lifting of Corporate Veil”
Once a company is incorporated, it becomes a separate legal identity. An incorporated
company, unlike a partnership firm which has no identity of its own, has a separate legal
identity of its own which is independent of its shareholders and its members.
The companies can thus own properties in their names, become signatories to contracts etc.
According to Section 34(2) of the Companies Act, 2013, upon the issue of the certificate of
incorporation, the subscribers to the memorandum and other persons, who may from time
to time be the members of the company, shall be a body corporate capable of exercising all
the functions of an incorporated company having perpetual succession. Thus the company
becomes a body corporate which is capable of immediately functioning as an incorporated
individual.
The central focal point of Incorporation which overshadows all others is a distinct legal entity
of the Corporate organisation.
Solomon v Solomon
What the milestone case Solomon v Solomon lays down is that “in inquiries of property and
limitations of acts done and rights procured or liabilities accepted along these lines… the
characters of the common people who are the organization’s employees is to be
disregarded”.
Lee v Lee’s Air Farming Ltd
In Lee v Lee’s Air Farming Ltd., Lee fused an organization which he was overseeing executive.
In that limit he named himself as a pilot/head of the organization. While on the matter of the
organization he was lost in a flying mishap. His widow asked for remuneration under the
Workmen’s Compensation Act. At times, the court dismisses the status of an organization as
a different lawful entity if the individuals from the organization attempt to exploit this status.
The aims of the people behind the cover are totally uncovered. They are made to obligate for
utilizing the organization as a vehicle for unfortunate purposes.

Circumstances under which the Corporate Veil can be Lifted

There are two circumstances under which the Corporate Veil can be lifted. They are:
1: Statutory Provisions
2: Judicial Interpretations
Statutory Provisions
Section 5 of the Companies Act, 2013
This particular section characterizes the distinctive individual engaged in a wrongdoing or a
conduct which is held to be wrong in practice, to be held at risk in regard to offenses as ‘official
who is in default’. This section gives a rundown of officials who will be at risk to discipline or
punishment under the articulation ‘official who is in default’ which includes within itself, an
overseeing executive or an entire time chief.
Section 45 of the Companies Act, 2013
Reduction of membership beneath statutory limit: This section lays down that if the individual
count from an organization is found to be under seven on account of a public organization
and under two on account of a private organization (given in Section 12) and the organization
keeps on carrying on the business for over half a year, while the number is so diminished,
each individual who knows this reality and is an individual from the organization is severally
at risk for the obligations of the organization contracted during that time.
Section 147 of the Companies Act, 2013
Misdescription of name: Under sub-section (4) of this section, an official of an organization
who signs any bill of trade, hundi, promissory note, check wherein the name of the
organization isn’t referenced in the way that it should be according to statutory rules, such
official can be held liable on the personal level to the holder of the bill of trade, hundi and so
forth except if it is properly paid by the organization. Such case was seen on account
of Hendon v. Adelman.
Section 239 of the Companies Act, 2013
Power of inspector to explore affairs of another company in the same gathering : It gives that
in the event that it is important for the completion of the task of an inspector instructed to
research the affairs of the company for the supposed wrong-doing, or a strategy which is to
defraud its individuals, he may examine into the affairs of another related company in a
similar group.
Section 275 of the Companies Act, 2013
Subject to the provision of Section 278,
This section provides that no individual can be a director of in excess of 15 companies at any
given moment. Section 279 furnishes for a discipline with fine which may reach out to Rs.
50,000 in regard of every one of those companies after the initial twenty.
Section 299 of the Companies Act, 2013
This Section emphasises and offers weightage to the existing proposal of the Company Law
Committee: “It is important to see that the general notice which a director is bound to provide
for the company of his interest for a specific company or firm under the stipulation to sub-
section (1) of Section 91 which is ought to be given at a gathering of the directors or find a
way to verify that it is raised and read at the following gathering of the Board after it is
given. The section not only applies to public companies but also applies to private companies.
Inability to consent and act in consonance to the necessities of this Section will cause
termination the Director and will likewise expose him to punishment under sub-section (4).
Section 307 & 308 of the Companies Act, 2013
Section 307 applies to each director and each regarded director. The register of the
shareholders should contain in it, not just the name but also how much shareholding, the
description of shareholding and the nature and extent of the right of the shareholder over
the shares or debentures.
Section 542 of the Companies Act, 2013
Pretentious Conduct: If over the span of the winding up of the company, it gives the idea that
any business of the company has been continued with goal to defraud the creditors of the
company or some other individual or for any deceitful reason, the people who were
intentionally aware of this and still agreed to the carrying on of the business, in the way
previously mentioned, will be liable on a personal level without incurring the liabilities of the
company, and will be liable in a manner as the court may direct.
In Popular Bank Ltd, it was held that the Section 542 seems to leave the Court with
attentiveness to make an assertion of risk, in connection to ‘all or any of the obligations or
liabilities of the company’.
Judicial Interpretations and Pronouncements
Instances are not few in which the courts have resisted the temptation to break through the
Corporate Veil. But the theory cannot be pushed to unnatural limits. Circumstances must
occur which compel the court to identify a company with its members. A company cannot,
for example, be convicted of conspiring with its sole director. Other than statutory
arrangements for lifting the corporate veil, courts additionally do lift the corporate veil to see
the genuine situation. A few situations where the courts lifted the veil are laid down below as
per the following case laws:
Daimler Co. Ltd. v. Continental Tyre and Rubber Co. (Great Britain) Ltd
In a great deal of cases, it ends up being important to check the character of an organization,
to check whether it is a companion or a foe of the country the business is set up in. A milestone
managing in this field was spread out in Daimler Co Ltd v Continental Tire and Rubber Co
Ltd. The facts of the case are referenced below:
An organization was set up in England and it was set up to sell tires which were thus made by
a German organization in Germany. Most of the control in the British organization was held
by the German organization. The holders of the rest of the shares with the exception of one,
and every one of the chiefs were German, dwelling in Germany. In this way the genuine
control of the English organization was in German hands. During the First World War, the
English organization started an activity to recover an exchange obligation. What’s more, the
inquiry was whether the organization had turned into an adversary organization and should,
accordingly, be banned from keeping up the activity.
The House of Lords laid out that an organization consolidated in the United Kingdom is a
lawful entity. It’s anything but a characteristic individual with brain or inner voice. It can nor
be anyone’s companion nor foe yet it might accept a foe character when people in ‘true’
control of its issues are inhabitants in any adversary nation or, any place the occupants are,
are acting under the control of the foes. Just in case the activity had been permitted, the
organization would have been utilized as a means by which the motivation behind offering
cash to the foe would be practiced.
That would be incredibly against open arrangement. But in case there was no such fear, the
courts may decline to tear open the Corporate Veil.
Dinshaw Maneckjee Petit, Re.
The court has the ability to slight and infer the corporate substance in case that it is utilized
for tax avoidance purposes or to go around expense commitment. An unmistakable and
appropriate description of this situation is given in Dinshaw Maneckjee Petit, Re. The assessee
was an affluent man getting a charge out of tremendous profit and intrigue pay. He shaped
four privately owned businesses and concurred with each to hold a square of speculation as
an operator for it. Pay was credited in the records of the organization yet the organization
gave back the sum to him as an imagined advance.
Further, he isolated his pay into four sections in an attempt to lessen his assessment
obligation. It was held that the organization was shaped by the assessee absolutely and
basically as a method for maintaining a strategic distance from super-charge and the
organization was just the assessee himself. It did no business however was made essentially
as a legitimate substance to apparently get the profits and interests and to hand them over
to the assessee as imagined credits.
Government Companies
An organization may some time be viewed as an operator or trustee of its individuals or of
another organization and may, accordingly, be esteemed to have lost its distinction for its
head. In India, this inquiry has regularly emerged regarding Governmental organizations.
Countless privately owned businesses for business purposes have been enrolled under the
Companies Act with the president and a couple of different officials as the investors.
The undeniable preferred position of framing an administration organization is that it gives
the exercises of the State “a tad bit of the opportunity which was appreciated by private
partnerships and the legislature got away from the standards which hampered activity when
it was finished by an administration division rather than an administration enterprise. At the
end of the day, it gave the administration portion of the robes of the person”.
So as to guarantee this opportunity, the Supreme Court has repeated in various cases that an
administration organization isn’t an office or an augmentation of the state. It’s anything but
a specialist of the State. As need be, its representatives are not government workers and right
writs can’t issue against it. In one of the cases, the court commented:
“The organization being a non-statutory body and one consolidated under the Companies Act
there was neither a statutory nor an open obligation forced on it by a resolution in regard of
which requirement could be looked for by methods for the writ of Mandamus”.
The Madhya Pradesh High Court regarded a Government company to be a separate entity for
the purpose of enabling a Development Authority to subject it to development tax. The assets
of a Government company were held to be not exempt from payment of non-agricultural
assessment under an AP legislation. The exemption enjoyed by the Central Government
property from State taxation was not allowed to be claimed by a Government company.
Gilford Motor Co v Horne
The corporate entity is wholly incapable of being strained to an illegal or fraudulent purpose.
The courts will refuse to uphold the separate existence of the company where the sole reason
of it being formed is to defeat law or to avoid legal obligations. Some companies are just set
up simply to defraud their customers or to act in a way which is against the statutory
guidelines. This was clearly illustrated in the landmark ruling Gilford Motor Co v Horne. The
case of the facts are laid out below:
The litigant was selected as an overseeing chief of the company of the plaintiff depending on
the prerequisite condition that he will not, whenever he will hold the workplace of an
organisation in which he will oversee the executive work subsequently, open a business
similar to the one which he was presently leaving or give the clients of the previous. His work
was resolved under an understanding that is mentioned above. In the blink of an eye
thereafter he started a business in the name of his wife the role of which was exactly what he
had been prohibited to do according to the aforementioned contract. The new business was
definitely a competing business and it was soliciting the customers of its previous business
which was clearly a provision that was going against what he had agreed to before he left the
job in the previous company.It was held that the organization was clearly based on conflicting
terms that the defendant had agreed upon.
The respondent organization was an insignificant channel utilized by Horne to empower him,
for his very own advantage, to acquire the upside of the clients of the offended party
organization, and that the litigant organization should be limited just as Horne.
Where an individual obtain cash from an organization and put it in offers of three distinct
organizations in all of which he and his children were the main individuals, the loaning
organization was allowed to join the advantages of such organizations as they were made
uniquely to dupe the loaning organization.

Approach of the Indian Courts in the 21st Century

Subhra Mukherjee v. Bharat Coking Coal Ltd.
In this situation, Hoax or façade is being talked about. A private coal company sold its real
estate to the spouses of executives before nationalization of the company. Truth be
told,archives were tweaked and back-dated to corroborate that the deal of the selling of the
real estate to the wives of the directors was before nationalization of the company. Where
such exchange is claimed to be a hoax and deceitful, the Court was supported in piercing the
veil of incorporation to discover the genuine idea of the exchange as to realize who were the
genuine parties to the deal and whether it was real and in good faith or whether it was
between the married couples behind the façade of the different entity of the company.

STATUTORY EXCEPTIONS TO THE RULE OF LIMITED LIBABILITY

Limited Liability
The liability of a member as shareholder, limited upto the nominal value of the shares held
and not paid by him. Members, even as a whole, are neither the owners of the company nor
liable for its debts.
“The privilege of Limited liability is one of the principal advantages of doing business under
the corporate form of organization”.
EXCEPTIONS TO THE RULE OF LIMITED LIABILITY
1. Members are severally liable in certain cases where no. of members is reduced below 7 in
case of public company & 2 in case of private company & the company carries the business
for more than 6 months with this reduced criterion.[Sec. 3A]
2. Where a company got incorporated by means of any false or incorrect information or
representation & suppression of any material facts regarding its incorporation.
3. At the time of winding up it appears that business of company is carried on with the
intention of defraud the creditors of the company.
4. When the company is incorporated as an Unlimited Company.
5. Where it is proved that a prospectus has been issued with intention to defraud the
applicants for the securities of company or for any other fraudulent purpose.
7. There is a fraud reported by Inspector & it is found that undue advantages of this fraud
has been taken by Director, KMP or Any other officer of the company.

DISTINCTION BETWEEN LLP AND COMPANY

Sr. BASIS OF LIMITED LIABILITY COMPANY

No. DIFFERENCES PARTNERSHIP (LLP)

1 Governing law LLP is governed by “THE LLP Companies are prevailed by

ACT,2008” “THE COMPANIES ACT,2013”.

2 Name of entity The LLP contains “LLP ”as The company contains “Pvt.
suffix. Ltd. OR Ltd.” As suffix.

3 Registration Registration with Registrar of Registration with ROC is

LLP is required required

4 Distinct Entity LLP is a distinct entity Company is a distinct entity

under The LLP Act,2008 under The Companies
Act,2013
5 Charter Document The LLP Agreement is the The MOA & AOA are the
Charter Document for a LLP. charter documents for the
company.
6 Principal/Agent The Partners of LLP act as The directors of company act
Relationship agents of LLP as agents of company

1.3 KINDS OF COMPANIES

Classification of companies:
On the basis of size or number of members in a company:
Private Company:
According to section 2(68) of the Companies Act, 2013 (as amended in 2015), “private
company” is essentially defined as a company having a minimum paid-up share capital as
may be prescribed, and which by its articles, restricts the right to transfer its shares. A private
company must add the word “Private” in its name. It can have a maximum of 200 members.
Public Company
Section 2(71) of the Companies Act, 2013 (as amended in 2015), defines a “public company”.
A public company must have a minimum of seven members and there is no restriction on the
maximum number of members. A public company having limited liability must add the word
“Limited” at the end of name. The shares of a public company are freely transferable.

One Person Company:

T he Companies Act, 2013 also provides for a new type of business entity in the form of a
company in which only one person makes the entire company. It is like a one man- army.
Under section 2(62), One Person Company (OPC) means a company which has only one
person as a member.
On the basis of control, we find the following two main types of companies:
Holding Company:
Such type of company directly or indirectly, via another company, either holds more than half
of the equity share capital of another company or controls the composition of the Board of
Directors of another company.
A company can become the holding company of another company in any of the following
ways:
• by holding more than 50% of the issued equity capital of the company,
• by holding more than 50% of the voting rights in the company,
• by holding the right to appoint the majority of the directors of the company.
Subsidiary Company:
A company, which operates its business under the control of another (holding) company, is
known as a subsidiary company. Examples are Tata Capital, a wholly-owned subsidiary of Tata
Sons Limited.
On the Basis of Ownership, companies can be divided into two categories:
Government Company:
“Government company”under Section 2(45) of the Companies Act, 2013 is essentially defined
as, that company in which equal to or more than 51% of the paid-up share capital is held by
the Central Government, or by any State Government or Governments (more than one state’s
government), or partly by the Central Government and partly by one or more State
Governments, and includes the company, which is a subsidiary company of such a
Government company.
A government company gives its annual reports which have to be tabled in both houses of
the Parliament and state legislature, as per the nature of ownership.
Some examples of government company are National Thermal Power Corporation Limited
(NTPC), Bharat Heavy Electricals Limited (BHEL), etc.
Non-Government Company:
All other companies, except the Government Companies, are known as Non-Government
Companies. They do not possess the features of a government company as stated above.
Associate companies
The provisions of Section 2 (6) of the Companies Act, 2013 and the Rule 2 of Companies
(Specification of definitions details) Rules, 2014, essentially explains (defines) “associate
company” as;
For companies say X and Y, X in relation to Y, where y has a significant influence over X, but X
is not a subsidiary of y and includes joint venture company. Here X is an associate company.
Wherein;
1. The expression, “significant influence” means control of at least twenty percent of
total voting power, or control of or participation in business decisions under an
agreement.
2. The expression, “joint venture” means a joint agreement whereby the parties that
have joint control of the arrangement have rights to the net assets of the
arrangement.
When a company under which some other company holds either 20% or more of share
capital, then they shall be known as Associate Company.
If in case a company is formed by two separate companies and each such company holds 20%
of the shareholding then the new company shall be known as Associate Company or Joint
Venture Company. The Companies Act 2013 for the first time had introduced the concept of
the Associate Company or Joint Venture Company in India through section 2(6). A company
must have a direct shareholding of more than 20% and indirect one is not allowed.
For example, A holds 22% in B and B holds 30% in C. In this case, C company is an associate of
B but not of A.
Companies on the Basis of Liabilities
When we look at the liabilities of members, companies can be limited by shares, limited by
guarantee or simply unlimited.
a) Companies Limited by Shares
Sometimes, shareholders of some companies might not pay the entire value of their shares
in one go. In these companies, the liabilities of members is limited to the extent of the amount
not paid by them on their shares.
This means that in case of winding up, members will be liable only until they pay the remaining
amount of their shares.
b) Companies Limited by Guarantee
In some companies, the memorandum of association mentions amounts of money that some
members guarantee to pay.
In case of winding up, they will be liable only to pay only the amount so guaranteed. The
company or its creditors cannot compel them to pay any more money.

c) Unlimited Companies
Unlimited companies have no limits on their members’ liabilities. Hence, the company can
use all personal assets of shareholders to meet its debts while winding up. Their liabilities will
extend to the company’s entire debt.

