COMPANY LAW

V SEMESTER LLB
What are the advantages and disadvantages of incorporation
of a company ?

Advantages of Incorporation of a Company

1. Creates a Separate Legal Entity: This states that a
company is independent and separate from its members, and
the members cannot be held liable for the acts of the
company, even when a particular member owns majority of
shares.
This was held in the case of Salomon v Salomon & Co. Ltd.
(1897) AC 22. Salomon transferred his business of boot
making, initially run as a sole proprietorship, to a company
(Salomon Ltd.), incorporated with members comprising of
himself and his family. The price for such transfer was paid
to Salomon by way of shares, and debentures having a
floating charge (security against debt) on the assets of the
company. Later, when the company’s business failed and it
went into liquidation, Salomon’s right of recovery (secured
through floating charge) against the debentures stood prior
to the claims of unsecured creditors, who would, thus, have
recovered nothing from the liquidation proceeds. The claims
of certain unsecured creditors in the liquidation process of
Salomon Ltd., where Salomon was the majority shareholder,
was sought to be made personally liable for the company’s
debt. Hence, the issue was whether, regardless of the
separate legal identity of a company, a shareholder/controller
could be held liable for its debt, over and above the capital
contribution, so as to expose such member to unlimited
personal liability. The House of Lords held that, as the
company was duly incorporated, it is an independent person
with its rights and liabilities appropriate to itself, thus,
making Salomon & Co. Ltd liable, and not Salomon.
2. Company has Perpetual Succession: The term perpetual
succession means continuous existence, which means that a
company never dies, even if the members cease to exist. The
membership of a company changes from time to time, but
that has no effect on the existence of the company. The
company only comes to an end, when it is wound up
according to law, as per the provisions of the Companies Act,
2013. Re Noel Tedman Holdings Pty Ltd (1967) Qd R
56 stated that a company’s members may come and go but
this does not affect the legal personality of the company
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 3. Can own Separate Property: Since a company is termed as
a separate legal entity in the eyes of law, it can hold property
in its own name and the members cannot claim to be the
owner of the companies property(s). The Supreme Court, in
the case of Bacha F. Guzdar v CIT Bombay stated that a
company being a legal person, in which all its property is
vested and by which it is controlled, managed and disposed
of a member cannot, ensure the companies property on its
own name. In Macaura v. Northern Assurance Co. Ltd., a
shareholder of a timber company, held all shares of the
company but one. He also insured the timber (asset of the
company) on his own name, which was destroyed in fire.
When he sought compensation, it was held that they were not
liable to pay any money to the shareholder, in lieu of the
timber since he did not own the timber and that timber,
which the company owned was not insured.
4. Capacity to sue and be sued: The company has the capacity
of suing a person or being sued by another person in its own
name. A company, though can be sued or sue in its own
name, it has to be represented by a natural person and any
complaint which is not represented by a natural person is
liable to be dismissed in the same way in which an individual
complaint is liable to be dismissed in the absence of the
complainant.
5. Easier access to Capital: Raising capital is easier for a
corporation, since a corporation can issue shares of stock.
This may make it easier for your business to grow and
develop. If the in the market for a bank loan, that’s another
reason to incorporate, since n most cases, banks prefer and
easily lend money to incorporated business ventures.

Disadvantages of Incorporation of a Company

1. Cost – The initial cost of incorporation includes the fee
required to file your articles of incorporation, potential
attorney or accountant fees, or the cost of using an
incorporation service to assist you with completion and filing
of the paperwork. There are also ongoing fees for maintaining
a corporation.
2. Double Taxation – Some types of corporations such as a C
Corporation, have the potential to result in “double taxation.”
Double taxation occurs when a company is taxed once on
profits, and again on the dividends paid to shareholders.
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 3. Loss of Personal “Ownership” – If a corporation is a stock
corporation, one person doesn’t retain complete control of the
entity. The corporation is governed by a board of directors
who are elected by shareholders.
4. Required Structure – When you form a corporation, you
are required to follow all of the rules outlined by the state in
which you filed. This includes the management of the
corporation, operational requirements and the corporation’s
accounting practices.
5. Ongoing Paperwork – Most corporations are required to file
annual reports on the financial status of the company. The
ongoing paperwork also includes tax returns, accounting
records, meeting minutes and any required licenses and
permits for conducting business.
6. Difficulty Dissolving – While perpetual existence is a benefit
of incorporating, it can also be a disadvantage because it can
require significant time and money to complete the necessary
procedures for dissolution.
7. Lifting of Corporate Veil – From the juristic point of view, a
company is a legal person distinct from its
members [Salomon v. Salomon and Co. Ltd. (1897) A.C 22].
This principle may be referred to as the ‘Veil of incorporation’.
The courts, in general, consider themselves bound by this
principle. The effect of this Principle is that there is a fictional
veil between the company and its members. That is, the
company has a corporate personality which is distinct from
its members. But, in a number of circumstances, the Court
will pierce the corporate veil or will ignore the corporate veil
to reach the person behind the veil or to reveal the true form
and character of the concerned company. The rationale
behind this is probably that the law will not allow the
corporate form to be misused or abused. In those
circumstances in which the Court feels that the corporate
form is being misused, it will rip through the corporate veil
and expose its true character and nature.

What is the doctrine of ultra-vires?

Ultra-vires
It is a Latin term made up of two words “ultra” which means
beyond and “vires” meaning power or authority. So we can say that
anything which is beyond the authority or power is called ultra-
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vires. In the context of the company, we can say that anything
which is done by the company or its directors which is beyond their
legal authority or which was outside the scope of the object of the
company is ultra-vires.
Doctrine of Ultra-Vires
Memorandum of association is considered to be the constitution of
the company. It sets out the internal and external scope and area
of company’s operation along with its objectives, powers, scope. A
company is authorized to do only that much which is within the
scope of the powers provided to it by the memorandum. A company
can also do anything which is incidental to the main objects
provided by the memorandum. Anything which is beyond the
objects authorized by the memorandum is an ultra-vires act.

Origin of the doctrine

The doctrine of ultra-vires first time originated in the classic case
of Ashbury Railway Carriage and Iron Co. Ltd. v. Riche, (1878) L.R.
7 H.L. 653, which was decided by the House of Lords. In this case
the company and M/s. Riche entered into a contract where the
company agreed to finance construction of a railway line. Later on,
directors repudiated the contract on the ground of its being ultra-
vires of the memorandum of the company. Riche filed a suit
demanding damages from the company. According to Riche, the
words “general contracts” in the objects clause of the company
meant any kind of contract. Thus, according to Riche, the company
had all the powers and authority to enter and perform such kind
of contracts. Later, the majority of the shareholders of the
company ratified the contract. However, directors of the company
still refused to perform the contract as according to them the act
was ultra-vires and the shareholders of the company cannot ratify
any ultra-vires act.
When the matter went to the House of Lords, it was held that the
contract was ultra-vires the memorandum of the company, and,
thus, null and void. Term “general contracts” was interpreted in
connection with preceding words mechanical engineers, and it was
held that here this term only meant any such contracts as related
to mechanical engineers and not to include every kind of contract.
They also stated that even if every shareholder of the company
would have ratified this act, then also it had been null and void as
it was ultra-vires the memorandum of the company. Memorandum

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of the company cannot be amended retrospectively, and any ultra-
vires act cannot be ratified.
What is the need or purpose of the doctrine of ultra-vires?
This doctrine assures the creditors and the shareholders of the
company that the funds of the company will be utilized only for the
purpose specified in the memorandum of the company. In this
manner, investors of the company can get assured that their
money will not be utilized for a purpose which is not specified at
the time of investment. If the assets of the company are wrongfully
applied, then it may result into the insolvency of the company,
which in turn means that creditors of the company will not be paid.
This doctrine helps to prevent such kind of situation. This doctrine
draws a clear line beyond which directors of the company are not
authorized to act. It puts a check on the activities of the directors
and prevents them from departing from the objective of the
company.
Difference between an Ultra-Vires and an Illegal act
An ultra-vires act is entirely different from an illegal act. People
often mistakenly use them as a synonym to each other, while they
are not. Anything which is beyond the objectives of the company
as specified in the memorandum of the company is ultra-vires.
However, anything which is an offense or draws civil liabilities or
is prohibited by law is illegal. Anything which is ultra-vires, may
or may not be illegal, but both of such acts are void-ab-initio.
The doctrine of ultra-vires in Companies Act, 2013
Section 4 (1)(c) of the Companies Act, 2013, states that all the
objects for which incorporation of the company is proposed any
other matter which is considered necessary in its furtherance
should be stated in the memorandum of the company.
Whereas Section 245 (1) (b) of the Act provides to the members and
depositors a right to file a application before the tribunal if they
have reason to believe that the conduct of the affairs of the
company is conducted in a manner which is prejudicial to the
interest of the company or its members or depositors, to restrain
the company from committing anything which can be considered
as a breach of the provisions of the company’s memorandum or
articles.

