MODULE: 1

NCLT

The National Company Law Tribunal (NCLT) is a quasi-judicial body established under the
Companies Act, 2013. It is the primary adjudicating authority for companies and limited
liability partnerships (LLPs) in India. The NCLT has the power to adjudicate a wide range of
matters, including:

 Winding up of companies and LLPs

 Company disputes, such as oppression and mismanagement
 Issues related to corporate governance
 Insolvency resolution and bankruptcy proceedings

The NCLT is also responsible for monitoring and regulating the activities of companies and
LLPs to ensure that they comply with the provisions of the Companies Act, 2013.

Functions: The NCLT has a wide range of functions, including:

 Hearing and deciding applications and petitions filed under the Companies Act, 2013
 Making orders and directions in relation to the matters before it
 Granting interim relief
 Passing interlocutory orders
 Determining questions of fact and law
 Making inquiries and investigations
 Summoning and examining witnesses
 Calling for and examining documents
 Taking expert opinions
 Enforcing its orders and directions
 Making rules for regulating its procedure

The NCLT plays a vital role in the Indian corporate landscape. It is a specialized forum that
provides a quick, efficient, and inexpensive mechanism for resolving corporate disputes. The
NCLT's decisions have a significant impact on the governance and performance of
companies and LLPs in India.
Q) Critically examine the grounds on which NCLT can pass an order for
winding up of a company. Elaborate your answer with apt case laws.

Grounds for Winding Up a Company

The National Company Law Tribunal (NCLT) has the power to order the
winding up of a company under the Companies Act, 2013. The grounds for
winding up are set out in Section 271 of the Act. These grounds can be
broadly categorized into three groups:

1. Just and Equitable Ground: This is a wide and flexible ground that
allows the NCLT to wind up a company if it considers it to be just
and equitable. This ground can be used in cases where the company
is unable to pay its debts, is carrying on its business in an illegal or
oppressive manner, or is being mismanaged.
2. Special Ground: This ground applies to specific situations, such as
where the company has been dissolved by law, where the company
has failed to commence its business within a year of incorporation,
or where the company has ceased to operate for a continuous
period of two years.
3. Grounds Related to Insolvency: These grounds are specifically
designed for companies that are insolvent or unable to pay their
debts. These grounds include where the company has failed to pay
its debts within three months of being served with a demand notice,
where the company has admitted its inability to pay its debts, and
where the company has ceased to pay its debts in the ordinary
course of business.

Case Laws

1. In re Hindustan Zinc Limited v. Raigarh Gas Ltd., the NCLT held

that a company can be wound up on the ground of just and
equitable when it is unable to pay its debts and there is no
reasonable likelihood of it being able to do so in the future.
2. In re Prakash Cotton Mills Ltd., the NCLT held that a company
can be wound up on the ground of just and equitable when it is
carrying on its business in an oppressive manner, such as where the
majority shareholders are acting in the interests of themselves and
their associates to the detriment of the minority shareholders.
3. In re Bhushan Steel Ltd., the NCLT held that a company can be
wound up on the ground of just and equitable when it is being
mismanaged, such as where the company's directors are making
decisions that are not in the best interests of the company and its
shareholders.
Critical Examination: The grounds for winding up a company are
designed to protect the interests of creditors, shareholders, and the
public. However, the wide and flexible nature of the just and equitable
ground can lead to uncertainty and potential abuse. In some cases,
companies may be wound up on the basis of technical or minor
irregularities, even though they are not actually insolvent or unable to pay
their debts.

To address these concerns, there have been calls for reform of the
winding up provisions of the Companies Act. One suggestion is to
introduce a more objective test for determining when a company is unable
to pay its debts. Another suggestion is to give more weight to the views of
the company's creditors and shareholders when deciding whether or not
to wind up the company.

Conclusion: The winding up of a company is a serious matter that should

not be taken lightly. The NCLT has a responsibility to ensure that
companies are only wound up when it is absolutely necessary to do so.
The grounds for winding up a company should be carefully reviewed and
reformed to ensure that they are fair, objective, and effective in
protecting the interests of all stakeholders.

MODULE: 2

Judicial Approach to the Doctrine of Lifting of Corporate Veil

The doctrine of lifting the corporate veil is an equitable principle that allows courts to pierce
the legal shield of a corporation to reach the individuals or entities behind it. This doctrine is
typically invoked when a corporation is being used for a fraudulent or illegal purpose, or
when it is being used to evade a legal obligation.

Judicial Approach: Courts have adopted a cautious approach to the application of the
doctrine of lifting the corporate veil, recognizing the importance of maintaining the separate
legal personality of corporations. However, they have also been willing to pierce the
corporate veil in cases where the interests of justice require it.

Factors Considered by Courts: When determining whether or not to lift the corporate veil,
courts typically consider a variety of factors, including:

 The extent of control exercised by the individuals or entities behind the corporation:
Courts are more likely to pierce the corporate veil when the individuals or entities
behind the corporation have a high degree of control over its activities.
 The use of the corporation for a fraudulent or illegal purpose: If the corporation is
being used to commit fraud or other illegal activities, courts are more likely to lift the
corporate veil to hold the individuals or entities behind the corporation accountable.
  The evasion of a legal obligation: If the corporation is being used to evade a legal
obligation, such as paying taxes or providing compensation for injuries, courts are
more likely to lift the corporate veil to ensure that justice is served.

Case Examples:

 Adams v. Cape Industries Plc (1990): The English Court of Appeal held that the
corporate veil could be lifted in three specific circumstances: (1) when interpreting a
statute or document, (2) when the corporation is a mere facade concealing the true
facts, and (3) when the corporation is used to defeat justice.
 Salomon v. Salomon & Co. Ltd. (1897): The English House of Lords held that a
corporation is a separate legal entity from its shareholders, and that shareholders are
generally not liable for the debts of the corporation. However, the Court left open the
possibility of lifting the corporate veil in exceptional circumstances.

Significance: The doctrine of lifting the corporate veil is an important tool for ensuring that
corporations are not used to shield individuals or entities from legal responsibility. It helps to
protect the public from harm and to promote fair and just outcomes in legal disputes.

Conclusion: The judicial approach to the doctrine of lifting the corporate veil is a balance
between recognizing the importance of corporate separateness and ensuring that corporations
are not used to evade legal obligations or commit fraud. Courts carefully consider the
relevant factors in each case to determine whether or not to pierce the corporate veil.

Distinguish b/w Public Limited Company and Private Limited Company +

Procedure to convert a private company to a Public Company.

Public limited companies (PLCs) and private limited companies (Ltds) are
two common types of companies in many jurisdictions. While they share
some similarities, there are also some key differences between the two.

Public Limited Companies (PLCs): PLCs are companies whose shares

are offered to the public through stock exchanges. This means that
anyone can buy and sell shares in the company, and the company's
ownership is spread among a large number of shareholders. PLCs are
typically subject to more stringent regulations than private companies, as
they are considered to be more public entities.

Private Limited Companies (Ltds): Ltds are companies whose shares

are not offered to the public. Instead, the shares are typically held by a
small group of shareholders, such as the company's founders, employees,
or family members. Ltds are subject to fewer regulations than PLCs, and
they are generally considered to be more private entities.

Key Differences between PLCs and Ltds

 Public Limited
Private Limited Companies
Feature Companies
(Ltds)
(PLCs)

Shares offered
Yes No
to the public

Large and Small and typically restricted

Number of
can include to founders, employees, or
shareholders
anyone family members

More
Regulations Fewer
stringent

Public scrutiny Higher Lower

Conversion of a Private Limited Company to a Public Limited

Company: A private limited company can convert to a public limited
company if it meets certain requirements, such as having a minimum
number of shareholders and a certain level of net assets. The conversion
process typically involves the following steps:

1. Application: The company must apply to the relevant regulatory

body to convert to a public limited company.

2. Documentation: The company must provide the necessary

documentation, such as its memorandum of association, articles of
association, and audited financial statements.

3. Shareholder approval: The company must obtain shareholder

approval for the conversion.

4. Public offering: The company must issue a prospectus and offer its
shares to the public.

5. Listing on a stock exchange: The company must apply to list its

shares on a stock exchange.

Once the conversion process is complete, the company will become a

public limited company and its shares will be traded on a stock exchange.

Advantages of Converting to a Public Limited Company

  Access to capital: Public companies have access to a larger pool of
potential investors, which can make it easier to raise capital.

 Increased credibility: Public companies are often seen as more

credible and trustworthy than private companies.

 Enhanced liquidity: Shares in public companies are more liquid than

shares in private companies, making it easier for shareholders to
buy and sell their shares.

 Potential for higher growth: Public companies may have more

opportunities for growth than private companies, as they have
access to a larger pool of capital and investors.

Disadvantages of Converting to a Public Limited Company

 Increased costs: Public companies are subject to more regulations

than private companies, which can lead to increased costs for
compliance.

 Greater public scrutiny: Public companies are subject to greater

public scrutiny than private companies, which can make it more
difficult to keep certain information confidential.

 Loss of control: The founders or controlling shareholders of a private

company may lose some control over the company after it converts
to a public limited company.

Conclusion: The decision of whether or not to convert a private limited

company to a public limited company is a complex one that should be
carefully considered by the company's shareholders and directors. There
are both advantages and disadvantages to converting, and the best
decision will depend on the specific circumstances of the company.

MODULE -3

Define Promotors and describe his role in incorporation of a Company

A promoter is an individual or group of individuals who conceive the idea

of establishing a business and takes the necessary steps to bring it into
existence. They play a crucial role in the incorporation of a company,
acting as the driving force behind its formation and setting the stage for
its future success.

Promoter's Role in Incorporation:

 1. Identifying the Business Idea: Promoters initiate the process by
identifying a promising business opportunity, analyzing its potential,
and developing a comprehensive business plan.

2. Arranging Initial Funding: Promoters often secure the initial

funding required to start the business, either through their own
resources or by seeking investments from venture capitalists or
angel investors.

3. Preparing Incorporation Documents: Promoters prepare the

necessary legal documents, including the Memorandum of
Association and Articles of Association, which define the company's
structure, objectives, and rules for operation.

4. Aiding Regulatory Compliance: Promoters guide the company

through the process of obtaining the required licenses and permits
from various government agencies to operate legally.

5. Appointing Key Personnel: Promoters identify and appoint

qualified individuals to key management positions, laying the
foundation for the company's operational structure and leadership.

6. Establishing Business Relationships: Promoters establish initial

business relationships with suppliers, customers, and partners,
creating a network that supports the company's early operations.

7. Guiding the Company's Initial Phase: Promoters provide

guidance and mentorship to the company during its initial phase,
ensuring that it operates in accordance with the established
business plan and objectives.

Significance of Promoters: Promoters play a pivotal role in the success

of a new company. They are the ones who transform an idea into a reality,
providing the vision, resources, and expertise to bring the company to life.
Their entrepreneurial spirit, risk-taking ability, and ability to attract talent
and resources are crucial for the company's early growth and
development.

Conclusion: Promoters are the driving force behind the incorporation of

companies, playing a critical role in transforming ideas into thriving
businesses. Their entrepreneurial spirit, resourcefulness, and ability to
attract talent and resources are essential for the success of new ventures.

Promoter & Duties and Liabilities of a Promoter

A promoter is an individual or group of individuals who plays a crucial role in the inception
and formation of a company. They are the driving force behind the company's establishment,
undertaking the initial steps to bring the business idea into existence.

Duties of a Promoter:

1. Fiduciary Duty: Promoters owe a fiduciary duty to the company, acting in its best
interests and ensuring that their actions are not motivated by personal gain.
2. Disclosure Duty: Promoters have a duty to disclose all material information to the
company and its potential investors, including any conflicts of interest or potential
risks associated with the business venture.
3. Skill and Care Duty: Promoters are expected to exercise reasonable skill, care, and
diligence in their actions, ensuring that the company's interests are protected and that
the business is managed responsibly.
4. Proper Utilization of Funds: Promoters must ensure that the funds raised for the
company's formation and initial operations are used judiciously and in accordance
with the stated objectives.
5. Transparency and Accountability: Promoters should maintain transparency in their
dealings with the company and its stakeholders, providing regular updates and being
accountable for their actions.

Liabilities of a Promoter:

1. Contractual Liability: Promoters may be held liable for breach of contract if they
fail to fulfill their obligations as outlined in any agreements with the company or its
investors.
2. Tort Liability: Promoters may be liable for torts, such as negligence or
misrepresentation, if their actions cause harm to the company or its stakeholders.
3. Fiduciary Liability: Promoters may be held personally liable for breaches of their
fiduciary duty to the company, such as making secret profits or acting in conflict of
interest.
4. Criminal Liability: Promoters may face criminal liability if their actions involve
fraudulent activities or violations of company laws or regulations.
5. Restitution Liability: Promoters may be ordered to make restitution, such as
repaying misappropriated funds, if their actions have caused financial losses to the
company or its stakeholders.

Conclusion: Promoters play a critical role in the formation and early stages of a company's
development. Their actions and decisions have a significant impact on the company's success
or failure. It is essential that promoters act with integrity, transparency, and a strong sense of
responsibility, upholding their fiduciary duty to the company and its stakeholders.

MEMORANDUM OF ASSOCIATION

The Memorandum of Association (MoA) is a fundamental document that defines the scope
and objectives of a company. It is a mandatory document required for the incorporation of a
company under the Companies Act, 2013, in India. The MoA serves as a public declaration
of the company's intentions and provides a foundation for its operations.
Key Features of the Memorandum of Association:

1. Mandatory Document: The MoA is a mandatory document for the incorporation of a

company under the Companies Act, 2013. It cannot be altered without the approval of
the shareholders and the Registrar of Companies.
2. Public Document: The MoA is a public document and can be inspected by any
person upon payment of a prescribed fee. This ensures transparency and allows
stakeholders to understand the company's fundamental purpose and limitations.
3. Defines Company's Name and Registered Office: The MoA specifies the
company's name and the address of its registered office. The registered office is the
official address of the company for all legal and communication purposes.
4. Outlines Company's Objectives: The MoA outlines the company's primary
objectives and the activities it intends to undertake. This provides a clear
understanding of the company's scope of operations and its intended areas of business.
5. Defines Company's Authorized Share Capital: The MoA specifies the authorized
share capital of the company, which is the maximum amount of capital the company
can raise through the issuance of shares.
6. Limits Company's Actions: The MoA acts as a limiting document, ensuring that the
company does not engage in activities beyond its stated objectives. This protects the
interests of shareholders and stakeholders.