Other Types of Companies

a) Government Companies
Government companies are those in which more than 50% of share capital is held by either
the central government, or by one or more state government, or jointly by the central
government and one or more state government.
b) Foreign Companies
Foreign companies are incorporated outside India. They also conduct business in India using
a place of business either by themselves or with some other company.
c) Charitable Companies (Section 8)
Certain companies have charitable purposes as their objectives. These companies are called
Section 8 companies because they are registered under Section 8 of Companies Act, 2013.
Charitable companies have the promotion of arts, science, culture, religion, education, sports,
trade, commerce, etc. as their objectives. Since they do not earn profits, they also do not pay
any dividend to their members.
d) Dormant Companies
These companies are generally formed for future projects. They do not have significant
accounting transactions and do not have to carry out all compliances of regular companies.
e) Nidhi Companies
A Nidhi company functions to promote the habits of thrift and saving amongst its members.
It receives deposits from members and uses them for their own benefits.
f) Public Financial Institutions
Life Insurance Corporation, Unit Trust of India and other such companies are treated as public
financial institutions. They are essentially government companies that conduct functions of
public financing.
The Doctrine of Ultra Vires
Background: MoA of any company is the basic charter of that company. It is a binding
document that narrates about the scope of that company, about which it’s written.
Ultra vires in literal sense is a Latin phrase, which means “beyond the powers”. In the legal
sense, the “Doctrine of Ultra Vires” is a fundamental rule of the Company Law. It states that
the affairs of a company has to be in accordance with the clauses mentioned in the
Memorandum of Association and can’t contravene its provisions.
Therefore, any act or contract is said to be void and illegal if the company is doing the act,
attempts to function beyond its powers, as prescribed by its MoA. So, it can be stated that for
any contract or any act to not fall under this criteria, has to work under the MoA.
It is noteworthy that a company can’t be bound by means of an ultra vires contract.
Estoppel, acquiescence, lapse of time, delay, or ratification cannot make it ‘Intra Vires’ (an act
done under proper authority, is intra vires).
An act being ultra vires the directors of a company, but intra vires the company itself, can be
done if members of the company, pass a resolution to ratify it. Also, an act being ultra vires
the AoA of a company, can be ratified by a special resolution at a general meeting.
The Disadvantage to this doctrine
This doctrine stops the company from changing its activities in a direction agreed by all
members, which if done would be profitable to the company. This is because clauses of the
MoA don’t allow the company to go in that direction.
If any Act done by the directors, on behalf of the company, contravenes the clauses of MoA,
the MoA can be amended, by virtue of passing a resolution, pursuant to which the aforesaid
Act will become intra vires, vis-a-vis MoA. This defeats the whole purpose of having such a
Doctrine, as then any act can be done, no matter what, since the clauses of the MoA can be
amended anytime in order to make any action legal.
When private limited company becomes a public limited company
The private limited company is usually preferred by businessmen because of all the special
privileges it enjoys. In private limited company, the capital is derived from close friends,
relatives and known persons and not from the public. Therefore, the Companies Act, 1956
does not impose stringent rules and regulations on private limited companies when
compared to Public limited companies. However, in certain circumstances, a private limited
would become a public company.
They are:
1. Conversion by default
2. Conversion by operation of law
3. Conversion by choice or by option
Conversion by default
A private company:
1. Restricts the right to transfer shares,
2. Limits the maximum number of members to 50,
3. Prohibits inviting the public for subscription of shares or debentures.
Upon the violation of any of these terms, a private company would become a public Company
by default.
Conversion by operation of law: Deemed Public Company
A private company is converted into a public company (by the operation of law):
When equal to or more than 25% of the paid-up share capital of a private company is held by
one or more public companies,
When the average of total turnover of a private company is more than or equal to Rs.25 crores
for three consecutive years,
When the private company holds more than 25% of the paid-up share capital of a public
company.
When the private company invites, accepts or renews the deposits from the public.
Conversion by Choice or Option
If desired, then out of its own free will, a private company, can get itself converted into a
public company. Generally, when private companies want to expand and therefore require
more capital resources, the private companies by themselves can convert themselves into
public companies.
By becoming public companies, they (the private companies) can issue shares or
debentures to the public and hence can get the amount of capital required. In India, many
organizations which have commenced their operations as private companies, got themselves
converted into public limited companies in order to expand and diversify.
Any private company which desires to get converted into a public company has to make the
necessary changes in its Articles and follow the below mentioned steps:
 1. It should call for a general meeting and therein pass a special resolution by following
proper protocols, hence alter the Articles.
2. The copy of the resolution along with amended Articles is to be then filed with the
registrar within 30 days of passing the special resolution.
3. The number of members should be increased to 7.
4. The company has to apply to the registrar, in order to obtain a fresh certificate of
incorporation wherein the word ‘Private’ is deleted from its name.
Conversion of public into a private company
Certain pre-requisites for filing an application for conversion from Public to Private Company
Limit of Shareholders:
Although no limit for maximum strength of Shareholders in a Public Limited Company is there,
however, post-conversion into Private Limited Company, it becomes mandatory to ensure
that the maximum strength doesn’t cross the threshold of 200 shareholders.
Non-invitation of funds from Public:
Post conversion, no funds/capital should be raised from the general public, either through
the issuance of prospectus or any other means.
Non- listing of Company:
Prior to conversion, it must be assured that the company was never listed on Stock Exchange
and if it all it was listed, all necessary procedures were complied for delisting of the shares in
accordance with the applicable e- laws, as prescribed by the Securities Exchange Board of
India (“SEBI”).
Procedure for conversion of public limited company to private limited company:
Steps for Conversion
Step 1
The first step is to hold a meeting of the Board of Directors (“BOD”) of the Company for the
following purposes:
• For considering the reason of conversion and suitable alterations in the Memorandum
of Association (“MOA”) and Articles of Associations (“AOA”) of the Company reflecting
the changes arising due to conversion;
• To provide authorization for filing the necessary application for conversion with the
adjudicating authority.
Step 2
Next step essentially is to hold a General Meeting of Shareholders of the Company for
obtaining their consent to the said conversion and the necessary alterations in the MOA and
AOA, by means of passing a special resolution.
Step 3
To fill the prescribed e-form with Registrar of Companies (“ROC”) within 30 days of the
passing of the aforesaid special resolution.
Step 4
To file an application for conversion to the adjudicating authority within 60 days from the
date of passing special resolution in the General Meeting of Shareholders. However, before
proceeding with filing of the application, the company must at least 21 days before the date
of filing application with RD, advertise notice of conversion both English and other regional
newspaper widely circulating in the state wherein the Registered office of the Company is
situated.
Step 5
The Company must serve individual notice of conversion to each of its Creditors by registered
post. Further, the Company must also serve individual notice of the conversion to both; the
RD and ROC or any other authority which regulates the Company by registered post.
Step 6
Post the necessary publications and serving of notice of conversion, the company shall within
60 days file the Application for conversion with Regional Directorate (“RD”) in the prescribed
e- form, from the date of passing special resolution along with the following documents:
1. The Draft copy of altered MoA and AoA of the Company and copy of the Minutes of
General Meeting of Shareholders wherein the said conversion was approved by the
Shareholders;
2. Copy of board resolution giving the authorization to file such an application with RD;
3. Prescribed declarations from Directors/KMP (key management personnel) of the
Company with respect to restriction of total number of members to 200, non-
acceptance of deposits in violation of the law and various other matters as elucidated
under the relevant section of the Act;
4. list of creditors drawn not older than 30 days from the date of filing Application
supported by an Affidavit which duly verifies the said list.
Step 7
In case no objections are received, then the RD shall pass an order duly approving the
application within 30 days from the date when the application was received.
Step 8
On the receipt of order, the same is to be filed with the ROC in the prescribed e-form within
15 days from the date of order. ROC will then close the former registration and issue a fresh
certificate of incorporation, thereby evidencing the conversion from Public Limited Company
to Private Limited Company.
Step 9
The Company has to now apply for conversion in the database of all tax authorities i.e.
PAN/TAN, and all other registrations. The company has to ensure that the letterheads,
invoices, name plate, and/or any other correspondences are amended/altered and undertake
the necessary updation of bank records.
Foreign companies
A foreign company, as per The Companies Act, 2013 means a company or a corporate body
which is incorporated outside India which either has a place of business in India whether by
itself or through an agent, either physically or through an electronic mode and conduct any
business activity in India in any other manner.”
Accounts of foreign company
Section 381 of The Companies Act, 2013 states the rules or instructions about how a foreign
company’s accounts are to be handled. It states that:
1. Every foreign company must, in every calendar year;
(a) make a balance sheet and profit and loss account in such a form which contains all such
particulars and includes or has annexed or attached thereto such documents as may be
prescribed,
(b) must deliver a copy of those documents to the Registrar, provided that the Central
Government may, by notification, direct that, in case of any foreign company or class of
foreign companies, the requirements of above- pointer “a” wouldn’t apply, or would apply
subject to such exceptions and modifications as may be specified in that notification.
2. If any document as is mentioned in Section 381(1) of The Companies Act, 2013 is not
in the English language, there shall be annexed to it, a certified translation thereof in
the English language.
3. Every foreign company shall send to the Registrar along with the documents required
to be delivered to him under sub-section (1), a copy of a list in the prescribed form of
all places of business established by the company in India as at the date w.r.t.
reference to which the balance sheet referred to in sub-section (1) is made out.
Government Companies
A “Government company” is defined under Section 2(45) of the Companies Act, 2013 as “any
company in which not less than 51% of the paid-up share capital is held by the Central
Government, or 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”.
Government Company is that company or an organization in which at least 51% of the paid-
up share capital is held by the central or state government or partly by both central and state
government. Examples for government companies are Steel Authority of India Limited, Bharat
Heavy Electricals Limited, etc.
Features of a Government Company
There are several features of a government company which are helpful in increasing the
potential and efficiency of the company to a great extent.
Separate legal entity
Perhaps one of the most important features of a government company is that a government
company is a separate legal entity, which helps a government company in dealing with many
legal aspects. One main legal aspect is the non-dependence on any other body, in legal terms
as it is a separate entity in itself, this makes the system more fluent and better efficient.
Incorporation under The Companies Act 1956 & 2013
A government company is incorporated under “The Companies Act, 1956 & 2013”. This gives
government company boundaries to work under and hence it profits the end-users of the
services, as their are lesser chances of fraud or improper working. Also, the employees get
better working conditions and are not exploited, as they have Law as their back- up, to protect
them.
Management as per provisions of The Companies Act
Management, in a government company, is governed and regulated by the provisions of The
Companies Act. This makes sure that employees are not exploited and overburdened. This
further ensures the smooth functioning of the company.
Appointment of employees
The appointment of employees is governed by MoA and AoA (Memorandum of Association
and Articles of Association). This ensures a fair appointment on the basis of meritocracy and
people don’t misuse their contacts and enter government company.
Fund Raising
A government company gets its funding from the government and other private
shareholdings. The company can also raise money from the capital market. Hence, a
government company has several fund raising mechanisms, which helps it to be financially
less burdened as finances in a government company can be raised with a lot of ways.
Limitations of a Government Company
• Government company usually has to face a lot of government interference and has
the involvement of too many government officials. Hence, it has to go through lots of
 checks in order to make a stable decision. Governmental decisions are usually late as
they follow an elaborate procedure before actual implementation.
• These companies evade all constitutional responsibilities of not answering to the
parliament because these companies are financed by the government.
• The efficient operations of these companies are hampered, as the board of such
companies comprises mainly of politicians and civil servants, who have special
emphasis and interest in pleasing their political party’s co-workers or owners and are
less concentrated on growth and development of the company. They (politicians and
civil servants) essentially are focussed on their promotions which essentially is in the
hands of their seniors, hence they keep on pleasing their seniors. In order to please
their seniors, they usually make wrong decisions too.

Holding company and subsidiary company

Section 2 (46) of The Companies Act, 2013 defines holding company as, “Holding company, in
relation to one or more other companies, means a company of which such companies are
subsidiary companies”.
According to Section 2 (87) of The Companies Act, 2013;
“Subsidiary company or subsidiary in with respect to any other company (that is to say the
holding company), means a company in which, either the holding company controls the
composition of the Board of Directors or exercises/controls more than half of the total share
capital either on its own or together with one or more than one of its subsidiary companies:
Provided that such class or classes of holding companies as may be prescribed shall not have
layers of subsidiaries beyond such numbers as may be prescribed.
Further Explanation
• The composition of a company‘s Board of Directors would 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;
• ”Layer” in relation to a holding company means its subsidiary or subsidiaries”
What Is a Subsidiary company ?
A subsidiary company is that company which is both owned and controlled by another
company. The owning company is called a parent company or a holding company.
The parent of a subsidiary company may be the sole owner or one of several owners, of the
company. If a parent company or holding company owns the full other company, that
company is called a “wholly-owned subsidiary.”
There is a difference between a parent company and a holding company, in terms of
operations. A holding company has no operations of its own and it owns a controlling share
of stock and holds assets of subsidiary companies.
A parent company is simply a company that runs a business and owns another business —
the subsidiary. The parent company has its own operations , and the subsidiary may carry on
a related business. For example, the subsidiary might own and manage property assets of the
parent company, to separate the liability from those assets.
Holding company and subsidiary has certain common grounds on which they share
relationship, such as;
Consolidated Balance Sheet
It is the accounting relationship between the holding company and the subsidiary company,
which shows the combined assets and liabilities of both companies . The consolidated balance
sheet shows the financial status of the entire business enterprise, which includes the parent
company and all of its subsidiaries.
Management and Control
The autonomy of a subsidiary company may seem to be merely theoretical. Besides the
majority stockholding, the holding company also controls important business operations of a
subsidiary. For example, the holding company takes the charge of preparing the by-laws
which governs the subsidiary, especially for matters pertaining to hiring and appointing the
senior management employees.
Responsibility
The subsidiary and holding companies are two separate legal entities; any of them may be
sued by other companies or any of these companies may sue others. However, the parent
company has the responsibility of acting in the best interest of the subsidiary by making the
most favourable decisions which affect the management and finances of the subsidiary
company. The holding company may be found guilty in a court, for breach of fiduciary duty,
if it does not fulfil its responsibilities. The holding company and the subsidiary company are
perceived to be one and the same if the holding company fails to fulfil its fiduciary duties to
the subsidiary company.
Investment in holding company
A subsidiary company can’t hold shares in its holding company. Any company can, neither by
itself nor through its nominees, hold any shares in its holding company and no holding
company shall allot or transfer its shares to any of its subsidiary companies and any such
allotment or transfer of shares of a holding company to its subsidiary company would be void:
Provided that nothing in this subsection shall apply to a case;
(a) where the subsidiary company holds such shares as the legal re presentative of a
deceased member of the holding company; or
(b) where the subsidiary company holds such shares as a trustee; or
(c) where the subsidiary company is a shareholder even before it became a subsidiary
company of the holding company:
Illegal associations
Illegal associations are taken care of by section 464 of The Companies Act, 2013. This section
states that no company, association or partnership consisting of more than 50 people be
formed in order to carry on any business for gain unless it is registered under The Indian
Companies Act. It may also be registered under some other Indian law too. For example, a
limited liability partnership, which is formed for carrying on business for gain by professionals,
registered under the Limited Liability Partnership Act, 2008 is a legal body corporate. There is
no limit to the maximum number of members in such a limited liability partnership. The
objective of such associations must be to carry on a business for gain. Section 464 doesn’t
apply to Non- Profit- Organizations or Charitable Associations because the objective is not
earning profit.
Rules for counting the number of people
• A person, either natural or artificial (an artificial person is an entity created by law and
given certain legal rights and duties of a human being. It can be real or imaginary and
for the purpose of legal reasoning, is treated more or less as a human being. For
example, corporation, company, etc.), would be treated as one person. Therefore, a
company is treated as a single person.
• Similarly, a joint Hindu Family managed by Karta is also treated as a single person.
• If two or more joint hindu families form an association, all the adult members of the
family would be taken into consideration while counting the number of members.
• It is also important to note that any partnership firm is not a separate legal entity. All
the partners would be treated as different persons.
• If two or more persons hold a share jointly, they would be treated as one single
person.
Consequences of an Illegal Association;
No Legal Existence:
Any Illegal association cannot enter into binding contracts. Neither the association nor the
members can file a suit against a third-party who has contracted with it. One member cannot
sue other member in respect of any matter connected with the association. Further, a
member cannot file a suit against the association.
Unlimited Personal Liability of the Members:
The liability of the members is unlimited. Every member of such an association is personally
liable for all the liabilities incurred in the business. The third party can take action against the
members. If the number of members in an illegal association comes within the statutory limit,
the illegal association would not become legal merely by virtue of such reduction.

Advantages of private company

A private limited company enjoys the following advantages:
Ease of formation:
A private company can be formed merely by two persons. It can start its business just after
incorporation and doesn’t have to wait for the certificate of commencement of business.
Greater flexibility:
There are comparatively lesser legal formalities which are to be performed by a private
company as compared to the public company. It also enjoys special exemptions and privileges
under the company law. Thus it can be concluded that there is a greater flexibility of
operations in a private company.
Quick decisions:
In a private company, lesser number of people are to be consulted. The core people of the
company who are to make decisions have a closer relationship (so to say) and thus a better
mutual understanding hence, obtaining consent is usually not a problem therefore it makes
the process of making decisions faster.
Secrecy:
A private company is not required to publish its accounts or file several documents. Therefore,
it is in a much better position than a public company when it comes to the maintenance of
business secrets.
Continuity of policy:
Same core people (having close relations) continue to manage the affairs of a private
company. Due to their close relations, the continuity of policy can be maintained, as there is
a mutual trust and a low dispute- attitude.
Personal touch:
There is comparatively, a greater personal touch with employees and customers in a private
company. There is also a comparatively greater incentive to work hard and for taking initiative
in the management of business.
1.4 Promoters of company , formation of company , effects of certificate of
incorporation and registration.
Definition
The definition of the phrase “promoter” has been defined in Section 2 (69)[1] of Companies
Act, 2013. The term has been used specifically in Section 35, 39, 40, 300 and 317 of the Act.
Section 2 (69) of the Act states that promoter is a person whose name has been mentioned
in the prospectus of the company or is identified in the annual returns of the company, or any
person who has direct or indirect control over the affairs of the company, whether as a
stakeholder or as a director, or on whose direction the Board of Directors act. In simple words,
a promoter is a person who performs the various preliminary steps like making the prospectus
of the company, floating the securities in the market, etc. but if a person is doing this in a
professional capacity, he wouldn’t be considered a promoter. In Bosher v. Richmond Land Co.
(1892), the term Promoter has been defined as 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 subscriptions, and sets in motion the machinery which leads
to the formation itself.

Statutory definition – Section 2(69) of the Companies Act, 2013

The Companies Act, 2013 contains a statutory definition of the promoter which is also more
or less in terms of functional categories: Promoter means a person
1. who has been named as such in a prospectus or is identified by the company in the
annual return referred to in Section 92;
2. who has control over the affairs of the company, directly or indirectly, whether as a
shareholder, director or otherwise;
3. in accordance with whose advice, directions or instructions the Board of directors of
the company is accustomed to act. The proviso excludes persons acting in a
professional capacity.
Types of promoters in company law
The promoters can be broadly divided into 4 categories:
Professional Promoters
These promoters are specialists in the work of promoting the company in the initial stage or
at the time of the formation of a company. After the company makes its position in the
market, they hand over the company to the shareholders. Our country had a paucity of such
professional promoters. They are very important for the growth in the starting days of the
business.
Occasional Promoters
It involves those persons which are not very active in promoting the business on a day to day
basis. They carry responsibilities of 2-3 companies simultaneously and they only involve
themselves in the important affairs of the business.
Financial Promoters
This category involves those promoters who invest money or capital and hold a substantial
stake in the business. They got voting rights and they strongly influenced the working of the
business. For example- Financial institutions such as SBI, LIC, etc. are promoters of some well-
renowned companies.
Managing Agents as Promoters of a company
These agents used to float new companies in India, and in return got their managing agency
rights. However, it is important to note that this system of promotion has almost vanished
from our country.

Functions of Promoters of a Company

In a company, a promoter needs to conduct numerous tasks which even start before the
business comes into existence. These functions involve-
Identification of Business Opportunity:
At the outset, the promoter needs to identify the opportunity in a particular type of business
that may prove fruitful in the upcoming period. The opportunity may relate to exploiting a
new area of natural resources or bringing something new into the existing structure. The
promoter can figure out this opportunity with the help of the technical expert of that
particular field. When a promoter realises that this particular business venture has the
potential to grow, then the idea is taken further.
Detailed Investigation:
At this stage, various factors are thoroughly studied and analysed from various points of view
to assess the profitability and long term sustainability of the business. The market demand,
availability of raw material, arrangement of finance, transportation facilities, mode of supply,
etc are taken into consideration. On the basis of the prospective demand, the market share
of the product is computed. After analysing the cost structure with an expert, the decision is
taken.
Approval of Name:
After deciding the structure of the business, now it is time to get the business registered with
a particular name. The name of the business is approved by the “registrar of companies”.
While deciding a name, it is important to note that it shouldn’t resemble an existing name
and it should avoid words like national, state, king, queen, etc.
Signatories to Memorandum:
The memorandum of association (MOA) is the constitution of a company. The promoters
decide the names of the person who will be the signatories of this constitutional document.
Normally, the first signatory of the MOA becomes the director of the company. The director
needs to provide his written consent for the same as per the format prescribed by the Law.
Appointment of Professionals:
Just like a human body can’t survive without food and water, similarly, a business can’t survive
without adequate capital. So, it is very essential to make the necessary arrangements of
capital. The promoter decides the capital requirement and the source from which this money
can be obtained. The various sources include bank loans, private equity, Initial public offering,
etc. For the successful arrangement of capital, various financial and legal professionals are
appointed.
Preparing necessary Documents
Apart from the Memorandum of Association (MOA), a business needs to deposit certain other
important documents with the registrar of companies. It includes Article of Association (deals
with all the internal affairs of the business), prospectus, incorporation certificate, etc.

Duties of Promoter in a Company

In a business, a promoter is one of the most important parties. So, he is subject to some duties
which are expected on his part to abide by them with utmost honesty and bona fide intention.
Disclose the Hidden Profit
It is the first and foremost duty of the promoter to be loyal to the business and doesn’t involve
in any malpractice. He shouldn’t earn any hidden or secret profits. All the information relating
to the earnings and the profitability should be shared with all the relevant stakeholders of the
company.
Disclose all the Material Facts:
A promoter has a fiduciary duty toward the company and it is his moral duty to disclose all
the relevant information relating to the business.
Must Make Good to the Company:
In each and every possible condition, he should prioritise the company’s interest over his
personal interest. In all the dealings, he should give utmost consideration to the best interest
of the company.
To Disclose Private Arrangements:
In a business, a large number of private transactions also took place. But, it is the duty of the
promoter to disclose all such private transactions and the profit earned therefrom.
Rights of Promoters in a Company
There are various rights of promoters given under the law:
Right of Indemnity
If in a business more than one promoter is involved, then one promoter can claim
compensation or the damages from the others, in case of a breach of contract. It is important
to note that all the promoters are jointly and severally liable for all the affairs of the company.
Right to Receive Legitimate Expenses
It is the legitimate right of a promoter to receive all those expenses which he incurred from
his pocket during the formation of the company. These expenses include – registration,
documentation, advertisement, legal expenses, etc.
Right to Receive Remuneration
If the promoter is handling a managerial position in the company, he will also be entitled to
receive remuneration from the company. However, there must be a contract of employment
to that effect

Legal Position of Promoter in a Company

In India, the promoters are governed by the provisions of the Companies Act, 2013 and SEBI
Regulations. The definition of promoter is given under Section 2(69) of the Companies Act,
2013. It states that a promoter is a person-
• Who has been named as a promoter in the prospectus or the annual returns filed
under Section 92 of the Companies Act, 2013.
• Who has control over the affairs of the business, directly or indirectly.
• Under whose advice, directions or instructions, the board of directors of a company is
accustomed to Act.
The first and the third provision are quite straightforward and no such ambiguity appears
therein. But, the interpretation of the 2nd provision has always been subject to dispute.
“Control” is a very subjective term and it can’t be defined exclusively.
The definition of control is given under 2(27) of the Act. The control includes the right to
appoint the majority of directors or the right to influence the managerial or policy decisions
of the company. The Security Appellate Tribunal (SAT) in the matter of Subhkam Venture vs
SEBI held that the control is an only affirmative right and not a restrictive one. So, the rights
by which an individual restrict the other party from doing something can’t be termed as
exercising “control”.

Liabilities of a promoter
Liability regarding irregularities in the prospectus
Section 26 describes what should be stated in the prospectus and what reports should be
included. The promoter may be held accountable by the shareholders if this provision is not
followed.
Civil liability
Section 35 outlines the civil liabilities for any prospectus misstatements. Under this Section,
a person who has subscribed for the company’s shares and debentures on the basis of the
prospectus can hold the promoter accountable for any false statements in the prospectus.
The promoter may be held liable for any loss or damage suffered by any person who
subscribes for shares or debentures as a result of the false statements made in the
prospectus. Specific provisions have also been provided under Section 62 regarding the
reasons on which the promoter can avoid his liability. These remedies are available to anyone
who can be held accountable for a prospectus misstatement.

Criminal liability
Section 34 deals with the criminal liabilities of drafting a prospectus that contains false claims.
The promoters can be held criminally accountable, in addition to the civil liabilities described
in the previous two examples, if the prospectus they released contains misstatements. The
penalty is either a two-year prison sentence or a fine of up to 5000 rupees, or both. Unless he
can show that the inaccurate statement was inconsequential or that he was justified in
believing, on reasonable grounds, that the statement was truthful at the time of prospectus
issuing, the promoter may be held criminally liable for misstatements.
Public examination of promoters
Section 300 gives the court the authority to order a public investigation of all promoters
found guilty of fraud in the promotion or establishment of a corporation. If the liquidator’s
report indicates fraud in the promotion or establishment of the company during its winding
up, the promoter, like every other director or officer of the company, can be held liable for
public examination by the
court.