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Basic principles regarding the doctrine
1. Shareholders cannot ratify an ultra-vires transaction or act
even if they wish to do so.
2. Where one party has entirely performed his part of the
contract, reliance on the defense of the ultra-vires was
usually precluded in the doctrine of estoppel.
3. Where both the parties have entirely performed the contract,
then it cannot be attacked on the basis of this doctrine.
4. Any of the parties can raise the defense of ultra-vires.
5. If a contract has been partially performed but the
performance was insufficient to bring the doctrine of estoppel
into the action, a suit can be brought for the recovery of the
benefits conferred.
6. If an agent of the corporation commits any default or tort
within the scope of his employment, the company cannot
defend it from its consequences by saying that the act was
ultra-vires.
Exceptions to the doctrine
1. Any act which is done irregularly, but otherwise it is intra-
vires the company, can be validated by the shareholders of
the company by giving their consent.
2. Any act which is outside the authority of the directors of the
company but otherwise it is intra-vires the company can be
ratified by the shareholder of the company.
3. If the company acquires property in a manner which is ultra-
vires of the contract, the right of the company over such
property will still be secured.
4. Any incidental or consequential effect of the ultra-vires act
will not be invalid unless the Companies Act expressly
prohibits it.
5. If any act is deemed to be within the authority of the company
by the Company’s Act, then they will not be considered as
ultra-vires even if they are not expressly stated in the
memorandum.
6. Articles of association can be altered with retrospective effect
to validate an act which is ultra-vires of articles.
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Types of ultra-vires acts and when can an ultra-vires act be
ratified?
Ultra-vires acts can be generally of four types:
1. Acts which are ultra-vires to the Companies Act.
2. Acts which are ultra-vires to the Memorandum of the
company.
3. Acts which are ultra-vires to the Articles of the company but
intra-vires the company.
4. Acts which are ultra-vires to the directors of the company but
intra-vires the company.
Acts which are ultra-vires to the Companies Act
Any act or contract which is entered by the company which is
ultra-vires the Companies Act, is void-ab-initio, even if
memorandum or articles of the company authorized it. Such act
cannot be ratified in any situation. Similarly, some acts are
deemed to be intra-vires for the company even if they are not
mentioned in the memorandum or articles because the Companies
Act authorizes them.
Acts which are ultra-vires to the memorandum of the company
An act is called ultra-vires the memorandum of the company if, it
is done beyond the powers provided by the memorandum to the
company. If a part of the act or contract is within the authority
provided by the memorandum and remaining part is beyond the
authority, and both the parts can be separated. Then only that
part which is beyond the powers is considered as ultra-vires, and
the part which is within the authority is considered as intra-vires.
However, if they cannot be separated then whole contract or act
will be considered as ultra-vires and hence, void. Such acts cannot
be ratified even by shareholders as they are void-ab-initio.
Acts which are ultra-vires to the Articles but intra-vires to the
memorandum
All the acts or contracts which are made or done beyond the
powers provided by the articles but are within the powers and
authority given by the memorandum are called ultra-vires the
articles but intra-vires the memorandum. Such acts and contracts
can be ratified by the shareholders (even retrospectively) by
making alterations in the articles to that effect.
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Acts which are ultra-vires to the directors but intra-vires to the
company
All the acts or contracts which are made by the directors beyond
the powers provided to them are called acts ultra-vires the
directors but intra-vires the company. The company can ratify
such acts and then they will be binding.
Development of the doctrine
Eley v The Positive Government Security Life Assurance Company,
Limited, (1875-76) L.R. 1 Ex. D. 88
It was held that the articles are not a matter between the company
and the plaintiff. They may either bind the members or mandate
the directors, but they do not create any contract between plaintiff
and the company.
The Directors, &C., of the Ashbury Railway Carriage and Iron
Company (Limited) v Hector Riche, (1874-75) L.R. 7 H.L. 653.
The objects of the company as per the memorandum of association
were to supply and sell some material which is required in the
construction of the railways. Here the contract was for
construction of railways which was not in the memorandum of the
company and thus, was contrary to them. As the contract was
ultra-vires the memorandum, it was held that it could not be
ratified even by the assent of all the shareholders. If the sanction
had been granted by passing a resolution before entering into the
contract, that would have been sufficient to make the contract
intra-vires. However, in this situation, a sanction cannot be
granted with a retrospective effect as the contract was ultra-vires
the memorandum.
In Shuttleworth v Cox Brothers and Company (Maidenhead),
Limited, and Others, [1927] 2 K.B. 9
It was held that if a contract is subject to the statutory powers of
alteration contained in the articles and such alteration is made in
good faith and for the benefit of the company then it will not be
considered as a breach of the contract and will be valid.
In Re New British Iron Company, [1898] 1 Ch. 324
It was held that in this particular case the directors will be ranked
as ordinary creditors in respect of their remuneration at the time
of the winding-up of the company. This was stated because
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generally articles are not considered as a contract between the
company and the directors but only between shareholders.
However, in this particular case, the directors were employed, and
they had accepted office on the footing of the articles of association.
So at the time of winding-up of the company they were considered
as the creditors.
Rayfield v Hands and Others, [1957 R. No. 603.]
Field-Davis Ltd. was a private company carrying on business as
builders and contractors, The plaintiff, Frank Leslie Rayfield, was
the registered holder of 725 of those shares, and the defendants,
Gordon Wyndham Hands, Alfred William Scales and Donald
Davies were at all material times the sole directors of the company.
THere was a provision in the Articles of association of the company
where it was required that if he wants to sell his shares, he will
inform the directors, who will buy them equally at a fair valuation.
However, when he informed the directors, they refused to buy them
by saying that there is no such liability imposed by the articles
upon them.
The plaintiff claimed that fair value of the shares must be
determined and directors must be ordered to purchase them at a
fair value. It was held that articles of the company required the
directors to buy the shares at a fair price, but the relationship
between them was not as a member and director but as a member
and a member.
Effects of ultra vires Transactions – Doctrine of Ultra Vires
1. Void ab initio: The ultra vires acts are null and void ab initio.
These acts are not binding on the company. Neither the
company can sue, nor it can be sued for such acts.[Ashbury
Railway Carriage and Iron Company v. Riche
].
2. Estoppel or ratification cannot convert an ultra-vires act into
an intra-vires act.
3. Injunction: when there is a possibility that company has
taken or is about to undertake an ultra-vires act, the
members can restrain it from doing so by getting an
injunction from the court. [Attorney General v. Gr. Eastern
Rly. Co., (1880) 5 A.C. 473].

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 4. Personal liability of Directors: The directors have a duty to
ensure that all corporate capital of the company is used for a
legitimate purpose only. If such funds are diverted for a
purpose which is not authorized by the memorandum of the
company, it will attract a personal liability for the directors.
In Jehangir R. Modi v. Shamji Ladha, [(1866-67) 4 Bom.
HCR (1855)], the Bombay High Court held, “A shareholder
can maintain an action against the directors to compel them
to restore to the company the funds of the company that have
by them been employed in transactions that they have no
authority to enter into, without making the company a party
to the suit”.
Criminal action can also be taken in case of a deliberate
misapplication or fraud. However, there is a small line between an
act which is ultra-vires the directors and acts which are ultra-vires
the memorandum. If the company has authority to do anything as
per the memorandum of the company, then an act which is done
by the directors beyond their powers can also be ratified by the
shareholders, but not otherwise.
1. If any property is purchased with the money of the company,
then the company will have full rights and authority over
such property even if it is purchased in an ultra-vire manner.
2. Relationship of a debtor and creditor is not created in an
ultra-vires borrowing. [In Re. Madras Native Permanent
Fund Ltd., (1931) 1 Com Cases 256 (Mad.)].
Effects of an act which is Ultra Vires – on borrowings
Any borrowing which is made by an act which is ultra-vires will be
void-ab-initio. It will not bind the company and company and
outsiders cannot get them enforced in a court.
Members of the company have power and right to prevent the
company from making such ultra-vires borrowings by bringing
injunctions against the company.
If the borrowed funds of the company are used for any ultra-vires
purpose, then directors of the company will be personally liable to
make good such act. If the company acquires any property from
such funds, the company will have full right to such property.
No estoppel or ratification can convert an ultra-vires borrowings
into an intra-vires borrowings, as such acts are void from the very
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beginning. As no debtor and creditor relationship is created in
ultra-vires borrowings only a remedy in rem and not in personam
is available.
Doctrine likely to lose sanctity
It is proposed in the Companies Amendment Bill,2016 that instead
of adopting a universal memorandum, business will be free to
adopt a model memorandum of association. So now the new
companies will be enjoying the benefit of having a single object
clause which states that they will be engaged in any lawful act or
business. In this situation, it would be challenging to trace out that
which act is ultra-vires and which act is intra-vires. The only case
where it will be possible will be when a company specifies the exact
business instead of just a general clause.