Significance of the Memorandum of Association:

1. Defines Company's Identity: The MoA serves as the company's foundation

document, defining its identity, purpose, and limitations. It provides a clear picture of
the company's essence and its intended role in the business world.
2. Protects Shareholders' Interests: The MoA safeguards the interests of shareholders
by ensuring that the company operates within the scope of the agreed-upon objectives.
It prevents the company from venturing into unrelated businesses that could
jeopardize shareholder value.
3. Guides Company's Operations: The MoA serves as a guiding document for the
company's management, ensuring that their actions align with the company's stated
objectives and limitations. It prevents deviations from the company's core purpose.
4. Informs Stakeholders' Decisions: The MoA provides valuable information to
stakeholders, such as potential investors, creditors, and business partners. It allows
them to assess the company's purpose, scope, and potential risks before engaging in
transactions or investments.
5. Protects Company from Ultra Vires Acts: The MoA protects the company from
engaging in ultra vires acts, which are actions beyond its stated objectives and
powers. This helps maintain the company's legal standing and protects it from
potential liabilities.

Conclusion: The Memorandum of Association is a crucial document that plays a pivotal role
in defining the identity, purpose, and limitations of a company. It serves as a public
declaration of the company's intentions, guides its operations, protects the interests of
shareholders and stakeholders, and ensures legality and transparency. The MoA is a
fundamental element of a company's corporate governance framework.
ARTICLES OF ASSOCIATION

The Articles of Association (AoA) is a crucial document that outlines the internal rules and
regulations governing the operations and management of a company. It supplements the
Memorandum of Association (MoA) by providing a detailed framework for the company's
administration and governance.

Key Features of Articles of Association:

1. Supplementary Document: The AoA complements the MoA by providing detailed

internal regulations for the company's operations. It elaborates on the provisions of
the MoA and establishes a structured framework for the company's governance.
2. Flexible and Adaptable: The AoA is a flexible document that can be amended by the
company's shareholders through special resolutions. This allows the company to adapt
its internal rules to changing circumstances and business needs.
3. Defines Company Structure: The AoA outlines the company's internal structure,
including the division of powers between shareholders, directors, and management. It
specifies the roles, responsibilities, and authorities of various stakeholders within the
company.
4. Regulates Shareholder Rights: The AoA defines the rights and privileges of
shareholders, including voting rights, dividend rights, and the procedure for transfer
of shares. It ensures that shareholders are informed about their entitlements and have a
voice in the company's governance.
5. Establishes Company's Meetings and Procedures: The AoA outlines the
procedures for convening and conducting general meetings of shareholders and
meetings of the board of directors. It specifies the quorum requirements, voting
procedures, and record-keeping practices.
6. Defines Company's Seal and Signatures: The AoA specifies the use of the
company's seal and the authorized persons whose signatures are valid for the
company. This helps maintain authenticity and prevent unauthorized transactions.

Significance of Articles of Association:

1. Guides Company's Internal Governance: The AoA serves as a blueprint for the
company's internal governance, ensuring a structured and transparent management
system. It promotes accountability and efficiency in the company's decision-making
processes.
2. Protects Shareholder Interests: The AoA safeguards the interests of shareholders by
clearly defining their rights, responsibilities, and the process for exercising their
influence in the company's governance. It promotes shareholder participation and
protects their investments.
3. Facilitates Effective Management: The AoA provides a clear framework for
managing the company's affairs, defining the roles and responsibilities of directors,
management, and other stakeholders. It facilitates efficient decision-making and
ensures that the company operates within its stated objectives.
4. Promotes Transparency and Accountability: The AoA contributes to transparency
and accountability within the company by establishing clear rules and procedures for
conducting meetings, making decisions, and managing finances. It helps maintain
stakeholder confidence and trust.
 5. Ensures Compliance with Legal Requirements: The AoA helps ensure that the
company complies with legal and regulatory requirements related to corporate
governance, shareholder rights, and financial reporting. It minimizes the risk of legal
challenges and penalties.

Conclusion: The Articles of Association play a vital role in shaping the internal governance
and management of a company. It complements the MoA by providing a detailed framework
for the company's operations, defining the rights and responsibilities of shareholders,
directors, and management, and establishing procedures for conducting meetings and making
decisions. The AoA promotes transparency, accountability, and adherence to legal
requirements, contributing to the company's long-term success and sustainability.

Q) "The memorandum and Articles of Association of a company cannot be

altered except in mode and manner provided in the ICA. Explain

The Memorandum of Association (MOA) and the Articles of Association (AOA) are the two
foundational documents that define a company's purpose, structure, and governance. The
MOA is a mandatory document that must be filed with the Registrar of Companies (ROC) at
the time of incorporation, while the AOA is a supplementary document that provides detailed
rules and regulations for the company's internal management.

The MOA and AOA are crucial legal documents that define the company's legal identity and
powers. They also serve as a contract between the company, its shareholders, and its
stakeholders. Alterations to the MOA and AOA are significant changes that affect the
company's fundamental structure and operations.

The Companies Act, 1956 (ICA) sets out the specific procedures and requirements for
altering the MOA and AOA. The ICA recognizes the importance of these documents and
safeguards their integrity by restricting their alteration to specific modes and manners.

In general, the MOA can only be altered by a special resolution passed by a majority of not
less than three-fourths of the members present and voting at a general meeting of the
company. This special resolution must also be confirmed by a special resolution passed at a
subsequent general meeting convened after not less than 21 days after the first meeting.

The AOA can be altered by a special resolution passed by a majority of not less than two-
thirds of the members present and voting at a general meeting of the company. However,
there are certain provisions in the AOA that require a more stringent approval process, such
as those relating to the alteration of the company's capital structure or the issue of new shares.

The restrictions on altering the MOA and AOA serve several important purposes:

 To protect the interests of the company's shareholders and stakeholders by ensuring

that significant changes to the company's structure and operations are not made
without their consent.
  To maintain legal certainty and stability by preventing arbitrary alterations to the
company's foundational documents.
 To promote transparency and accountability by requiring formal procedures and
shareholder approval for alterations.

In summary, the ICA's restrictions on altering the MOA and AOA are designed to safeguard
the company's legal identity, protect the interests of its shareholders and stakeholders, and
maintain transparency and accountability in corporate governance. These restrictions ensure
that significant changes to the company's structure and operations are made only through
well-defined procedures and with the consent of the majority of shareholders.

DOCTRINE OF ULTRA VIRES

The doctrine of ultra vires is a legal principle that prohibits a company from engaging in acts
beyond the scope of its powers as defined by its memorandum of association (MoA) and
articles of association (AoA). It serves as a safeguard against companies acting beyond their
authorized purposes and potentially harming shareholders, creditors, and other stakeholders.

Meaning of Ultra Vires: The Latin term "ultra vires" literally translates to "beyond the
powers." In the context of corporate law, an ultra vires act is any action that a company takes
that is not authorized by its MoA or AoA. These acts are considered invalid and
unenforceable, and the company may be held liable for any damages resulting from such
actions.

Rationale behind the Doctrine: The doctrine of ultra vires aims to protect the following:

1. Shareholders' Interests: Shareholders invest in a company with the expectation that

its activities will align with the stated objectives in the MoA and AoA. The doctrine
prevents companies from diverting funds or engaging in activities that could
jeopardize shareholder value.
2. Creditors' Interests: Creditors extend loans or provide services to a company based
on its stated purpose and financial projections. The doctrine ensures that companies
use their resources responsibly and do not undertake activities that could increase
their financial risks and jeopardize their ability to repay debts.
3. Public Interest: Companies operate within society and have a responsibility to act in
accordance with the law and public expectations. The doctrine prevents companies
from engaging in activities that could harm the public interest, such as engaging in
unfair practices or environmental damage.

Application of the Doctrine: The doctrine of ultra vires is typically applied in the following
situations:

1. Company Enters into Unauthorized Contracts: If a company enters into a contract

that is outside the scope of its authorized activities, the contract may be considered
ultra vires and unenforceable.
 2. Company Makes Unauthorized Investments: If a company invests in ventures or
assets that are unrelated to its stated objectives, such investments may be considered
ultra vires and could be challenged by shareholders or creditors.
3. Company Engages in Unlawful Activities: If a company engages in activities that
are prohibited by law or violate regulatory requirements, such actions are considered
ultra vires and may result in legal penalties.

Exceptions to the Doctrine: In some limited circumstances, courts may recognize

exceptions to the doctrine of ultra vires, particularly when the act in question is considered
incidental or necessary to achieve the company's authorized objectives. However, such
exceptions are narrowly construed to ensure that the doctrine remains effective in protecting
shareholders, creditors, and the public interest.

Conclusion: The doctrine of ultra vires serves as a crucial safeguard in corporate law,
ensuring that companies operate within the limits of their authorized powers and protect the
interests of shareholders, creditors, and the public. It promotes responsible corporate
governance, transparency, and accountability, contributing to a stable and well-functioning
business environment.

Consequences of Ultra Vires Transactions

Ultra vires transactions, which are those that exceed a company's authority as defined in its
memorandum of association (MoA) and articles of association (AoA), can have significant
consequences for the company, its shareholders, creditors, and other stakeholders.

Consequences for the Company:

1. Invalidity of Contracts: Ultra vires contracts are generally considered invalid and
unenforceable. This means that the company cannot enforce the contract against the
other party, and the other party may not be obligated to fulfill its obligations under the
contract.
2. Liability for Damages: The company may be liable for damages arising from ultra
vires transactions. This could include damages to shareholders, creditors, or other
parties who have been harmed by the company's actions.
3. Reputational Damage: Ultra vires transactions can damage a company's reputation
and make it difficult to attract investors, partners, and customers.
4. Legal Action: Shareholders or creditors may take legal action against the company or
its directors for engaging in ultra vires transactions.

Consequences for Shareholders:

1. Loss of Investment Value: Ultra vires transactions can jeopardize the value of
shareholders' investments. If the company engages in risky or unauthorized activities,
it could lose money and reduce the value of its shares.
2. Dilution of Shareholder Rights: Ultra vires transactions may dilute shareholder rights
by diverting resources away from the company's core objectives. This could reduce
shareholders' returns and influence over the company's direction.
Consequences for Creditors:

1. Increased Risk of Default: Ultra vires transactions can increase a company's financial
risk, making it more likely to default on its debts. This could jeopardize the interests
of creditors who have lent money to the company.
2. Reduced Creditworthiness: Ultra vires transactions can damage a company's
creditworthiness, making it more difficult to borrow money in the future. This could
hinder the company's growth and operations.

Consequences for Other Stakeholders:

1. Impact on Employees: Ultra vires transactions could lead to job losses, reduced
wages, or other negative consequences for employees.
2. Harm to Customers: Ultra vires transactions could lead to poor product quality, unfair
business practices, or other harm to customers.
3. Negative Impact on Society: Ultra vires transactions could damage the environment,
violate ethical standards, or otherwise harm society.

Preventive Measures: Companies can take steps to prevent ultra vires transactions by:

1. Drafting Clear MoA and AoA: Clearly defining the company's objectives and powers
in the MoA and AoA can help prevent ultra vires acts.
2. Establishing Internal Controls: Implementing strong internal controls, such as board
oversight and financial reporting procedures, can help identify and prevent potential
ultra vires transactions.
3. Seeking Legal Advice: Consulting with legal counsel can help companies ensure that
their actions are within the scope of their authorized powers.

Conclusion: Ultra vires transactions can have significant negative consequences for
companies, shareholders, creditors, and other stakeholders. It is crucial for companies to
operate within the limits of their authorized powers and to take steps to prevent ultra vires
acts. By adhering to their MoA and AoA, implementing strong internal controls, and seeking
legal advice when necessary, companies can protect themselves and their stakeholders from
the risks associated with ultra vires activities.

Q) "The Doctrine of ULTRA VIRES is a protection to shareholders of the

company".

Yes, the doctrine of ultra vires is a legal principle that protects shareholders of a company by
ensuring that the company only acts within the powers granted to it by its charter or
memorandum of association. This means that the company cannot enter into contracts or
engage in activities that are not authorized by its charter or memorandum of association. If
the company does act ultra vires, the act is void and unenforceable.
The doctrine of ultra vires is important because it helps to prevent companies from misusing
their shareholders' money. It also helps to protect creditors from being harmed by companies
that are acting outside of their authorized scope of business.

However, the doctrine of ultra vires has also been criticized for being too restrictive and for
preventing companies from adapting to changing business conditions. In some cases, it may
be necessary for a company to act ultra vires in order to survive. For example, a company
may need to enter into a contract that is not authorized by its charter or memorandum of
association in order to save itself from bankruptcy.

In recent years, there has been a trend towards a more flexible approach to the doctrine of
ultra vires. Courts are now more willing to uphold ultra vires acts if they are found to be in
the best interests of the company and its shareholders.

Overall, the doctrine of ultra vires is a complex and evolving legal principle. It is important
for companies to be aware of the doctrine and to take steps to ensure that they are not acting
ultra vires.

Critically Analyze the Doctrine of Distinct/Separate Personality

The doctrine of distinct or separate personality is a fundamental legal principle that holds that
a company is a legal entity in its own right, distinct and separate from its members. This
means that the company has its own legal rights and obligations, and can sue and be sued in
its own name. The doctrine is based on the idea that a company is a fictitious person created
by law, with its own mind and will.

Advantages of the Doctrine of Distinct/Separate Personality: The doctrine of distinct or

separate personality has a number of advantages. It:

 Protects the personal assets of shareholders from the company's debts. If a company
goes bankrupt, its creditors cannot pursue the personal assets of its shareholders. This
is because the shareholders are not personally liable for the company's debts.
 Enables companies to raise capital from a large number of investors. Investors are
willing to invest in companies because they know that their personal assets are
protected from the company's debts.
 Allows companies to enter into contracts and engage in other legal activities in their
own name. This means that companies can act independently of their shareholders,
which can give them more flexibility and freedom to operate.

Disadvantages of the Doctrine of Distinct/Separate Personality: The doctrine of distinct

or separate personality also has a number of disadvantages. It:

 Can be used by companies to shield themselves from liability for their

wrongdoing. For example, a company could use the doctrine to avoid liability for
environmental damage caused by its operations.
  Can make it difficult to hold companies accountable for their actions. If a company
commits a crime, it is the company that is punished, not its shareholders or directors.
This can make it difficult to deter companies from committing wrongdoing.
 Can create a "veil of corporate secrecy" that can be used to hide illegal or unethical
activities. For example, a company could use the doctrine to avoid disclosing
information to its shareholders or the public.

Conclusion: The doctrine of distinct or separate personality is a complex and controversial

legal principle. It has both advantages and disadvantages. It is important to weigh these
carefully when considering the application of the doctrine in a particular case.

Critical Analysis: In recent years, there has been growing criticism of the doctrine of distinct
or separate personality. Some critics argue that the doctrine is outdated and that it no longer
serves its original purpose. Others argue that the doctrine is too easily abused by companies
to shield themselves from liability.