Personal liability
Promoters can be held personally liable for pre-incorporation contracts.
 • A promoter has to mention the true facts in the prospectus of the company. If he does
not do so, he may be held liable for it. The promoter will be liable for any untrue
statement which has been made in the prospectus, and on the basis of that untrue
statement any person has subscribed to the securities of the company. The person
may sue the promoter if he has suffered any damage.
• Apart from civil liability, the promoter may be held criminally liable also for
mentioning any untrue statements in the prospectus. A severe penalty will also be
imposed on him if he provides any untrue statement with the view of obtaining
capital.
• A promoter can be made liable to a public examination if there are any reports which
allege fraud in the formation of the company or the promotion activities.
• The company can also proceed against the promoter in case there is a breach of duty
on the promoter’s part or he has misappropriated any property of the company or is
guilty of breach of trust.
Position of a promoter in relation to the company- before and after incorporation
Prior to incorporation of the company
Promoters found it extremely difficult to carry out promotion activities before the Specific
Relief Act was introduced in 1963. Before this Act was passed, pre-incorporation contracts of
the company were held to be void. Such contracts also couldn’t be ratified. Therefore, people
were very hesitant to supply resources for incorporation of the company without any definite
contract. Promoters were also very apprehensive about taking personal liability. The
introduction of the Specific Relief Act, 1963[4] made it easier for the promoters to carry out
incorporation activities, as the promoters could now enter into pre-incorporation contracts
with third-parties.
Section 15 (h) and 19 (e) states that;
• The promoter should have entered into the contract for the purpose and benefit of
the company
• The terms provided in the incorporation agreement should warrant such contracts.
• The contract should be ratified after the company, and it should be informed to the
opposite party.
A contract made between the promoter on the behalf of the company and the third parties
will still be considered as a contract between two individuals. The right to ratify a contract
does not lie with the company inherently. The authority of ratifying a contract should be given
to the company through its memorandum. So a company cannot be sued by the third party if
the company does not ratify the contract, even if the contract was beneficial for the company.
In case the company does not have the authority to ratify the contract (because such
authority has not been provided in the Articles), or the company does not ratify the contract,
then the promoter will be personally liable.
After Incorporation of the Company
After the company comes into existence, and in case it ratifies the contract entered into by
the promoter, in such a case the contract will become binding on the company and not the
promoter. Section 15(h)[5] and 19 (e)[6] also state that the promoter can transfer his rights
and liabilities to the company, provided that such provision is present in the incorporation
agreement. Although the promoter is not entitled to any kind of salary and remuneration. But
the general trend is to compensate the promoter in lump-sum after the company has been
set up. A promoter cannot be asked to be compensated as a legal right. If the promoter is
compensated at all, the compensation given to him is on the basis of equity ad fairness. If any
shares are being allotted to the promoter of the company, the promoter also becomes a
member of the company automatically.

2. Incorporation of a Company
Incorporation brings a company into existence as a separate corporate entity.
As per Sec. 3(1) a company may be formed for any lawful purpose by:
(a) seven or more persons, where the company to be formed is to be a public company;
(b) two or more persons, where the company to be formed is to be a private company; or
(c) 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.
2.1 Preliminary Steps
The promoters have to go through the following preliminary steps before applying for
incorporation of the proposed company:
1. As per Sec. 4(2) a company cannot be registered with a name which is considered to be
undesirable in the opinion of the Central Government. The name should not be identical with
or resemble too nearly to the name of an existing company or registered under this Act or
any previous company law. Therefore the promoters are advised to make an application in
the Form 1 A to ascertain the availability of maximum six names in the order of their
preference.
2. A fee of Rs. 500 has to be paid alongside and the digital signature of the applicant proposing
the company has to be attached in the form. If proposed name is not available, the user has
to apply for a fresh name on the same application.
3. The name approved will be reserved by the Registrar for a period of 20 days from name
approval. Within this period, the applicant can apply for registration of the new company by
filing the required forms (i.e. Forms 1, 18 and 32).
4. Before promoters begin the incorporation of a company, they have to appoint chartered
accountants, lawyers etc., to help them in preparing various documents.
5. Arrange for the drafting of the memorandum and articles of association by solicitors,
vetting of the same by Registrar of Companies and printing of the same.
The Memorandum and Articles must be signed by at least 7 subscribers (2 in case of private
company) along with address, description, occupation, if any, in the presence of at least of
one witness. The subscribers should also clearly mention the number and nature of shares
subscribed by them.
2.2 Applying to the Registrar of Companies
After having done the preliminary work, the promoters are required to make an application
to the Registrar of the State in which company’s registered office will be situated,
accompanied by the following documents and information for registration [Sec. 7(1)]:
(a) the memorandum and articles of the company duly signed by all the subscribers to the
memorandum in such manner as may be prescribed;
(b) a declaration in the prescribed form by an advocate, a chartered accountant, cost
accountant or company secretary in practice, who is engaged in the formation of the
company, and by a person named in the articles as a director, manager or secretary of the
company, that all the requirements of this Act and the rules made thereunder in respect of
registration and matters precedent or incidental thereto have been complied with;
(c) a declaration from each of the subscribers to the memorandum and from persons named
as the first directors, if any, in the articles that he is not convicted of any offence in connection
with the promotion, formation or management of any company, or that he has not been
found guilty of any fraud or misfeasance or of any breach of duty to any company under this
Act or any previous company law during the preceding five years and that all the documents
filed with the Registrar for registration of the company contain information that is correct and
complete and true to the best of his knowledge and belief;
(d) the address for correspondence till its registered office is established;
(e) the particulars of name, including surname or family name, residential address, nationality
and such other particulars of every subscriber to the memorandum along with proof of
identity, as may be prescribed, and in the case of a subscriber being a body corporate, such
particulars as may be prescribed;
(f) the particulars of the persons mentioned in the articles as the first directors of the
company, their names, including surnames or family names, the Director Identification
Number, residential address, nationality and such other particulars including proof of identity
as may be prescribed; and
(g) the particulars of the interests of the persons mentioned in the articles as the first
directors of the company in other firms or bodies corporate along with their consent to act as
directors of the company in such form and manner as may be prescribed.
The Registrar on the basis of the required documents and information filed shall register all
the documents and information in the register and issue a certificate of incorporation in the
prescribed form to the effect that the proposed company is incorporated under this Act.
On and from the date mentioned in the certificate of incorporation, the Registrar shall allot
to the company a corporate identity number, which shall be a distinct identity for the
company and which shall also be included in the certificate.
If any person furnishes any false or incorrect particulars of any information or suppresses any
material information, of which he is aware in any of the documents filed with the Registrar in
relation to the registration of a company, he shall be liable for action under section 447 of the
Companies Act.
Online Registration of a New Company
The MCA 21 Project of the Ministry of Corporate Affairs enables online registration of a
company on the portal of the MCA. The steps for online registration of a company are as
follows:
Step 1: Application for DIN
To register a company, first Director Identification Number (DIN) is to be obtained. One needs
to file eForm DIN-1 in order to obtain DIN.
Step 2: Acquire/Register DSC
All filings done by the companies under MCA 21 e-Governance programme are required to be
filed with the use of Digital Signatures by the person authorised to sign the documents.
Acquire DSC — A licensed Certifying Authority (CA) issues the digital signature.
Register DSC — Role check for Indian companies is to be implemented in the MCA application.
Step 3: New User Registration
To file an e-Form or to avail any paid service on MCA portal, it is first required to be registered
as a user in the relevant user category, such as registered and business user.
Step 4: Incorporate a Company
— Select, in order of preference, at least one suitable name up to a maximum of six names,
indicative of the main objects of the company.
— Ensure that the name does not resemble the name of any other already registered
company and also does not violate the provisions of Emblems and Names (Prevention of
Improper Use) Act, 1950 by availing the services of checking name availability on the portal.
— Apply to the concerned ROC to ascertain the availability of name by filing Form INC-1 for
the same in to the portal. A fee of Rs. 500 has to be paid alongside and the digital signature
of the applicant proposing the company has to be attached in the form. If proposed name is
not available, the user has to apply for a fresh name on the same application.
— After the name approval, the applicant can apply for registration of the new company by
filing the required forms Form INC-7 or Form INC: Form INC-7 for Application for incorporation
of a company (Other than OPC) or Form INC-2 for Application for Incorporation of OPC within
60 days of name approval.
— Arrange for stamping of the Memorandum and Articles with the appropriate stamp duty.
It can be paid electronically on the MCA portal.
— Get the Memorandum and the Articles signed by at least two subscribers (7 in case of
public company) in his/her own hand, his/her father’s name, occupation, address and the
number of shares subscribed for and witnessed by at least one person.
— Ensure that the Memorandum and Article is dated on a date after the date of stamping.
— Login to the portal and fill the following forms and attach the mandatory documents listed
in the e-Form:
•

• Form INC-22: Notice of situation or change of situation of registered

office based on the option chosen in Form INC-7.
• Form DIR-12: Particulars of appointment of directors and the key
managerial personnel and the changes among them.
• Declaration of compliance
— After processing of the Form is complete and Corporate Identity is generated, obtain
Certificate of Incorporation from RoC.
2.3 Certificate of Incorporation
Certificate of incorporation is a legal document relating to formation of a company which
confirms the name by which the company is registered under the Companies Act and date of
incorporation. The Registrar of Companies issues certificate of incorporation in the prescribed
form on the basis of submission of the required documents and information laid down by the
Companies Act.
From the date of incorporation mentioned in the certificate of incorporation, such subscribers
to the memorandum and all other persons, as may, from time to time, become members of
the company, shall be a body corporate by the name contained in the memorandum, capable
of exercising all the functions of an incorporated company under this Act and having
perpetual succession and a common seal with power to acquire, hold and dispose of property,
both movable and immovable, tangible and intangible, to contract and to sue and be sued,
by the said name.
Thus, the consequences of certificate of incorporation are:
(1) The certificate of incorporation brings the company into existence from the date
mentioned in the certificate.
(2) It grants legal personality, corporate existence and perpetual succession to the company.
(3) The subscribers to the Memorandum together with such other persons, as may from time
to time become members of the company, become a body corporate with a distinct entity
from such members having a perpetual succession with a common seal and with the liability
of the members limited to the amount for the time being unpaid on the shares held by them.
(4) The Memorandum and Articles of Association become binding upon the members and
the company as if they have been signed by the company and by each member.
2.4 Validity of Certificate of Incorporation
Certificate of incorporation is a legal evidence with regard to the registration and formation
of a company. Section 7(6) of the Companies Act, 2013 provides that where at any time after
the incorporation of a company, it is proved that the company has been got incorporated by
furnishing any false or incorrect information or representation or by suppressing any material
fact or information in any of the documents or declaration filed or made for incorporating
such company, or by any fraudulent action, the promoters, the persons named as the first
directors of the company and the persons making declaration shall each be liable for action
under section 447 of the Companies Act.
Section 7(7) of the Act provides that where a company has been got incorporated by
furnishing any false or incorrect information or representation or by suppressing any material
fact or information in any of the documents or declaration filed or made for incorporating
such company or by any fraudulent action, the Tribunal may—
(i) pass such orders, as it may think fit, for regulation of the management of the company
including changes, if any, in its memorandum and articles, in public interest or in the interest
of the company and its members and creditors; or
(ii) direct that liability of the members shall be unlimited; or
(iii) direct removal of the name of the company from the register of companies; or
(iv) pass an order for the winding up of the company; or
(v) pass such other orders as it may deem fit.
2.5 Commencement of Business [Section 10A]
A company incorporated after the commencement of Companies (Amendment) Act, 2019
and having a share capital shall have to fulfil the following procedural requirement before
commencing any business or exercising any borrowing powers:
(a) Filing of declaration to the Registrar of Companies
A declaration by a director within 180 days of incorporation of the company in the prescribed
form to the Registrar of Companies must be filed stating that every subscriber to the
memorandum has paid the value of shares agreed upon by them at the time of making such
declaration; and
(b) Verification of the registered office
The company is required to file with the Registrar of Companies a verification of its registered
office as per section 12(2) of the Companies Act.
2.6 Default
In case of default by a company in complying with the requirement of this provision on
commencement of business, the company shall be liable to a penalty of Rs. 50,000 and every
officer in default with a penalty of Rs. 1000 for each day during which such default continues
which may go up to Rs. 1 lakh.
Further, the Registrar of Companies may initiate action for the removal of the name of the
company from the register of companies when the Registrar has reasonable cause to believe
that the company is not carrying on any business.
2.7 Provisional Contract
Provisional contracts are the contract entered into by a company having share capital
between the date of incorporation and the date on which the company has fulfilled the
requirement of section 10A on commencement of business. These are valid contracts if
company meets the requirements and would be non-operative in case the company fails to
do so.

1.5 MOA and AOA

Memorandum of association- Skeleton of company
Meaning of Memorandum of Association
A Memorandum of Association is the most important document which presents the structure
of the company with the help of five clauses as specified under Section 4 of the Companies
Act, 2013. It consists of:
• Name clause,
• Registered office clause,
• Objects clause,
• Liability clause,
• Capital clause.
Section 2(56) of the Companies Act, 2013 lays down the meaning of the word memorandum’.
It reads, “memorandum means the Memorandum of Association of a company as originally
framed or as altered from time to time in pursuance of any previous company law or of this
Act”.
Purpose of Memorandum of Association
A Memorandum of Association is a charter on which the framework of a company is based.
The main objective behind the framing of the memorandum is to lay down the scope and
ambit of powers of the company within which it can function. Anything done outside its ambit
is considered void by the application of the doctrine of ultra vires. Therefore, it keeps a check
on the powers of the company. The relations of a company with outsiders are defined by this
instrument. Also, as the Company Act, 2013 guides this instrument, its contents should
conform to the provisions of this statute.
Features of Memorandum of Association
Owing to its significance for the corporations and ambiguous definition under Section 2(56)
of the Companies Act, several questions regarding the clauses, the possibility of amendments,
binding force, and the consequences for deviating from the memorandum arise. The critical
aspects and intricacies of the Memorandum of Association are briefly discussed as follows:
‘Undesirable’ names not allowed
Section 4 specifies that the name of the company should not match with the names of
companies already registered and should not nearly resemble them. For instance, in British
Diabetic Association v. Diabetic Society Ltd. (1995), the British Diabetic Society Association
had to change its name as it was sufficiently similar to another company’s name ‘British
Diabetic Society’. Further, in the case of Society of Motor Manufacturers and Traders Ltd v.
Motor Manufacturers and Traders Mutual Insurance Co. Ltd. (1925), it was observed that with
the registration, a corporation gets a monopoly over its name which excludes every other
company to adopt a name similar to it.
Change of name of a company
A company can change its name with the approval of the Central Government and by
following the mandates provided under Section 4 and Section 13 of the Company Act, 2013.
Change of registered office
The information regarding the exact place of the registered office should be given to the
registrar within 30 days of incorporation or commencement of the business, whichever is
earlier. As the alteration in place of registered office could affect several parties such as
shareholders, creditors, employees, etc., any change in the place of registered office requires
a special resolution and sanction of the Central Government.
Objects of the company
The memorandum contains the objects of a company that should not be against the law and
the provisions of the Companies Act. If the company performs functions that are beyond the
scope of its objects and powers then the doctrine of ultra vires comes into the picture. For
example, in London County Council v. Attorney General (1902), according to the objects and
powers clause, the Council had the power to work tramways. Therefore, its act of running
omnibuses, even in connection with the tramways, was considered to be ultra vires.
Liability of members
The limited liability of the members could be inferred from the company’s name. The liability
of the members can be limited by shares or limited by a guarantee. In the former, members
cannot be called to pay anything more than the nominal value of their shares, while in the
latter, the members themselves take a guarantee so as to contribute to the assets of the
company in the event of its winding up.
Capital of members
The fifth clause requires that the memorandum should state the nominal capital of the
company and the divisions and value of shares.

Articles of Association : rulebook of a company

Meaning and purpose of Articles of Association
It is a document containing the rules and bye-laws of a company. Section 2(5) of the
Companies Act defines articles as, “articles means the Articles of Association of a company as
originally framed or as altered from time to time or applied in pursuance of any previous
company law or of this Act”. Articles of Association consist of paragraphs that are signed by
every subscriber. The companies can either frame their own articles or adopt Table
F from Schedule 1 of the Companies Act. Table F is applicable to a company limited by shares.
Purpose of Articles of Association
The purpose of this document is to smoothen the internal operation of the companies. The
rules and regulations specified under the articles help in managing the companies’ internal
affairs.
Features of Articles of Association
The following points highlight some of the glaring features of the Articles of Association:
Provisions of entrenchment
According to Section 5 of the Companies Act, the articles may contain provisions regarding
retrenchment. They can be added while framing the article or after the formation of the
company via amendment.
Alteration
The Articles of Association can be altered with the help of a special resolution. Section 14 of
the Companies Act grants this discretion to the companies to alter their articles which
includes the power to make alterations with respect to changing a private form of the
company into a public company and vice versa. This power is almost absolute with the
conditions that the alteration must neither be violating the provisions of the Act nor be
abrogating the clauses contained in the Memorandum of Association.
Doctrine of indoor management
The doctrine simply implies that the outsiders are contracting with the company and act with
the presumption that the directors of the company are working lawfully. This rule protects
the outsiders from the company’s indoor management. This rule was described in the case
of Royal British Bank v. Turquand (1856) in the following words, “if the directors have power
and authority to bind the company, but certain preliminaries are required to be gone through
on the part of the company before that power can be duly exercised, then the person
contracting with the directors is not bound to see that all these preliminaries have been
observed. He is entitled to presume that the directors are acting lawfully in what they do”.
Differences between Memorandum of Association and Articles of Association
Memorandum of Association, Articles of Association, and prospectus are the most important
documents of a company. However, there has always been a great deal of confusion around
the differences between memorandum and articles. As already discussed, the memorandum
is the skeleton of a company as it carries the five important clauses on which each company
is structured and, the articles are the rulebook containing the regulations and bye-laws of a
corporation. These two also differ on various other grounds. Let’s delve deeper into those
with the help of forthcoming points.

Definition and meaning

Definition of MoA
The meaning of a memorandum is defined under Section 2(56) of the Companies Act, 2013
which does not actually define a memorandum and just calls it something which is originally
framed or altered from time to time. Section 4 is the most significant provision with regard to
the memorandum which truly defines it by stating its contents.
Definition of AoA
On the other hand, the provision regarding the definition of articles is under Section 2(5) of
the Companies Act, 2013. It is interesting to note that this definition matches the definition
of memorandum as discussed under Section 2(56), however, Section 5 states that articles
contain the regulations for the management of the company and shall also contain any
additional matters pivotal to the company’s management.
Position or status
Status of MoA
Since, the Memorandum of Association forms the structure of a company, it is treated to be
on a higher pedestal than the articles. It is crucial for the functioning of a corporation.
However, it is subordinate to the Company Act, 2013 as specifically stated under Section 6 of
the Companies Act. In simple terms, all the clauses contained in the memorandum should
comply with the provisions of the Companies Act. For example, the objects stated in the
memorandum should not be in contradiction with its provisions.
Status of AoA
On the other hand, the articles of association are subordinate to both the memorandum and
the Companies Act, 2013. Thus, articles must not include anything which is against the
memorandum. In the case of Bryon v. Metropolitan Saloon Omnibus Co. (1858), the Court
stated that “this (the fact that the articles are subordinate to the memorandum) is so because
the object of the memorandum is to state the purposes for which the company has been
established, while the articles provide the manner in which the company is to be carried on
and its proceedings disposed of”. Furthermore, the contents of the articles must be in
accordance with the provisions of the Companies Act.
Section 14(3) expressly specifies that in case of the alteration of the articles, the changes are
subject to the provisions of the Act. In the case of Madhava Ramchandra Kamath v. Canara
Banking Corporation (1940), a company’s Articles of Association contained a provision
regarding the expulsion of a member if he/ she unjustly or unlawfully has recourse to law in
any matter. A clause was added in the articles which authorised the selling of shares
belonging to the expelled member to any third person without any valid instrument. This was
held to be in contravention with the Companies Act, 1956, and thus, invalid.

Compulsory filing at the time of registration

It is mandatory to register a memorandum at the time of incorporation. It is a compulsory
document that is to be submitted to the registrar. However, filing of the Articles of Association
is optional at the time of registration.