Who is a 'promoter' ? What are his duties and liabilities.

Definition of promoter
The definition of the phrase “promoter” has been defined in Section
2 (69) of Companies Act, 2013. The term has been used specifically
in Sections 35, 39, 40, 300 and 317 of the Act. Section 2 (69) of
the Act states that promoter is a person whose name has been
mentioned in the prospectus of the company or is identified in the
annual returns of the company, or any person who has direct or
indirect control over the affairs of the company, whether as a
stakeholder or as a director, or on whose direction the Board of
Directors act. In simple words, a promoter is a person who
performs the various preliminary steps like making the prospectus
of the company, floating the securities in the market, etc. but if a
person is doing this in a professional capacity, he wouldn’t be
considered a promoter.
In Bosher v. Richmond Land Co. (1892), the term Promoter has
been defined as a person who brings about the incorporation and
organization of a corporation. He brings together the persons who
become interested in the enterprise, aids in procuring
subscriptions, and sets in motion the machinery which leads to
the formation itself.
Statutory definition – Section 2(69) of the Companies Act, 2013

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The Companies Act, 2013 contains a statutory definition of the
promoter which is also more or less in terms of functional
categories: Promoter means a person
1. who has been named as such in a prospectus or is identified
by the company in the annual return referred to in Section
92;
2. who has control over the affairs of the company, directly or
indirectly, whether as a shareholder, director or otherwise;
3. in accordance with whose advice, directions or instructions
the Board of directors of the company is accustomed to act.
The proviso excludes persons acting in a professional
capacity
Types of promoters
As stated above, a promoter is the one who conceives the idea of
formation of a company. An individual, an association of a person,
a firm or a company, can act as a promoter. A promoter may be an
occasional, professional, managing or financial promoter. A
professional promoter is the one who hands over the reign of the
company to the stakeholders when the company is up and
running. Financial promoters are those promoters, who promote
financial institutions or banks. Their main aim is to assess the
financial situation of the market and form a company at the
opportune moment. In the case of managing promoters, they not
only help in the formation of the company but when the company
is formed, they get managing agency rights in the company.
Occasional promoters are those whose main work is to float the
company and do all the preliminary work. Although they do not do
the promotion work routinely, they may float a company and then
go back to their original profession.
Professional promoter
 Professional promoters are people who are specialists in
promoting new business ventures
 Professional promoters initiate all the steps in establishing a
new company; they have years of experience in promoting
various businesses, and with that experience, they promote
a company professionally.
 Professional promoters have the promotion of companies as
their occupation. Professional promoters are mostly not
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 directly connected with any specific company because they
have an occupation as promoters for various other
companies. They are connected to a specific company only at
the time of promotion.
 Once the professional promoters are done with the promotion
of the company, they pass on the management of the
company to their owners or shareholders, and then they
move to another new business venture or another company
to promote it.
Occasional promoter
 Occasional promoters are not involved in the promotion work
of a company on a regular basis, and they do not have
promotion as their occupation.
 Unlike professional promoters, occasional promoters do not
promote a series of companies from time to time; they
promote only a limited number of companies that they wish
to promote.
 Since occasional promoters have their own occupation or
profession apart from promoting a company and once the
promotion work is done they hand over the management of
the company to their owners or shareholders, they move back
to their profession.
 Normally, the occasional promoter has an interest in
promoting a company or helping the company get into a
floating stage. They like to bring a company into existence
with their ideas. The occasional promoters can be lawyers,
accountants, doctors or any other professionals; if they have
an interest in promoting a company, they become occasional
promoters.
Financial promoter
 Certain financial institutions sometimes aid new business
ventures by bringing them into existence, and they become
their promoters and do the promotion of the company as a
normal promoter would.
 Most financial institutions provide financial assistance and
financial guidance to upcoming businesses and help them
launch their business ventures in the business world.

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  A company needs capital for its existence, and the promoter
works in order to bring the company to existence. The
financial promoter helps the company by funding its capital.
 Financial promoters most often collaborate with new
entrepreneurs who are willing to invest and persuade them
to invest in new businesses, thus promoting new businesses
by acquiring financial aid.
 Financial promoters provide the management and technical
expertise needed for a company to come into existence.
Entrepreneurial promoter
 The role of an entrepreneur is that of an initiator and a
promoter. The entrepreneur is also a promoter, as he does all
the initial work just like the promoter, like finding the correct
members for the business, entering into contract in his name
for the sake of the company, and bringing the business or the
company into existence.
 Individuals who conceive ideas for business and take all the
necessary steps required for the promotion of the company
are called entrepreneurial promoters.
 These types of promoters take necessary steps to set up a
business unit to give it shape and they take ultimate control
and manage the company. Mostly, the founder who does the
promotion is the entrepreneurial promoter.
 These types of promoters are those who work on the ground
level for the promotion of the company. As they are mostly
founders, they are liable for all the risks that occur during
the promotion of the company.
 The best examples of entrepreneurial promoters in India are
the Tata, Birla and Reliance groups, where the founders did
all the promotion of the company.

Functions of a promoter
A promoter plays various functions in the formation of a company,
from conceiving the idea to taking all the necessary steps to
convert the idea into reality. Some of the functions of a promoter
are-

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 One of the main functions of a promoter is to comprehend the
idea of formation of the company
 The promoter looks into the viability and feasibility of the idea
that whether the formation of the company will be profitable
and practicable or not.
 After the idea has been conceived, the promoter collects and
organizes the resources available to convert the idea into a
reality.
 The promoter decides the name of the Company and also
settles the content regarding the Articles of Association and
the Memorandum of Association of the Company.
 The promoter is the one who decides where the head office of
the company will be situated. The promoter also nominates
people or associations for vital posts. For instance, the
promoter may appoint the bankers, auditors and Directors of
the company for the first time.
 The promoter also prepares all the other necessary
documents which are required to incorporate a company.
 The promoter must undergo a detailed investigation, and
after analyzing all the concepts related to the idea discovered,
the promoter must think about the cost, profitability,
production, demand of the product, supply of such product
in the market, etc.
 The promoter has to enter into a preliminary contract with
the third parties on behalf of the company to collect all the
resources necessary to form a company. The promoter makes
contracts for the purchase of material, land, and machinery,
and he also recruits staff for the initial functioning of the
company.
 The promoter decides who can be the signatories to both the
MoA and AoA of the company. The signatories are those who
become the directors of the company, and the promoter gets
written consent from such signatories that they will act as
the directors.
 The promoter makes all the publicity for the company by way
of advertisement and marketing strategies during the period
of promotion of the company

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Defining the legal status of a promoter can be a very tough job. He
cannot be considered an employee, trustee or an agent of the
company. The role of the promoter ceases to exist when the
company is on the track and is handled by the Board and the
Management.
Legal position of a promoter
The legal position of the promoter of a company is very complicated
to understand. The legal position of the promoter is hard to fix,
even though he does all the work to bring the company into
existence. The legal position of the promoter is explained in detail
below:
Promoter is not an agent
The company should be in existence in order to make the promoter
an agent of the company, and since the company is not registered
during the promotion of the company, the promoter is not an
agent, and he is not liable for the contracts entered personally by
him on behalf of the company.
As the contract is held on behalf of the company, the company has
to ratify it; if it does not have the power to ratify and the promoter
still enters into a contract with third parties, then the promoter
would be liable. Hence, the promoter would be individually liable
and would not be liable as an agent of the company.
Promoter is not entitled to expenses incurred
The promoter works in his own capacity for the existence of the
company, and he is not entitled to the expenses incurred from the
promotion.
If the promoter has incurred expenses during the promotion of the
company, the company has to reimburse the promoter for such
expenses. Hence, the promoter is legally not entitled to any
expenses incurred on behalf of the company during the promotion.
Promoter and his remuneration
The company may remunerate the promoter, but it is not
mandatory for the company to remunerate the promoter for the
work he has done. The remuneration can be paid by paying the
promoter a lump sum payment or commission for the work done
by him during the promotion of the company.

16
Normally, if the promotion of the company is held by the owners
or shareholders of the company, then the concept of remuneration
is immaterial, but in terms of professional promoters, as discussed
above, their remuneration is mandatory. Since the sole occupation
of the professional promoters is to promote a company, they ought
to be paid. The professional promoters get remuneration from
various companies that they have promoted.
Allotment of shares or debentures to the promoters
The company may allow and allot shares or debentures to the
promoters, or they can also give the option to purchase their
security at a future date. If the shares are allotted to the promoters,
then they become shareholders of the company, thus enjoying
ownership of the company to some extent.