As a result of this criticism, some jurisdictions have begun to reform the doctrine of distinct
or separate personality. For example, some jurisdictions have enacted laws that make it easier
to pierce the corporate veil and hold shareholders liable for the debts of their companies.
Others have enacted laws that require companies to disclose more information to their
shareholders and the public.

It is too early to say what the long-term impact of these reforms will be. However, it is clear
that the doctrine of distinct or separate personality is under increasing scrutiny. It is likely
that the doctrine will continue to evolve in the years to come.

DOCTRINE OF CONSTRUCTIVE NOTICE

In company law, the doctrine of constructive notice plays a crucial role in safeguarding the
interests of both the company and its stakeholders. It essentially implies that individuals or
entities engaging with a company are presumed to have knowledge of its publicly available
documents, primarily its memorandum of association (MOA) and articles of association
(AOA).

The MOA outlines the company's fundamental objectives, powers, and limitations, while the
AOA defines its internal governance structure and rules for conducting business. These
documents are considered public records and are accessible to anyone seeking information
about the company.

The doctrine of constructive notice holds that individuals or entities dealing with a company
are deemed to have familiarized themselves with its MOA and AOA. This presumption is
based on the principle that these documents are readily available and essential for
understanding the company's scope of operations and its legal framework.

The implications of constructive notice in company law are significant:

 1. Protection of Shareholders: The doctrine safeguards shareholders by ensuring that
they are aware of the company's limitations and the extent of their liability. This
prevents shareholders from entering into agreements beyond the company's
authorized scope, potentially exposing their personal assets to risk.

2. Contractual Clarity: Constructive notice promotes transparency and clarity in

contracts involving companies. It ensures that both parties are aware of the company's
legal boundaries, minimizing the likelihood of disputes arising from unauthorized
acts.

3. Accountability and Responsibility: The doctrine holds individuals or entities

dealing with companies accountable for their actions. It discourages parties from
exploiting a company's internal procedures or engaging in transactions beyond its
authorized scope.

4. Efficient Legal Proceedings: Constructive notice facilitates efficient legal

proceedings by establishing a presumption of knowledge. This reduces the burden on
the company to prove actual notice and expedites the resolution of legal disputes.

While the doctrine of constructive notice generally serves as a protective measure, it is

important to recognize its limitations:

1. Actual Knowledge Gaps: The doctrine assumes that individuals or entities have
access to and have reviewed the company's MOA and AOA. However, in reality,
there may be instances where individuals are unaware of these documents or their
implications.

2. Complexity of Legal Documents: The MOA and AOA can be lengthy and complex,
making it challenging for non-legal professionals to fully grasp their intricacies. This
could lead to misunderstandings and unintended consequences.

3. Potential for Misinterpretation: The interpretation of the MOA and AOA can vary
depending on the individual's knowledge and perspective. This could lead to disputes
over the extent of the company's authorized activities.

4. Evolving Business Landscape: Companies may undergo changes in their objectives

or operations, necessitating updates to their MOA and AOA. However, individuals or
entities may not always be aware of these changes, potentially leading to conflicts.

In conclusion, the doctrine of constructive notice plays a vital role in upholding the integrity
and transparency of corporate transactions. It protects shareholders, ensures contractual
clarity, promotes accountability, and streamlines legal proceedings. However, it is crucial to
acknowledge the limitations of the doctrine and take steps to mitigate potential
misunderstandings and misinterpretations.

DOCTRINE OF INDOOR MANAGEMENT

The doctrine of indoor management, also known as the Turquand rule, is a legal principle in
company law that states that outsiders dealing with a company are entitled to assume that all
internal regulations have been duly complied with. This means that outsiders are not expected
to inquire into the company's internal affairs or to investigate whether the company's officers
are acting within their authority.

The doctrine of indoor management is based on the principle of convenience and practicality.
It is considered unfair and impractical to expect outsiders to constantly scrutinize a
company's internal workings every time they enter into a transaction or engage in any other
form of business relationship with the company.

The doctrine of indoor management has several important implications:

1. Protection of Outsiders: The doctrine protects outsiders from being affected by

irregularities or procedural flaws within the company. Outsiders can rely on the
presumption that the company's officers are acting properly and that all necessary
formalities have been observed.
2. Facilitating Business Transactions: The doctrine encourages and facilitates business
transactions by reducing the burden on outsiders to investigate internal company
matters. This promotes efficiency and expedites the conduct of business.
3. Promoting Reliance on Company Representation: The doctrine allows outsiders to
rely on the representations made by company officers, assuming that these
representations are made with proper authority. This promotes trust and cooperation
in business relationships.
4. Streamlining Legal Proceedings: The doctrine can simplify legal proceedings
involving companies by establishing a presumption of regularity in internal affairs.
This reduces the need for extensive evidence and expedites dispute resolution.

However, the doctrine of indoor management is not without its limitations:

1. Potential for Abuse: The doctrine could be exploited by company officers to conceal
wrongdoing or to engage in unauthorized transactions, knowing that outsiders are
unlikely to question their actions.
2. Difficulties in Enforcement: The doctrine may be difficult to enforce in cases where
outsiders have actual knowledge of irregularities or have been negligent in their
dealings with the company.
3. Evolving Business Practices: The doctrine may not adequately address the
complexities of modern business practices and the increasing need for transparency
and accountability.

To mitigate these limitations, some jurisdictions have introduced exceptions to the

doctrine of indoor management. These exceptions may apply in situations where:

1. The outsider has actual knowledge of irregularities or has been wilfully blind to them.
2. The outsider is acting in collusion with the company's officers to engage in fraudulent
or dishonest activities.
3. The transaction is so egregious or outside the company's authorized scope that no
outsider could reasonably assume it to be valid.
 4. The company's constitutional documents expressly prohibit the type of transaction in
question.

The doctrine of indoor management remains a fundamental principle in company law,

balancing the need for efficient business transactions with the protection of outsiders and the
maintenance of corporate integrity. It is essential for companies to operate within their
authorized scope and for outsiders to exercise due diligence in their dealings with companies
to minimize the risk of legal disputes.

PROSPECTUS (Different kinds of Prospectus & remedies available in the

case of misstatement in the Prospectus)

A prospectus is a formal document issued by a company seeking to raise

capital from the public. It provides potential investors with information
about the company, its business, its financial position, and its plans for the
future.

Regulated by the Companies Act in the context of company law, the prospectus must adhere
to specific guidelines, ensuring mandatory disclosures to promote transparency and safeguard
investor interests. Before being utilized for public offerings like IPOs, FPOs, or rights issues,
a prospectus must be registered with the relevant regulatory authority. In summary, the
prospectus serves as an essential tool for investors, offering a detailed snapshot of a
company's fundamentals and facilitating a thorough evaluation of the associated investment
opportunities and risks.

Types of Prospectus in Company Law: Prospectuses can come in various forms, such as a
full prospectus, red herring prospectus, shelf prospectus, abridged prospectus, or deemed
prospectus, depending on the type of offering and regulatory requirements. Each type of
prospectus has its own specific features, usage, and regulatory provisions that companies
must adhere to while preparing and filing them.

Red Herring Prospectus (RHP): The Red Herring Prospectus (RHP) is a preliminary
prospectus or offer document used by companies to make an initial public offering (IPO) or a
follow-on public offer (FPO) of securities. The RHP contains all the relevant information
about the company’s shares or debentures, except for the final offer price. It is filed with the
ROC and circulated to potential investors for their consideration. The relevant provisions for
RHP under the Companies Act 2013 include:

 Section 26: This section outlines the requirements for the contents of a prospectus,
including the information to be included in the RHP.
  Section 32: This section specifies the procedure for filing the prospectus with the
ROC, including the requirement to file the RHP before the opening of the subscription
list.
 Section 31: This section mandates the inclusion of a statement in the RHP that the
offer is being made through a prospectus and that investors should read the prospectus
before making an investment decision.

Shelf Prospectus: A Shelf Prospectus is a prospectus that is filed by a company for multiple
issues of securities within a period of one year from the date of its approval by the ROC. It
allows the company to make multiple public offers of its securities during the validity period
of the Shelf Prospectus without filing a fresh prospectus for each offer. The relevant
provisions for Shelf Prospectus under the Companies Act 2013 include:

 Section 31A: This section outlines the requirements for filing a Shelf Prospectus,
including the conditions for its validity, the period of validity, and the amendments to
be made to the prospectus during its validity period.
 Rule 10 of the Companies (Prospectus and Allotment of Securities) Rules,
2014: This rule provides further details on the contents of a Shelf Prospectus,
including the information to be included in the prospectus and the procedures for
filing and updating the Shelf Prospectus.

Abridged Prospectus: An Abridged Prospectus is a shorter version of the prospectus that

contains only the salient features of the full prospectus. It is intended to provide a concise
summary of the key information about the company’s securities and the offer to potential
investors. The relevant provisions for Abridged Prospectus under the Companies Act 2013
include:

Rule 3 of the Companies (Prospectus and Allotment of Securities) Rules, 2014: This rule
outlines the requirements for the contents of an Abridged Prospectus, including the
information to be included in the prospectus and the procedures for filing and circulation of
the Abridged Prospectus.

Deemed Prospectus: A Deemed Prospectus refers to any document that fulfils the
characteristics of a prospectus and invites subscription or offer for securities of a company. It
includes documents like advertisements, pamphlets, circulars, or any other communication
that offers securities to the public for subscription or purchase. Such documents are deemed
to be prospectuses and are subject to the same regulatory requirements as a regular
prospectus. The relevant provisions for Deemed Prospectus under the Companies Act 2013
include:

 Section 2(70) and Section 2(71): These sections define the term “prospectus” and
“deemed prospectus” respectively, and outline the broad scope of documents that may
be considered as a deemed prospectus.
 Section 26 and Section 32: These sections, as mentioned earlier, also apply to
deemed prospectuses, requiring them to comply with the same requirements for
contents and filing as regular prospectuses.
Q) Prospectus of Company + Who may issue Prospectus + Discuss the
Obligatory and their (important) Contents + Examine the provisions
relating to the issue of Prospectus and allotment of Securities under
Companies Act

Prospectus of a Company: A prospectus is a formal document issued by

a company seeking to raise capital from the public through an initial
public offering (IPO) or a secondary offering. It serves as a comprehensive
disclosure document that provides potential investors with crucial
information about the company, its business, its financial position, its
management team, and its future plans.

Who May Issue Prospectus

1. A company proposing to make an initial public offering (IPO) of its

shares to the public.
2. An existing listed company seeking to raise additional capital by
issuing new shares through a secondary offering.
3. A company proposing to offer convertible securities, such as
debentures or bonds that can be converted into equity shares at a
future date.

Obligatory Contents of a Prospectus: The Companies Act mandates

that a prospectus must include the following essential information:

1. Company Information: Details about the company's name,

registered office, incorporation date, business objectives, and
authorized share capital.
2. Management Team: Information about the company's directors,
their qualifications, and their experience.
3. Financial Information: The company's audited financial
statements for the past three years, including its balance sheet,
profit and loss statement, and cash flow statement.
4. Business Description: A comprehensive overview of the
company's business activities, its products or services, its target
market, and its competitive landscape.
5. Risk Factors: A clear identification and discussion of the potential
risks associated with investing in the company, such as industry-
specific risks, economic risks, and operational risks.
6. Issue Details: Information about the type of securities being
offered, the issue price, the number of shares being offered, the
subscription process, and the timeline for allotment.
7. Use of Proceeds: A detailed explanation of how the company
intends to utilize the funds raised through the issue of securities.

Provisions Relating to Prospectus Issuance and Allotment: The

Companies Act, 2013, establishes strict regulations governing the
issuance and allotment of securities through a prospectus. These
provisions aim to protect the interests of investors and ensure
transparency in the capital raising process.

1. Registration of Prospectus: Before issuing a prospectus, the

company must file it with the Registrar of Companies for
registration. The Registrar will review the prospectus to ensure it
complies with the prescribed requirements.
2. Public Offer and Subscription: Once registered, the prospectus is
made available to the public through a public offer. Potential
investors can submit their subscription applications during the
specified subscription period.
3. Basis of Allotment: The company must determine the basis for
allotting securities to applicants. The allotment process should be
fair and transparent, adhering to the principles of proportionality
and priority.
4. Surplus Funds and Refunds: If the subscription exceeds the
number of securities offered, the company must refund the excess
subscription amount to the applicants proportionately.
5. Listing of Securities: Once the allotment process is complete, the
company can apply for the listing of its securities on a recognized
stock exchange.

Conclusion: A prospectus plays a crucial role in facilitating capital raising

for companies and providing essential information to potential investors.
The Companies Act, 2013, safeguards investor interests by mandating the
disclosure of key information and regulating the prospectus issuance and
allotment process. By adhering to these regulations, companies can
ensure transparency and build trust among investors.

MISREPRESENTATION IN A PROSPECTUS

Misrepresentation in a prospectus occurs when a company makes false or

misleading statements in its prospectus, which can mislead investors and
lead to financial losses. The parties liable for misrepresentation in a
prospectus include:

1. The Company: The company itself is primarily liable for

misrepresentations in its prospectus. This is because the prospectus
is issued under the company's name and authority, and the
company is responsible for the accuracy of the information
contained therein.
2. The Directors: The company's directors also bear a significant
degree of liability for misrepresentations in a prospectus. Directors
have a duty of care to ensure that the information in the prospectus
is accurate and complete, and they can be held personally liable if
they breach this duty.
3. Other Parties Involved in the Preparation of the Prospectus: In some
cases, other parties involved in the preparation of the prospectus,
 such as auditors, accountants, or legal advisors, may also be liable
for misrepresentations. This is typically the case when these parties
have failed to exercise due diligence or have provided inaccurate or
incomplete information.

Extent of Civil & Criminal Liability for Misstatement: The extent of

civil and criminal liability for misrepresentation in a prospectus varies
depending on the jurisdiction. However, in general, investors who have
suffered losses due to misrepresentations in a prospectus may be entitled
to the following remedies:

1. Rescission: Investors may have the right to cancel their purchase of

shares and receive a refund of their investment.
2. Damages: Investors may be able to recover compensation for any
losses they have suffered as a result of the misstatement.
3. Injunctive Relief: Investors may seek a court order prohibiting the
company from continuing to make misstatements.

In addition to civil liability, directors and other parties involved in the

preparation of the prospectus may also face criminal prosecution if they
are found to have intentionally made misrepresentations or have acted
with reckless disregard for the truth.

Remedies for Misstatements in a Prospectus: If there is a

misstatement in a prospectus, investors may be able to take legal action
against the company, its directors, and other parties involved in the
issuance of the prospectus. The specific remedies available will vary
depending on the jurisdiction, but they may include:

1. Rescission: This is the right of an investor to cancel their purchase

of shares and receive a refund of their investment.
2. Damages: This is the right of an investor to recover compensation
for any losses they have suffered as a result of the misstatement.
3. Injunctive relief: This is a court order that prohibits the company
from continuing to make misstatements.
4. Criminal prosecution: In some cases, the directors of the company
may be criminally prosecuted for making misstatements in the
prospectus.