Major contents
Major contents of Memorandum of Association
The five clauses, specified under Section 4, form the structure of the memorandum. These
are discussed below:
Name clause
Every memorandum should consist of the name of the company. A company, being a legal
person, requires a name and it should conform to certain guidelines. Firstly, the name should
not be identical or undesirable, in the opinion of the central government. Secondly, the name
should not show a connection with the patronage of the central government. Thirdly, the
name should not lead to illegal consequences. Fourthly, limited companies should add the
word ‘limited’ and private companies should add the word ‘private’ in their names.
It is essential that the name of the company should be painted outside the offices of the
company and the companies should use this name on every business document. In Nassau
Steam Press v. Tyler (1894), the name of the company was ‘Bastille Syndicate Ltd.’, however,
the directors and secretary of the company accepted the bill of exchange by writing it as ‘The
Old Paris and Bastille Ltd.’ The Court held that the name was not properly mentioned and the
directors and secretary of the company could be made liable. Also, it is pertinent to note that
the name of the company should not be regarded as ‘calculated to deceive’.
Registered office clause
Section 12 stipulates the provisions regarding the registered office of the company. The place
of the registered office is to be informed to the registrar within 30 days of incorporation of a
company and it should be painted outside the office of the company and other conspicuous
places. Section 12(9) states that in case the registrar has reasonable cause to conclude that
the company is not carrying on any business operations, he/ she can conduct the inspection
of the registered office of the company.
Objects clause
The corporations are free to choose their objects unless they are unlawful or contrary to the
Companies Act. The reason behind the framing of the objects clause is to inform the
shareholders regarding the purposes for which the capital contributed by them is being
invested. It also grants the feeling of security to the creditors as they make sure that the
capital is spent only on the projects which are connected to the company’s objectives.
Therefore, it prevents the diversification of capital.
This gives rise to the doctrine of ultra vires which declares the activities of the company
invalid if they are not in consonance with the objects clause. Ashbury Railway Carriage and
Iron Co. Ltd. v. Riche (1875) is the first case in which the doctrine was applied. In this case, the
objects clause of the company stated “make or sell, or lend on hire, railway carriages, and
wagons and all kinds of railway plants, etc, to carry on the business of mechanical engineers
and general contractors”. But, the company contracted to finance the construction of a
railway line. According to them, this would be within the meaning of ‘general contractors’.
However, the House of Lords held that the contract was ultra vires and made an important
observation regarding the objects clause which said that there are two functions of the
objects, primarily to stipulate the powers of a corporation and secondly to define a boundary
within which these powers could be exercised. Further, in the case of Attorney-General v.
Great Eastern Railway Co. (1880), it was observed that the objects should be reasonably
understood and applied and in the matters concerning the application of the doctrine of ultra
vires, the case should be fairly regarded as against the objects clause.
In Re Lee, Brehens & Co. Ltd. (1932), three tests were devised regarding the application of this
doctrine.
The Court, in this case, observed that “the validity must be tested by the answer to three
pertinent questions:
• Is the transaction reasonably incidental to the carrying on of the company’s business?
• Is it a bona fide transaction?
• Is it done for the benefit and to promote the prosperity of the company?”
In order to avoid the limited scope with respect to freedom of taking actions, the ‘main
objects’ rule of construction is applied by the courts while considering the question of ultra
vires actions. The consequences of the ultra vires transactions include:
• injunction which can be granted to restrain the ultra vires acts of a company;
• when capital is used by the directors in ultra vires transactions then they are
personally liable to replace it;
• in case of breach of warranty, the agents or directors are liable to the third party;
• in case any property is acquired as a result of the ultra vires transaction, the company
has the right over such property as it was held by the Madras High Court in the case
of Ahmed Sait v. Bank of Mysore (1930) that even though, a company has acquired
property outside the scope of its objects, it cannot be forced to give away the right in
such property;
• the ultra vires contracts, being outside the scope of objects, are considered null and
void.

Liability clause
Section 4(1)(d) of the Companies Act stipulates that the memorandum should state the
liability of the members. In the case of companies with limited liability, the clause must state
whether the liability is limited by shares or by guarantee.
Capital clause
Section 4(1)(e) of the Companies Act requires that the nominal capital of the company is to
be specified in the capital clause. Furthermore, according to Section 4(1)(f), in the case of one
person company, this clause should contain the name of the person who is to become a
member of the company after the death of the subscriber.
Major contents of Articles of Association
The contents of the articles can be formulated at the discretion of the subscribers to the
memorandum of the company, according to the company’s requirements. This can include
the provisions that guide the relations between the members inter se or members and the
company. But, again, anything stipulated in the Articles of Association should not breach the
provisions of the Companies Act. For instance, in the case of Re. Peveril Gold Mines
Ltd. (1898), it was held that the shareholders’ right to petition for winding up of the company,
as provided under Section 82 of the Company Act, 1862, cannot be taken away by the articles.
The articles of a company should be framed with the utmost care, keeping in mind the
interests of the stakeholders and the functioning of a corporation. Following are some of the
essential contents of the Articles of Association:
Share capital
All the rules regarding the payment of share capital are specified under the articles. The
important dates of issuance of certificates, payment of unpaid share capital, etc are
mentioned under this clause. Furthermore, it consists of the rights of shareholders.
Lien
In the event of non-payment of the declared amount by the shareholder, the company
exercises the option of lien with which the amount already paid by the shareholder is retained
by the company. This clause contains the rules regarding the lien on shares. For example,
rules specifying an extension of lien to dividends and bonuses, sale of shares retained on a
lien, etc are stipulated under this clause.
Transfer of shares
Transfer of shares is executed by the transferor as well as the transferee. This clause contains
the provisions regarding the procedure and registration of the transfer of shares.
Furthermore, it stipulates the rights of the nominees in case of transmission of shares.
Alteration of capital
The capital can be altered by an ordinary resolution. An ordinary resolution is passed to
consolidate and divide share capital into shares, to convert and re-convert fully paid shares
into stock, to sub-divide the shares into shares of a smaller amount, and to cancel the shares.
All these provisions are mentioned under the alteration of the capital clause.
General meetings
This clause covers the information regarding general meetings and extraordinary general
meetings. All the points regarding the calling and functioning of a general meeting are
specified. The meetings of the Board of Directors are held for the conduct of the business and
in order to adjourn or regulate the meetings of a company.
Directors
The remuneration, powers, and functions performed by the Directors of a company are
stipulated under the Articles of Association. Also, it contains the specification with respect to
the proceedings of the Board of Directors.
Capitalisation of profits
The rules related to the capitalisation of profits also form an essential element of the Articles
of Association. The profits can be utilised for distribution to the shareholders in the form of
dividends. Table F states that “the company in general meeting may, upon the
recommendation of its Board, resolve that it is desirable to capitalise any part of the amount
for the time being standing to the credit of any of the company‘s reserve accounts, or to the
credit of the profit and loss account, or otherwise available for distribution”.
Voting rights
It contains voting rights and restrictions on the members of a company. There are different
voting rights of the members owing to their age, joint ownership, mental capacity, etc. All
these details are specified under this clause.
Winding up of company
All the rules and procedures that guide the winding up of a company are covered under the
Articles of Association. The assets of the company are divided amongst the members and
trustees. The articles lay down the procedure and extent of division of these assets at the
time of winding up of the company.
Additionally, Table F of the Company Act, 2013, contains the format of articles for a limited
liability company. It consists of the following clauses:
• Interpretation,
• Share capital and variation of rights,
• Lien,
• Calls on share,
• Transfer of shares,
• Transmission of shares,
• Forfeiture of shares,
• Alteration of capital,
• Capitalisation of profits,
• backBuyback of shares,
• General meetings,
• Proceedings at general meetings,
• Adjournment of meeting,
• Voting rights,
• Proxy,
• Board of directors,
• Proceedings of the Board,
• Chief Executive Officer, manager, company secretary or Chief Financial Officer,
• The seal,
• Dividends and reserve,
• Accounts,
 • Winding up, and
• Indemnity.
Mandatory drafting
It is mandatory to draft a memorandum of the company as it is the essential document of a
company that presents its layout.
Regarding the Articles of Association, a private limited company has to draft articles while a
public limited company can adopt Table F which contains a comprehensive structure of
articles. Some of the elements of Table F include share capital and variation of rights, lien,
transfer of shares, forfeiture of shares, voting rights, proceedings of the board, accounts, and
winding up.

Alteration
The definitions of memorandum and articles are given under Sections 2(56) and 2(5) of the
Companies Act respectively, giving them permission to alter these.
Alteration of MoA
The clauses under the memorandum can be altered in accordance with Section 13 of the Act.
Section 13(1) stipulates that a memorandum can be altered by passing a special resolution.
Additionally, there are different conditions for the alteration of each clause of the
memorandum.
Alteration in name clause
In case of alteration of name clause, the conditions stipulated under sub-section (2) and (3)
of Section 4 are to be complied with. It also requires the approval of the Central Government.
A fresh certificate of incorporation is issued to the company by the registrar after the change
of name. In the case of Malhati Tea Syndicate Ltd. v. Revenue Officer (1972), a company filed
a writ petition with its old name, even when its new name was entered into the register of
joint stock companies. The Court held their petition to be incompetent on this ground alone.
Alteration of registered office clause
The registered office clause of a company can be altered with the approval of the Central
Government. The fact that such alteration is taking place with the consent of the stakeholders
of the company is taken into account before the approval. In case of a change of registered
office from one state to another, the company has to file the certified copy of the order of
the central government with both the states. In Mackinnon Mackenzie & Co, re (1966), the
company filed a petition to change its registered office from West Bengal to Bombay.
However, the state contended against such a petition on the ground that it would lead to a
loss of revenue. The Court while rejecting this contention observed, “there is no statutory
right of the state, as a state, to intervene in applications under Section 17 of the Companies
Act with regard to change of registered office. If notice has been directed by the court to the
State, the State appears pursuant to the notice. If notice is given to secure whether revenues
have been paid or not, the court in exercising its discretion sees that a company before
removing its office from one State to another does not leave liabilities to the State
undischarged. The court in making an order can impose terms to secure discharge of such
liabilities”.
Alteration of objects
In case of filing of alteration in objects clause, a special resolution is to be passed by
conducting a general meeting. The copy of the special resolution is filed with the registrar
who has to certify the same within the span of 30 days. Earlier the approval of the Company
Law Board or Central Government was essential, but now the procedure has become much
more liberal and it just requires the passing of a special resolution.
Alteration in liability clause
Section 13(11) specifically makes the alteration in the capital void, if the company’s capital is
limited by a guarantee and it, via alteration, intends to grant any person (except its members)
the right to participate in the divisible profits.
Alteration of AoA
The Articles of Association can be altered in accordance with Section 14 of the Companies Act
by a special resolution. It can convert a public company into a private company or vice versa.
Additionally, the conversion of a public company into a private company requires approval
from the Tribunal. It is also pertinent to note that in case any private company, via alteration,
excludes the limitations and restrictions which are significant to include in the articles, then
that company would cease to be a private company. The errors in the Articles of Association
can also be corrected by altering these. The following points are to be taken into
consideration during the process of alteration of the Articles of Association:
• Board of Directors should be informed and a Board meeting is to be organised. The
date and time of the general meeting are decided and notice informing the same is
sent to the members of the company. According to Section 101 of the Companies Act,
a general meeting is called by giving a 21 days’ notice to the members.
• The notice is given to the auditors, directors, and all the members of the company.
• A special resolution is passed in the meeting with a two-thirds majority of the
members.
• Within 30 days of the passing of the special resolution, its copy is to be presented
before the registrar.
• Alteration should not be unlawful.
• It should not violate the provisions of the Company Act, 2013, and the Memorandum
of Association.
• The alteration should not result in the increase in the liability of a company.
The alteration of articles cannot justify the breach of contract. In the leading case of Southern
Foundries (1926) Ltd. v. Shirlaw (1940), a person was appointed as the director of the
company in the year 1933 for 10 years, however, in 1935 after the amalgamation of the
company, it adopted new articles and the person was removed from the post of director. This
was challenged and the Court held it to be a breach of agreement and awarded damages to
the plaintiff.
Relations
The memorandum contains the conditions which are the basis of the operation of a company
and therefore, it handles the relations of the corporation with outsiders like creditors,
shareholders, and the public. On the contrary, the articles are the internal regulations and
these manage the internal affairs of a company.

Breach
Section 10 of the Companies Act lays down that both memorandum and articles bind the
company and its members. However, this Section expresses the contractual force of these
two instruments.

Breach of MoA
The acts done beyond the scope of the memorandum are void. The doctrine of ultra vires in
the case of the objects clause is the perfect example. The ultra vires acts of the directors,
make them personally liable. Also, the court can grant an injunction as to the effect of
such ultra vires alteration in the contract.
Breach of AoA
The Articles of Association, being an instrument for managing the internal affairs of a
company, have a binding force in cases of agreements between the members inter se and
between the members and the corporation. In the case of Wood v. Odessa Waterworks
Co. (1889), according to the articles, the directors of the company were required to pay
dividends to its members. Then, a resolution, to grant them debenture bonds instead of
dividends, was passed. This was held to be a breach of articles as the articles provided for the
dividend, i.e., to be paid in cash. Therefore, an injunction was granted and the directors were
restrained from acting in this way.

Distinction between MOA And AOA

 MODULE 2

2.1 prospectus -Kinds

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 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. 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.
• Red Herring Prospectus
• Shelf Prospectus
• Abridged prospectus
• Deemed Prospectus

1. Shelf Prospectus
Shelf prospectus can be defined as a prospectus that has been issued by any public financial
institution, company or bank for one or more issues of securities or class of securities as
mentioned in the prospectus. When a shelf prospectus is issued then the issuer does not need
to issue a separate prospectus for each offering he can offer or sell securities without issuing
any further prospectus.
The provisions related to shelf prospectus has been discussed under section 31 of the
Companies Act, 2013.
The regulations are to be provided by the Securities and Exchange Board of India for any class
or classes of companies that may file a shelf prospectus at the stage of the first offer of
securities to the registrar.
The prospectus shall prescribe the validity period of the prospectus and it should be not be
exceeding one year. This period commences from the opening date of the first offer of the
securities. For any second or further offer, no separate prospectus is required.
While filing for a shelf prospectus, a company is required to file an information memorandum
along with it.

Information Memorandum [Section 31(2)]

The company which is filing a shelf prospectus is required to file the information
memorandum. It should contain all the facts regarding the new charges created, what
changes have undergone in the financial position of the company since the first offer of the
security or between the two offers.
It should be filed with the registrar within three months before the issue of the second or
subsequent offer made under the shelf prospectus as given under Rule 4CCA of section
60A(3) under the Companies (Central Government’s) General Rules and Forms, 1956.
When any company or a person has received an application for the allotment of securities
with advance payment of subscription before any changes have been made, then he must be
informed about the changes. If he desires to withdraw the application within 15 days then
the money must be refunded to them.
After the information memorandum has been filed, if any offer or securities is made, the
memorandum along with the shelf prospectus is considered as a prospectus.
2. 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 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.
3. 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.

4. 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.
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.

2.2 information memorandum

The prospectus is an offer or Invitation to Offer?

The Prospectus has issued to the public at large, so the question arises that the prospectus is
whether a general offer to the public? No, a prospectus is not an offer but merely it is an
invitation to offer according to the Indian Contract Act. The prospectus is a constructed
document that shall be issued to the public as an invitation for the subscription of shares.
When the new company is incorporated, they issue a prospectus through which the public
gets to know about the existence of the Company. The company tries to convince the public
that they give the best opportunity to them for their investment. If the public is convinced
then they give an offer through the application for the purchase of shares and debentures.
Prospectus — invitation of offer
Application for purchase of shares — Offer
Allotment of Shares — Acceptance
After acceptance, the contract is binding to the Companies and the shareholders.
A Company gets 120 days for this whole process after the prospectus was issued. But if the
company fails to do so i.e. obtain a minimum subscription from the public with a specified
period, then the amount they received from the public is returned to them. Also, the company
didn’t get the “Certificate of Commencement of Business” because the public doesn’t rely
upon or interested in this company.
Who needs a prospectus?
The potential investors need a prospectus to evaluate the value of the offered public
securities. Prospectus also states the company history, financial performance, company’s
projects, capital structure of the company, potential growth of a company, etc. In other
words, a prospectus discloses material facts of the company in front of the potential users
which helps them to understand the risk factor on their investment.
When Prospectus is not required to be issued?
Under Section 26 of the Companies Act, 2013, the following state of affairs where the
prospectus need not be issued-
1. When the shares or debentures are not offered to the public.
2. When shares and debentures are to be allotted to the existing shareholders or debenture
Holders with or without a right to renounce (reject).
E.g. when shares are placed privately to less than 50 persons (private placement means less
than 50 (i.e. 49), if 50 or more then considered as a public issue).
3. When shares and debentures are to be allotted are similar (uniform in nature) to the
current shares and debentures (already issued shares and debentures), then there is no
requirement to issue a new prospectus.
4. When not permissible by law (i.e. a Private Company is not required to issue prospectus
(Section 2 (35)).
5. Where invitation to the public for subscription to the shares or debentures of a company is
made in the form of Newspaper Advertisement (Section 30).
6. When an invitation to such person who has an underwriting contract for shares and
debentures.
Content incorporated in Prospectus
The Prospectus has issued on the behalf of the company. Section 26 of the Companies Act,
2013, read with Rule 3 of the Companies (Prospectus and Allotment of Securities) Rule 2012:-
For the formation of the Public Company, the prospectus must be signed and dated and
contains the following information:
. General Information:
• Name and Addresses- It includes the name and registered office address of the
Company. It must also include the name and address of the Company Secretary,
Auditor, Chief Financial Officers, Legal Advisor, Banker, Trustee.
• Issued Listed at (Name of Stock Exchange)
• Opening and Closing Date of the issue- Details of opening and closing date of the
Subscription list.
• Rating of the shares and debentures
• Details about underwriters
• A statement by the Board of Directors- A statement was given by the Board of
Directors about the separate bank account in which the money raised from the issue
shall be deposited. Also, the Board of the Director discloses that how much amount
they used or utilized.
• Consent of the directors/ auditors/ bankers to the issue, experts opinion or another
person as may be prescribed.
2. The capital structure of the Company:
• Issued, subscribed, and paid-up capital
• Size of the present issue
3. Terms of the Present Issue:
• The Authority for the issue
• Procedure and schedule for allotment and issue of securities
• How to apply- Availability of Prospectus and Terms & Mode of Payment for the
subscription
• Special tax benefits to the shareholders and Company
4. Particulars of the Issue:
• Objects of the Issue
• Project Cost
5. The company, Management and Project:
• History, main objects and present Business of the Company
• Plant location, machinery, technology, etc.
 • Backgrounds of promoters, collaboration, etc.
• Infrastructure and facility
• The products and services
• Information related to threat factors of certain specific projects or their imminent
legal actions, the gestation period of the project, and all other information related to
it.
6. Financial Performance of the Company:
• Balance Sheet Data, Profit And Loss Account
• Any change in accounting policy during the last three years
• Stock market quotation of shares and debentures
7. Details of all payments refunds, interest, dividend, dues, etc.
8. Detail of Companies under same management- If there are numbers of companies under
the same management, disclose all the details of these companies