The Indian law prohibits companies from granting Employee Stock

Option Plans (ESOPs) to promoters. This prohibition to grant
ESOPs is provided in Regulation 2(1)(i) of the Securities and
Exchange Board of India (Share Based Employee Benefit and
Sweat Equity) Regulations, 2021 and in Rule 12 of the Companies
(Issue of Share Capital and Debenture) Rules, 2014.
These rules and regulations are applicable to listed companies. The
promoters are excluded from the definition of employees, and thus
the granting of Employee Stock Options (ESOPs) is prohibited to
them.
This restriction does not apply to the promoters of the startups
registered with the Department of Promotion of Industry and
Internal Trade. The Company Law Committee (CLC), through
its 2016 Report, provided this exemption. The CLC recommended
that startups be given permission to grant Employee Stock Options
(ESOPs) to the promoters, as they might be working as employees
or whole-time directors. The grant of ESOPs to the promoters
would allow startups to compensate them adequately without the
cash flows being impacted.
Duties of a promoter
The promoters who form the company have certain basic duties
towards the company. A promoter has a relationship of confidence
and trust with the company, i.e., a fiduciary relationship. Keeping
this fiduciary relationship in mind, the promoter is under the
17
obligation to disclose all the material facts which relate to the
formation of the company. The promoter is also under the
obligation to not take any secret profit while carrying out the
promoting activities like buying a property and then selling it to
the company for profit, without making any disclosure. The
promoter is not barred from making profits while dealing with
various parties. The only condition is that he is under the duty to
disclose such profits and not make any secret profits.
Fiduciary position of the promoter
The fiduciary position of the promoter with regards to a company
was first explained in the case of Erlanger v. New Sombrero
Phosphate Co. (1878). Lord Cairns, in this case, stated that the
promoters undoubtedly stand in a fiduciary position. The creation
and molding of the company is in their hands. They have the power
of defining when and how, in what shape and under whose
supervision the company shall come into existence and begin to
act as a business corporation.
Since the concept of promotion of a company gives a very
advantageous position to the promoter in relation to the company
proposed, the responsibility of a fiduciary position is fixed upon
the promoter by the courts. The first and foremost duty of a
promoter is that if he attains any form of profit through
transactions with the company and obtains money from the
shareholders, he must disclose all facts faithfully relating to such
transactions.
The fiduciary position of the promoter is explained in the below
case of Erlanger v. New Sombrero Phosphate Co. (1878).
Facts of the case
A group of people headed by Erlanger bought an island that had
phosphate mines for 55,000 euros. A company by the name of
Phosphate Co. was then incorporated on the same island, and
Erlanger was the promoter of the company. Erlanger named five
persons as directors of the company, out of which two were abroad,
and of the three others, two of them were entirely under Erlanger’s
control. The three directors purchased the island from Erlanger for
1,10,000 euros, a prospectus was issued, and shares of the
company were distributed. The shareholders adopted the purchase
of the land at their first meeting, but the facts were not disclosed
to them. The company failed, and the promoter was sued by the
18
liquidator for a refund of the profit and disclosure of a conflict of
interest.
Issue of the case
Whether the promoter will be sued for not disclosing the conflicting
interest despite having a fiduciary relationship with the company?
Judgment of the case
The only contention on behalf of the promoter was that the
company’s board of directors had knowledge of the facts of such a
purchase of the island from Erlanger. The Court rejected this
argument and held that if the promoter proposed to sell the island
to the company, it is incumbent upon him to take care of and
provide the company with a group of persons (directors) who have
the information that the property that they are going to purchase
is the promoter’s property. The group of persons must be
competent and impartial as to whether the purchase had to be
made or not. The Board of directors must be independent and
impartial in such purchases. In this case, the island was bought
by just three directors of the Board and out of whom two were
entirely under Erlanger’s control. Hence, the promoter had control
over the Board, and the disclosure of facts to the specific directors
of the Board cannot be considered a disclosure of facts to the
company. The promoter was held liable and was entitled to refund
the profit.
Promoter must work with utmost care and due diligence
The promoter has the duty that he must work with utmost care
and due diligence while performing the work of the company
during its promotion. Since the promoter is empowered with so
many powers and rights during the stage of the promotion of the
company, he is expected to work with the utmost care and due
diligence.
Liabilities of a promoter
Liability regarding irregularities in the prospectus
Section 26 describes what should be stated in the prospectus and
what reports should be included. The promoter may be held
accountable by the shareholders if this provision is not followed.
Civil liability

19
Section 35 outlines the civil liabilities for any prospectus
misstatements. Under this Section, a person who has subscribed
for the company’s shares and debentures on the basis of the
prospectus can hold the promoter accountable for any false
statements in the prospectus. The promoter may be held liable for
any loss or damage suffered by any person who subscribes for
shares or debentures as a result of the false statements made in
the prospectus. Specific provisions have also been provided under
Section 62 regarding the reasons on which the promoter can avoid
his liability. These remedies are available to anyone who can be
held accountable for a prospectus misstatement.
Criminal liability
Section 34 deals with the criminal liabilities of drafting a
prospectus that contains false claims. The promoters can be held
criminally accountable, in addition to the civil liabilities described
in the previous two examples, if the prospectus they released
contains misstatements. The penalty is either a two-year prison
sentence or a fine of up to 5000 rupees, or both. Unless he can
show that the inaccurate statement was inconsequential or that
he was justified in believing, on reasonable grounds, that the
statement was truthful at the time of prospectus issuing, the
promoter may be held criminally liable for misstatements.
Public examination of promoters
Section 300 gives the court the authority to order a public
investigation of all promoters found guilty of fraud in the
promotion or establishment of a corporation. If the liquidator’s
report indicates fraud in the promotion or establishment of the
company during its winding up, the promoter, like every other
director or officer of the company, can be held liable for public
examination by the court.
Personal liability
Promoters can be held personally liable for pre-incorporation
contracts.
 A promoter has to mention the true facts in the prospectus of
the company. If he does not do so, he may be held liable for
it. The promoter will be liable for any untrue statement which
has been made in the prospectus, and on the basis of that
untrue statement any person has subscribed to the securities

20
 of the company. The person may sue the promoter if he has
suffered any damage.
 Apart from civil liability, the promoter may be held criminally
liable also for mentioning any untrue statements in the
prospectus. A severe penalty will also be imposed on him if
he provides any untrue statement with the view of obtaining
capital.
 A promoter can be made liable to a public examination if
there are any reports which allege fraud in the formation of
the company or the promotion activities.
 The company can also proceed against the promoter in case
there is a breach of duty on the promoter’s part or he has
misappropriated any property of the company or is guilty of
breach of trust.
Position of a promoter in relation to the company before and after
its incorporation
Prior to incorporation of the company
Promoters found it extremely difficult to carry out promotion
activities before the Specific Relief Act was introduced in 1963.
Before this Act was passed, pre-incorporation contracts of the
company were held to be void. Such contracts also couldn’t be
ratified. Therefore, people were very hesitant to supply resources
for incorporation of the company without any definite contract.
Promoters were also very apprehensive about taking personal
liability. The introduction of the Specific Relief Act, 1963[4] made
it easier for the promoters to carry out incorporation activities, as
the promoters could now enter into pre-incorporation contracts
with third-parties.
Section 15 (h) and 19 (e) states that;
 The promoter should have entered into the contract for the
purpose and benefit of the company
 The terms provided in the incorporation agreement should
warrant such contracts.
 The contract should be ratified after the company, and it
should be informed to the opposite party.
A contract made between the promoter on the behalf of the
company and the third parties will still be considered as a contract
21
between two individuals. The right to ratify a contract does not lie
with the company inherently. The authority of ratifying a contract
should be given to the company through its memorandum. So a
company cannot be sued by the third party if the company does
not ratify the contract, even if the contract was beneficial for the
company.
In case the company does not have the authority to ratify the
contract (because such authority has not been provided in the
Articles), or the company does not ratify the contract, then the
promoter will be personally liable.
After Incorporation of the company
After the company comes into existence, and in case it ratifies the
contract entered into by the promoter, in such a case the contract
will become binding on the company and not the promoter. Section
15(h)[5] and 19 (e)[6] also state that the promoter can transfer his
rights and liabilities to the company, provided that such provision
is present in the incorporation agreement. Although the promoter
is not entitled to any kind of salary and remuneration. But the
general trend is to compensate the promoter in lump-sum after the
company has been set up. A promoter cannot be asked to be
compensated as a legal right. If the promoter is compensated at
all, the compensation given to him is on the basis of equity ad
fairness. If any shares are being allotted to the promoter of the
company, the promoter also becomes a member of the company
automatically.
Privileges of a promoter
Right to indemnity
When more than one member acts as the company’s promoter, one
promoter can sue the other for the compensation and damages he
paid. Promoters are jointly and severally accountable for any false
statements made in the prospectus, as well as for any hidden
profits.
Right to recover genuine preliminary expenditures
A promoter is entitled to reimbursement for valid preliminary
expenditures incurred in the establishment of the firm, such as
advertising costs, solicitors’ fees, and surveyors’ fees. It is not a
contractual entitlement to receive the preliminary expenses. It is