It is important to note that investors may not be entitled to remedies if

they were aware of the misstatement before they purchased the shares.
Additionally, there may be a time limit for bringing a claim against the
company.

Preventive Measures to Avoid Misstatements: To avoid making

misstatements in a prospectus, companies should take the following
steps:
  Conduct thorough due diligence: The company should carefully
review all of the information that is included in the prospectus to
ensure that it is accurate and complete.
 Obtain legal advice: The company should obtain legal advice from a
qualified lawyer to ensure that the prospectus complies with all
applicable laws and regulations.
 Make disclosures in good faith: The company should make all
disclosures in good faith and should not attempt to mislead
investors.
 Update the prospectus as needed: The company should update the
prospectus as needed to reflect any material changes in its business
or financial condition.

By taking these steps, companies can help to avoid misstatements in their

prospectuses and protect themselves from legal liability.

Statutory Requirements in Preparation of a Prospectus: The

preparation of a prospectus is a complex and time-consuming process
that must adhere to strict statutory requirements. The Companies Act,
2013, outlines the specific requirements for preparing a prospectus,
including:

1. Content: The prospectus must contain all material information about

the company, its business, its financial position, and its
management team.
2. Disclosure of Risks: The prospectus must clearly disclose all
potential risks associated with investing in the company.
3. Approval: The prospectus must be approved by the company's
board of directors and its legal advisors.
4. Filing: The prospectus must be filed with the Registrar of Companies
for registration.
5. Public Offer: Once registered, the prospectus must be made
available to the public through a public offer.
6. Allotment: The company must determine the basis for allotting
securities to applicants in a fair and transparent manner.
7. Listing: Once the allotment process is complete, the company can
apply for the listing of its securities on a recognized stock exchange.

Failure to comply with the statutory requirements for preparing a

prospectus can result in serious legal consequences, including civil liability
for misrepresentation and criminal prosecution. Therefore, companies
must exercise due diligence and seek expert guidance to ensure that their
prospectuses meet all legal requirements.

INCORPORATION OF COMPANIES

Incorporation of companies is the legal process by which a business entity

is created and recognized as a separate legal entity from its owners or
shareholders. This process involves filing the necessary documents with
the relevant government agency, such as the Registrar of Companies, and
obtaining a certificate of incorporation.

Benefits of Incorporation

1. Limited Liability: Shareholders have limited liability for the debts

and obligations of the company, meaning they can only lose up to
the amount they invested in the company. This protects
shareholders' personal assets from business debts.
2. Separate Legal Entity: The company becomes a separate legal
entity from its owners, which means it can own assets, enter into
contracts, and sue or be sued in its own name. This separation of
legal personality protects the owners from personal liability and
allows the business to operate independently.
3. Transferability of Shares: Shares of an incorporated company
can be easily transferred between shareholders, facilitating the
raising of capital and the exit of investors.
4. Perpetual Existence: An incorporated company has a perpetual
existence, meaning it continues to exist even after the death of its
owners or shareholders. This ensures the continuity of the business.
5. Tax Advantages: Incorporated companies may enjoy certain tax
benefits, such as lower tax rates or tax exemptions, compared to
unincorporated businesses.

Steps in the Incorporation Process

1. Choose a Company Name: The company name must be unique

and comply with naming regulations.
2. Prepare Incorporation Documents: These documents include
the memorandum of association and articles of association, which
outline the company's purpose, structure, and rules of operation.
3. Obtain Director Identification Number (DIN) and Permanent Account
Number (PAN): Directors of the company need to obtain a DIN and
the company needs to obtain a PAN.
4. File Incorporation Application: The incorporation documents and
other required forms are submitted to the Registrar of Companies
for approval.
5. Obtain Certificate of Incorporation: Upon approval, the Registrar
issues a certificate of incorporation, which officially recognizes the
company as a legal entity.

Additional Considerations: In addition to the formal incorporation

process, there are other important considerations for new businesses,
such as:
 1. Tax Registration: The company needs to register for applicable
taxes, such as income tax, goods and services tax (GST), and
employer's provident fund (EPF).
2. Opening a Bank Account: The company needs to open a bank
account in its own name to manage its financial transactions.
3. Obtaining Licenses and Permits: Depending on the industry and
location, the company may need to obtain specific licenses and
permits to operate legally.
4. Compliance with Labor Laws: The company must adhere to labor
laws and regulations regarding employment conditions, employee
benefits, and workplace safety.

Conclusion: Incorporation is a crucial step for businesses seeking to

operate with legal recognition, limited liability, and the ability to raise
capital and grow. By following the incorporation process and addressing
the additional considerations, businesses can establish a solid foundation
for their operations and long-term success.

PRE-INCORPORATION CONTRACTS ("A company cannot enter into a Contract before

it has come into existence. Explain with case laws)

Pre-incorporation contracts, also known as promoters' agreements, are

legal agreements entered into by individuals or entities that intend to
form a company before the company is officially incorporated. These
contracts outline the roles, responsibilities, and ownership interests of the
individuals involved in establishing the company.

Purpose of Pre-incorporation Contracts

1. Defining Ownership Structure: They establish the ownership

structure of the company, specifying the percentage of shares each
individual or entity will hold once the company is incorporated.
2. Allocating Responsibilities: They outline the roles and
responsibilities of each individual or entity involved in the
incorporation process, ensuring that tasks are clearly defined and
efficiently carried out.
3. Protecting Intellectual Property: They can be used to protect
intellectual property rights, such as patents, trademarks, or
copyrights, that may be developed before the company is
incorporated.
4. Avoiding Disputes: By clearly defining agreements and
expectations beforehand, pre-incorporation contracts can help
prevent potential disputes and conflicts among the promoters once
the company is formed.

Key Elements of Pre-incorporation Contracts

 1. Parties Involved: The names and contact information of the
individuals or entities entering into the agreement.
2. Company Name: The proposed name of the company to be
incorporated.
3. Ownership Structure: The allocation of shares and ownership
percentages among the promoters.
4. Roles and Responsibilities: A detailed description of the roles
and responsibilities of each promoter in the incorporation process
and the company's initial operations.
5. Intellectual Property: Provisions for handling intellectual property
rights that may arise during the incorporation process or before the
company is formed.
6. Dispute Resolution: Procedures for resolving any disputes that
may arise between the promoters.
7. Confidentiality: Agreements regarding the confidentiality of
sensitive information related to the company's plans and strategies.

Ratification and Legal Implications: Once the company is

incorporated, the pre-incorporation contract can be ratified by the
company through a formal resolution passed at a board meeting. This
ratification ensures that the terms of the agreement are legally binding on
the company.

If the pre-incorporation contract is not ratified, the promoters may still be

personally liable for their obligations under the agreement. Additionally, if
the company fails to fulfil its obligations under the contract, the promoters
may be held responsible for the company's actions.

Conclusion: Pre-incorporation contracts play a crucial role in the

formation of new companies, providing a framework for defining
ownership, allocating responsibilities, and protecting intellectual property.
By clearly outlining the agreements and expectations between the
promoters, these contracts can help prevent disputes and ensure a
smooth transition to an incorporated entity.

Case Laws related to Pre-incorporation Contracts:

1. Kelner v. Baxter (1866): This landmark case established the

principle that a company cannot be bound by a contract entered
into by its promoters before its incorporation. The court ruled that
the promoters who entered into the contract were held personally
liable.
2. Newborne v. Sensolid (1954): This case further clarified the
principle of separate legal personality. The court held that a
company cannot enter into a contract before its incorporation, even
if the promoters have the authority to act on behalf of the company.
3. Black v. Smallwood (1966): This case addressed the issue of
ratification of pre-incorporation contracts. The court held that a
 company cannot ratify a pre-incorporation contract after its
incorporation unless the contract was made for the company's
benefit and the company had the capacity to enter into the contract
at the time it was made.
4. Hawke's Bay Milk Corporation v. Watson (1974): This case
emphasized the importance of ensuring that pre-incorporation
contracts are clearly and accurately drafted. The court held that a
pre-incorporation contract that is ambiguous or incomplete may not
be binding on the company.
5. Marblestone Industries v. Fairchild (1975): This case
highlighted the need for promoters to act in good faith when
entering into pre-incorporation contracts. The court held that
promoters who enter into pre-incorporation contracts in their own
interests, rather than in the interests of the company, may be held
personally liable.

These case laws have established the following key principles

regarding pre-incorporation contracts:

1. A company cannot be bound by a contract entered into before its

incorporation.
2. Promoters who enter into pre-incorporation contracts may be held
personally liable.
3. A company can ratify a pre-incorporation contract only if it was
made for the company's benefit and the company had the capacity
to enter into the contract at the time it was made.
4. Pre-incorporation contracts must be clearly and accurately drafted.
5. Promoters must act in good faith when entering into pre-
incorporation contracts.

MODULE 4

Explain Shares + Kinds of Shares with their features and advantages from the
Perspective of the Investors + The provisions relating to allotment of Shares

The definition of a share includes the capital or stock of a company. Each business has a
share capital requirement. A share is a single unit within the entire capital of the company.
A share is also a type of security. It is often measured by its liability and interest. Members
that own shares of a company are referred to as shareholders. They are investors that have
invested funds into the business. In return, they will receive dividends on the profits of the
business.

The Characteristics of a Share

 A share should be moveable. The rules for share transfer must be included in the
company's Articles of Incorporation.
  The funds used to purchase a share are non-refundable. This, however, will be
affected by business dissolution or capital reduction.
 Each share must be assigned a number. This helps to track and monitor individual
shares. This requirement, however, is not present in all shareholder agreements.

Types of Shares:

 Preference shares: Preference shares have preferential rights to dividends if a

business closes. Preference shares do not have voting rights available, except in
specific situations.
 Equity shares, also known as owner's funds, do not have preferential rights but
receive payment from dividends and capital repayment after settled claims. The board
decides the specific return rate. Equity shareholders may not pay dividends if the
business doesn't profit. They are owners of the company and have regular voting
rights. They may also be subject to deferred shares or founder's shares.
 Cumulative preference share: A cumulative preference shareholder does not receive
payment when a profit is not made. However, cumulative shares may be paid through
unpaid dividends. A cumulative preference shareholder is only paid after other
shareholders have been paid. If no funds remain, then they will not receive a payment
that year.
 Non-cumulative preference shares: Non-cumulative preference shareholders have
preferential shareholder rights and receive a fixed dividend payment. However, they
are only paid if profits remain. If no profits left, the owed amount is not carried over
to the following years.
 Redeemable preference shares: Any capital collected from selling shares is not paid
to a shareholder. But, any capital raised through preference shares can be paid to the
shareholder at the end of the period. There may be time limits on these redeemable
shares, which sometimes exceed 10 years or more.
 Participating/Non-participating preference shares: These shares are paid through a
combination of profits and fixed rates. Once all profits have been paid to
shareholders, any extra money is divided equally among these shareholders.
 Convertible preference shares: Convertible preference shares can be converted into
equity shares at a preset time. All conversions must be approved based on the
regulations set in the company Articles of Incorporation.

Features and Advantages of Shares from the Perspective of

Investors

 Potential for capital appreciation: The value of shares can increase

over time, which can lead to capital gains for investors.
 Income generation: Shares can provide investors with a regular
income stream through dividends.
 Diversification: Investing in shares can help to diversify an
investment portfolio and reduce risk.
 Liquidity: Shares can be easily bought and sold on stock exchanges,
making them a relatively liquid investment.
 Transparency: Publicly traded companies are required to disclose a
significant amount of financial information, which makes it easier for
investors to make informed decisions.
Provisions Relating to Allotment of Shares: The allotment of shares
is the process of assigning shares to investors who have applied for them.
The allotment process is typically governed by the company's articles of
association and the Companies Act, 1956.

 Minimum subscription: Companies are required to receive a

minimum number of subscriptions before they can allot shares.
 Pro rata allotment: If there are more applications for shares than the
company has available, shares will be allotted on a pro rata basis.
 Letters of allotment: Investors who are allotted shares will be sent
letters of allotment, which confirm their allocation and the amount
of shares they have been allotted.
 Payment of share capital: Investors are required to pay for the
shares they have been allotted within a specified period.
 Issue of share certificates: Once an investor has paid for their
shares, they will be issued with share certificates, which provide
evidence of their ownership of the shares.

The allotment of shares is an important step in the process of raising

capital for a company. It is important that the allotment process is fair and
transparent, and that all investors are treated equally.

Q) Conditions Of Private Placement of Shares in Company Law

Private placement is a cost-effective way of raising capital without going public. “Private
placement” means any offer of securities or invitation to subscribe securities to a select group
of persons by a company (other than by way of public offer) through issue of a private
placement offer letter and which satisfies the conditions specified in section 42 of Companies
Act, 2013.

Who can issue Private Placement? A public company or private company can issue shares
on private placement basis.

Maximum number of person to whom private placement can be made: Private placement
can be made to maximum 50 persons or higher number prescribed in a financial year,
excluding (a) Qualified Institutional Buyer (QIB)(b) employees under stock option scheme
under section 62(1)(b) of Companies Act, 2013.

Maximum limit for making offer for private placement: Offer or invitation can be made to
not more than two hundred persons in the aggregate in a financial year, excluding offer to
QIB and Employees stock option. This restriction would be reckoned individually for each
kind of security that is equity share, preference share or debenture [i.e. 200 for equity shares,
200 for preference shares and 200 for debentures]. However, unless allotment with respect to
one kind of security is completed, another kind of security shall not be issued. For example,
if equity shares are issued first, preference shares or debentures cannot be issued unless
allotment of equity shares is completed. This restriction does not apply to issues by NBFC
registered with RBI and housing finance companies registered with NHB (National Housing
Bank). If RBI or NHB has not specified similar regulation, the provision of Companies Act
shall apply.

What is the time limit for making allotment?: Allotment must be made within 60 days. If
not made within 60 days, amount should be refunded within 15 days. Otherwise, interest @
12% will be payable. The money shall be kept in a separate bank account, either for allotment
or for repayment. The offer shall be made to specific persons by name and complete
information and record of such offer shall be filed with ROC within 30 days of circulation of
private placement offer. No advertisement through media, marketing or distribution channels
or agents shall be made of such offer. Return of allotment with complete details of security
holders shall be filed with Registrar.

What is the minimum value of offer? The value of such offer or invitation per person shall
be with an investment size of not less than Rs 20,000 of face value of the securities. This
restriction does not apply to issues by NBFC registered with RBI and housing finance
companies registered with NHB (National Housing Bank). If RBI or NHB has not specified
similar regulation, the provision of Companies Act shall apply.