Issues of Prospectus:
Under Section 26 of the Companies Act, 2013, the issues of a prospectus are stated-
The prospectus shall be considered invalid if the company does not issue a prospectus before
90 days from the date from which the copy was delivered to the registrar.
The company can be punished if a prospectus was issued in contravention under Section 26
of the Act. The punishment for the contravention is a fine of ₹50000 and it may extend to
₹300000.
Misstatement of a Prospectus
The prospectus is a trusted legal document on which people can rely before subscribing or
purchasing securities from the company. But any misstatement that occurs in the prospectus
leads to punishment in the form of a fine or imprisonment. Misstatement includes an untrue
or misleading statement, non-disclosing facts, which is issued in the prospectus.
Liability for misstatement in a Prospectus
The liabilities for Misstatement in a prospectus are Civil Liability (Section 35) and Criminal
Liability (Section 34).
1. Civil Liability (S.35)
According to the provision of Section 35 under the Companies Act, 2013, civil liability arises
when a person who has subscribed for securities on the faith of the misleading prospectus
has remedies against the company and the directors, promoters, experts & every person who
authorized the issue of prospectus.
(i) Remedies against Company:-
In against company, two remedies are available:
(a) Rescind the Contract– The person who purchases the shares can rescind the contract if he
found any misstatement in the prospectus and the money will be refunded to him which he
pays to the company while purchasing securities.
Right to rescind or terminate the contract is available if the person proves the following:
• The prospectus was issued on the behalf of the company;
• The statement must be untrue;
• The statement must be a material misrepresentation;
• The misrepresentation must have induced the shareholders to take the securities and
he must have relied on the statement in applying for securities;
• The misrepresentation of statement must be of fact and not of law
• That he has taken action promptly to rescind the contract within a reasonable time
and before the company goes into liquidation.
(a) Damages for Fraud – In this case, the person only claims damages against the company
but he cannot rescind the contract because of unreasonable delay, affirmation (provide
assurance), and commencement of winding- up. At these stages, the shareholder can file a
suit against the company for the misstatement and claim damages for it.
(ii) Remedies against the directors, promoters, experts & every person who authorized the
issue of prospectus–
In cases where it is proved that a prospectus has been issued with intent to defraud the
applicants, then, every person referred to in subsection (1) of Section 35[5] shall be personally
accountable without any limitation of liability any of the losses or damages that may have
been sustained by any person who subscribed to the securities based on such prospectus.
Defences available to avoid criminal liability:
Under Section 35 (2) of the Act, if the person proves that,
1. Having a director of the company given his consent for issuing prospectus but he
withdrew his consent before the issue of the prospectus and that it was issued without
his authority or consent;
2. That the prospectus was issued without his knowledge or consent and that on
becoming aware he gave a reasonable public notice that it was issued without his
knowledge or consent.
Criminal Liability (S.34)
According to the provision of Section 34 of the Companies Act, 2013, criminal liability arises
where prospectus contains any untrue statement, then, every person who has authorized the
issue of the prospectus shall be punishable under Section 447. The punishment involves
imprisonment for a period of 6 months which can be extended to 10 years or a fine, maybe
the amount involved in the fraud, or it can be extended 3 times the amount involved in the
fraud or both.
Defences available under criminal liability:
The defenses are available under criminal law if a person proves that,
• Such statement or omission was immaterial;
• He has a judicious ground to consider that the inclusion or omission was necessary;
• He has judicious ground to consider that the statement was true.
Case Laws
In APL Industries Ltd. v. Securities and Exchange Board of India,[6]
The SEBI (Securities and Exchange Board of India) ordered the company to refund the amount
of subscription to the subscriber where the public issue of share was unsubscribed.
In Derry v. Peek,[7]
The prospectus of a company contained that the company has been authorized to use steam
power in moving its trams. But, the authority that was authorized to approve the Board of
Trade refuses its approval. The court held that there is no misstatement in the prospectus,
the Board of Directors was not held guilty of fraud, because they were honest and they
mentioned the statement in a good faith. They were not intended to deceive anyone.
In Henderson v. Lacon,[8]
In the prospectus, it is contended that the directors and their friends have subscribed a large
portion of and they now offer to the public remaining shares. But in reality, the directors had
subscribed only 10 shares each. The court held that the subscribers can rescind the contract.
In Arnison v. Smith,[9]
The court held that, in the prospectus, the non-disclosure of facts does not amount to
misrepresentation unless the concealment has prevented an adequate appreciation of what
was stated.
In Peek v. Gurney,[10]
The court held that-
• Every man must be held responsible for the consequence of false representation
made by him to another, upon which the other acts and is injured.
• The aforesaid false representation was made with the intention that it should be acted
upon by the third person in the manner resulting in injury.
• Such injury must be an immediate consequence and not remote.
2.3 Shares : kind of shares capital
Although most companies have share capital, it is not an essential ingredient in the
incorporation of a Company. For instance, it could be a company limited by guarantee. The
Share Capital of a company is usually divided into shares of equal amounts. The maximum
Share Capital of a Company must be mentioned in the Memorandum of
Association (hereinafter referred to as “MOA”) of the said Company and is referred to as the
Company’s authorised capital. This is also referred to as its nominal capital and the company
cannot raise more capital than its authorized capital. In order to exceed the authorized capital
amount, the MOA must be amended accordingly. Nonetheless, the Company may issue an
amount smaller than the Authorized Share Capital and this is known as its Issued Share
Capital. Therefore, the amount that is issued from the Authorized Share Capital is known as
its Issued Share Capital. Furthermore, it is not necessary that the entire Issued Share Capital
might be taken up and that is why only the part that is subscribed to is known as the
Subscribed Share Capital.
The part of the Subscribed Capital that the company calls up for payment is known as the
called up share capital. The part that is not called up for payment is the uncalled capital. By
passing the Special Resolution, the uncalled Capital can be transformed into reserve share
capital. Subsequently, the part of the called up capital that the shareholders actually pay is
called the paid up share capital, while the unpaid part is referred to as its unpaid capital.
What is a ‘share’ as per Companies Act, 2013?
The capital of the company seldom comprises of a ‘single unit’, in fact, it comprises of
numerous indivisible units. These units are of a specific amount. Therefore, when a person
purchases such a unit or several units, he purchases a certain defined percentage of the share
capital of the company. In this case, he becomes one of the many shareholders of that
company. The Companies Act has provided an extremely vague and ambiguous definition to
share and defines it as ‘a share is share in the Share Capital of the company’.[i] Although there
are various ways of looking at this, a share is not merely a sum of money, but a clear depiction
of interest a shareholder hold’s in a company.
What is a ‘share’ as per Sale of Goods Act, 1930?
Section 2 (7) of the Sale of Goods Act, 1930 (hereinafter referred to as “Sale of Goods Act”)
defines goods as movable property that does not include actionable claims and money, but
includes shares and stocks. Nonetheless, it cannot be solely regulated as per the Sale of Goods
Act simply because it has been regarded as a movable property.
Is a Share Certificate the same as a Share?
At times, shareholders tend to confuse share with a share certificate. It is pertinent to note
that there lies a thin line of difference between an actual share that makes a part of the share
capital and a share certificate. As per the provisions of the Companies Act, a share certificate
acts as a prima facie evidence of the title of the shareholder to the shares or stock. A share
can either remain a part of Company’s share capital or be owned by a shareholder. Even when
the share is owned by a shareholder, it forms a part of the company. Section 44 of the
Companies Act, 2013 mentions that a share is a movable property transferable in the manner
provided by the articles of the company. On the contrary, section 46 states that share
certificate means a certificate, under the common seal of the company, specifying any shares
held by any member. A similar distinction was drawn between a share and share certificate
in Shree Gopal Paper Mills Ltd. v. CIT.
Types of Shares as per Companies Act, 2013
As per Section 43 of the Companies Act, the share capital of a company limited by shares shall
be of two kinds i.e., equity share capital or preference share capital, unless otherwise
provided by MOA or Articles of Association (hereinafter referred to as “AOA”) of a private
company.
1. Preference Shares
Preference shares are the shares where shareholders get a preferential dividend. The
dividend may consist of a fixed amount that is payable to preference shareholders. As the
name suggests, the preference shareholders get a ‘preference’ over the equity shareholders
in receiving dividends. At times, the equity shareholders may not even receive profits. The
dividend amount paid to them may be calculated at a fixed rate. The preference shareholders
vote only on such resolutions that directly affect their rights as preference shares and a
resolution for the winding-up of the company or for the repayment or reduction of its equity
or preference share capital.
Furthermore, during the winding-up of the company the preference shareholders get a right
to be paid, i.e., amount paid up on preference shares must be paid back before anything is
paid to the equity shareholders. Preference shares can be bifurcated into six kinds, namely,
cumulative preference shares, non – cumulative preference shares, participating preference
shares, non – participating preference shares, redeemable preference shares and non –
redeemable preference shares.
Cumulative Preference Shares And Non Cumulative Preference Shares
There may be times when the company does not generate profits and therefore fails to give
dividends. Preference shareholders who own cumulative preference shares can be paid from
the profits made in the subsequent years for the current year’s dividends that are in arrears.
Until it is fully paid, the fixed dividend keeps on accumulating. The non-cumulative preference
share gives the right to its holder to a fixed amount or a fixed percentage of dividend out of
the profits of each year. If no profits are available in any year or no dividend is declared, the
preference shareholders get nothing, nor can they claim unpaid dividends in the coming year.
Preference shares are cumulative unless expressly stated to be non-cumulative and the same
was held in Foster v. Coles[iii] where it was observed that mere deletion of the word
cumulative would not render the preference shares non – cumulative.
Participating Preference Shares And Non-participating Preference Shares
The shares which are entitled to a fixed preferential dividend are known as Participating
preference shares. Additionally, they have a right to participate in the surplus profits along
with equity shareholders after dividend at a certain rate has been paid to equity shareholders.
For example, after 20% dividend has been paid to equity shareholders, the preference
shareholders may share the surplus profits equally with equity shareholders. Again, in the
event of winding-up, if after paying back both the preference and equity shareholders, there
is still some surplus left, then the participating preference shareholders get additional share
in the surplus assets of the company. Unless expressly provided, preference shareholders get
only the fixed preferential dividend and return of capital in the event of winding-up out of
realised values of assets after meeting all external liabilities and nothing more. It is pertinent
to note that Participating Preference Shareholder’s right to participate shall be provided
either in the MOA or AOA or by virtue of their terms of issue.
Reedeemable Preference Shares And Irredeemable Preference Shares
Although equity shares are not redeemable, as per section 55 of the Companies Act,
preference shares can either be redeemable or irredeemable. Redeemable preference shares
refer to those shares where the shareholders can be repaid after an estimated period of time.
This act of repayment is referred to as redemption of preference shares. Therefore, in cases
where the shareholder is issued a redeemable preference share, they are entitled to receive
that amount after the completion of the stipulated period. Where the amount cannot be
redeemed even after the completion of the stipulated period, such shares will be referred to
as irredeemable preference shares. According to Section 55 of the Companies Act, a company
that is limited by shares cannot issue redeemable preference shares. Nonetheless, it may only
issue redeemable preference shares if authorized by the AOA of the said company, and are
liable to be redeemed within a period that does not go beyond 20 years from the date of their
issue. However, subject to certain conditions given in the provisions of the Companies Act
and the Rules and Regulations, a company may issue such preference shares for infrastructure
projects for a period exceeding 20 years.
2. Equity Shares
The most common kind of shares that we hear about on a daily basis are equity shares. Equity
shares are defined as those shares that are not preference shares, this simply means that
shares which do not enjoy any preferential right in the matter of payment of dividend or
repayment of capital, are known as equity shares. After the rights of preference shareholders
are done, the equity shareholders get their share in the remaining amount of distributable
profits of the company. But there may be times when the company may not accrue any profits
as dividend to its equity shareholders even when it has distributable profits. The dividend on
equity shares is not fixed and may differ every year depending on the profits available. Equity
shareholders of a company limited by shares get a right to vote on every resolution placed
before the company and their voting rights on a poll are in proportion to the share in the paid-
up equity share capital of the company. But if the MOA or the AOA of the company allows it
provide differential voting rights it may do so.
Sweat Equity Shares
According to section 54 of the Companies Act, a company can issue sweat equity shares.
These equity shares are issued by a company to its own employees or directors. Such shares
are generally issued at a discount. Such shares might also be issued for consideration other
than cash like for rendering know how or making some Intellectual Property Rights available
for the company, etc. All limitations, restrictions and other provisions that are applicable to
equity shares are also applicable to sweat equity shares. Sweat equity shareholders rank pari
passu with regular equity shareholders.
3. Bonus Shares
Bonus shares are always issued to existing members. According to Article 63, a company is
free to issue fully paid up bonus shares to the members out of its Securities Premium Account,
its free reserves and Capital Redemption Reserve Account. In Standard Chartered Bank v. The
Custodian[iv], the court stated that such kind of shares can be described as a distribution of
capitalized undivided profit. Furthermore, the Court added that when bonus shares are
issued, there is an increase in the company’s capital due to transferring the amount from the
company’s reserve to the Capital Account of the company. This results in additional or extra
shares being issued to the shareholders. In the aforementioned case, the Supreme Court even
went on to state “A bonus share is a property which comes into existence with an identity
and value of its own and capable of being bought and sold as such.”
Buy-Back: Sections 67, 69 & 70
When a company who issued the shares decides to take back its share from the market and
buys its own share (i.e. the company buys its own shares) by paying the shareholders the
market value per share it is known as/refers to buy-back. A stock buy-back is a way for a
company to re-invest in itself. Liability of a company decreases when they do the buy-back
process. Companies usually buy-back its share when they have extra surplus cash; a company
either invests the surplus cash in its new venture or by buying back its own share.
Objectives of Buy-Back
1. Surplus cash accountability: Directors are accountable for what they are doing with
the surplus cash to shareholders. The idea behind it is that money should keep on
flowing, excess of surplus cash on balance sheet is not a good sign. Money should be
invested and the flow of money should keep on rotating.
2. Increase in current share price of the company.
3. Increase in earnings per share.
4. Discourage the unwelcome takeover bids.
Buy-Back Takes Place Out of
• Free reserve;
• Securities premium account;
 • Proceeds of any issue.
Conditions
1. It should be permissible by articles of association.
2. Maximum buyback can be of 25% of paid-up share capital & free reserve.
3. Special resolution has to be passed by the shareholders.
4. Declaration of solvency has to be signed by 2 directors. Out of which 1 has to be
managing director. They have to sign a declaration that company is in a sound position
and that after buy back their company will not be affected and that for 1 year they will
be in a strong financial position and their company will not suffer insolvency.
5. Buy-backs can be from the existing shareholders only.
Prohibition of Buy-Back
1. Company cannot buyback through their Subsidiary Company or Investment Bankers
or Investment Company.
2. No buy -can be made if there is any kind of default in payment of dividend, loans, or
repayment.
3. There should be no liability on the company because buy-back in itself means that only
surplus money can be used which means there should be no liability on the company.
Failure to Comply
• Fine up to 1-3 hundred thousand on Company.
• Fine up to 1-3 hundred thousand for every independent officer.
• Imprisonment up to 3 years.

2.4 debentures
debenture is one of the capital market instrument which helps business houses to raise funds
from the market for the development of the business. The word debenture has been derived
from the Latin word “debere” which means borrowing or taking a loan. In layman’s language,
debenture can be defined as an acknowledgement of debt issued by the company to the third
parties under the common seal of the company. In accordance with Section 2(30) of the
Companies Act, 2013, debentures include debenture stock issued by the company as an
evidence of debt taken by such company, either by creation or non-creation of the charge
over the assets of the company.

Salient Features of Debentures

Some of the salient features of debentures are as follow:
 1. It is an acknowledgement of the debt;
2. It is issued by the company under its common seal;
3. Debentures can be both secured or unsecured;
4. The rate of interest and the date of payment is pre-determined;
5. Debentures issued are freely transferrable by debenture holders;
6. Debenture holders do not get any voting right in the company;
7. Interest payable to the debenture holders are charged against the profits of the
company.
Provisions Governing Debentures
Following provisions of the Companies Act, 2013 governs the floatation, issue and allotment
with regards to the debentures:
1. Section 2(30) – Definition;
2. Section 44 – Nature of debentures;
3. Section 71 – Provisions relating to issue and allotment of debentures;
4. Rule 18 of the Companies (Share Capital and Debenture) Rules, 2014 – Rules
pertaining to issue and allotment of debentures.
Types of Debentures
There are various forms of debentures which a company can issue depending upon its
requirement. Debentures can be issued based on various factors i.e. performance, security,
priority, convertibility and record.
1. Based on Performance
Based on the performance, there are two types of debentures which are issued i.e.
o Redeemable Debentures
Redeemable debentures are the debentures where the date of redemption of the debentures
are specifically mentioned in the debenture certificate issued, where on such date, the
company is legally bound to return the principal amount to the debenture holder.
o Irredeemable Debentures
Irredeemable debentures continue for perpetuity and unlike redeemable debentures, there
is no fixed date on which the company needs to pay the debenture holders. It becomes
redeemable only when the company goes into liquidation.
2. Based on security
o Secured Debentures
When the debentures are issued by way of creation of charge over the assets of the company,
then such debentures are called as secured debentures. The charge created over the
debentures may be fixed or maybe floating. In accordance with the provisions of the
Companies Act, 2013, such charge created has to be registered with the Registrar within 30
days of such creation.
o Unsecured Debentures
Unlike secured debentures, unsecured debentures are issued by the company without
creation of charge over the assets of the company. In other words, these debentures do not
offer any protection to the debenture holder in case the company is unable to pay the
principal amount on the due date.
3. Based on Priority
o First Mortgaged Debentures
Basically, the distinction of debentures based on priority can be called as a subcategory of the
secured debentures. First Mortgaged Debentures are those debentures which has first
preference over all the other debentures issued by the company. Such preference is claimed
at the time of liquidation of the company when the assets of the company are distributed
among the credit holders.
o Second Mortgaged Debentures
Second Mortgage Debenture, as the name suggests, has second preference over the assets
of the company at the time of liquidation after the first mortgaged debentures. Only after the
first mortgaged debenture holders are satisfied, will the second mortgaged debenture
holders can claim their principal amount from the company at the time of liquidation.
4. Based on Convertibility
o Fully Convertible Debentures
Fully convertible debenture holders have the right to convert their debentures into equity
shares of the company at a future date, at the option of the debenture holders. The
conversion ratio, the rights of the debenture holders post-conversion and the trigger date for
conversion are defined at the time of issue of these debentures.
o Partially Convertible Debentures
Partially convertible debentures can be divided into two parts. The first part being the
debentures which are convertible to equity shares of the company and the second part being
non-convertible debentures which shall redeem at the expiry of its tenure. An option is given
to the debenture holder to partially convert its debt into shares of the company. Partially
convertible debentures are also deemed as optionally convertible debentures.
o Non-Convertible Debentures
Debentures which do not have an option to get converted into equity shares of the company
are called non-convertible debentures. These debentures get redeemed at the end of the
maturity period.

5. Based on Record
o Registered Debenture
In case of registered debenture, the name, address, number of debentures and other details
pertaining to holding are entered by the company in the register of debentures. In such cases,
the transfer of debentures from one debenture holder to another debenture holder is
recorded in the register of debenture holders as well as register of transfer.
o Unregistered Debentures
Unregistered debentures are also called bearer debentures. Unlike registered debentures,
the company does not maintain the records of such debentures and the principal amount and
the interest is paid to the bearer of the instrument as against the name written over such
instrument. These debentures are easily transferrable in the market.
Use of Debentures
Debentures are issued by the company in order to raise funds from the market. Such funds
are then used by the company for research and development and growth in the market.
Debentures or debt financing is preferred over the issue of equity shares for two major
reasons i.e. issue of debentures does not lead to dilution of the ownership in the company
and the cost of raising funds through debt is cheaper as compared to cost of raising equity.
Considering its various types, debentures are issued by the company as required by the
investor investing in the company. In case the investor insists on issuing first mortgaged
debenture to have an added protection over and above the secured debenture, the company
may issue such debenture to the investor, which again depends on the necessity of funds to
the company. In the usual course of business, registered non-convertible redeemable secured
debentures are issued by the company as it provides protection to the investors against the
failure of the company to repay the principal amount. Where the investor prefers to have a
shareholding in the company after a fixed period of time, the company may be required to
issue fully or optionally convertible debentures.
Nature of Debentures
1. Debentures for cash
As defined above, debentures are usually issued for raising funds for the company. They are
mainly issued for cash. The Debentures can be issued either at par, at discount or at premium.
2. Debentures as collateral security
A collateral security is additional security along with the primary security when a company
obtains loan or overdrafts facility from a bank or any other financial institution. Debentures
issued as such a collateral liability are a contingent liability for the company, Only when the
company defaults on such a loan plus interest will this liability arise.

3. Debentures issued as consideration other than cash

This is another type of issue of debentures. Sometimes company requires some assets or
machineries, plants, equipments which are huge in cost. The company need not have money
at that particular time for the payment. So, instead of making payment in cash, the Company
issues debentures to the vendor against such purchase with the terms of payment of the
consideration other than cash.

Difference between shares and debentures

Definition of Shares
Smallest division of the company’s capital is known as shares. The shares are offered for sale
in the open market, i.e. stock market to raise capital for the company. The rate on which the
shares are offered is known as share price. It represents the portion of ownership of the
shareholder in the company. The shareholders are entitled to the dividend (if any) declared
by the company on the shares. The shares are movable i.e. transferable and consist of a
distinctive number. The shares are broadly divided into two major categories:
• Equity Shares: The shares which carry voting rights on which the rate of dividend is
not fixed. They are irredeemable in nature. In the event of winding up of the company
equity, shares are repaid after the payment of all the liabilities.
• Preference Shares: The shares which do not carry voting rights, but the rate of
dividend is fixed. They are redeemable in nature. In the event of winding up of the
company, preference shares are repaid before equity shares.
Definition of Debentures
A long-term debt instrument issued by the company under its common seal, to the debenture
holder showing the indebtedness of the company. The capital raised by the company is the
borrowed capital; that is why the debenture holders are the creditors of the company. The
debentures can be redeemable or irredeemable in nature. They are freely transferable. The
return on debentures is in the form of interest at a fixed rate. Debentures are secured by a
charge on assets, although unsecured debentures can also be issued. They do not carry voting
rights. The debentures are of following types:
Secured Debentures
Unsecured Debentures
Convertible Debentures
Non-convertible Debentures
Registered Debentures
Bearer Debentures
2.5 dividends
A dividend may be defined as a reward a company gives to its shareholders in return for their
investment in the company. It is the portion of profit received by the shareholders after the
accounts of the company are finalized. The reward may take the form of cash or stock. Section
2(35) of the Companies Act, 2013 (“Companies Act”) defines “dividend”, stating that it
includes any ‘interim dividend’. It is given in proportion to the amount paid for each share
held by the shareholders if so authorized by the Articles of Association of the company
(Section 51, Companies Act). All companies except Non-Profit Organizations, i.e., companies
registered under Section 8, can declare a dividend.

Applicable provisions: Chapter VIII- Declaration and Payment of Dividend (Section 123 to 127)
read with Companies, (Declaration and Payment of Dividend), Rules 2014.

Companies Act, 2013 defines the dividend as including the interim dividend. Types of
Dividend:
1. Final Dividend
2. Interim Dividend
Sections 123 to 127, Chapter VIII, Companies Act deal with the declaration and payment of
dividends. The company may pay a dividend in the manner prescribed under Section 123:

1. By paying out of the profits of the current year of the company,

2. by paying out of the accumulated and undistributed profits of the previous years of
the company, and
3. by paying out of the amount of money for the purpose of payment of dividend given
by the Central or State Governments under a guarantee.
The company may declare dividend only when the following conditions are fulfilled:
1. Depreciation
Depreciation is provided on all depreciable assets according to the rates and useful life of
assets given under Schedule II of the Companies Act.
2. Transfer to reserves
A certain proportion of profit must be transferred to reserves.
 3. Settling of losses of the previous years
Losses of the previous years and depreciation of the company are set off from the current
year’s profit.
4. Free reserves
The dividend must be declared only from free reserves.
At times, it may so happen that the company might have no profits or might not make
adequate profits to pay a dividend to its shareholders. However, under the second Proviso
of Section 123 (1), the company can propose to declare and pay dividends to its shareholders
from the unutilized profits from the previous years, subject to certain conditions. This article
discusses the conditions and protocol for the declaration and payment of dividends out of
reserves under the Companies Act, 2013 and the Companies (Declaration and Payment of
Dividend) Rules, 2014.
Section 123(1): Source of Dividend:
1. Out of the profits of the company of the current year, after providing for deprecation.
2. Out of the profits of the company for any previous financial year, after providing for
deprecation.
3. Any amount received from the Central Government or State Government for the payment
of dividend.

Proviso: Before declaring the dividend, consider the following points:

1. Unrealized Gain, Notional Gain or revaluation of assets and any change in carrying amount
of an asset or of a liability on measurement of the asset or the liability at fair value shall not
be considered for the dividend.
2. Before declaration of dividend, company requires to transfer such percentage of profit as
it may be consider appropriating to the reserve of the company.
3. No dividend shall be declared or paid by the company from its reserve other than General
Reserve.

4. No company can declared dividend, unless previous year losses and depreciation not
provided in previous year or years are set off against profit of the company for the current
year.
Rule: 3 Inadequacy of Profit:
In the event of inadequacy or absence of profits in any year, a company may declare dividend
out of free reserves subject to the fulfillment of the following conditions, namely:-
Rule 3, Companies (Declaration and Payment of Dividend) Rules, 2014 lays down the
conditions for the declaration of dividend out of free reserves:
 1. Rate of dividend
The rate of dividend declared shall be equal to or less than the average of the rates at which
the company declared dividend in the three (3) financial years immediately preceding the
current financial year.
The above condition shall not apply to a company that has not declared any dividends in three
(3) immediately preceding financial years.
2. Total amount of withdrawal
The total amount to be drawn from such accumulated and unutilized profits shall be equal to
or less than one-tenth (1/10th) of the sum of its paid-up share capital and free reserves as it
appears in the latest audited financial statement of the company.
3. Utilization of amount withdrawn
The amount that is so drawn from the accumulated and unutilized profits shall be first
employed to settle the losses incurred by the company in the financial year in which dividend
is declared before declaring any dividend concerning equity shares.
4. Balance amount of reserves:
The amount in the free reserves after such withdrawal must be equal to or more than fifteen
percent (15%) of its paid-up capital as it appears in the company’s latest audited financial
statement.