22
up to the company’s board of directors to decide. Vouchers should
be attached to the cost claim.
Right to remuneration
Unless there is a contract to the contrary, a promoter has no right
to remuneration from the company. Although the company’s
articles may provide for the directors to pay promoters a certain
sum for their services, this does not provide the promoters with
any contractual right to sue the company. This is just a power
granted to the company’s directors. However, because the
promoters are usually the directors, the promoters will earn their
remuneration in practice.
Case laws
Weaver Mills v. Balkies Ammal(1969)
The Madras High Court’s ruling in Weavers Mills Ltd. v. Balkies
Ammal [1969] broadened the applicability of Pre-incorporation
contracts. In this instance, the promoters agreed to buy several
properties for and on behalf of the firm that was being pushed.
When the firm was formed, it took possession of the land and
began to build facilities on it. It was held that the company’s title
to the property could not be set aside even if the promoter had not
conveyed the land to the firm after its incorporation.
Kelner v. Baxter (1866)
In Kelner v. Baxter (1866), the promoter accepted Mr. Kelner’s
promise to sell wine on behalf of an unformed company; however,
the corporation neglected to pay Mr. Kelner, and he sued the
promoters. The principal-agent relationship cannot exist prior to
incorporation, according to Erle CJ, and the principal of an agent
cannot exist if the firm does not exist. He goes on to say that the
company cannot assume obligation for a pre-incorporation
contract by adoption or ratification because a stranger cannot
ratify or accept a contract, and the company was a stranger
because it did not exist at the time the contract was formed. As a
result, he concluded that the promoters are personally
accountable for the pre-incorporation contract because they
consented to it.
Probir Kumar Misra v. Ramani Ramaswami (2009)
The question of whether the signatures of the promoters in the
Memorandum and Articles of Association were required in order to
23
make them liable arose. The Madras High Court held that, before
the incorporation of the company, there is no need for the promoter
to be either a signatory of the Memorandum or Articles of
Association, or shareholder or the Director of the Company. The
High Court of Madras further stated that the promoters are called
“midwives” of the business, as coined by Henry in the Law of
Corporations. It is the promoter who does all the major roles for
the purpose of bringing the corporate person into existence, like
proposing the objectives of the company, forming the original
scheme, making arrangements to get the company registered,
preparing a prospectus, Memorandum and Articles of Association,
etc., which are crucial for the company to come into existence.
Thus, the promoters can be held liable even though they may not
be either signatories to the Memorandum or Articles of Association
or a shareholder or the Director of the company, as they are so
connected to the company and its incorporation.
Conclusion
It can be said that a promoter can be an individual, a company, or
an association of person which conceives the idea of formation of
a company, undertake all the activities which are necessary for the
company’s incorporation and brings about the actual existence of
the company as a separate legal entity. The promoter nominates
the directors, bankers and auditors of the company and also
decide the contents of the Articles of the company. The promoter
can be called as a molding block who gives basic shape to the
company, and his role is of utmost important. The most important
part while incorporating a company is the promotion of the
company. It is in the time of promotion that all the vital steps to
incorporate a company take place, and the promoters are the
persons who do the promotion of a company. The promoter
undoubtedly has a great influence on the promotion and
incorporation of a company.
1. Are Individuals alone eligible to become the promoters of a
company?
It is not necessary that the individuals alone have to be the
promoters of the company. An individual, an association of
persons, a firm or a company—anyone can be a promoter of a
company. Whoever helps the company in the early stages of
incorporation and aids in bringing the company into existence can
become its promoter.
24
2. What is the difference between the founder and promoter of the
company?
There is a very thin-line difference between the founder of the
company and the promoter of the company. The founder and the
promoter both have the idea on which the company is to be started.
Sometimes the founder may just have the idea, but he won’t do
any required work for the promotion of the company. At that time,
the founder may get help from the promoter to promote the
company. The founder is responsible for the company’s success or
failure throughout its lifetime, whereas the promoter is responsible
for the company only during the process of promotion. A founder
can also be a promoter.
3. What is promoter holding?
The promoter holding is the percentage of shares of the company
that is held by the promoter of such a company. Companies with
high promoter holding stocks are often considered safer for
investors to invest in. Since the promoter has knowledge of the
company’s actual performance and its capabilities, if the promoter
thinks that it is worth buying the shares, then there is a possibility
that the company will perform well in the future.

what is ‘Prospectus'? what are the remedies available in case

of its mis representation ?
A prospectus is a document issued by a company to invite deposits
or subscriptions from the public by way of issuing securities of the
company. It can be understood as a document or a booklet
containing crucial information about the company and its
securities for potential investors. Section 2(70) of the Companies
Act, 2013 defines a prospectus as “prospectus means any
document described or issued as a prospectus and includes a red
herring prospectus referred to in section 32 or shelf prospectus
referred to in section 31 or any notice, circular, advertisement or
other document inviting offers from the public for the subscription or
purchase of any securities of body corporate”
Meaning and purpose of a prospectus under Company Law
From the perspective of the issuer

25
A prospectus is a document that provides all the essential
information about the company at the time of raising an
investment from the public. It can be understood as an invitation
to offer the securities of the company. The public intending to
invest in the company can make an offer above the offered price
but within the price band. It is upon the company to allot shares
to the public in the manner it deems fit. Every time a company has
to raise an investment from the public, it is the duty of the
company to inform the public about its financial position and the
purpose of the investment. A prospectus is the first document
through which a company publicises or discloses its financial and
other relevant information.
Section 28(2) of the Companies Act, 2013 provides that any
document through which an offer for sale is made to the public
shall be deemed a prospectus. It is pertinent to note that the
document has to be issued to the public and not a particular set
of persons. Even if an advertisement is made in a newspaper
regarding certain shares left for purchase by the company, it shall
constitute a prospectus, as has been held by the Hon’ble Calcutta
High Court in Pramatha Nath Sanyal v. Kali Kumar Dutt (1924).
From the perspective of the Investor
In order to be able to make an informed decision regarding an
investment, an investor must have access to all the information
about a company before investing in it. Institutional investors
might receive such information without much trouble. However, it
is the retail investors whose interest might be compromised if such
information is not provided in due course. Thus, a prospectus
becomes the most crucial document for any investor intending to
invest in a company. This is also the reason why the company law
mandates the filing of a prospectus every time before raising a
public investment. It can also be safe to infer here that issuing a
prospectus is one of the means of ensuring good corporate
governance practices in a company as it encourages transparency,
accountability and responsibility.
Golden Rule by VC Kinderseley
The ‘Golden Rule’ of the prospectus was propounded by Judge VC
Kinderseley in the landmark judgement of The New Brunswick
Railway Company v. Muggeridge (1859). In this case, it was held
that “Prospectus is one of the means by which the investor is
informed about the soundness of the company’s venture.” The
26
essence of the rule is that it is mandatory on part of the company
to issue a prospectus; it is not only required to accurately put forth
all the relevant facts and information but also ensure that it does
not hide any information which might affect the decision of an
investor. The rule is also known as the ‘Golden Legacy’ as has been
described by Judge Pagewood in Henderson v. Lacon (1865).
This aforementioned rule has been reflected under various
provisions of the Companies Act, 2013 which seeks to protect the
interests of investors by providing comprehensive and elaborative
guidelines and requiring relevant disclosure of material facts to
ascertain the financial soundness of a company.
Essentials for a document to be called as a prospectus
The essential conditions required to be fulfilled for a document to
be considered as a prospectus under the Indian company law are
as follows:
1. Invitation to the Public – One of the most important points
that one must remember is that a prospectus is an invitation
to offer rather than an offer itself. This means that a company
makes an open declaration to the public at large that some of
its securities are available for subscription. A document shall
be deemed to be an invitation to the public only if it is open
for any person to subscribe, though there may be a possibility
that ultimately the securities may not be issued to him owing
to oversubscription or any other disqualification.
2. Invitation by the company – The prospectus must be issued
by the company itself that wishes to raise the funds. Even if
all the requisite disclosures are made available by the public
by some other authority, that would not satisfy the criteria
for making the invitation. However, an entity, on behalf of the
company or on the authorisation of the company, may follow
the stipulated process in order to make an invitation to offer
to the public. Hence, an invitation to offer must be made by
the company itself or on behalf of the company by some other
authority authorised by the company.
3. Nature of document and particulars therein – A
prospectus shall be in the nature of an invitation to offer,
allowing subscription to the securities of the company. Any
document merely disclosing the details of the securities shall
not be considered a prospectus. It must fulfil all the required
27
 stipulations that have been provided under the Companies
Act, which have been discussed in the later section of the
article.
4. Information regarding securities of the company – A
prospectus is required to contain all the details regarding the
securities. The prospectus must specify the nature of
securities, whether equity-based or debt-based. It must also
specify the category as to whether it is an equity or preference
share, debenture, bond, warrant, etc. It must specify the
number of securities available for subscription. It must also
provide for other particulars, such as redemption, rate of
interest, etc., as may be applicable to the category of
securities.
Advertisement for a prospectus under Company Law
Section 30 of the Act provides for certain particulars to be
mentioned whenever a prospectus is being advertised in any
manner for call for subscription to securities. These particulars
include specifying the contents of the memorandum regarding the
primary object for raising funds, liability of the members, amount
of total share capital, names of the signatories and the number of
shares subscribed by each of them, and the capital structure of
the company.
Types of prospectus under Company Law
The definition of prospectus under Section 2(70) is an inclusive
definition. It provides that a prospectus shall include a Shelf
Prospectus (as mentioned under Section 31), a Red Herring
Prospectus (as mentioned under Section 32), or any other
document inviting applications for subscription/purchase of
securities of the company. The various categories of prospectus
under the Companies Act, 2013 have been discussed hereafter.
Shelf prospectus
Drafting a prospectus is a cumbersome process as it requires a
number of disclosures and information to be passed on to the
investor. It may also be possible that a company makes multiple
public offers in one financial year itself. In such a case, it will
become nearly impossible for the company to draft an entirely new
prospectus every time. Yet, it is also crucial to note that significant
changes may take place in the financial status of the company. To