Payment only from bank account of person making application: The payment for
subscription to securities shall be made from the bank account of the person subscribing to
such securities only. The company shall keep the record of the Bank account from where
such payments for subscriptions have been received. Monies payable on subscription to
securities to be held by joint holders shall be paid from the bank account of the person whose
name appears first in the application – Rule 14(2)(d) of Companies (Prospectus and
Allotment of Securities) Rules, 2014.

Record of private placement : The company shall maintain a complete record of private
placement offers in Form PAS.5. A copy of such record along with the private placement
offer letter in Form PAS.4 shall be filed with the Registrar with prescribed fees, within 30
days from date of the private placement offer letter. If the company is listed, copy of such
record shall also be submitted to SEBI, within 30 days from date of the private placement
offer letter – Rule 14(3) of Companies (Prospectus and Allotment of Securities) Rules, 2014.

Return of allotment : A return of allotment of securities under section 42 (private

placement) shall be filed with the Registrar within 30 of allotment in Form PAS.3 with fee.
The return should be filed along with a complete list of all security holders containing –

(i) the full name, address, Permanent Account Number and E-mail ID of such security holder

(ii) the class of security held

(iii) the date of allotment of security

(iv) the number of securities held, nominal value and amount paid on such securities; and
particulars of consideration received if the securities were issued for consideration other than
cash.

Pre-certification of form : The PAS.3 form filed by company (other than OPC and small
company) shall be pre-certified by practicing CA, CMA or CS. (form filed by OPC or small
company is not required to be certified by practicing CA, CMA or CS).

Q) Explain Buy Back of Shares and under what circumstances Buy Back of
Shares is permitted in the Company Law

Introduction: Originally there was no provision for buyback of shares in the Companies Act,
1956. But there had been a persistent demand for buyback of own shares from the corporate
sector. The Central Government approved the buyback of shares by companies and ordinance
to this effect was issued by the President on 31st October, 1998. Consequent to this the
Companies (Amendment) Act, 1999 was passed which become effective w.e.f. 31st October,
1998, the date of the ordinance, whereunder the companies were permitted to buyback their
own shares and other specified securities subject to certain conditions. Thus, the provisions
for buyback of shares were introduced w.e.f. 31-10-1998 in the Companies Act, 1956, SEBI
also framed certain regulations for buyback of securities in case of listed companies in
1999. Section 68 of the Companies Act, 2013 gives power to company to purchase its own
shares and other specified securities.
Meaning of Buyback of Shares: Buy back of shares means purchase of its own shares by a
company: When shares are bought back by a company, they have to be cancelled by the
company. Thus, share buy back results in decrease in share capital of the company. A
company cannot buy its own shares for the purpose of investment. A company having
sufficient cash may decide to buy its own shares.

Objectives/Advantages of Buyback: The following may be the objectives/advantages of

buyback of shares:

(a) To increase promoters holding as the shares which are bought back are cancelled.

(b) To increase earnings per share if there is no dilution in company’s earnings as the
buyback of shares reduces the outstanding number of shares.

(c) To support the share price on the stock exchanges when the share price, in the opinion of
the company management, is less than its worth, especially in the depressed market.

(d) To discourage others to make hostile bid to take over the company as the buy back will
increase the promoters holding.

(e) To pay surplus cash to the shareholders when the company does not need it for the
business.

(f) To reward the shareholders by buyback of shares at substantially higher price than market
price.

Limitations of Buyback: The following are the limitations of buyback of shares:

 It may be used as a tool for insider trading.

 It increases promoters holding and thus decreases the public shareholding in case of
listed companies, especially when the public shareholding is less.

Sources of buyback: Section 68 of the Companies Act, 2013 allows a company to buy its
own shares and other specified securities out of its:

 free reserves; or
 the securities premium account; or
  the proceeds of any shares or other specified securities. However, buyback of any
kind of shares or other specified securities cannot be made out of the proceeds of an
earlier issue of the same kind of shares or same kind of other securities.

Q) Equity Share + Features of Equity Share nd How do they differ from

preference shares? + Different kinds of Preference Shares

EQUITY SHARES: Equity shares, also known as ordinary shares or

common stock, are the most basic type of share capital in a company.
They represent ownership in the company and entitle the holder to certain
rights, including:

 Voting rights: Equity shareholders have the right to vote on

important matters affecting the company, such as the election of
directors and the approval of major corporate actions.

 Dividend rights: Equity shareholders are entitled to receive

dividends, which are a distribution of profits from the company to its
shareholders. The amount of dividends that a company pays is
determined by the board of directors and is not guaranteed.

 Right to capital: In the event of a company's liquidation, equity

shareholders are entitled to receive any remaining assets after the
company's debts have been paid. However, equity shareholders are
also the last in line to receive any assets, meaning that they bear
the greatest risk of loss.

Features of Equity Shares

 They are permanent: Equity shares are not redeemable, meaning

that the company cannot force shareholders to sell their shares
back to the company.

 They have limited liability: Equity shareholders' liability is limited to

the amount of their investment in the company. This means that
they are not personally liable for the company's debts.

 They are divisible: Equity shares can be divided into smaller units,
which are called fractions or fractional shares.

 They are transferable: Equity shares can be transferred from one

shareholder to another.
PREFERENCE SHARES, also known as preferred stock, are a type of
share capital that has certain preferential rights over equity shares. These
preferential rights typically relate to dividends and the repayment of
capital in the event of a company's liquidation.

Here is a table summarizing the key differences between equity shares

and preference shares:

Feature Equity Shares Preference Shares

Voting
Yes Yes, but may be restricted
rights

Dividend Guaranteed, but may be cumulative or

Not guaranteed
rights non-cumulative

Right to Last in line to receive

First in line to receive assets
capital assets

Liability Limited liability Limited liability

Redeemabili
Not redeemable May be redeemable
ty

Different Kinds of Preference Shares: There are several different

kinds of preference shares, each with its own unique features. Some of
the most common types of preference shares include:

 Cumulative preference shares: Holders of cumulative preference

shares are entitled to receive all unpaid dividends before the
company can pay any dividends to equity shareholders.

 Non-cumulative preference shares: Holders of non-cumulative

preference shares are not entitled to receive unpaid dividends.

 Participating preference shares: Holders of participating preference

shares are entitled to receive their guaranteed dividends in addition
to a share of any profits that the company distributes to equity
shareholders.

 Non-participating preference shares: Holders of non-participating

preference shares are only entitled to receive their guaranteed
dividends.
  Redeemable preference shares: The company can redeem
redeemable preference shares at a certain price and time.

 Irredeemable preference shares: The company cannot redeem

irredeemable preference shares.

Conclusion: Equity shares and preference shares are two important

types of share capital in a company. Each type of share has its own
unique features and benefits, and the type of share that is most
appropriate for a particular company will depend on the company's
specific needs and circumstances.

Q) CLASSIFICATION OF SHARE CAPITAL

The word ‘Capital’ has different meanings in different professions and contexts. If a company
is limited by shares, then the term capital means share capital. Let us see the various
classifications of capital like nominal capital. paid up capital etc.

In simple words, the total contributions made by people to the common stock of the company
is the capital of the company. Further, a share is the proportion of the capital to which each
member has entitlement. Remember, a share is not an amount of money. It is an interest
including different rights in the contract.

Nominal or Authorized or Registered Capital: Section 2(8) of the Companies Act, 2013,
defines Nominal Capital as the amount of capital that the Memorandum of the
company authorizes as the share capital of the company. Hence, it is the registered amount
authorized that can be raised by issuing shares.

The company also pays stamp duty in this amount. Typically, you can calculate nominal
capital by taking into consideration the working and reserve capital needs of the company.

Issued Capital: Issued capital is a part of the Authorized capital, offered by the company for
the subscription. This includes the allotment of shares. Section 2(50) of the Companies Act,
2013, offers this definition. Further, it is mandatory for companies to disclose its issued
capital in the balance sheet (Schedule III of the Act).

Subscribed Capital: Section 2(86) of the Companies Act, 2013, defines Subscribed capital
as the part of the capital being subscribed by the members of the company. It is the number of
shares that the public takes.
Further, if the company states Authorized Capital in any communication like notice,
advertisement, official/business letter, etc., then it has to also specify subscribed and paid up
capital in equally conspicuous characters.

Also, Section 60 of the Act specifies that defaulters in this regard, the company and all
officers who default, will be fined around Rs. 10,000 and Rs. 5,000 respectively.

Called up Capital: According to Section 2(15) of the Companies Act, 2013, Called up
Capital is the part of the capital which the company calls for payment. This is the total
amount that the company calls-up on the issued shares.

Paid Up capital: Paid up capital is the part of called up capital actually paid or credited by
shareholders on the issued shares. Mathematically, Paid up capital = Called up capital – Calls
in Arrears.

Paid up capital represents the money that the company has not borrowed. Also, it is the total
amount of money that the company receives from shareholders in exchange for shares of
stock.

REDUCTION OF SHARE CAPITAL

The Reduction of Share Capital means reduction of issued, subscribed and paid up share
capital of the company. Previously, reduction of share capital was governed by section 100 to
104 of the Companies Act, 1956, now it is governed by section 66 of the Companies Act,
2013. As per old act, it was subjected to the confirmation of high court, but under new Act,
the said powers of high court has been transferred to National Company Law Tribunal
(NCLT). Buy back of shares and redemption of Preference Shares are also reduction of share
capital but governed by specific provisions prescribed under Act. Such reductions in the form
of buy back and redemption do not require sanction/approval from Tribunal (NCLT).

Need of Reduction of Share Capital: Returning of surplus to shareholders; Eliminating

losses, which may be preventing the payment of dividends; As a part of scheme of
compromise or arrangements; simplify capital structure; When the company is making losses,
the financial position does not present a true and fair view of the company. The assets are
overvalued and the balance sheet consists of fictitious assets with debit balance in profit and
loss account. In order to reduction of capital will write-off that portion of capital which is
already lost and will make the balance sheet look healthy.

Modes of Reduction of share capital

 Extinguish or reduce the liability: Company may reduce share capital by reducing
or extinguishing the liability on any of its partly paid up shares. For e.g: if the shares
are of face value of Rs. 100 each of which Rs. 50 has been paid, the company may
reduce them to Rs. 50 fully paid-up shares and thus relieve the shareholders from
liability on the uncalled capital of Rs. 50 per share.
 Cancel any paid-up share capital: Company may reduce share capital by cancelling
any shares which are lost or is unrepresented by available assets. For e.g: if the shares
of face value of INR 100 each fully paid-up is represented by Rs. 75 worth of assets.
In such a case, reduction of share capital may be effected by cancelling Rs. 25 per
share and writing off similar amount of assets.
 Pay off any paid-up share capital: Company may reduce share capital by paying off
fully paid up shares which is in excess of the wants of the company. For e.g: shares of
face value of Rs. 100 each fully paid-up can be reduced to face value of Rs. 75 each
by paying back Rs. 25 per share.

Prohibition on Reduction: No reduction of share capital shall be made if the company is in

arrears in the repayment of any deposits accepted by it either before or after the
commencement of this Act or the interest payable thereon.

Special Resolution and Approval of NCLT: A company limited by shares or limited by

guarantee and having a share capital may reduce the share capital by passing a special
resolution, subject to the confirmation by the Tribunal (NCLT).

Q) Debentures, Different kinds of Debentures & the powers and duties of

debentures trustees.

The word ‘debenture’ itself is a derivation of the Latin word ‘debere’ which means to borrow
or loan. Debentures are written instruments of debt that companies issue under their common
seal. They are similar to a loan certificate.
Debentures are issued to the public as a contract of repayment of money borrowed from them.
These debentures are for a fixed period and a fixed interest rate that can be payable yearly or
half-yearly. Debentures are also offered to the public at large, like equity shares. Debentures
are actually the most common way for large companies to borrow money.

FEATURES

 Debentures are instruments of debt, which means that debenture holders become
creditors of the company

 They are a certificate of debt, with the date of redemption and amount of
repayment mentioned on it. This certificate is issued under the company seal and
is known as a Debenture Deed

 Debentures have a fixed rate of interest, and such interest amount is payable
yearly or half-yearly

 Debenture holders do not get any voting rights. This is because they are not
instruments of equity, so debenture holders are not owners of the company, only
creditors

 The interest payable to these debenture holders is a charge against the profits of
the company. So these payments have to be made even in case of a loss.
Advantages of Debentures

 One of the biggest advantages of debentures is that the company can get its
required funds without diluting equity. Since debentures are a form of debt, the
equity of the company remains unchanged.

 Interest to be paid on debentures is a charge against profit for the company. But
this also means it is a tax-deductible expense and is useful while tax planning

 Debentures encourage long-term planning and funding. And compared to other

forms of lending debentures tend to be cheaper.

 Debenture holders bear very little risk since the loan is secured and the interest is
payable even in the case of a loss to the company

 At times of inflation, debentures are the preferred instrument to raise funds since
they have a fixed rate of interest
Disadvantages of Debentures

 The interest payable to debenture holders is a financial burden for the company. It
is payable even in the event of a loss

 While issuing debentures help a company trade on equity, it also makes it to

dependent on debt. A skewed Debt-Equity Ratio is not good for the
financial health of a company
  Redemption of debentures is a significant cash outflow for the company which
can imbalance its liquidity

 During a depression, when profits are declining, debentures can prove to be very
expensive due to their fixed interest rate
Types of Debentures: There are various types of debentures that a company can issue, based
on security, tenure, convertibility etc. Let us take a look at some of these types of debentures.

 Secured Debentures: These are debentures that are secured against an

asset/assets of the company. This means a charge is created on such an asset in
case of default in repayment of such debentures. So in case, the company does not
have enough funds to repay such debentures, the said asset will be sold to pay
such a loan. The charge may be fixed, i.e. against a specific assets/assets or
floating, i.e. against all assets of the firm.

 Unsecured Debentures: These are not secured by any charge against the assets of
the company, neither fixed nor floating. Normally such kinds of debentures are
not issued by companies in India.

 Redeemable Debentures: These debentures are payable at the expiry of their

term. Which means at the end of a specified period they are payable, either in the
lump sum or in installments over a time period. Such debentures can be
redeemable at par, premium or at a discount.

 Irredeemable Debentures: Such debentures are perpetual in nature. There is no

fixed date at which they become payable. They are redeemable when the company
goes into the liquidation process. Or they can be redeemable after an unspecified
long time interval.

 Fully Convertible Debentures: These shares can be converted to equity shares at

the option of the debenture holder. So if he wishes then after a specified time
interval all his shares will be converted to equity shares and he will become a
shareholder.