Proviso: In case, a company is incurring loss as per financials of latest quarter, interim dividend
shall not be higher than average dividend declared by the company during last three financial
years.
Mode of payment of dividend:
Proviso: Any dividend payable in cash may be paid up cheque or warrant or any electronic
mode to the shareholder.
Section 123(2): depreciation shall be provided in accordance with the provisions of Schedule
II.
Section 123(3): The Board of Directors of a company may declare interim dividend during any
financial year or at any time during the period from closure of financial year till holding of the
annual general meeting out of the surplus in the profit and loss account or out of profits of
the financial year for which such interim dividend is sought to be declared or out of profits
generated in the financial year till the quarter preceding the date of declaration of the interim
dividend.
Section 123(4): The amount of dividend shall be deposited in a separate account in a
scheduled Bank within five days from the date of declaration of such dividend. When dividend
has been declared by the company, shareholder can claim such portion of profit within 30
days from the date of depositing.
Section 123(5): No dividend shall be paid by a company in respect of any share therein except
to the registered shareholder of such share or to his order or to his banker and shall not be
payable except in cash:
Section 124(1): If the dividend has not been paid or claimed within 30 days from the date of
declaration to any shareholder, such amount shall be transferred to Unpaid Dividend Account
with 3 days from the expiry of such 30 days. This special account on the name of Unpaid
Dividend is to be opened by the Company. Thus number of days to transfer unpaid or
unclaimed amount of dividend to unpaid dividend account comes to 30 + 7 = 37 days.
Section 124(2): The company shall, within a period of 90 days of making any transfer of an
amount to the Unpaid Dividend Account, prepare a statement containing the names, their
last known addresses and the unpaid dividend to be paid to each person and place it on the
website of the company, if any, and also on any other website approved by the Central
Government for this purpose.
Section 124(3): If any default is made in transferring the total amount or any part thereof to
the Unpaid Dividend Account of the company, company shall pay, from the date of such
default, interest on amount that has not been transferred to the said account, at the rate of
12% per annum and the interest accruing on such amount shall ensure to the benefit of the
members of the company in proportion to the amount remaining unpaid to them.
Section 124(4): Any person claiming to be entitled to any money transferred to the Unpaid
Dividend Account of the company may apply to the company for payment of the money
claimed.

Section 124(5): Any money transferred to the Unpaid Dividend Account of a company which
remains unpaid or unclaimed for a period of seven years from the date of such transfer shall
be transferred by the company along with interest accrued, if any, thereon to the IEPF Fund
established and the company shall send a statement in the prescribed form of the details of
such transfer to the authority which administers the said Fund and that authority shall issue
a receipt to the company as evidence of such transfer.
Section 124(6): All shares in respect of which dividend has not been paid or claimed for seven
consecutive years or more shall be transferred by the company in the name of Investor
Education and Protection Fund along with a statement containing such details as may be
prescribed:
Section 126: Right to dividend, rights shares and bonus shares to be held in abeyance
pending registration of transfer of shares.
Where any instrument of transfer of shares has been delivered to any company for
registration and the transfer of such shares has not been registered by the company,
Transfer the dividend in relation to such shares to the Unpaid Dividend Account unless the
company is authorized by the registered holder of such shares in writing to pay such
dividend to the transferee specified in such instrument of transfer; and keep in abeyance in
relation to such shares (a) any offer of rights shares and (b) any issue of fully paid up bonus
shares.
Section 127: Punishment for Failure to Distribute Dividend
Where dividend has been declared by the company but has not been paid within 30 days
from the date of declaration of dividend ‘ Every Director: Imprisonment extends to 2 Years +
Fine not less than Rs. 1000 for every day during which such default continues Company-
Simple Interest @18% p.a. during the period which defaults continues. No offence under
this section shall be deemed to have been committed:
1. If dividend could not be paid by the reason of Operation of Law
2. Where a shareholder given direction regarding the payment of dividend
3. Where there is Dispute regarding the dividend
4. Where the dividend is lawfully adjusted by the company against sum due from the
shareholder
5. Where for any other reason, the failure to pay dividend within the specified period.

MODULE 3
3.1 Company’s Meeting: Kinds of Meetings and Procedure
What is a Company Meeting?
Generally, a meeting can be defined as “a gathering, assembling or coming together of two or
more persons for the objective of discussing lawful business. Companies Act, 1956, nowhere
defines a meeting. But, if we are to further define a company meeting on the pretext of the
meaning of a meeting, then it is this gathering whose participants are the members of a
company, a meeting is often a formal setting. For any company meeting to take place, it is
important that there is a quorum of members who come together on a previous notice for
discussing a lawful common business interest. Therefore we can conclude requisites for a valid
company meeting as:
1. Two or more than two members;
2. With an objective of the meeting – discussion on common business interests;
3. Through a previous notice;
4. At a particular place, date and time;
5. As per the provisions of the Companies’ Act.
However, it is important to note that in a few exceptional cases one member meetings are also
declared to be valid. For example, where there is only a single shareholder in a company, he
can alone hold a valid meeting. On similar lines, this goes for situations where there is a single
creditor or board of director for the company. Except for these exceptions, the requisites cannot
be compromised with.

What is the Procedure for any company meeting?

For any company meeting to validly happen it is important that the procedure laid down by the
Companies’ Act is followed. Section 170 of the Companies Act’ 1956 states that the
forthcoming sections i.e. Sections 171-186 shall apply to every general meeting of any public
or private company. These steps can be briefly enlisted as:
• Notice (Sections 171-173)
• A Quorum (Section 174)
• A Chairman (Section 175)
• Proxies (Section 176)
• Voting procedure (Sections 177, 179-185)
• Result (Section 178)
• Power of Tribunal to call a meeting (Section 186)
Thus, now we will read into the detailed requirements of each step for a general meeting:
1. Notice
Notice prior to the meeting is the most important prerequisite for any meeting. Section 171 lays
down that a notice is to be served to the joining members of a meeting twenty one days prior
to such meeting. However the same can be reduced at the admissal of the members to such
modification. Every notice by virtue of Section 172 of the act shall specify the itinerary of the
meeting including the agenda for the meeting. These notices shall be served in writing to all
the members of the company at their residences. Also in case any member’s death or
insolvency, the same shall be addressed to the person entitled to such member’s shares. Section
173 requires such notices to be annexed with an explanatory note concerning the ‘special’
business to be discussed in the meeting. However, in case a member is ‘accidentally’ omitted
this serving of notice, the meeting shall not get invalidated ipso facto.
2. Quorum and Chairman
Section 174 of the act constitutes a quorum of five persons in case of a public company and
two when it is any other company. If within half an hour of the commencement of the meeting
there is no quorum constituted, it will dissolve the meeting arranged for. Likewise, section 175
of the act lays down the requirement of a chairman for the meeting. The members present shall
elect a chairman for the forthcoming meeting. This election shall be a simple show of hands.
Once a member is thereof elected, he acts as the chairman for the whole meeting.

3. Proxies
Every member by virtue of section 176 of the act is empowered to appoint any other person as
his proxy for the meeting. However, such proxy’s powers are limited to voting on polls. He at
no instance can speak his opinion at the meeting. Also, such empowerment is prohibited in
case of companies with no share capital. Likewise, members of private companies are limited
to use only one proxy per occasion. The member appointing any proxy has to provide a duly
signed written proxy authorizing the proxy to vote in his place and be deposited to the company
before forty-eight business hours of such meeting.
4. Voting
In case of companies with share capital, any member or proxy present in person can ask for
voting on a particular motion; which the same section 179 lays that in companies with no share
capital, one member or a proxy in presence of less than total seven members and two members
or a proxy in presence of more than total seven members can ask for the voting initiation. After
such demand is made under section 179, there shall be a polling procedure by show of hands
by virtue of section 177. The Chairman shall then state conclusively if the resolution was to be
carried out. The same is to be noted down in the minutes’ book of the company as per section
178. However, section 183 lays down that there is no hard and fast rule for the members or the
proxies to use their multiple votes in the same manner. Later, section 180 lays down that in
case of a decision on adjournment the polling shall be conducted instantaneously once asked
for, while in any other cases such polling shall be conducted within forty-eight hours of such
demand. Section 181 and 182 on the other hand put restrictions on these polling rights of the
members. Through the former, the company can restrict the defaulter members from voting
who are yet to pay on their shares or when their shares are under a right of lien by the company;
while through the latter the company can restrict the members who did not hold shares
preceding the voting or any other ground not specified in the former section. To scrutinize the
votes, under section 184, the chairman is empowered to appoint two scrutineers amongst whom
one has to be the member present at the voting.
5. Result of the voting
Finally, section 185 of the act lays that firstly, it is the chairman who decides the manner of
polling. Secondly, he then declares the result of the polling. And finally, the result of the polling
shall be deemed to have been the result upon the proposed resolution in the meeting.
However, an exception to this usual procedure is section 186 where instead of the board, the
tribunal calls for the meeting. As empowered by Section 186[1] and solidified by cases like ‘R.
Rangachari vs. S. Suppiah and Ors.’[2] in situations where it is ‘impracticable’ for the board
to call for meetings other than annual general meetings, the National Company Law Tribunal
has the power to call for such meetings either at its own, or on the requisition of a director or
even a single eligible member to ask for a requisition. Such meetings will also have a status
similar to those held on requisitions by members of the board.

What are the types of company meetings?

Company meetings can be divided into three: Shareholders’, directors’ and special meetings.
These three categories further diversify into eight more. Firstly, Shareholders’ meetings consist
of Statutory meetings, Annual general meeting and Extraordinary general meeting. Secondly,
the Directors’ meetings consist of Board meetings and Committee meetings. Lastly, Special
meetings are made of Class meetings, Creditors’ meetings and Debenture Holders’ meetings.
Shareholders’ Meetings
1. Statutory Meetings
Statutory meetings are the first general meetings of any public company after they become
entitled to business. Section 165[3] of the Companies Act, 1956, defined statutory meetings as
the one which shall be conducted between one to six months from the date of commencement
of business. Additionally, such a company shall be one limited by shares or guarantee with a
share capital. Also, the nature of such meetings is to be general. The section further puts down
the requirement of a statutory report which needs to be forwarded to all the members twenty
one days before the meeting is held. This report is required to have all the information related
to the companies’ shares. For eg. the distribution of shares, payments made against each share
sold, etc. The members can cast their votes and discuss matters enlisted in the notice served
prior to the meeting. However, In no case can there be a discussion on matters not enlisted in
such notice. Also, statutory reports are supposed to be registered with the registrar office after
its copies are sent off to all members. However, none of these requirements is imposable on
private companies or public companies which are not limited by shares or guarantees with
shares.
2. Annual General Meeting
Annual general meetings, as the term suggests, are held once in a year by companies
irrespective of having a share capital. Section 166[4] of the Companies’ Act, 1956 lays down
that apart from other meetings, an annual general meeting should take place in every company
irrespective of its nature, whether public or private. Additionally, there must not be a gap of
more than fifteen months between two annual general meetings. However, there are two
exceptions to this condition. Firstly, if it is the first annual general meeting after the inception
of the business, the fifteen-month gap can be extended to an eighteen-month gap. Secondly,
this period can be relaxed for another three months if the registrar office permits owing to
special reasons. There is one more facet to such meetings: Annual Returns. In the case of ‘Anita
Malhotra vs. Apparel Export Promotion Council and Ors.’[5] section 159[6] was given
clarity in the sense that it required companies with share capital to submit their annual returns
within sixty days of their annual general meetings to the registrar office. Such returns shall
include details of directors, shareholders, debts, debenture-holders, other members and the
registered office. Generally, such meetings are to be held on an official day during business
hours in the registered office or anywhere in the city where such office was located. Section
168[7] of the act imposes fine in case there is a default in complying with annual general
meetings despite the instructions and notice being served without a reasonable cause.
3. Extraordinary General Meeting
Section 169[8] of the Companies Act, 1956 lays down the rules for an Extraordinary meeting.
Meetings held between two annual general meetings are called Extraordinary general meetings.
These meetings are called upon by members for discussing urgent matters that fall outside the
general scope and cannot wait until the next annual general meeting. In companies with share
capital members holding one-tenth paid-up share capital can send a requisition for convening
the meeting to the board of directors. And, in companies with no share capitals, one-tenth of
members having the right to vote can ask for similar requisition. For any or every matter to be
taken up in the meeting, the requisitioners must sign the requisition and send it off to the
registrar office. If a meeting is not called within twenty-one days of such requisition
submission, the requisition makers can themselves call the meeting.
Directors’ Meetings
1. Board Meetings
Section 285[9] of the Companies Act, 1956 rules out that every company shall have a board of
directors’ meeting every three months annually. Thus, each company is required to observe
four board meetings each year with a three-month gap in between. The notice of every such
meeting shall be given to each director in writing at his place of residence[10]. Such notices are
to have the specified businesses to be discussed in the forthcoming meeting. In no case can a
director waive this requirement. The objective of such meetings is to ensure that the directors
are well-aware of the business proceedings going on in the company. However, the requirement
of four meetings yearly can be relaxed by the central government for certain classes of
companies. Also, the act under section 287[11] requires for a formation of a quorum of either
minimum of two directors or one-third of the total strength, whichever is higher. Usually
known as ‘Standing orders’, each company has the power to lay down rules concerning the
itineraries of the Board meetings. These meetings are generally held to discuss the development
of the company and any other major issue of the company.
2. Committee Meetings
Committee meetings are a dilute form of board meetings. Here instead of the board of
directors, the committee of directors made in the board come together for a meeting. Generally,
the board delegates the powers to its committees to organize work. For Eg., a board might
consist of one committee that solely takes care of finances and another that takes over
completely of workforce issues. These committees are formed on the lines of the articles of the
company and follow the same procedure as that of the board for meetings.
Special Meetings
1. Class Meetings
The shares that a company holds are all of the different kinds. So when shareholders of a
particular class arrange for a meeting, it is called a class meeting. So when a company decides
to give the bonus only to the equity holders of the company, the meeting that will be convened
for the equity holders will be an example of a class meeting.
2. Creditors’ Meetings
These types of meetings are called by the directors when they propose to set a scheme for
arrangement and compromise with its creditors. Section 391[12] of the act empowers the
company or the liquidator in case of winding up of the company to ask the tribunal to call for
a meeting of creditors. In such meetings, if any proposal is passed with a three-fourth majority
of the creditor value, then the same is held to be binding on all the creditors and the company.
For the final order to be effectual, it has to be submitted to the registrar. In case the tribunal
observes the impracticability to implement the order, it can ask for modifications by virtue of
section 392[13]. The peculiar feature of such kinds of meetings is that the procedure is directed
by the National Company Law Tribunal directly.

3. Debenture Holders’ Meetings

The debenture trust deed lays down the procedure and principles concerning the debenture
holders’ meetings. These meetings are arranged by debenture holders of a particular class.
Also, these meetings are held whenever there is a concern regarding the rights and interests of
the debenture holders.

3.2 Director: Kinds- Independent Director, Women Director; Director’s

Identification Number
There are different types of directors chosen in a firm. The Companies Act 2013 defines a
director under Section 2(34) as a director appointed to the Board of a company; this primer will
be divided into four sections, i.e., Minimum Requirements, Functions, Appointment, and
Residuary Types. The latter three sections deal with the types of directors, while the first
section deals with minimum requirements for all Company Law Directors.
1. Minimum Requirements
The minimum requirements can be based on two broad grounds, composition and eligibility
1.1 Composition
• All public companies should have a minimum of 3 directors maximum of 15 directors,
and 1/3 of them must be independent directors
• All private companies must have a minimum of 2 directors and a maximum of 15
directors
• To have more than 15 directors, a special resolution must be passed by Section 114.
1.2 Eligibility of Directors
Any person other than the following would be eligible to be a director
• Auditory of the company.
• A previously banned director.
• A minor under 16 years of age.
• Any person declared to be bankrupt or insolvent.
2. Type of Directors Based on Functions Performed
Types of directors are two types – executive directors and non-executive directors.

2.1 Executive Directors

Executive directors are present internally and are involved in the company – s.149(12). They
are two types – Managing Directors and Whole-Time Directors
Managing Director – A director who is the CEO and entrusted with substantial management
powers under s. 2(54) . Whole-Time Director – A director employed on a whole-time basis,
not the CEO of the company, and is under a special contract, appointed under s.2(94)
2.2 Non-Executive Directors
Non-executive directors are external professionals and are uninvolved in the everyday activities
of the company – s.149(12). They are of two types – independent directors and nominee
directors.
Independent Directors – They are appointed to ensure transparency and provide expertise. Must
have the following qualifications
• Industrial expertise and knowledge
• Must not have any stock options or stake in the company
• It can only be appointed for a maximum of 5 years and for two terms, with a minimum
cooldown of 3 years between the terms.
Nominee Directors – Representative of the stakeholders appointed to the board of directors.
Must have the following requirements – s.149(7) and s.161(3)
• Must be appointed if provided in the Articles of Association (AoA)
• Tata v. Cyrus – Must have unfettered discretion to protect the interests of both the
company and the shareholders
3. Types of Directors Based on Appointment
The Companies Act 2013 allows for three types of directors based on appointment to deal with
contingencies – Additional Director, Alternate Director, and Casual Vacancy Director
3.1 Additional Director
A company may appoint an additional director under s.161(1) to deal with unexpected or
additional work. Hence, it must fulfill the following requirements.
• Must be provided for in the AoA
• Cannot serve beyond the next Annual General Meeting
• Paul v. City Hospital – Additional Directors cannot be appointed in special
circumstances to strengthen the majority. You can make the Directors in company
law by consulting experts in your field.
3.2 Alternate Director
• Can be appointed under s.161(2) in the absence of the director for more than three
months to act on his behalf if provided under AoA
• Can only serve till the managing director returns, cannot serve beyond that point
• Must be a like-for-like replacement – only an independent, alternate director may fill
in for an alternate director.
3.3 Casual Vacancy Director
• Can be appointed under s.161(4) on the death, resignation, disqualification, or
incapacity of a director
• Need not be provided for under AoA
• Can only serve till the term of the director who has vacated.
• This only applies to public companies.
4. Miscellaneous Types of Directors
This section deals with classification of directors based on categories that may overlap with
earlier categories. This section covers residential directors, women directors, and small
shareholders directors.
4.1 Residential Directors
• Provided in s.149(3) that every company must have at least one director who resides
in India for at least 182 days in a year
• For newly incorporated companies, the requirement shall apply proportionally (50%)
to the end of the FY
4.2 Women Directors
• Provided for in s.149(1), requires three types of companies to have a minimum of one
women director
• Every listed company
• Every public company without a paid-up share capital of 100 cr or a turnover of 300 cr.
• Companies registered before the Companies Act,
2013: https://www.mca.gov.in/Ministry/pdf/CompaniesAct2013.pdf shall appoint
w omen directors within a year of this act coming to force, while new companies post-
2013 act shall appoint women directors within six months of registering.
4.3 Small Shareholders Director
• There is no mandate to appoint a small shareholders director under s.151, left up to the
company’s discretion
• Companies must fulfill two criteria to be eligible to appoint a small shareholders’
director
• It must be a public company
• It must have at least 1000 or more small shareholders.

4.4 Managing Director

Managing director is a person who has substantial powers of management of the company. He
is given this power by the articles of the company, agreement with the company, passing
resolution in the general meeting of the company, or by the board of directors.

4.5 Independent Director

A person becoming the independent director of the company must fulfil certain criteria given
under section 149(6) of the Companies Act, 2013, which states that an independent director is
a person other than managing director, whole-time director, or nominee director, and:
• He must have relevant experience and should be a person of integrity as per the board.
• A person appointed as an independent director shall not be a promoter of the same
company or any other company which is the holding, subsidiary, or associate company
of the same company in which he has been appointed.
• The person shall not be related to the promoters or directors of the company or its
holding, subsidiary, or associate company.
• The person must not have any money-related relationship with the company or its
holding, subsidiary, or associated company other than his salary.
• None of his relatives or he himself shall not have any kind of interest in the company.
Provided, the relative can hold shares of face value up to Rs. 50 Lakhs or 2% of the
paid-up capital.
Section 149(4) of the Companies Act, 2013, states that every listed public company must have
1/3rd of its total directors as independent directors.
Example: XYZ Ltd is a listed public company having a total of 15 directors. 1/3rd of 15 is 5.
Therefore, the company will have 5 directors as independent directors.
Rule 4 of Companies (Appointment and Qualification of Directors) Rules, 2014 states that the
following companies will have at least two independent directors:
• Companies having paid-up share capital of Rs. 10 crores or more.
• Companies having a turnover of Rs. 100 crores or more.
• Companies having outstanding loans, debentures, deposits, in aggregate of more than
Rs. 50 crores.
4.6 Nominee Director
The nominee director is not appointed or removed by the company. He is appointed by the
financial institution, by an agreement, by the Government, or by any other person in order to
represent his interest in the company.
The company does not have the power to retire such directors, nor are they retired by rotation.
Only the agencies who have nominated such a director can remove the nominee director.
Example: If XYZ Ltd took a loan from SBI bank, then the bank (to monitor the activities of
the company) will appoint a nominee director in the company till the time the company does
not repay the loan.