28
balance the interests of the company as well as that of investors,
the law provides for the concept of shelf prospectus.
Explanation to Section 31 of the Companies Act, 2013 provides
that “the expression “shelf prospectus” means a prospectus in
respect of which the securities or class of securities included therein
are issued for subscription in one or more issues over a certain
period without the issue of a further prospectus.” A company issues
a shelf prospectus when it has to offer for subscription by the
public, more than one round of issue. Shelf prospectus is a single
prospectus that can hold good for multiple public offers.
The Securities Exchange Board of India (SEBI) shall have the
power to prescribe the class or classes of listed companies that
may be allowed to file a shelf prospectus. The validity of a shelf
prospectus shall not exceed one year from the date of the first offer.
The provision also provides a more stringent rule for disclosures
by the company issuing a shelf prospectus.
An information memorandum has to be filed by the company while
filing a shelf prospectus, containing the following material facts:
 new charges created;
 all the changes in the financial position that have occurred
after the first offer of securities or the previous offer of
securities and before the succeeding offer of securities; and
 such other changes as may be prescribed.
Such an information memorandum must be filed with the
Registrar within the prescribed time period (three months) prior to
the issue of the second or subsequent offer made under the shelf
prospectus.
Further, it is also the obligation of the company to inform an
investor about the changes if they have been allotted the securities
in advance before the adjustments. Further, based on such
information, an investor has also given the right to withdraw their
application and they will be refunded their money within fifteen
days thereof.
Red Herring prospectus
Though most of us imagine big companies when talking about
investments and funding, mid-size and small companies also
require investments and they also make public offers. To safeguard
29
their rights and enable them to have better access to finance, the
law provides for red herring prospectus. Explanation to Section 32
of the Companies Act, 2013 provides the definition of a red herring
prospectus as “the expression “red herring prospectus” means a
prospectus which does not include complete particulars of the
quantum or price of the securities included therein.” A red herring
prospectus is a prospectus wherein information regarding either
the quantity of securities or the price of securities is not disclosed
by the company. Rather, the company only provides a price band.
This enables a company to gauge the worth of its securities and
enables them to achieve the requisite minimum subscription,
which may not otherwise be possible had they already supplied the
entire information .
A red herring prospectus is subjected to same regulations as a
prospectus. It has to be filed before the Registrar of Companies at
least three days before the issue has to be made public. Further,
the company must file the complete details of the issue with the
Registrar and the SEBI after the securities has been duly
subscribed to.
Abridged prospectus
A prospectus could run into hundreds of pages in a single issue,
which may prove to be a hectic task for retail investors. Retail
investors, having limited access to financial knowledge as well as
resources, might not be competent enough to understand the
intricate details mentioned in the prospectus. A solution to this
problem is an abridged prospectus.
Section 2(1) of the Companies Act, 2013 defines an abridged
prospectus as a memorandum containing the salient features of
an issue. The features to be included in an abridged prospectus
are to be provided by SEBI. Further, Section 33 of the Act
mandates for annexing an abridged prospectus along with form for
application of purchase of securities. However, the proviso to sub-
section (1) provides that this requirement may be dispensed with
where the form of application was issued for:
 “in connection with a bona fide invitation to a person to enter
into an underwriting agreement with respect to such securities;
or
 in relation to securities which were not offered to the public.”

30
Section 33(3) of the Act provides that if the company fails to comply
with the provisions of abridged prospectus as discussed above, it
shall be subjected to a penalty of up to Rs.50,000 for every default.
Deemed Prospectus
When a company wishes to issue its securities through an
intermediary, the document containing the details of such
securities is considered a deemed prospectus. Section 25(1) of the
Companies Act, 2013 governs the deemed prospectus. The
document shall be a deemed prospectus for the company whose
securities are being offered to the public.
Process for filing and issuing a prospectus under Company Law
Contents
For filing and issuing the prospectus of a public company, it must
be signed and dated and contain all the necessary information as
stated under Section 26 of the Companies Act, 2013:
1. Name and other crucial information, such as the registered
address of the office, its secretary, auditor, etc.;
2. The dates of issue, including the opening date and the closing
date;
3. Undertakings of the Board of Directors regarding separate
bank accounts for the purpose of keeping receipts of the
issue;
4. Undertakings of the Board of Directors regarding the details
of utilisation and non-utilisation of receipts of previous
issues;
5. Consent of the directors, auditors, and bankers to the issue,
and expert opinions;
6. The details of the resolution passed for the issue;
7. Procedure and time scheduled for the allotment of securities;
8. The capital structure of the company;
9. The objective of the issue;
10. The objective of the business and its location;
11. Particulars related to risk factors of the specific project,
gestation period of the project, any pending legal action and
other important details related to the project;
31
 12. The amount is payable on the premium;
13. Details of directors, their remuneration and the extent
of their interest in the company;
14. Reports for financial information such as auditor’s
report, report of profit and loss of the five financial years,
business and transaction reports, statement of compliance
with the provisions of the Act and any other report.
As per Section 26(4) of the Companies Act, 2013, the company
issuing the prospectus has to deliver a copy of the prospectus,
signed by every person whose name has been mentioned in the
prospectus as a director of the company or the attorney of the
director, to the Registrar on or before the date of publication.
Delivery of a copy of the prospectus to the registrar
As per Section 26(6) of the Companies Act 2013, the prospectus
shall duly state that a copy of the prospectus has been served to
the registrar. It should also mention the documents submitted to
the registrar along with the prospectus.