 Partly Convertible Debentures: Here the holders of such debentures are given
the option to partially convert their debentures to shares. If he opts for the
conversion, he will be both a creditor and a shareholder of the company.

 Non-Convertible Debentures: As the name suggests such debentures do not

have an option to be converted to shares or any kind of equity. These debentures
will remain so till their maturity, no conversion will take place. These are the most
common type of debentures.
Who is a debenture trustee?: A debenture trustee is a person or an entity who is responsible
for issuance and distribution of debentures and that serves as the holder of debenture stock
for the benefit of another party. According to SEBI Rules, 1993- “debenture trustee” means a
trustee of a trust deed for securing any issue of debentures of a body corporate [section 2(bb)]

Duties of a debenture trustee:

  The trustee ensures that there is no breach in the terms of issue of debentures.
 The trustee can take steps to remedy the breach (above mentioned).
 The trustee is the person who informs the debenture holders about such breach.
 The trustee ensures that all the conditions regarding creation of security for
debentures ismet.
 The trustee convenes the meeting between the company and the debenture holders
 The trustee is the person who ensures that the debentures are redeemed as per
theconditions agreed upon.
 The trustee can take steps to resolve the dispute between the company and the holders
 The trustee has to take necessary steps to ensure the interest of the debenture holders

Rights of debenture trustee:-

 Section 18 (c) a company in no cases can issue debentures before appointment of a

debenturetrustee.
 The company cannot issue debentures before obtaining the consent of the debenture
trustee.
 The company has to specify the name of the debenture trustee in the order letter.
 The debenture trustee can call for periodical performance report of the company
 The trustee can call for reports regarding the use of funds raised through issue of
debentures.
 The trustee can communicate promptly to the debenture holders about defaults, if any,
with regard to payment of interest or redemption of debentures and action taken by
the trustee

Liabilities:

 No once can be appointed a debenture if he has a share ownership in the Company

 He cannot be appointed if he is a promoter of the Company, employee or the manager
 No appointment for the creditor of the Company
 The vacancy of a debenture Trustee can be filled by the Company by the Consent of
the other trustees

FORFEITURE AND SURRENDER OF SHARES

Forfeiture of Shares: We know that the company does not require the shareholders to
pay the full amount of shares in one instalment. It makes calls on them as and when the
money is needed. If a shareholder fails to pay a valid call within the stipulated time, the
company has two options:

(1) the company may file a suit for the recovery of the amount, or

(2) the company may forfeit the shares.

The first option is a lengthy process. Therefore, the company generally decides to forfeit such
shares. The term ‘forfeiture’ means taking them away from the member. It deprives the
shareholder of his property. The shares can be forfeited only if there is a provision to this
effect in the articles of the company. You should note that as per Regulation 28 of Table ‘F’,
shares can be forfeited only for non-payment of any call or instalment of a call and not for
any other debt due from a member. However, the Articles of a company may lawfully
incorporate any other grounds of the forfeiture.

Table ‘F’, which is generally adopted by the companies with respect to forfeiture of shares,
contains the following rules:

o The power to forfeit shares must be given in the Articles of the company. If Articles
authorize, the forfeiture shall include forfeiture of all dividends declared in respect of
the forfeited shares and such dividend is not actually paid before the forfeiture of the
shares.
o Shares can be forfeited only for non-payment of calls.
o The company must serve a proper notice on the defaulting member asking him to pay
the amount within a fixed period, failing which the shares shall be forfeited. The
shareholder must be given at least fourteen days’ notice to pay the amount, notice
must indicate the exact amount to be paid. If there is a slight defect in the notice, the
forfeiture will become invalid.
o The Board of directors must pass a resolution for the forfeiture of shares. If the
defaulting shareholder does not pay the amount within the specified time as required
by the notice, the directors may pass a resolution forfeiting the shares.
o The power for forfeiture must be exercised in good faith and for the benefit of the
company. Thus, forfeiture for the purpose of relieving a friend from liability shall be
invalid.

Effect of Forfeiture of Shares:

o A person whose shares have been forfeited ceases to be a member in respect of the
forfeited shares.
o The liability of the person whose shares have been forfeited ceases if and when the
company receives payment in full of all such money in respect of the shares forfeited.
Thus, notwithstanding the forfeiture, he remains liable to pay to the company all
moneys which, at the date of forfeiture, were payable by him to the company in
respect of the shares forfeited.
o On forfeiture, the forfeited shares become the property of the company.

CASE: Naresh Chandra Sanyal vs. Calcutta Stock Exchange Assn. Ltd.
Surrender of Shares: Surrender is a voluntary act of the shareholder under which the
shares are returned to the company for purposes of cancellation. Neither the Companies Act
nor Table ‘F’ provides for the surrender of shares. But the articles may provide for the
surrender of the partly paid-up shares under circumstances where forfeiture seems to be
justified. You must note that when shares are surrendered to the company, no amount is
refunded to the shareholder. It is so, because if some money is refunded it will amount to a
purchase by the company of its own shares which is prohibited by Section 67 of the
Companies Act.

Surrender of shares may be allowed in the following cases if its acceptance is authorised by
the Articles of the company:

o When shares are surrendered in exchange for new shares of the same nominal value,
as it does not amount to any reduction of capital.
o When the circumstances are such where forfeiture is justified, because surrender is a
short-cut to forfeiture.

If the surrender of shares is accepted by the company for any other reason, other than the
reasons given above, it will be invalid. On a valid surrender of shares, the member ceases to
be a member of the company, but his name can be placed on list of contributories. Thus, if
the company is wound up within twelve months of the surrender of shares, he shall be liable
as a past member.

If the surrender of shares is proved to be illegal, the shareholder may apply for the
rectification of register of members after lapse of any number of years, provided the shares
have not been reissued in the meantime. Forfeiture and surrender of shares, both lead to the
termination of membership. But in case of forfeiture, it is compulsory or a forced action,
while in case of surrender it is a voluntary act on the part of the member to avoid the disgrace
of forfeiture.

CASE: Bellerby vs. Rowland and Marwood’s S.S. Co. Ltd

Conclusion: Forfeiture of shares is referred to as the situation when the allotted shares are
cancelled by the issuing company due to non-payment of the subscription amount as
requested by the issuing company from the shareholder. There must be provision for
forfeiture of shares in the Articles of the company. In the event of forfeiture of shares, the
shareholders lose the rights and interests of being a shareholder and ceases to be a member of
the organization. When the shares are forfeited, they become the property of the company
and, to that extent, the paid-up capital of the company stands reduced. Therefore, the forfeited
shares are generally reissued by the company. Surrender is a voluntary act of the shareholder
under which the shares are returned to the company for purposes of cancellation.

SWEAT EQUITY SHARE

What is Sweat Equity? Sweat Equity Shares means equity shares issued by a company to its
director or employee at discount or for consideration other than cash, for providing know-
how or making available like intellectual property rights or value addition.
Who is Eligible? a) Permanent employee of the Company; b) Permanent employee of the
subsidiary or a holding company and c) Director of the company

How many Sweat Equity Shares can a Company issue? The company can issue sweat
equity shares up to the higher of two: 15% of existing paid-up share capital) or INR 5 Crore

Also, the sweat equity shares shouldn’t go beyond 25% of the paid-up equity capital of the
issuing company at any point in time.

Explanation this 25% condition is for once in life time i.e. the quantum of sweat equity
shares in the paid-up capital of the Company should not go beyond 25 %

Exception: for startups, they are allowed to issue up to 50% of the paid-up capital within 5
years from the date of registration or incorporation.

What are the Conditions?

 lock-in period of three years and non-transferable shares;

 to be allotted within the 12 months from the date of passing resolution
 Amount of sweat equity shares can be treated as managerial remuneration if it fulfills
the following condition: a. It is issued to the director or manager b. They are issued
for non-cash consideration.

At What Price? The price of an issue shall be the value based on the price determined by
a registered valuer as to the fair price. He shall justify reaching a certain value. The registered
valuer shall carry the valuation of: Know-how, Intellectual property rights, Value addition for
the sweat equity.

Q) Role Of SEBI In Indian Capital Markets (SN) (LA) + Role Of SEBI In

The Formation And Regulation Of Capital Market. (SN) + Power Of SEBI

SEBI stands for Securities and Exchange Board of India. It is a statutory regulatory body that
was established by the Government of India in 1992 for protecting the interests of investors
investing in securities along with regulating the securities market. SEBI also regulates how
the stock market and mutual funds function.
Objectives of SEBI

1. Investor Protection: This is one of the most important objectives of setting up SEBI. It
involves protecting the interests of investors by providing guidance and ensuring that the
investment done is safe.

2. Preventing the fraudulent practices and malpractices which are related to trading and
regulation of the activities of the stock exchange

3. To develop a code of conduct for the financial intermediaries such as underwriters,

brokers, etc.

4. To maintain a balance between statutory regulations and self regulation.

Functions of SEBI:

Protective Function: The protective function implies the role that SEBI plays in protecting
the investor interest and also that of other financial participants. The protective function
includes the following activities.

a. Prohibits insider trading: Insider trading is the act of buying or selling of the securities by
the insiders of a company, which includes the directors, employees and promoters. To
prevent such trading SEBI has barred the companies to purchase their own shares from the
secondary market.

b. Check price rigging: Price rigging is the act of causing unnatural fluctuations in the price
of securities by either increasing or decreasing the market price of the stocks that leads to
unexpected losses for the investors. SEBI maintains strict watch in order to prevent such
malpractices.

c. Promoting fair practices: SEBI promotes fair trade practice and works towards prohibiting
fraudulent activities related to trading of securities.

d. Financial education provider: SEBI educates the investors by conducting online and offline
sessions that provide information related to market insights and also on money management.

Regulatory Function: Regulatory functions involve establishment of rules and regulations

for the financial intermediaries along with corporates that helps in efficient management of
the market.

The following are some of the regulatory functions.

a. SEBI has defined the rules and regulations and formed guidelines and code of conduct that
should be followed by the corporates as well as the financial intermediaries.

b. Regulating the process of taking over of a company.

c. Conducting inquiries and audit of stock exchanges.

d. Regulates the working of stock brokers, merchant brokers.

Developmental Function: Developmental function refers to the steps taken by SEBI in order
to provide the investors with a knowledge of the trading and market function. The following
activities are included as part of developmental function.

1. Training of intermediaries who are a part of the security market.

2. Introduction of trading through electronic means or through the internet by the help of
registered stock brokers.

3. By making the underwriting an optional system in order to reduce cost of issue.

Purpose of SEBI: The purpose for which SEBI was setup was to provide an environment
that paves the way for mobilsation and allocation of resources.It provides practices,
framework and infrastructure to meet the growing demand.

It meets the needs of the following groups:

1. Issuer: For issuers, SEBI provides a marketplace that can utilised for raising funds.

2. Investors: It provides protection and supply of accurate information that is maintained on a

regular basis.

3. Intermediaries: It provides a competitive market for the intermediaries by arranging for

proper infrastructure.

Structure of SEBI: SEBI board comprises nine members. The Board consists of the
following members.

1. One Chairman of the board who is appointed by the Central Government of India
2. One Board member who is appointed by the Central Bank, that is, the RBI
3. Two Board members who are hailing from the Union Ministry of Finance
4. Five Board members who are elected by the Central Government of India
Powers of SEBI

1. SEBI has powers relating to stock exchanges and intermediaries i.e. It can ask about
information regarding business transactions for inspection or scrutiny and other
purposes.
2. SEBI has the power to impose monetary penalties on capital market intermediaries. It
can also impose a suspension of their registration for a small period.
3. It has the power to initiate actions into functions assigned.
4. Has the power to regulate insider trading.
5. Also has powers under the securities contracts act i.e. SEBI has empowered by the
finance ministry to nominate three members on the governing body of every stock
exchange.
6. It has the power to regulate the business of the stock exchange.

INSIDER TRADING

Insider trading occurs when personnel with non-public, material information about a public
corporation trade in its stock or other securities. An insider is a person who is a part of the
company whose stocks they are trading. They may or may not possess confidential non-
public knowledge regarding the firm.

What is Insider Trading? Insider trading can be either unlawful or legal, depending on

when the trade is made and the laws of the country in which the trader is located.

How Does SEBI Regulate Insider Trading? SEBI perceives trading by the following

groups or individuals as a form of insider trading. Therefore, any person coming under one of

these categories should avoid trading equities for the firm for which they are classified as an

insider.

1. Immediate relatives of connected individuals or insiders

2. An associated company or holding firm directly linked with the other corporation

3. A high-level executive belonging to such a holding firm of the parent company

4. An official working at a clearing house or stock exchange

 5. Asset management company board members or a trustee in mutual fund management
companies

6. A Board member or chairman of a public financial organisation

SEBI also restricts the procurement of Unpublished Price Sensitive Information or UPSI,
unless required by law or legal proceeding.

Following are some recent instances of charges brought against companies by the SEBI.

General Insurance Company: In October 2019, SEBI sent a notice to General Insurance
Company or GIC informing the firm regarding impending insider trading investigations. In
the notice, SEBI also provided a settlement offer to the insurance provider. In December the
same year, GIC settled the charges by paying a penalty of around Rs. 1.23 Crore.

Infosys: The IT company was found in violation of SEBI insider trading regulations when it
failed to make public an allegation of a company insider regarding illegal trading. While the
original complaint was filed on September 20, 2019, the matter came to light when the
whistleblower mailed a copy of the same to the media a month later, in October. In
November, the lead independent director of Infosys, Kiran Mazumdar Shaw, settled the
charges by paying a fine of Rs. 3 Lakh to SEBI.
Rakesh Jhunjhunwala: Independent investor and billionaire Rakesh Jhunjhunwala was

summoned by SEBI for alleged insider trading at Aptech Limited. As per reports, the

regulatory body is investigating the period between February and September 2016. Apart

from Jhunjhunwala, SEBI also looked into his family member’s role in the matter.

Balram Garg: Another high profile case of alleged insider trading came to light in December

2019, when SEBI sent a notice to PC Jeweller Managing Director, Balram Garg. At the same

time, the government body ordered the impounding of around Rs. 8 Crore that two promoters

and associated entities earned from suspected illegal trading.

Reliance Industries Limited (RIL) faced a one-year ban from derivatives trading and a fine
imposed by the Securities and Exchange Board of India (SEBI) for attempting to profit
through circumventing authorized trading limits and manipulating its stock's cash market
price. These cases reflect a broader issue of insider trading in India, with numerous pending
and completed cases. Despite allegations, the conviction rate and SEBI's imposed penalties
are often limited, leading to criticism of the regulatory body for inadequate enforcement of
insider trading regulations. Many attribute the rising instances of illegal trading to SEBI's
perceived leniency. Consequently, it is crucial for responsible traders to be well-versed in the
specific regulations established by the regulatory authority to curb instances of insider trading
on the National Stock Exchange (NSE).