3.3 Director: Powers, Duties and liabilities.

Meaning of Director
In Section 2(34) of the Companies Act 2013, a director is a “person appointed to the Board of
Directors.”. Under the companies act, operations are carried out by the chief agents constituted
by the Board of directors. Therefore, the powers and duties of Directors of a company are
challenging and require right-minded people to take up the position of responsibility.
The Minimum number of directors for:
1. A public limited company: 3 directors
2. A private limited company: 2 directors
3. A one-person company: 1 director
A company is allowed to have a maximum of 15 directors. However, it can exceed the
maximum number by passing a special resolution in a general meeting with the shareholders.
Section 157 of the companies act 2013 mentions that Director/ Whole-time director or
manager’s age is a minimum of 21 years and a maximum of 70 years. Therefore, any individual
younger than 21 years (minor) cannot be appointed company director. A special resolution
needs to be passed to appoint a director who has attained the age of 70.
Every person appointed should have a Director Identification Number (DIN) or Corporate
Identification Number (CIN) prescribed under section 153 of the act. Moreover, the person
acting as Director should be:-
• Of a sound mind
• Capable of entering into a contract
• Debt-free.
Appointment of Director
Section 152 of the Companies Act 2013 says that an individual appointed as the company’s
Director has to be a natural person. Therefore, a legal firm with an artificial legal personality
cannot be established as a company agent.
In a private or public company, two-thirds of the Director is appointed by the company’s
stakeholders. And the remaining one-third are selected as per the specification of the articles
of association. The Articles of Association can dictate any method for the Director’s
appointment.
According to a specific policy in the companies act, the organisation can employ the directors
according to proportional representation.
Following documents are required for the appointment of a person as Director:

1. The first step is to create a Digital Signature Certificate (DSC).

2. Every Director should have a unique Director Identification Number (DIN) which the
Central Government allots.
3. The company shall file Form DIR-12 (particulars of appointment of directors and KMP along
with the form DIR-2 as an attachment) within 30 days of the appointment of a director.
4. A letter in writing stating that the said person has agreed to hold the position.
5. An appointment letter is to be issued to a director for their appointment.
6. A notice should be given to call board meetings with an explanatory statement.

At least one women director must be appointed in companies with a paid-up share capital of
Rs. 100 Crore or a turnover of Rs. 300 Crores. For every company, it is mandatory to have a
Resident Director (a person who has stayed in India for 182 days or more during the financial
year).
Removal of a Director
Directors are an essential asset for a company. Any organisation will take a lot of their efforts
and valuable time to name someone their Director. But sometimes, there are cases where the
company may remove them due to negligence, violation of privacy, or other cases.
Section 169 of the Companies Act, 2013 deals with the removal of Directors. After giving the
person a reasonable opportunity to justify the reason for their actions, the company has the
right to remove them before the expiry of the term.
Circumstances like these will result in an issue of a “Special Notice” for appointing a new
director if the previous one is removed.
The procedure of removal of a director is:
1. The first step is to prepare a notice and the resolution(s) draft that needs to be passed in the
board meeting. The company should also convey the agenda of the meeting to all the directors
of the company.
2. The company is responsible for imitating the Director removed.
3. The legal notice for removal of the Director needs to be sent 14 days before the meeting is
held. In addition, a special note needs to be signed by members holding more than one per cent
of the voting power or holding shares on which an aggregate of 5 lakh rupees has been paid on
the date of the notice.
4. The directive to be removed has to be permitted to be heard and to be able to speak.
5. Intimating all department heads to remove the directors and prepare the necessary documents
is necessary.
Two forms are required for the removal of a director:
 • E-form MGT-14
• E-form DIR-12
The forms need to be filed within 30 days from the passing of the ordinary resolution. The
company should make necessary entries regarding removal of Director in the Register of
Director and Key Managerial Personals and Register of contracts and arrangements in which
directors are interested in Form MBP-4

Liability of Directors
The powers and duties of directors of a company include within itself the added responsibility
of being held liable for actions that do not abide with the provisions mentioned in the
Companies Act, 2013.
In addition, they will have to face the consequences of their actions. The company, being an
artificial person, cannot commit a crime that requires mens-rea.
1. For the Company
Breach of Fiduciary Duty
When the actions of a director directly harm the interest and well-being of the company, the
Director is said to violate their fiduciary duty. In such conflicts of interest, the concerned
Director should make the necessary disclosures to obtain the confidence of the stakeholders
and prevent themselves from liability.
Ultra-Vires Act
The powers and duties of a company director are subjected to the specification of the
Companies Act, the Memorandum and Articles of Association. Anything exceeding these acts
will make the Director personally liable. But in cases where their actions are intra-vires (within
the Director’s power), the stakeholders can ratify those in the general meeting.
Negligence
As long as the Director is fulfilling their duties, there is no liability. But if there is a failure to
exercise caution to the business operations, they are held personally liable for the damages. An
error of judgment is, however, not considered negligence.
Issue of Prospectus with Intent to Defraud
Suppose a director issues a prospectus to defraud the applicants or other persons for any person.
In that case, they will be held personally liable for the damages incurred by any person who
has subscribed to the securities based on such prospectus.
2. For Third Party
None of the Director (s) of a company is liable to third-party contracts, even if the company
has initiated the arrangement with the said party. They will only be held personally responsible
if :
• The contract is in a personal capacity
• Where the principal is not disclosed
 • When it is a pre-incorporation contract
• When the contract is ultra-vires
3. Criminal Liabilities of the Director
Attribution-based Liability
The Director will not be held liable when the company’s criminal activities are concerned. The
court has mentioned the concept of alter-ego, which can only be applied to make the company
responsible for the acts of the directors.
Vicarious Liabilities
The supreme court has analysed the company’s criminal liability for the action of the person in
control of the company and has communicated that the company will be held liable and not the
other way around.
Liabilities in the case of Independent and Non-Executive Directors
The Independent and Non-Executive Directors can be held liable if acts of omission or
commission have been conducted under their knowledge.
Other Liability of the Directors
Liability in Case of Tax
If companies cannot pay taxes, the Director is liable to pay. However, the Director can escape
paying the tax if they can prove that the non-recovery of such tax is not due to the breach, gross
neglect, or misconduct on their part.
Refund of the Share Application Money
A director is personally liable to refund the share application or excess share application
money.
Unlimited Liability
In some cases, a director(s) ‘s liability may be unlimited if specified in the Memorandum or a
special resolution is passed in the general meeting.
Dishonoured Cheques
If a director signs a dishonoured check knowingly, they can be prosecuted along with the
company.
Offences in Income tax
If a company commits an income tax fraud, the person in charge is held personally liable
(usually the Director of the company).
Fraud on Minority Shareholders
If the Director pursues discriminatory actions for stakeholders with fewer shares, directors will
be held liable.
Powers of Directors
The directors are considered as the head and brain of a company. When the brain functions, the
company is said to function. For the proper functioning, the directors should be properly
entrusted with some powers. The directors generally acquire their powers from the provisions
of the Articles of Association and then from the Companies Act.
1.General Powers of a Company Director
As per Sec. 291 of the Act, the Board is entitled to exercise all such powers and to do all such
acts and things as the company is authorized to do. The exceptions are the acts, which can be
done by the company only in the general meetings of the members as required by law.
2. Specific Powers of a Company Director
1.A) As per Sec. 262, in the case of a public company a private or company, which is a
subsidiary of a public company, the power to fill a casual vacancy of directors is to be exercised
at a Board meeting.
2. B) As per Sec. 292, the following powers of the company shall be exercised by the Board
by means of resolution passed at the meeting of the Board:
To make calls,
To issue debentures,
To borrow moneys by other means,
To invest the funds of the company, and
To make loans.

The last three powers cannot be delegated to the Manager or to a Committee of Directors but
must be exercised only at a Board meeting.
3. Powers of Director subject to the Consent of the Company
The directors of a public company or of a private company can exercise the following powers,
which is a subsidiary of a public company only with the consent of the company in the general
meeting:
• To sell, lease or otherwise dispose of the undertaking of the company.
• To remit or give time for repayment of any debt due to the company by a director.
• To invest the sale proceeds of any property of the company in securities other than trust
securities.
• To borrow moneys where the moneys borrowed (other than temporary) exceeds the total of
the paid-up capital and free reserves of the company.
• To contribute to charities and other funds not directly relating to the business of the company
or to the welfare of the employees in any year in excess of Rs.50,000 or 5% of the average net
profits of the three preceding financial years whichever is greater.
4. Powers of Director subject to the Consent of the Central Government
A) As per Sec. 268, any provision relating to the appointment or reappointment of a Managing
Director can be altered by the Board with the consent of the Central Government.
B) As per Sec. 295, the Board, subject to the Central Government's consent, has the power to
appoint a person for the first time as a Managing Director.
C) As per Sec. 295, the Board, only with the previous approval of the Central Government, can
make any loan or give any guarantee or provide any security in connection with a loan made
by any other person to:
Any of its directors or any director of its holding company, or
• Any partner or relative of such director, or Any firm in which any such director or
relative is a partner, or
• Any private company of which any such director is a member or director, or
• Anybody corporate, 25% or more of whose total voting power may be exercised or controlled
by any such director or two or more directors together, or
• Anybody corporate, whose Board or Managing director or Manager is accustomed to act in
accordance with the directions or instructions of any director or directors of the leading
company.
Subject to the approval of the Government, the Board has the power to invest in the shares of
another company in excess of the limits specified in Sec. 372.
3.4 Prevention of Oppression and Mismanagement: Protection of Minority Shareholders;
Powers of Tribunal and Central Government
Meaning Of Oppression
Oppression is the exercise of authority or power in an unjust manner against the consent of the
other party. In the Black Law Dictionary, the term ‘oppression’ is defined as ‘the act or an
instance of unjustly exercising power.’ It can also be viewed as an act or instance of oppression
and the feeling of being heavily burdened, mentally or physically, by troubles, adverse
conditions, and anxiety.
In the case of Dale and Carrington Investment Pvt Ltd. v P. K. Prathapan, it was held that
increasing the capital of a company with the sole purpose of gaining control over can be termed
as oppression.

Application to Tribunal for relief in cases of Oppression

The aggrieved shareholder may approach the National Company Law Tribunal set up under
the Company legislations.

Application against oppression and mismanagement

Earlier under the Companies Act, 1956 section 397 dealt with the application against
oppression and mismanagement. The Companies Act, 2013 lays down the provision to make
an application against the oppression under section 241. The chapter XVI of the Company Act
clearly specifies who can raise a complaint and under which circumstances a complaint may
be raised of oppression and mismanagement.
First let’s consider a situation when a member of the company makes a complaint regarding
the affairs of the company when the affair may seem shady affecting the interest of the public
at large or the company, or when the affairs of the company is oppressive in nature and against
the member making the complaint or any other member of the company. The member may also
make a complaint regarding the material change in the management or control of the company
which may seem to be prejudicial to the company. The Central government may, by itself, file
the oppression and mismanagement application before the tribunal against a company if it
believes that the affairs of the company are prejudicial in nature.
Who can file an application against Oppression and Mismanagement?
The Provision of Section 244 of Companies Act is also crucial as it describes who has a right
to file such an application. The right is broadly divided between the company and entitlement
to one member, to file on behalf of the other members. In a company, the right may further be
differentiated based upon the companies having a share capital and companies not having a
share capital. The share capital of the member complaining, may be calculated based upon
share capital’s number or its value. When it comes to number, it should be 100 or 1/10 of the
total members and when it comes to the value, it must be the members holding 1/10th of the
share capital value. In companies not having a share capital, 1/5th of the total members may
apply. Coming back to the entitlement to one member, to file on behalf of the other members,
it is posed with only one precondition that the person doing so must have the consent of others
in written form.
Power of Tribunal: Section 242 of the Companies Act, 2013
The tribunal is the special adjudicatory body brought about to deal with the matters pertaining
to the Companies Act in order to get efficient and immediate relief. Section 242 deals with the
powers of the tribunal and the same have been examined and explained for your kind perusal.
• The first power granted upon it by the legislation is to pass an order. Such order may
be passed if it is of the opinion that the affairs of the company have been or are being
conducted in a prejudicial manner. It has been mentioned that the winding up of the
company will not be ordered radically, but it is the oppression and mismanagement
which is aimed to be stopped.
• The same provision also confers powers upon the tribunal regarding three issues which
are concerning the 1) shareholders 2) Company and 3) others.
 • With respect to shareholders, a tribunal may order to purchase shares of members by
other members or by the company.
• A tribunal may as well order a reduction of the share capital or even enforce restriction
on transfer of shares because oppression and mismanagement at root cause depends
upon the coagulation of shares at the hands of individual or few members.
• Regarding the management of the company which is a crucial part of a company, a
tribunal may terminate or modify agreements made between company and management
or agreement between the company and any other person.
• The tribunal in case of management of the company may even remove the Managing
Director, Manager, and Director, the tribunal may recover undue gains made by such
official and also appoint another MD, manager, and director.
• In certain cases, the tribunal may appoint a person who shall report to the tribunal
regarding the activities of oppression and mismanagement by the management to curb
such oppression from taking place further.
• Lastly, the tribunal has certain other powers such as regulation of the conduct of the
affairs of the company, setting aside the transfers of any property of the company and
the tribunal may even impose costs. The procedural details are that the tribunal has to
send a copy of its order to the registrar and if the order has not been finalised, it may
provide an interim order to the registrar. Pertaining to changes made in MOA
(Memorandum of Association) and AOA (Article of Association) the changed
documents must be submitted to the registrar. The punishment prescribed in abeyance
of the law is set at 1 Lakh to 25 Lakh for a company and 25000 to 1 Lakh for an officer
in default and such officer may also be liable for a term of imprisonment of 6 months.
Oppression of the Minority
The management of a Company is based on the majority rule, but at the same time, the interests
of the minority can’t be completely overlooked. While talking of majority and minority, we are
not talking of numerical majority or minority but of the 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 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. So, the modern Companies Acts contain a
large number of provisions for the protection of the interests of minorities in companies.
Appeals against the Orders of the Tribunal and variation of the Order of the Tribunal
The Award pronounced by the NCLT (National Company Law Tribunal) may be appealed
before the NCLAT (National Company Law Appellate Tribunal). The procedure and provision
granting such right to appeal is Section 421 and the same is explained below.
• The appeal may be preferred by any person who is aggrieved by the decision of the
tribunal.
 • No appeal shall be entertained when the decision is given by the tribunal based upon
the consent of the parties.
• Appeals must be made within a period of forty-five days from the disputed order passed
by the tribunal and the extension may be given only when sufficient cause for such
delayed filing is brought before the court by such party and such extension shall only
be for another 45 days.
• On receiving such appeal, the appellate tribunal must give a reasonable opportunity to
the parties and then pass an order confirming or modifying or setting aside the order
appealed against.
Maintainability of Petitions under Sections 241 & 421
The validity of a petition must be judged from the facts as they were, at the time of its
presentation, and a petition which was valid when presented cannot cease to be maintainable
by reason of events subsequent to its presentation.
For the purposes of the petition under Sections 241 and 421, it was only necessary that members
who were already constructively before the court should continue the proceedings. The
provision under the Companies Act provides substantive provisions regarding an application
that is to be made when there is complaint of oppression and mismanagement. It clearly
specifies who may complain and when.
As discussed before, member shareholders may make a complaint when the company affairs
are conducted prejudicial to the company and its shareholders.
The central government may even take suo-moto action regarding the same under the
aforementioned provisions. Under the provision Section 421 of Company Act, one could make
an appeal from an order of the tribunal if such a person is aggrieved by the decision.
The time duration of 45 days has been fixed as maximum period within which appeal shall lie
from the order of company tribunal, but the appeal may be further extended to a maximum of
another 45 days on convincing court of the sufficient cause of delay.
Then the appellate tribunal finally gives the appellant a reasonable opportunity to present their
case again, to either uphold or overrule the previous decision of the tribunal. This appeal
provision is based upon the intrinsic right to appeal, which is provided to the aggrieved party
in order to do complete justice.

3.5 Class action suits

What is class action suit?
• A class action suit is a lawsuit where a group of people representing a common interest
may approach the Tribunal to sue or be sued.
• It is a procedural instrument that enables one or more plaintiffs to file and prosecute
litigation on behalf of a larger group or class having common rights and grievances.
Who are entitled to file class action suits?
1) Members:
a) In case of a company having share capital, member or members:
• not less than 100 members of the company or
• not less than 10% of the total number of its members, whichever is less or
• any member or members singly or jointly holding not less than 10% of the issued share
capital of the company.
Provided that the applicants have paid all calls and other sums due on their shares.
b) In case of a company not having a share capital, member or members:
• not less than 1/5th of the total number of its members.
2) Depositors:
• The number of depositors shall not be less than 100 or
• not less than 10% of the total number of its depositors, whichever is less or
• any depositor or depositors singly or jointly holding not less than 10% of the total value
of outstanding deposits of the company.

Who may be sued through class action suits?

A class action suit may be filed against the following authorities:
• A company or its directors for any fraudulent, unlawful or wrongful act or omission;
• an auditor including audit firm of a company for any improper or misleading statement
of particulars made in the audit report or for any unlawful or fraudulent conduct.
• an expert or advisor or consultant for an incorrect or misleading statement made to the
company.
Which reliefs may be claimed through class action suits?
Any member or depositor on behalf of such members or depositors may file a class action suit
before the National Company Law Tribunal (NCLT) to:
A) restrain the company from committing an act which is beyond the powers of the articles or
memorandum of association of the company;
B) restrain the company from committing breach of any provision of company’s memorandum
or articles;
C) to declare a resolution as void for altering the memorandum or articles of the company or
passed by suppression of the material facts or obtained by mis-statement to the members or
depositors;
D) to restrain the company and its directors from acting on such resolutions;
E) restrain the company from committing any acts which is contrary to the provisions of the
Act or any other law for the time being in force;
F) restrain the company from taking action contrary to any resolution passed by its members;
G) claim damages or compensation on demand any other suitable action against :
i) the company or its directors for any fraudulent, wrongful or unlawful act;
ii) an auditor including audit firm of a company for any improper or misleading statement of
particulars made in the audit report or for any unlawful or fraudulent conduct.
iii) an expert or advisor or consultant for an incorrect or misleading statement made to the
company.

Considerations by NCLT on receipt of an application [Section 245(4)]

On receipt of an application, the NCLT shall take into account:
• whether the member or depositor has acted in good faith while making the application
to seek an order;
• any evidence which identifies the involvement of any person other than the directors or
officers of the company on matters claimed as reliefs;
• whether the cause of action could be pursued by the member or the depositor in his own
right than through an order;
• any evidence relating to the views of members or depositors who have no personal
interest directly or indirectly in the matter;
• whether the cause of action is an act or omission that is yet to occur or already occurred
and in the circumstances is likely to be:
a) authorized by the company before it occurs or
b) ratified by the company after it occurs.

Publication of notice by NCLT on admission of a class action suit [Section 245(5)]:

The Tribunal shall-
I. serve a public notice on admission of the application to all the members or depositors
of the class in prescribed manner;
II. all similar applications may be consolidated into a single application and a lead
applicant be appointed who shall be in charge of the proceedings on the applicants side;
III. two class action application for the same cause of action shall not be allowed;
IV. cost or expenses connected with the class action suit will be paid by the company
and any other persons responsible for the oppressive act.
Penalties for non-compliance with NCLT order
1) An order passed by the NCLT shall be binding on the company, members, depositors,
auditors including audit form, consultant or advisor or any other person associated with the
company [Section 245(6)]
2) A company, which fails to comply with the order of the NCLT under Section 245(7):
• Shall be punishable with a minimum fine of INR 5 lakh which may extend to INR 25
lakh and
• every officer of the company who is in default shall be punishable with imprisonment
which may extend to 3 years with fine of minimum INR 25 thousand which may extend
up to INR 1 lakh.
3) If an application is found to be frivolous or vexatious, NCLT may reject the application by
recording the reasons in writing and order the applicant to pay a compensation not exceeding
INR 1 lakh to the opposite party [Section 245(8)].
4) No provision relating to class action suit under Section 245 of the new Act shall be applicable
to banking company [Section 245(9)].
Rule of Opt-Out [Rule 86]
As a general Rule, a Class member who receives a Public Notice as per the provisions of the
Section shall be deemed to be a member of the Class unless he expressly opts out of the
proceedings. A member of the Class action has an option to opt out of the proceedings at any
time after the Institution of Suit, with the permission of the Tribunal as per Form NCLT-1. A
class member opting out shall not be precluded from pursuing a claim against the Company on
an individual basis under any other law, subject to any conditions imposed by the Tribunal.
Orders of the Tribunal
Any Orders passed by the Tribunal Shall be binding on The Company and All its
members/depositors and Auditor including Audit Firm Expert, Consultant or Advisor or any
other person associated with the Company.[Section 245(6)]
Non-Compliance of Order [Section 245(7)]
In case of non compliance of the Order passed by the Tribunal: The Company shall be
punishable with a minimum fine of Rs 5 Lakh which may extend to Rs 25 Lakhs and every
Officer in default shall be punishable with the Imprisonment for a term which may extend to 3
years and with a minimum fine of Rs 25,000 which may extend to Rs 1 Lakh.
Cost of Frivolous Complaints [Section 245(8)]
Under this sub section the Tribunal has been provided with a right to reject the Application
with the cost on Applicant where it finds that the Application was frivolous or vexatious. Thus,
if an Application if found frivolous or vexatious, the same shall be rejected by the Tribunal and
the reasons shall be recorded in writing and shall make an Order imposing a cost on the
Applicant which shall not exceed Rs 1 Lakh, to be paid to the Opposite Party.