Registration of a prospectus
Section 26(7) states when the registrar can register a prospectus
when:
1. It fulfils the requirements of the provision; and
2. It contains the written consent of all the persons named in
the prospectus.
The invalidity of a prospectus
The prospectus is considered invalid if it is not issued within 90
days from the date of delivery to the Registrar.
Contravention of Section 26
The punishment for contravention of the mandatory provisions is
provided under Section 26(9) of the Act, which includes a fine of
not less than Rs. 50,000 extending up to Rs. 3,00,000.
Any person knowingly participating in the issue of prospectus even
after knowing that it is in contravention of the provisions shall be
punished with imprisonment up to a term of 3 years, or a fine of
more than Rs. 50,000 not exceeding Rs. 3,00,000.
32
Liability for misstatements in a prospectus under Company Law
A prospectus is used by potential investors to gather information
about the company. Thus, it is the duty of the company and its
authorised persons to make true and correct statements in the
prospectus. Generally, when false or incorrect information is
added to the prospectus, it becomes a misstatement. Even an
omission of important information amounts to a misstatement in
a prospectus. Making a false or misleading statement thus entails
certain liabilities. Under the Companies Act, 2013, there are two
types of liability for misstatements in the prospectus.
Civil Liability
Civil liability under the Companies Act, 2013 is provided
under Section 35. It provides that where a person has subscribed
to the securities of the company acting on any misstatement
included in the prospectus and has consequently suffered any
loss, the company and the persons authorising the issue of such
prospectus are liable for such loss, provided that certain
conditions are fulfilled. These conditions include:
1. Subscription to the securities acting upon the misstatement
2. Loss or damages due to such misstatement
3. Knowledge of the Defendant must be proved by the Plaintiff
4. Such misstatement must be material to the facts
If the above conditions are met, the Plaintiff can claim remedies
against the company as well as against the authorised personnel.
The remedies include rescission of the contract, damages, and
damages for the non-disclosure of material facts.
Criminal Liability
Apart from the civil liability in case of misstatements, Section 34
of the Act also provides the liability of the authorised personnel for
the misstatements in the prospectus. Criminal liability has been
provided under Section 447 of the Act. In case of fraud on the
Plaintiff (investor of the company), a criminal suit can be filed
against the following persons:
1. All the directors authorising the issue of the prospectus
2. All the proposed directors of the company
3. Each promoter
33
 4. Any expert involved in the issue
Section 447 of the Act prescribes a minimum imprisonment of six
months but not more than ten years, along with a fine which shall
not be less than the amount of damages suffered but not more
than three times of such amount. The proviso to the provision
provides that in case the issue involves a public interest, the
minimum term of imprisonment of the aforesaid persons shall be
three years.
Important judicial pronouncements
Kiran Mehta v. Universal Luggage Manufacturing Co. Ltd. (1988)
In this case, the Plaintiff filed a PIL against a company alleging that
the company had issued a prospectus containing false statements.
It was stated that the Plaintiff himself did not have any interest in
the matter but filed the case as the statements were likely to
confuse or mislead the general public. The Hon’ble Bombay High
Court dismissed the case stating that a locus standi of the Plaintiff
was required to file such a case.
Vijay Kumar Gupta v. Eagle Paint & Pigment Industries Ltd. (1997)
In this case, the question before the Company Law Board (now
replaced by the National Company Law Tribunal) was whether a
private company could issue advertisements for inviting deposits
from the public. It was held by the Board that a private company
cannot do so as per the provisions of the Act. Moreover, when the
company accepts deposits from its members or directors, it has to
obtain a declaration stating that the deposits are not a debt to the
company.
Mohandas Shenoy Adige v. Securities and Exchange Board of India
(2021)
In this case, the question raised by the complainant was whether
the non-compliance with the statements made in the prospectus
amounted to misstatement in the prospectus. The allegations
included that the company raised public funds only to syphon
funds to the group of companies. The Securities Appellate Board
held that no case of misstatement was found as the complainant
was unable to establish that the funds were actually being
syphoned. In case of no fact-based finding, the non-adherence with
the statements in the prospectus cannot be held to be
misstatements.
34
It was further held that “If a statement made in the prospectus is
not adhered to by the Company it does not become a misstatement.
At best it can be a case of the Company violating the terms and
conditions of the prospectus”.

Explain the types of meetings of company under company law.

Company meetings are formal gatherings of individuals who are
involved in the company’s operations, including shareholders,
directors, creditors and other stakeholders. These meetings are
conducted to discuss and decide on various aspects of the
company’s management, finances, strategy and legal obligations.
The primary purpose of these meetings is to ensure that the
company operates transparently, complies with statutory
requirements and makes informed decisions that align with its
goals and objectives.
Meetings in a corporate context are essential for several reasons:
1. Decision-Making: Meetings provide a platform for collective
decision-making, where the opinions and votes of
shareholders or directors can shape the future of the
company.
2. Transparency: Regular meetings ensure that the company’s
operations are transparent and that all stakeholders are
informed about the company’s financial status, strategic
plans and any issues that need to be addressed.
3. Compliance: Many types of company meetings are required
by law, such as Annual General Meetings (AGMs), ensuring
that the company adheres to legal and regulatory standards.
4. Accountability: Meetings hold directors and management
accountable to shareholders and other stakeholders by
providing a forum for them to report on their activities and
performance.
5. Conflict Resolution: Meetings offer a structured
environment where conflicts among stakeholders can be
discussed and resolved through dialogue and voting.

35
Given the critical roles that meetings play, it is essential that they
are conducted in a valid and legal manner, following specific
requisites.
Requisites of a Valid Company Meeting
For a company meeting to be considered valid and legally binding,
it must meet certain requisites. These requisites ensure that the
meeting is conducted in a manner that respects the rights of all
participants and adheres to the company’s legal obligations.
1. Proper Authority
The meeting must be convened by an individual or body with the
proper authority to do so, such as the board of directors, a
committee or a group of shareholders with the requisite power
under the company’s articles of association. If a meeting is called
without the appropriate authority, any decisions made during the
meeting may be invalidated.
2. Proper Notice
Proper notice of the meeting must be given to all eligible
participants. This notice should include the date, time, place and
agenda of the meeting. The notice period must comply with the
requirements set forth in the Companies Act, 2013, specifically
under Sections 101 and 102. Failure to provide adequate notice
can lead to the meeting’s decisions being challenged or invalidated.
3. Quorum
A quorum is the minimum number of members or shareholders
required to be present for the meeting to proceed. The quorum
ensures that the meeting represents a sufficient portion of the
company’s stakeholders. The specific number required for a
quorum will depend on the company’s articles of association and
the type of meeting being held.
4. Presiding Officer
A valid meeting must be presided over by a proper chairman or
presiding officer. The chairman is responsible for conducting the
meeting in an orderly manner, ensuring that the agenda is followed
and that all participants have the opportunity to speak. The
chairman’s role is important in maintaining the legality and
decorum of the meeting.
5. Valid Transaction of Business
36
The business conducted during the meeting must be within the
scope of the agenda provided in the notice. Any decisions made
outside of this agenda may be considered invalid. It is also
essential that the business is transacted in a manner that
complies with the company’s articles of association and relevant
laws.
6. Preparation of Minutes
Accurate minutes of the meeting must be prepared, documenting
the discussions, decisions and resolutions passed during the
meeting. These minutes serve as an official record and may be used
as evidence in legal proceedings or for future reference. The
minutes must be signed by the chairman or another authorised
individual.
Types of Company Meetings
Different types of company meetings serve various purposes and
are tailored to the specific needs of the company at different stages
of its operations. Below, we explore the primary types of company
meetings:
1. Statutory Meeting
A statutory meeting is the first meeting of shareholders, held by
public companies within a specified period after incorporation.
This meeting is essential for discussing the company’s formation,
financial position and the goals of the business. It provides an
opportunity for shareholders to understand the company’s
structure and future plans.

Features of Statutory Meeting:

 Held only once during the company’s lifetime.
 Provides shareholders with the statutory report detailing
share capital, assets and liabilities.
 Ensures transparency during the early stages of the
company’s operations.
Importance: The statutory meeting is critical for laying the
foundation of transparency and shareholder involvement in the
company’s operations.
2. Annual General Meeting (AGM)
37
The AGM is a mandatory meeting held by both public and private
companies at the end of each financial year. It serves as a platform
for presenting the company’s financial performance, electing
directors, declaring dividends and addressing shareholder
concerns.
Features of AGM:
 Mandatory annual event.
 Discusses financial statements, director appointments and
auditor reports.
 Provides shareholders with voting rights on key issues.
Importance: The AGM is a cornerstone of corporate governance,
ensuring that shareholders are informed and involved in the
company’s key decisions.
3. Extraordinary General Meeting (EGM)
An EGM is convened to address urgent or exceptional issues that
cannot wait until the next AGM. These meetings are usually called
for specific purposes such as mergers, acquisitions or changes to
the company’s rules.
Features of EGM:
 Held to discuss urgent issues outside the AGM schedule.
 Requires specific notice and agenda tailored to the issue at
hand.
 Decisions made are binding on the company.
Importance: EGMs allow companies to respond quickly to
significant events, ensuring that important decisions are made in
a timely manner.
4. Class Meetings
Class meetings are held for shareholders who hold a particular
class of shares, such as preference shares. These meetings address
issues that specifically affect that class, such as changes in
dividend rights or voting powers.
Features of Class Meetings:
 Exclusive to a particular class of shareholders.