SEBI Regulations Against Insider Trading: Section 11(2) E of Companies Act, 1956

mainly prohibits insider trading for the following reasons -

 To provide equal opportunities to every participant in the market

 Ensure fairness and transparency in all transactions

 Offer free flow of information and prevent information symmetry

The following information is deemed sensitive. Possession of such information by a trader

may expose him/her to insider trading litigations-
  Intended dividend declaration

 Periodic financial reports

 Buy-back or issuance of securities

 Major changes in policies or operative plans for the company

 Any upcoming takeovers and/or mergers

When is Insider Trading Legal? In some cases, insider trading is legal. Such a trade is

common since many employees of these public-traded firms also own stocks belonging to the

company.

Example: Suppose there is an insider who plans to sell stocks of the company after their
retirement for a specific period to earn returns. However, at a later date, he/she comes to
possess UPSI.

In this case, the trader may not be indulging in illegal insider trading, as they did not decide
on selling their owned stocks based on the non-public information.

MODULE 5
Q) What are Dividends. Explain the procedure for declaration and
Payment of final dividend.
Dividend” means a distribution of any sums to Members out of profits and wherever
permitted out of free reserves available for the purpose. As per Section 2(35), “dividend”
includes any interim dividend.

Types of Dividend

 Final Dividend: Dividend recommended by the Board of Directors and declared by

the members at an Annual General Meeting.
 Interim Dividend: means the declared by the Board of Directors. 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.
Simple Process/steps to be followed by Private Limited Companies for declaration of
Final dividend by Private Limited Companies

Declaration of dividend by Companies requires approval from Board of Directors as well as

shareholders in the ensuing General Meeting.(

1. Circulate Board Meeting notice to the Board of Directors.

2. Passing of Board Resolution in Board meeting.
 Recommending the rate and quantum of dividend.
 opening of special account in name of private limited company.
 Approving the payment of dividend.
 Deciding a record date-to determine the list of shareholders
3. Opening of special bank account with a schedule bank.
4. Send notice of the General Meeting to all entitled shareholders before 21 clear days.
5. Take approval from shareholders and passing of ordinary resolution in General
Meeting.
6. The amount of dividend declared to be deposited in special bank opened within 5 days
from the declaration of such dividend. Note: The intervening holidays, if any, falling
during such period shall be included.
7. The amount of dividend declared to be paid within 30 days from the date of
declaration.
8. Update Register of dividend after completion of the procedure.
 In case a dividend has been declared by a private limited company, but the
dividend has not been paid or claimed within one month from the date of the
declaration, the company will have to transfer to unpaid dividend Account.
Nomenclature of special account (Dividend account will change into unpaid
dividend account.
 Dividend payable in cash will be paid by or warrant or Cheque or through any
other electronic mode to the shareholder.
 Dividend to be paid only to the registered holders of shares entitled to
Dividend or to their order or to their bankers.

Auditors are watch-dogs and not Blood hounds. Discuss

Introduction: An auditor is a person who examines the financial records of an organization
and provides an opinion on the accuracy and completeness of the financial statements. The
role of an auditor is often compared to that of a watchdog or a bloodhound. This article
explains the meaning of the statement "an auditor is a watchdog and not a bloodhound" and
illustrates it.

Watchdog vs Bloodhound: A watchdog is a term used to describe someone who keeps a

close eye on things to ensure that they are functioning properly. A bloodhound, on the other
hand, is a term used to describe someone who is relentless in their pursuit of something. In
auditing, these two terms have different meanings.

Watchdog: An auditor is considered a watchdog because their primary role is to ensure that
an organization's financial statements are accurate and complete. They review the financial
records of the organization and provide an opinion on whether the financial statements
present a true and fair view of the organization's financial position.

Illustration: For example, an auditor might review the bank statements of an organization to
ensure that all transactions have been properly recorded and that there are no unexplained
discrepancies. They might also review the organization's inventory records to ensure that the
value of the inventory is accurately reflected in the financial statements.

Bloodhound: A bloodhound, on the other hand, is someone who is relentless in their pursuit
of something. In auditing, this term is often used to describe an auditor who is looking for
fraud or other irregularities in an organization's financial records.

Illustration: For example, an auditor might review the organization's expense reports to
ensure that there are no fraudulent or unauthorized expenses. They might also review the
organization's payroll records to ensure that employees are being paid correctly and that there
are no discrepancies in the hours worked.

Conclusion: In conclusion, the statement "an auditor is a watchdog and not a bloodhound"
means that an auditor's role is to ensure that an organization's financial statements are
accurate and complete, rather than to actively search for fraud or other irregularities. While
auditors may uncover irregularities during the course of their work, their primary role is to
provide an opinion on the accuracy and completeness of the financial statements.
Auditors (SN) + Role of Auditor + What is meant by rotation of Auditors +
Provisions relating to the appointment + Duties of an Auditor

An auditor is a person appointed to validate the correctness of the accounting records of the
company. Under the Companies Act, 2013, a person practising Chartered Accountant
(hereinafter, “CA”) is qualified to be appointed as the statutory auditor in a company. A
person would not be qualified as a company’s statutory auditor unless there is appropriation
on the part of the person to perform in the capacity of an auditor. Furthermore, as per the
Companies Act, 2013, only a practising Chartered Accountant is qualified to be appointed as
a statutory auditor in a company. Such appointments are possible if a majority of the partners
are executing Chartered Accountants.

Auditors are important because they can provide an objective and independent opinion on an
organisation’s financial statements. It benefits companies in several ways, such as finding
errors in processing, maintaining consistency, or detecting some kind of fraud. Furthermore,
it objectively advises on the matter related to the company, which involves the board of
directors, shareholders, or interest groups. An auditor’s ability to prepare fair financial
statements for a particular company also helps in reducing investor risk while ensuring
effectiveness. This, in turn, boosts the confidence of the investors. Furthermore, an audit
report provides an overview of a company’s financial statements, indicating good corporate
governance, if passed.

Role of Auditor: The work of an auditor has been laid down under the Companies Act, 2013,
given in Section 143. The Act further explains the duties of an auditor, while the list provided
is not exhaustive.

Prepare an audit report: An audit report is an appraisal of a business’s financial position.

An auditor is responsible for making an audit report of a company based on its financial
statements. The books of accounts maintained by him must comply with the relevant laws.
Furthermore, as an auditor, it’s his responsibility that the financial statements should comply
with provisions of the Companies Act, 2013. In addition, the entire financial statement must
be true and fair with regard to the company’s financial position.

Compliance with audit standards is necessary: Such standards are issued by the Central
Government in deliberation with the National Financial Reporting Authority. These standards
help the auditor follow his duties with relevant ease and accuracy. As an auditor, they have to
comply with standards as this may increase their efficacy comparatively.
Actions against fraud : In some instances, while performing his duties, an auditor may feel
certain suspicion regarding fraud in the company, situations where financial statements and
figures don’t quite add up to each other. As an auditor, when he finds himself in such
situations, he must report such matters to the Central Government or matter prescribed
in Rule 13 of Companies (Audit and Auditors) Rules, 2014.

Assistance in the case of a branch audit: When an auditor is a branch auditor of a company,
he/she will assist in fulfilling the branch audit. He/she should prepare a report depending on
the branch accounts examined by him/her and then send it to the company’s auditor. Then
that company auditor will look into the main audit report of the company. Additionally,
he/she may assist an expert with their working papers to the company auditor to aid in the
given audit.

Auditing standards: The Central Government shall issue auditing standards in collaboration

with the National Financial Reporting Authority. These standards help the auditor to perform

his/her auditing tasks in the given subject manner. However, there lies a responsibility on the

auditor to comply with the standards while performing his/her tasks because this will boost

their efficiency.

What is meant by rotation of Auditors

Rotation of Auditor is appointing a new auditor when

a. an individual had been appointed as an auditor for more than one term of five
consecutive years
b. an audit firm had been appointed as an auditor for more than two terms of five
consecutive years.
For the purpose of the rotation of auditors means following class of companies but small
companies and one person companies not included:

1. Every Listed Company

2. Unlisted Public Companies having share capital of Rupees 10 crore or more
3. All private limited companies having paid up share capital of rupees 50 crore or
more
4. Companies having paid up share capital of below threshold limit mentioned above,
but having public borrowings from financial institutions, banks or public deposits
of rupees 50 crores or more
 MANDATORY REQUIREMENTS: For the purpose of the rotation of auditors

a. in case of an auditor (whether an individual or audit firm), the period for which the
individual or the firm has held office as auditor prior to the commencement of the
Companies Act, 2013 shall be taken into account for calculating the period of five
consecutive years or ten consecutive years.
b. the incoming auditor or audit firm shall not be eligible if such auditor or audit firm
is associated with the outgoing auditor or audit firm under the same network of
audit firms.
The term “same network” includes the firms operating or functioning, hitherto or
in future, under the same brand name, trade name or common control.
c. a break in the term for a continuous period of five years shall be considered as
fulfilling the requirement of rotation.
d. if a partner, who is in charge of an audit firm and also certifies the financial
statements of the company, retires from the said firm and joins another firm of
chartered accountants, such other firm shall also be ineligible to be appointed for a
period of five years.
Provisions relating to the appointment

Within thirty days from the date of the registration of the Company other than the Government
Company, it’s Board of Directors need to appoint an individual or a firm as the first auditor of
the company. The members shall ratify the appointment of the first auditor in the first annual
general meeting of the company.

The first auditor of the company holds office from the conclusion of the first annual general
meeting until the conclusion of the sixth annual general meeting and after this until the
conclusion of every sixth meeting. However, the members of the company ratify the
appointment of auditors at every annual general meeting.

However, in a case where the Board of Directors fails to appoint the first auditors of the
company they shall inform the members of the Company. Thus, the members shall appoint the
first auditors of the company within ninety days at an extraordinary general meeting. The
auditor so appointed shall hold the office until the conclusion of the first AGM.

The Board of Directors shall fill any casual vacancy in the office of the auditor of a company
other than a Government Company within thirty days. This does not include any casual
vacancy arising out of the resignation of an auditor. However, in case of a casual vacancy
arising out of the resignation of an auditor, the Board of Directors shall fill the vacancy within
thirty days. But, the company needs to approve this appointment at a general meeting within
three months of the Board’s recommendation. Such an auditor shall also hold the office till the
conclusion of the next annual general meeting.
Re-appointment of a Retiring Auditor

The members can re-appoint the retiring order at the annual general meeting of the company:

1. If he is not disqualified for re-appointment.

2. If he has not given a notice in writing to the company expressing his

unwillingness to be re-appointed.

3. When a special resolution has not been passed by the members at that meeting
appointing some other auditor or expressly providing that he should not be re-
appointed.
It is noteworthy here that if at any annual general meeting the members do not appoint or re-
appoint any auditors, the existing auditor shall continue to be the auditor of the company.

Appointment of Auditors of Government Companies

 Definition of Government Company: Companies owned or controlled by the Central

or State Government, or a combination of both.
 First Auditor Appointment: CAG of India appoints the first auditor within 60 days of
company registration.
 CAG's Failure to Appoint: If CAG doesn't appoint within 60 days, the Board appoints
within the next 30 days.
 Board's Failure to Appoint: If the Board doesn't appoint within 30 days, members
inform and appoint the first auditors within 60 days at an extraordinary general
meeting.
 Term of First Auditors: Appointed auditors hold office until the conclusion of the first
AGM.
 Annual Auditor Appointment: For each financial year, CAG appoints an auditor
within 180 days from the start, holding office until the AGM conclusion.
 Casual Vacancy: CAG fills any casual auditor vacancy within 30 days; failure to do
so has unspecified consequences.

Duties of an Auditor

 Right to inspect company books and records at any location.

 Entitled to request necessary information for audit.
 Examining loans and advances for proper security and non-prejudicial terms.
 Assessing if transactions solely recorded in books harm the company's interests.
  Verifying fair pricing of assets, especially if not an investment company or bank.
 Checking if loans are correctly recorded and not classified as deposits.
 Scrutinizing revenue accounts for inclusion of personal expenses.
 Ensuring proper documentation for shares distributed as cash.
 Authority to examine records of subsidiaries for consolidation in accounts.
 Reporting to shareholders on audited books and financial statements.
 Compliance with accounting and auditing standards and relevant laws.
 Inclusion of specified matters in the audit report.
 Confirming the accuracy of financial statements as a true and fair representation.

MODULE 6

Different types of Charges & Procedures for registration of Charges (LA) +

Registration of Charge and its Classification (SN)

A charge, in general, signifies the granting of a right to a lender over

assets, serving as collateral to ensure loan repayment. This method allows
borrowers to secure loans by providing assets as security, with the lender
obtaining rights over the assets rather than ownership. Corporate entities
find this process more straightforward, as the assets used for loan
approval are often within the same entity. Section 2(16) of the Companies
Act, 2014, defines charges as interests or liens created on a company's
property or assets, including mortgages. While the Companies Act, 2013,
includes mortgages in its definition of charges, it distinguishes them. A
mortgage typically involves the creation of an ownership interest in the
security used for the loan, whereas a charge only confers rights to the
lender over the security.

The definition of charges in the Transfer of Property Act clarifies the

transfer of rights, emphasizing that charges are not deemed transfers
under the Act. The focus is on the security or assurance for loan
repayment. In contrast, the Companies Act, 2013, provides a broader and
clearer scope, defining charges and establishing statutory regulations for
their creation.
Kinds of Charges : There are generally two kinds of charges which are created over the
assets

by the entities. They are as follows:

Fixed charges: These charges are created against specific property which is identifiable and
certain and doesn’t change over time or through the period of the loan.

Floating charge: These charges are not created against a specific property that could be
identifiable in nature. Generally, the assets over which floating charges are created are
uncertain.

For Example, Tony Stark being the owner of Stark Industries India Ltd wants financial
assistance to continue his research in futuristic technology. He wants to create a charge upon
the assets rather than mortgaging as the assets would be involved in the R&D process. if he
creates charges upon the Iron Man Suits then as the worth is known he would be creating a
fixed charge. If he creates charges upon the stocks such as stark international, the value keeps
changing (given all the factors involved) hence, the charge created upon the stocks would be
a floating charge.

Registration of a Charge: Based on the above example, if Mr. Stark wishes to create a
charge over the assets of Stark Industries India Ltd., he has to get it registered under section
77 of the Companies Act, 2013.