4th MODULE
4.1 Winding Up of Companies: Modes- Voluntary & Compulsory
Winding up is a process by means of which the affairs of a company are wound up in a manner
to dissolve the company and put an end to the life of a Company. In the process of winding up,
the company’s assets and properties are administered for the benefit of the members and
creditors of the Company. The administrator, called liquidator, realises its assets, pays its debts
and finally distributes the surplus, if any, among the members/creditors, in accordance with
their right as provided in the article of the Company. In other words, winding up is a legal
process to dissolve the business of a company. The term “Winding Up” and “liquidation” are
used interchangeably. However, there are various means of winding up, i.e., by way of-
members’ voluntary up, creditors’ winding up, winding up by the tribunal etc.

Provisions of Winding up
Section 425 to Section 520 of the Companies Act, 1956 (Act, 1956) (corresponds to Section
270 to Section 365 of the Companies Act, 2013) read with Companies Court Rule, 1959
(hereinafter referred to as CCR, 1959), deals with the provisions of winding up. Since the
provisions of the Companies Act, 2013 has not yet come into force, the provisions of the Act,
1956 still governs the proceedings of winding up.
Modes of Winding Up
The Act, 1956 provides for the following three types of winding up:
1.Winding up by the order of the Tribunal or Compulsory winding up; (Sec 433 to Sec 483)
2.Voluntary winding up; (Sec 484 to Sec 520)
3.Subject to the supervision of the Court.
Grounds on which winding up may take place
In case of Compulsory winding up
The winding up of a company by the order of court is called compulsory winding up. Section
433 of the Act, 1956 envisaged the following circumstances under which the affairs of a
company wound up by the Tribunal:
1. If the company, of its own, passes a Special Resolution that it should be wound up by the
court, and presents a petition to the court for same.
2. If the company makes any default in filing the statutory report with the registrar of
companies or in holding the statutory meeting within the prescribed time
3. If the company does not commence business within one year from the date of its
incorporation or suspends its business for a whole year
4. If the number of members falls below seven in the case of a public company, and below
two in the case of a private company.
5. If the company is unable to pay its debts.
6. If the court is of the opinion that it is just and equitable that the company be wound up.
7. If the company has made default in filing its Balance sheet and Profit and Loss account or
annual return for any five consecutive financial year.
8. If the company has acted against the sovereignty or integrity of India, the security of the
state or friendly relation with foreign state etc,
9. If the tribunal is of the opinion that the Company should be wound up under circumstances
mentioned under Section 424G (sick company).

In case of Voluntary winding up

Winding up the affairs of a company either by its members or by its creditors, without any
interference of court it is called voluntary winding up of a company. Section 484 of the Act,
1956 lays down the following circumstances under which a Company may wound up
voluntarily:
1. By passing Ordinary Resolution: When the period fixed for the duration of the Company
by its Article has expired or the event, if any, on the occurrence of which the Article provides
that the Company is to be dissolve, the Company may wound up voluntarily by passing a
Ordinary resolution in the General Meeting.
2. By passing Special Resolution: The members of the company may, at any time by passing
a Special Resolution, wound up the affairs of the Company voluntarily. No reasons need to
be given when majority of the members decided to wind up the Company.

Difference between Compulsory and Voluntary winding up

Appointment of liquidator
Liquidator is an officer appointed by the creditors of the company (in case of Creditor’s
Voluntary Winding up) or by the members of the Company (in case of Members’ Voluntary
Winding up), when the company goes into winding up or liquidation voluntarily. A company
may appoint an insolvency practitioner (CA, CS or Lawyer) to whom it wishes to act as a
liquidator for the purpose of voluntary winding up. However, the Official liquidator is
appointed by the Central Government as per section 448 of the Act, 1956 who shall be attached
to the High Court of the state for the purpose of conducting liquidation proceeding or say
winding up proceeding of those companies which are ordered to be wound up by the
Tribunal. Functionally the Official Liquidator is under the supervision and control of the High
Court but administratively is under the control of the Central Government through the Regional
Director.
Types of Voluntary winding up
A company may wind up its affairs voluntarily in any of the following two manners:
1. Members’ voluntary winding up: Winding up the affairs of the company voluntarily under
the supervision of members whereby declaration of solvency is made by the Board and the
same has been filed with the Registrar.
2. Creditors’ voluntary winding up: Winding up the affairs of the Company when
declaration of solvency is not made by the directors and the Creditors of the Company control
and supervise the entire process.
Foreign capital contribution
In case the company has any capital contribution from a foreign entity the same will also
have to be refunded at the time of winding up. At the time of distribution of assets to such
foreign entity, compliances with RBI need to be ensured. AD Category-1 banks have been
allowed to remit winding up proceeds of the Companies in India which are under liquidation,
subject to payment of applicable taxes.

Winding up and dissolution

Many get confused between winding up, dissolution and insolvency. But the fact is that
winding up and insolvency are two different phases. Even a solvent Company can wind up its
affairs, with the approval of the members of the Company. Further, there are differences
between winding up and dissolution also. Winding up is a process that leads to dissolution.
During winding up, the assets and liabilities of the Companies are disposed off by the liquidator
so that at the end, the company shall not have any assets or liabilities. Whereas, when the affairs
of the company are fully wound up, dissolution takes place. On dissolution, the name of the
Company gets struck off the register of the Companies and its legal status as a corporation
disappears.

4.2 Grounds & Procedure for Winding Up.

Grounds for Winding up a Company
There are specific grounds for winding up a company:
 • If the tribunal thinks that the company is unable to pay debts. Inability to pay debts is
construed in s 271(2) of the CA 2013.
• If the company has taken a special resolution to wind up the affairs of the company.
• If the company has acted against the sovereignty and integrity of India and goes against
the state, friendly relations with foreign countries.
• If the tribunal has considered to wind up the company because it is a sick company
under chapter 19.
• If the tribunal is of the opinion that the company has done something fraudulently or
unlawful purpose for which the company. This clause can be activated by the registrar
or any person who is going to complain regarding the affairs of the company.
• If the company has regularly defrauded and faulted in filing the annual returns.
• If the tribunal is of the opinion that it is just and equitable for the company to wind up.
Procedure- Winding up of a Company
• Petition Filed for Winding up of a Company
First interested individuals should file a petition for winding up of the company. The following
can file the petition on behalf of the company:
• Trade Creditors of the Company
• The Company Itself
• Any form of contributories of the company
• Any of the three mentioned categories
• Government Authority such as the Central Government or the State Government
• Registrar of Companies
The petition must be submitted in Form WIN 1 or WIN 2. Such petition must be submitted in
Triplicate. An affidavit must be accompanied along with the petition in Form WIN 3.

4.4 Adjudicatory Bodies: NCLT & NCLAT– Constitution, Powers,

Jurisdiction, Procedure & Judicial Review
National Company Law Tribunal (NCLT) is a quasi-judicial body which was set up to resolve
the disputes which are arising in Indian Companies. It is the successor to the Company Law
Board. It is governed by the rules framed by the Central Government. NCLT is a special court
where cases relating to civil court have been barred from the jurisdiction.
Powers , Functions and Jurisdiction of NCLT
Class Action
Section 245 of Companies Act, 2013
1. An application may be filed to the tribunal by either the members of the company or by
the depositors or on the behalf of the members stating that affairs have been conducted
in the manner which is prejudicial to the interest of the company and seeking all or any
of the ground:
Deregistration
Section 7(7) of Companies Act, 2013 states if tribunal comes to the notice that the company at
the time of incorporation of the company furnished false or incorrect information or by
suppressing any material facts, information or any declarations is filed by the company the
tribunal may pass any one of the orders as mentioned below:
• Pass such orders as it thinks fit.
• Pass orders for winding of the company.
• Direct the liability of members shall be unlimited.
Oppression and mismanagement
Section 241 of Companies Act, 2013 states that any member of the company who has the right
to complain to tribunal as per section 244 of the Act, 2013 shall file a complaint to tribunal
stating that:
• Affairs of the company are conducted in such a manner which is prejudicial to public
interest or oppressive to him or to any member of the company or which is prejudicial
to the company.
• A material change which has been brought by the company which is against the interest
of creditors of the company, debenture holders, shareholders of the company and it has
brought significant change in the management or control of the company either in:
1. alteration in the board of directors,
2. alteration of managers,
3. alteration of the member, or
4. any other reason.
For such reasons, the members of the company perceive that affairs of the company have been
conducted in the manner which is prejudicial to its interest.
• When the Central Government is of opinion that affairs of the company have been
conducted in any one of below manner mentioned and by that tribunal comes to the
conclusion that it has been prejudicial to public interest or in an oppressive manner:
 1. a member of the company is either guilty of fraud, misfeasance, persistent negligent,
breach of trust or is the default in carrying out the obligations and functions as per law;
or
2. management of the company is not been carried out as per the sound principles or
prudent commercial practices; or
3. when a company is being conducted which causes serious injury to trade, business,
industry; or
4. when a company is being managed with the sole motive to defraud creditors, members,
or being managed only for fraudulent or unlawful purposes which is against the public
interest; shall file an application to the tribunal for seeking the remedy.
Investigation powers
Section 213 of Companies Act, 2013 states:
• When an application is made to the tribunal by:
1. Company having share capital: Not less than one hundred members or members who
are are not holding less than one-tenth shares of total voting power in the company; or
2. A company having no share capital: Not less than one-fifth of people on the company’s
register of the members.
• When an application is made by any other person other than the member of the company
to the tribunal stating one of the circumstances:
1. affairs of the company have been conducted only with the intent to defraud the creditors
or the members or any of the other persons.
2. business is being conducted either for fraudulent or unlawful purposes.
3. business is being conducted in such a way it is oppressive to its members.
4. business is being formed only with sole motive for unlawful or fraudulent purposes.
5. persons who were engaged in the formation of the company or management of its
affairs of the company were either guilty of fraud, misfeasance or misconduct towards
the company or any of its members.
6. When members of the company have failed to give all the information to the company
relating to the affairs of the company which they are expected to give including the
information relating to the calculation of commission payable to managing director,
director or any other manager of the company and the tribunal may after giving the
reasonable opportunity to the parties, the tribunal feel that the affairs of the company
should be investigated and for such purpose, the central government shall appoint an
inspector to investigate.
Provided after investigation it is proved that:
• affairs of the company have been conducted only with the intent to defraud the creditors
or the members or any of the other persons, or
 • business is being conducted either for fraudulent or unlawful purposes, or
• business is being conducted in such a way it is oppressive to its members, or
• business is being formed only with the sole motive for unlawful or fraudulent purposes,
• persons who were engaged in the formation of the company or management of its
affairs of the company were either guilty of fraud, misfeasance or misconduct towards
the company or any of its members.
Then every officer of the company who is in default and a person who is engaged either in the
formation of the company or managing the affairs of the company shall be punished for
fraud.
Conversion of Public Company into Private Company
Section 13 to 18 of Companies Act, 2013 read with the Rule 41 of Companies(Incorporation)
rule 2014 states when a company converts from a public company into private company an
approval of NCLT tribunal is required for such conversion. The tribunal may impose such
terms and conditions as in section 459 of Companies Act, 2013.
Annual General Meeting
As under section 97 and 98 of Companies act, 2013, if the members of the company fail to
convene the meeting within a particular time and the member of the company may give an
application to the tribunal to convene such meeting, the tribunal as such as the power to
convene those meetings.
Winding up of the company
Section 242 of Companies Act, 2013 a company may be wound by the tribunal when the affairs
of the company have been conducted in any one of below manner, set under section 242 of the
companies act, 2013 and by that tribunal comes to the conclusion that the company has been
prejudicial to public interest or in an oppressive manner.
Additional Powers
1. Section 221 of Companies Act, 2013 power of the tribunal to freeze the assets of the
company.
2. Section 2(41) of Companies Act, 2013 power to change the financial years of the
company registered.

Jurisdiction of NCLAT
The National Company Law Appellate Tribunal is headed by the Chairperson and consists of
not more than eleven members. It is a higher law governing forum than NCLT. The Appellate
Tribunal hears appeals filed against the Tribunal court orders. The appeal can be placed within
45 days from the date on which NCLT announces its decisions. The Appellate Tribunal court
goes through the evidence transferred from the Tribunal, making changes or confirming the
order given by the latter. This process happens within a time span of six months.
Dissatisfaction with Tribunal Orders
If a group or an individual is to be dissatisfied with the orders passed by the Tribunal Court it
is obvious to move on to the next, only, option, that is filing an appeal to the Appellate Court
where the decisions of NCLT are reviewed and checked from the point of law and facts. The
Tribunal Court is in charge of finding and gathering evidence while the Appellate Court decides
cases based on the already collected evidence. If the outcome is not satisfactory even then, one
should approach the Supreme Court.

4.4 Corporate Social Responsibility: Introduction, Need; Companies

(Corporate Social Responsibility Policy) Rules 2014
Corporate Social Responsibility (CSR) aims to contribute to the well being of the society in
which an entity operates. CSR can also be considered as corporate ethic strategy that helps
the Company to improve its public image. CSR activities have been made mandatory under
The Companies Act, 2013 for companies falling under the prescribed category. Section 135
of The Companies Act, 2013 and The Companies ( Corporate Social Responsibility Policy)
Rules, 2014 deals with the provisions relating to CSR.
Section 135(1) - Applicability of the Act
Every company including its holding or subsidiary, and a foreign company defined under
clause (42) of Section 2 of the Act having its branch office or project office in India, which
fulfills the following criteria during the immediately preceding financial year shall comply
with the provisions of section 135 of the Companies Act, 2013 and rules there under and
constitute a CSR Committee.
Net worth of rupees five hundred crore or more, or
Turnover of rupees one thousand crore or more or
A net profit of rupees five crore or more
Constitution of CSR Committee: Section 135(1): CSR Committee shall consist of Three or
more directors, out of which at least one director shall be an independent director.
Rule 5 of The Companies ( Corporate Social Responsibility Policy ) Rules, 2014
A Company which is not required to appoint an independent director shall have its CSR
Committee without such director.
A private company having only two directors on its Board shall constitute its CSR Committee
with two such directors;
The CSR Committee of a Foreign Company shall comprise of at least two persons of which
one person shall be as specified under clause (d) of sub-section (1) of section 380 of the Act
and another person shall be nominated by the foreign company.
Functions of CSR Committee: ( Section 135(3) )
(a) To formulate and recommend to the Board, a Corporate Social Responsibility policy
(b) To recommend the amount of expenditure to be incurred on the activities
(c) To monitor the Corporate Social Responsibility Policy of the company from time to time.

CSR Expenditure: Section 135(5)

The Board of every company shall ensure that the company spends at least two per cent. of
the average net profits of the company made during the three immediately preceding financial
years in pursuance of its Corporate Social Responsibility Policy:
Points to be noted: The company shall give preference to the local area and areas around it
where it operates, for spending the amount earmarked for Corporate Social Responsibility
activities:
If the company fails to spend such amount, the Board shall, in its report specify the reasons
for not spending the amount.
CSR expenditure shall include all expenditure including contribution to corpus, or on projects
or programs relating to CSR activities approved by the Board on the recommendation of its
CSR Committee (Rule 7)
CSR expenditure shall not include any expenditure on an item not in conformity or not in line
with activities which fall within the subjects specified in Schedule VII of the Act.( Rule 7)

CSR Activities: Rule 4 of The Companies (Corporate Social Responsibility Policy)

Rules, 2014
1. The CSR activities shall be undertaken by the company, as per its stated CSR Policy, as
projects or programs or activities (either new or ongoing).
2. Activities undertaken in pursuance of its normal course of business shall not be included in
CSR Activity.
3. The Board of a company may decide to undertake its CSR activities approved by the CSR
Committee, through
(a) a company established under section 8 of the Act or a registered trust or a registered
society, established by the company, either singly or alongwith any other company, or
(b) a company established under section 8 of the Act or a registered trust or a registered
society, established by the Central Government or State Government or any entity established
under an Act of Parliament or a State legislature : Provided that- if, the Board of a company
decides to undertake its CSR activities through a company established under section 8 of the
Act or a registered trust or a registered society, other than those specified in this sub-rule,
such company or trust or society shall have an established track record of three years in
undertaking similar programs or projects; and the company has specified the projects or
programs to be undertaken, the modalities of utilisation of funds of such projects and
programs and the monitoring and reporting mechanism”.
4. A company may also collaborate with other companies for undertaking projects or
programs or CSR activities.
5. The CSR projects or programs or activities undertaken in India only shall amount to CSR
Expenditure.
6. The CSR projects or programs or activities that benefit only the employees of the company
and their families shall not be considered as CSR activities.
7. Contribution of any amount directly or indirectly to any political party under section 182 of
the Act, shall not be considered as CSR activity.

CSR Policy
Rule 6 of The Companies ( Corporate Social Responsibility Policy ) Rules, 2014
The CSR Policy of the company shall, inter-alia, include the following namely :- a) A list of
CSR projects or programs which a company plans to undertake b) Monitoring process of such
projects or programs: The CSR Policy of the company shall specify that the surplus arising
out of the CSR projects or programs or activities shall not form part of the business profit of a
company.
Disclosures: Section 135(2)
The Board’s report under section 134(3) shall disclose the composition of the Corporate Social
Responsibility Committee.
Display of CSR Activities on its Website:
Rule 9 of The Companies ( Corporate Social Responsibility Policy ) Rules, 2014
The Board of Directors of the company shall, after taking into account the recommendations
of CSR Committee, approve the CSR Policy for the company and disclose contents of such
policy in its report and the same shall be displayed on the company’s website, if any, as per the
particulars specified in the Annexure.
Schedule VII : Activities which maybe included by companies in their CSR Policies
relating to:
• Eradicating hunger, poverty and malnutrition, promoting health care including
preventive health care and sanitation including contribution to the Swach Bharat Kosh
set-up by the Central Government for the promotion of sanitation and making
available safe drinking water.
• Promoting education, including special education and employment enhancing
vocation skills especially among children, women, elderly and the differently abled
and livelihood enhancement projects.
• Promoting gender equality, empowering women, setting up homes and hostels for
women and orphans; setting up old age homes, day care centres and such other
facilities for senior citizens and measures for reducing inequalities faced by socially
and economically backward groups.
• Ensuring environmental sustainability, ecological balance, protection of flora and
fauna, animal welfare, agroforestry, conservation of natural resources and maintaining
quality of soil, air and water including contribution to the Clean Ganga Fund set-up
by the Central Government for rejuvenation of river Ganga.
 • Protection of national heritage, art and culture including restoration of buildings and
sites of historical importance and works of art; setting up public libraries; promotion
and development of traditional art and handicrafts;
• Measures for the benefit of armed forces veterans, war widows and their dependents;
• Training to promote rural sports, nationally recognized sports, paralympic sports and
olympic sports.
• Contribution to the Prime Minister’s national relief fund or Prime Minister’s Citizen
Assistance and Relief in Emergency Situations Fund (PM CARES Fund) or any other
fund set up by the central govt. for socio economic development and relief and
welfare of the schedule caste, tribes, other backward classes, minorities and women;
• Contributions or funds provided to technology incubators located within academic
institutions which are approved by the central govt.
• Rural development projects
• Slum area development.

4.5 New Horizons of Corporate Governance- A Critical Comparison

Corporate governance is a system of making Management accountable towards the
stakeholders for effective management of the companies. (4) Corporate governance is also
concerned with the morals, ethics, values, parameters, conduct and behaviour of the company
and its management. (5) The underlying principles of corporate governance revolve around
three basic interrelated segments. These are:
ƒ Integrity and Fairness
ƒ Transparency and Disclosures
ƒ Accountability and Responsibility
According to the Confederation of Indian Industry (CII), corporate governance deals with laws,
procedures, practices and implicit rules that determine the ability of the company to make
managerial decisions visà-vis its claimants – in particular, its shareholders, creditors,
customers, the State and employees Corporate governance mainly consists of two elements i.e.,
A long-term relationship, which has to deal with checks and balances, incentives of managers
and communications between Management and investors. The second element is a
transactional relationship involving matters relating to disclosure and authority. In other words,
'good corporate governance' is simply 'good business'. Practices that the Board of Directors of
a listed entity follows to fulfill the expectations of all stakeholders (i. e. Shareholders,
employees, creditors, customers, government, regulatory authorities and society at large) is
called corporate governance practices.
NEED, IMPORTANCE AND OBJECTIVES OF CORPORATE GOVERNANCE
In order to overcome the under noted serious concerns within the business community, there is
a need to introduce a system of corporate governance that will ensure the transparency, integrity
and accountability of Management including non-executive directors.
• Concentration of greater financial power and authority in a lesser number of individuals,
• Violations of foreign exchange rules and regulations,
• Large scale diversion of funds to associate companies and risky ventures,
• Unfocussed business decisions leading to losses,
• Preferential allotment of shares to promoters at low prices,
• Exploited the weaknesses in the Accounting Standards to inflate profits and understate
liabilities,
• Frequent changes in Board structures,
• Spinning off profitable business operations to subsidiary companies, and
• Charging of royalty for use of brand name by the parent company by leading companies.
In an open financial market, investors choose from a variety of investment vehicles. The
existence of a corporate governance system is likely a part of this decision-making process. In
such a scenario, companies that are more open and transparent, and thus well governed, are
more likely to raise capital successfully because investors will have the information and
confidence necessary for them to lend funds directly to such companies. Moreover, well-
governed companies likely will obtain capital more cheaply than companies that have poor
corporate governance practices because investors will require a smaller “risk premium” for
investing in well-governed companies.
Thus, in an efficient capital market, investors will invest in companies with better corporate
governance frameworks because of the lower risks and the likelihood of higher returns. Good
corporate governance practices also enable Management to allocate resources more efficiently,
which increases the likelihood that investors will obtain a higher rate of return on their
investment. (11) Moreover, Good corporate governance practices ensure:
ƒ Adequate disclosures and effective decision making to achieve corporate objectives;
ƒ Transparency in business transactions;
ƒ Statutory and legal compliances;
ƒ Protection of shareholder interests;
ƒ Commitment to values and ethical conduct of business.
ƒ Long-term survival of the companies