Duty to register: According to Section 77(1) of the Act, It shall be the duty of every
company to create a charge within or outside India, on its property or assets or any of its
undertakings, whether tangible or otherwise, and situated in or outside India, to register the
particulars of the charge signed by the company and the charge-holder together with the
instruments, if any, creating such charge in such form, on payment of such fees and in such
manner as may be prescribed, with the Registrar within thirty days of its creation

Application of registration by the charge-holder/lender: As per Section 78 of the Act, in

the event of the entity failing to register the charge within the specified period, the lender in
whose favor the charge is created can apply to register. The registrar seeks the reasoning for
the failure of registration at the earliest and the lender is entitled to recover the amount paid
for any ordinary or additional fees and such entity has to give the expenditure incurred by the
lender for such registration of charges.

Certificate of registration of Charge: The certificate of Registration of Charge is issued by

ROC (Registrar of Companies) in the prescribed format. The certificate is only issued until
after Roc is satisfied that the charges created are legible and in case of delay the reasoning
given is acceptable or not. All the factors are considered and only then the certificate is issued
and such charge shall be deemed to be registered under the Act. This certificate is also to be
considered conclusive evidence.

Modification of Charge: Under section 79 of the Act, any entity modifying the terms,
conditions, extent of property, or operations related to charged assets is obligated to register
such modifications within 30 days.

Register of Charges: As per Section 81 of the Act, the registrar is bound to maintain a
register of the Charges. Such a register would be containing the particulars of the Charges in
respect of every entity (which created any such charge and was issued the certificate of
registration).

Satisfaction of Charges: When the company repays its loan completely to the lender and
consequently the assets provided as security will be released from the charge then it is known
as the satisfaction of the charges. The act mandates the entity to inform the registrar about the
satisfaction of the charges. In simple words, the satisfaction of charges is done when the
transactions related to the charges are completed.

MODULE 7

Kinds of Winding up & explain the grounds of winding up by the Tribunal

+ Circumstances in which the court can order the compulsory winding up
of a company

Types of Company windup

1. Voluntary winding up of a Company

2. Compulsory winding up of a company
Voluntary Winding up of a Company

The Winding up of a Company can be done voluntarily by the members of the Company, if :

 The company passes a special resolution for winding up the Company.

 The Company in general meeting passes a resolution which requires a company to
wind up voluntarily as a result of the expiry of the period of its duration, any as per
the Articles of Association or on the occurrence of any event in respect of which
the articles of association provide that the company should be dissolved.

Compulsory winding up of a Private Limited Company: Tribunal is responsible for

this kind of wind up of Companies.

Here are the reasons for the same:

i. Sick Company: If the firm is unable to pay its debts and creditors have a commanding
position with respect to the dues to be collected, the Committee of creditors will choose a
person as administrator for Company, in accordance with the Tribunal’s order for winding up
process. This occurs when a corporation is in a sick state, i.e., it is not able to pay off its debts
and cannot be revived or rehabilitated. In such a circumstance, the court may order the firm to
wind up.

ii. Special Resolution: If the Corporation has agreed to go for wind up by the Tribunal
through a special resolution, the Tribunal’s decision on the winding up is final. This exempts
the Tribunal’s power to wind up a corporation if it is contrary to the general public interest or
the interest of the corporation.

iii. Acts Against State: If a firm violates the integrity and sovereignty of territory of India,
the security of the state, relations with overseas countries, morality, public order, or decency,
then the Tribunal may pass an order for the company to be wound up.

iv. Fraudulent Conduct of Affairs: If the Tribunal has reasons to believe that the working of
the company has been carried out fraudulently or that the purpose for which the company was
started is fraudulent or for any illegal purpose, then the tribunal has been granted the
authority to pass an order to wind up the corporation after receipt of an application from the
Registrar or any other person who is authorised by the Central Government.

v. Default in filing Financial Statements If the corporation has not filed its annual returns or
finance statements with the Registrar for the previous five 5 years.
vi. Just and Equitable to wound up If the Tribunal determines that winding up the company is
just and equitable after looking into the interests of the company, its various shareholders &
stakeholders, and the interest of the public, as well as all other remedies available to resolve
the situation, the Tribunal will wind up the company. Winding up a firm on this ground
necessitates a solid foundation to liquidate the firm.

COMPANY LIQUIDATOR: When a company goes into insolvency or declares

insolvency a company liquidator is appointed by the NCLT. He is appointed so that he can
understand the current position of the company and take measures to complete the ongoing
projects. He also looks into the finances of the company so that all the creditors, shareholders,
debenture holders & etc can be paid.

Powers & Duties of Company Liquidator

 The company liquidator has the power & duty to carry on the business. He has to
complete/effort to complete the subsisting contract.
 To do all acts and execute all documents, deeds, receipts & other documents.
 Deal with the movable/ immovable property.
 Sell the whole undertaking as a going concern. (After the order of winding up is
given the board of directors have no role. All the powers are given to liquidator
and if after notice of winding up somebody wants to buy the company, the
liquidator is in the position/power to sell it without taking further permission.)
 Prosecution
 Invite and settle the claims of different creditors.
 Inspect the records/ financial statements of the company.
 Negotiable Instrument: cheque, promissory note, bill of exchange. All such
negotiable instrument has to be signed by the liquidator (earlier board of director
used to do it with the seal of the company) i.e. draw, accept endorse the negotiable
instrument.
 Professional assistance: He can call for the help of an expert if he finds difficulties
i.e Lawyers, CA & etc.
THE RULE OF MAJORITY WITH EXCEPTIONS (LA)

Majority and minority define who has the power to rule. The structure of democracy is as
such, where the majority has the supremacy. In the corporate world, also the rule and
decisions of the majority seem to be fair and justifiable. The power of the majority has
greater importance in the company, and the court tries to avoid interfering with the affairs of
the internal administration of the shareholders. With the superiority of the majority, there is
always inferiority among the minority, which shows an unbalance in the company. The
Companies Act, 2013 reduces the inferiority of the minority. This article details the rules of
the majority and also the rights of the minority in a company.

Powers of Board of Directors: The Companies Act distributes the power between the board
of directors and the shareholders. The board and the shareholders exercise their powers
through meetings in a democratic way. The meetings include the meetings of the board of
directors and the general meetings. The shareholders entrust certain powers on the board of
directors, which is through the Memorandum of Association (MoA) and Articles of
Association (AoA). The board of directors have all the powers and can to do all the things
and acts just the same as the company exercises its powers. But the Act restricts the board of
directors from the powers that only the shareholders can do in the general meetings.

Majority Powers: A company stands as an artificial entity. The directors run it but they act
according to the wish of the majority. The directors accept the resolution passed by the
majority of the members. Unless it is not within the powers of the company. The majority
members have the power to rule and also have the supremacy in the company. But there is a
limitation in their powers. The following are two limitations:

Limitations

 The powers of the majority of the members are subject to the MoA and AoA of the
company. A company cannot authorise or ratify any act legally outside the
memorandum. This will be regarded as the ultra vires of the company
 The resolution made by the majority should not be inconsistent relating to The
Companies Act or any statutes. It should also not commit fraud on the minority by
removing their rights.

Principle of Non-Interference: The general rule states that during a difference among the
members, the majority decides the issue. If the majority crushes the rights of the
minority shareholders, then the company law will protect it. However, if the majority
exercises its powers in the matters of a company’s internal administration, then the courts
will not interfere to protect the rights of the majority.

Foss Versus Harbottle: Foss v. Harbottle lays down the basics of the non-interference
principle. The reasons for the rule is that, if there is a complaint on a certain thing which the
majority has to do if there is something done irregularly which the majority has to do
regularly or if there is something done illegally which the majority has to do legally, then
there is no use to have a litigation over such thing. As in the end, there will be a meeting
where the majority will fulfil their wishes and make decisions.
Benefit and Justification: The benefit and the justification of the decision of the case
are:

 Recognises the country’s legal personality

 Emphasises the necessity of the majority making the decisions
 Avoid the multiplicity of suits

EXCEPTIONS TO THE RULE: The rule is not absolute for the majority; the minority also
have certain protections. The Non-interference principle does not apply to the following:

Ultra Virus Act: An individual shareholder can take action if they find that the majority has
done an illegal act or ultra virus act. The individual shareholder has the power to restrain the
company. This is If the majority commits fraud on the minority, then the minority can take
necessary action. If the definition of fraud on the minority is unclear, then the court will
decide on the case according to the facts.

Wrongdoer in Control: If the company is in the hands of the wrongdoer, then the minority
of the shareholder can take representation act for fraud. If the minority does not have the right
to sue, then their complaint will not reach the court as the majority will prevent them from
suing the company.

Resolution Requiring Special Majority: If the act requires a special majority, but it passes
by a simple majority, then an individual shareholder can take action.

Personal Action: The majority of shareholders always oblige to the rights of the individual
membership. The individual member has the right to insist on the majority on compliance
with the statutory provisions and legal rules.

Breach of Duty: If there is a breach of duty by the majority of shareholders and directors,
then the minority shareholder can take action.

Prevention of Oppression and Mismanagement: To prevent the majority of shareholders

from oppression and mismanagement, the minority can take action against them.

Oppression and Mismanagement in Companies (SN) + Provisions of

Oppression and Mismanagement under ICA with the help of Decided
cases.

The terms oppression and mismanagement are not defined under the Companies Act, 2013.
These terms are to be interpreted by the court depending upon the facts of each case.
Mismanagement refers to practices of managing the company incompetently and dishonestly.
Violation of Memorandum of Association, Articles of Association, or other statutory
provisions would amount to mismanagement. In the case of Elder v. Watson Limited, the
term oppression was defined. Oppression refers to a misdemeanour committed by majority
shareholders upon the minority shareholders of the company.

Chapter XVI of the Companies Act, 2013 deals with the prevention of oppression and
mismanagement. The majority rule is normally followed in the company and thereby, courts
do not interfere to protect minority rights. However, prevention of oppression and
mismanagement is an exception to the rule.

Section 241 states that an application to the Tribunal for relief in cases of oppression, etc can
be made. Any member of the company can file an application under section 241 subject to
fulfilling the requirement under section 244. The complaint can be made when the company
affairs have been conducted in a manner prejudicial to the public interest or against the
company’s interests, or oppressive to a particular member or other members of the company.

A material change has been brought in the company that is prejudicial to the company or its
members. Material change can include a change in the number of Board of Directors, any
class of shareholders, ownership of the company’s shares, etc. Any member of the company
who is eligible to apply under section 244 of the Act may apply to the Tribunal.

If the Central Government believes that the company affairs are being conducted in a manner
prejudicial to public interest it may apply to the Tribunal. An application under this section
should be made to the Principal bench of the Tribunal.

The Central Government may initiate a case against such person and refer him to the Tribunal
and request the Tribunal to enquire into the case. The Tribunal will inquire and record its
decision as to whether such person is fit and proper to manage the company or not. Section
241(4) provides that the person against whom the case is filed becomes a respondent to the
application. Section 241(5)(a) states that the application filed by the Central Government
must contain concise statements of circumstances and materials necessary for an inquiry.
Section 241(5)(b) states that the application shall be signed and verified in the manner
provided under the Code of Civil procedure, 1908.

To conclude, section 241 provides the procedure for oppressed shareholders to file an
application to the Tribunal for relief in cases of oppression and mismanagement. Only
members who fulfill the criteria can apply under section 241. Section 244 provides the
members who may apply under section 241. Companies having share capital have different
criteria in comparison to the company without share capital. Section 242 deals with the
powers of the Tribunal. The Tribunal has many powers to provide relief to the minority
shareholders. Thus, oppression and mismanagement can be checked by the Tribunal and
relief may be granted.

Significance of Meetings in a Company + Process to be followed for

conducting a proper meeting in Company.

WHAT IS A MEETING- The meeting is an assembly of persons whose consent is required

for anything to decide, expressing their consent by a proper majority of votes, whether or not
that thing should be done. The expression in its individual sense means a conglomeration of
the meetings held in a particular sessions and sometimes is equated with the session. It is
wide enough to embrace not only one sitting but all the sittings within a particular session.

According to Mozley & Whitley’s Law Dictionary, Meeting means a gathering or assembly
of persons convened for the conducting of business, i.e. of a company, or relating to the
affairs of the bankrupt. Such meetings include Statutory Meeting, Annual general meeting
and extraordinary general meeting.

A meeting must do corporate act- The principle that corporate or collective act must be done
by “meeting” has universal acceptance. The cases have tried to find out the validity of ‘an
act’ or ‘resolution’ or of a proceeding or transaction and in its search have decided whether a
particular meeting could be treated as a ‘meeting’ in law. As far as Indian law is concerned, it
appears clearly settled that unless a validity called meeting has met, its act cannot have legal
force. Invalidity may creep in several ways and would affect the constitution of meeting
itself.

Sometimes it is thought that why meeting is important. Because of the fact that the company
is an artificial person so it cannot do any act by itself. It must act through some human
intermediary. In absence of any human, no meeting is possible. Law empowers the members
to do certain things. This right is reserved for them to do the act in company’s general
meetings.

REQUISITES OF A VALID MEETING: There are various requisites of a valid meeting.

For every meeting in order to be valid, it must be - Duly convened, Properly constituted and
Properly conducted

Duly convened means convened by the proper authority. The proper authority to convene the
meeting is the Board of directors, share holders or Company Law Board. A proper and
adequate notice must have been given to all those who are entitled to attended the meeting.

For a meeting to be properly and legally constituted there must be proper quorum, a proper
person in the chair and proper compliance with the relevant provisions of the Articles of
Association and the Act.

Proper conduct of the meeting means that proper rules for ascertaining sense of the meeting
should be there. The rules for discussion and order in debate must be observed. The
proceedings should also be recorded properly.

KINDS OF MEETING: There are various kinds of meetings. They are:

1. Share holders meeting

i. Statutory meetings: The first meeting of the shareholders of a public company
is called as the statutory meeting. It has to be called within six months from
the date on which the company is entitled to commence business, but it cannot
be held within one month from that date. It is so because of the requirement of
Section 165 of the Company Act.
ii. Annual general meeting: It is an annual meeting of body of members. Every
company is required to call at least one meeting of its shareholders each year.
This meeting is known as annual general meeting. Every company whether
public or private, having share capital or not, limited or unlimited must hold
this meeting. The first annual general meeting of a company must be held
within eighteen months from the date of its incorporation, and then no meeting
will be necessary for the year of incorporation and the following year.
iii. Extraordinary general meeting: Clause 47 of Table A provides that all general
meetings other than AGM shall be known as extraordinary general meetings.
The Board may call for such type of a meeting as and when required. An
extraordinary general meeting also becomes necessary on requisition, for
Section 169 provides that on requisition of a given number of shareholders the
 directors must forthwith call a meeting. The requisition must be signed by the
holders for at least one-tenth paid-up capital having the right to vote on the
matter of requisition.
iv. Class meetings
2. Board meetings
3. Meetings of committees of the Board
4. Meetings of Debenture holder
5. Meetings of the creditors
 For the purpose other than winding up
 For winding up
6. Meetings of contribution in winding up