38
  Focuses on issues like rights alterations or class-specific
decisions.
 Resolutions passed are only binding on the class concerned.
Importance: Class meetings ensure that the interests of different
shareholder classes are protected and that any changes to their
rights are made with their approval.
5. Board of Directors Meeting
The board of directors meets regularly to discuss and decide on the
company’s strategic direction, financial performance and key
management issues. These meetings are central to the company’s
governance and operational efficiency.
Features of Board Meetings:
 Regularly scheduled, often monthly or quarterly.
 Covers strategic planning, financial oversight and policy-
making.
 Decisions made by the board guide the company’s operations.
Importance: Board meetings are essential for maintaining
effective oversight of the company’s management and ensuring
that the company remains on track to achieve its objectives.
6. Committee Meetings
Committee meetings involve smaller groups within the board, such
as the audit committee, compensation committee or risk
management committee. These meetings focus on specific areas of
the company’s operations and provide detailed oversight.
Features of Committee Meetings:
 Specialised focus on areas like finance, compensation or risk.
 Involves experts and directors with specific knowledge.
 Reports and recommendations are submitted to the full
board for approval.
Importance: Committee meetings allow for in-depth analysis and
oversight of critical areas, ensuring that the company’s operations
are managed efficiently and effectively.
7. Debenture Holders Meeting

39
Debenture holder meetings are convened to discuss issues related
to debentures, such as repayment schedules, restructuring or
defaults. These meetings are important for maintaining the trust
and confidence of the company’s creditors.
Features of Debenture Holders Meetings:
 Focuses on matters related to debentures and debt
instruments.
 Provides a forum for negotiating terms and resolving
disputes.
 Decisions impact the company’s financial structure and
obligations.
Importance: These meetings ensure that the interests of
debenture holders are considered and that any issues related to
the company’s debt obligations are addressed transparently.
8. Creditors Meeting
Creditors meetings are typically held during insolvency or
liquidation proceedings to discuss the repayment of debts, asset
distribution and other financial matters. These meetings are vital
for ensuring that creditors receive fair treatment during the
liquidation process.
Features of Creditors Meetings:
 Held in the context of insolvency or liquidation.
 Focuses on debt repayment, asset allocation and solvency.
 Creditors vote on proposals related to the company’s financial
restructuring.
Importance: Creditors meetings play an important role in the fair
and orderly resolution of a company’s financial obligations during
insolvency.
9. Creditors and Contributors Meeting
These meetings are convened during the voluntary dissolution of a
company, involving both creditors and contributors
(shareholders). The discussions focus on the division of assets,
repayment of debts and distribution of any surplus funds.
Features of Creditors and Contributors Meetings:

40
  Involves both creditors and shareholders in the dissolution
process.
 Discusses asset division, debt repayment and surplus
allocation.
 Ensures transparency and fairness in the liquidation
process.
Importance: These meetings ensure that all stakeholders are
involved in the dissolution process and that their interests are
protected.

What are the different kinds of debentures?

Distinguish between a shareholder and debenture holders.

Debentures
As discussed above, a debenture is one of the capital market
instrument which helps business houses to raise funds from the
market for the development of the business. The word debenture
has been derived from the Latin word “debere” which means
borrowing or taking a loan. In layman’s language, debenture can
be defined as an acknowledgement of debt issued by the company
to the third parties under the common seal of the company. In
accordance with Section 2(30) of the Companies Act, 2013,
debentures include debenture stock issued by the company as an
evidence of debt taken by such company, either by creation or non-
creation of the charge over the assets of the company.
Salient Features of Debentures
Some of the salient features of debentures are as follow:
1. It is an acknowledgement of the debt;
2. It is issued by the company under its common seal;
3. Debentures can be both secured or unsecured;
4. The rate of interest and the date of payment is pre-
determined;
5. Debentures issued are freely transferrable by debenture
holders;
6. Debenture holders do not get any voting right in the
company;
7. Interest payable to the debenture holders are charged against
the profits of the company.

Provisions Governing Debentures

41
Following provisions of the Companies Act, 2013 governs the
floatation, issue and allotment with regards to the debentures:
1. Section 2(30) – Definition;
2. Section 44 – Nature of debentures;
3. Section 71 – Provisions relating to issue and allotment of
debentures;
4. Rule 18 of the Companies (Share Capital and Debenture)
Rules, 2014 – Rules pertaining to issue and allotment of
debentures.
Types of Debentures
There are various forms of debentures which a company can issue
depending upon its requirement. Debentures can be issued based
on various factors i.e. performance, security, priority, convertibility
and record.

1. Based on Performance
Based on the performance, there are two types of debentures
which are issued i.e.
o Redeemable Debentures
Redeemable debentures are the debentures where the date of
redemption of the debentures are specifically mentioned in the
debenture certificate issued, where on such date, the company is
legally bound to return the principal amount to the debenture
holder.
o Irredeemable Debentures
Irredeemable debentures continue for perpetuity and unlike
redeemable debentures, there is no fixed date on which the
company needs to pay the debenture holders. It becomes
redeemable only when the company goes into liquidation.

2. Based on security
o Secured Debentures
When the debentures are issued by way of creation of charge over
the assets of the company, then such debentures are called as
secured debentures. The charge created over the debentures may
be fixed or maybe floating. In accordance with the provisions of the
Companies Act, 2013, such charge created has to be registered
with the Registrar within 30 days of such creation.
o Unsecured Debentures

42
Unlike secured debentures, unsecured debentures are issued by
the company without creation of charge over the assets of the
company. In other words, these debentures do not offer any
protection to the debenture holder in case the company is unable
to pay the principal amount on the due date.

3. Based on Priority
o First Mortgaged Debentures
Basically, the distinction of debentures based on priority can be
called as a subcategory of the secured debentures. First Mortgaged
Debentures are those debentures which has first preference over
all the other debentures issued by the company. Such preference
is claimed at the time of liquidation of the company when the
assets of the company are distributed among the credit holders.
o Second Mortgaged Debentures
Second Mortgage Debenture, as the name suggests, has second
preference over the assets of the company at the time of liquidation
after the first mortgaged debentures. Only after the first mortgaged
debenture holders are satisfied, will the second mortgaged
debenture holders can claim their principal amount from the
company at the time of liquidation.

4. Based on Convertibility
o Fully Convertible Debentures
Fully convertible debenture holders have the right to convert their
debentures into equity shares of the company at a future date, at
the option of the debenture holders. The conversion ratio, the
rights of the debenture holders post-conversion and the trigger
date for conversion are defined at the time of issue of these
debentures.
o Partially Convertible Debentures
Partially convertible debentures can be divided into two parts. The
first part being the debentures which are convertible to equity
shares of the company and the second part being non-convertible
debentures which shall redeem at the expiry of its tenure. An
option is given to the debenture holder to partially convert its debt
into shares of the company. Partially convertible debentures are
also deemed as optionally convertible debentures.
o Non-Convertible Debentures
Debentures which do not have an option to get converted into
equity shares of the company are called non-convertible

43
debentures. These debentures get redeemed at the end of the
maturity period.

5. Based on Record
o Registered Debenture
In case of registered debenture, the name, address, number of
debentures and other details pertaining to holding are entered by
the company in the register of debentures. In such cases, the
transfer of debentures from one debenture holder to another
debenture holder is recorded in the register of debenture holders
as well as register of transfer.
o Unregistered Debentures
Unregistered debentures are also called bearer debentures. Unlike
registered debentures, the company does not maintain the records
of such debentures and the principal amount and the interest is
paid to the bearer of the instrument as against the name written
over such instrument. These debentures are easily transferrable in
the market.

Use of Debentures
Debentures are issued by the company in order to raise funds from
the market. Such funds are then used by the company for research
and development and growth in the market. Debentures or debt
financing is preferred over the issue of equity shares for two major
reasons i.e. issue of debentures does not lead to dilution of the
ownership in the company and the cost of raising funds through
debt is cheaper as compared to cost of raising equity.

Considering its various types, debentures are issued by the

company as required by the investor investing in the company. In
case the investor insists on issuing first mortgaged debenture to
have an added protection over and above the secured debenture,
the company may issue such debenture to the investor, which
again depends on the necessity of funds to the company. In the
usual course of business, registered non-convertible redeemable
secured debentures are issued by the company as it provides
protection to the investors against the failure of the company to
repay the principal amount. Where the investor prefers to have a
shareholding in the company after a fixed period of time, the
company may be required to issue fully or optionally convertible
debentures.

44
Shareholders and Debenture Holders: Difference.

Particulars Shareholders Debenture Holders

Shareholders are partialDebenture holders are
Ownership
owners of the company creditors of the company
Hold debentures, which
Instruments Hold equity shares of
are debt instruments
held the company
issued by the company
Earn dividends and
Earn fixed interest at
capital appreciation;
predetermined intervals;
Returns returns are variable and
returns are stable and
depend on company
predictable
performance
Typically have voting No voting rights; do not
Voting rights rights and can influence influence company
corporate decisions management
Higher risk because the
Lower risk because the
returns depend on the
interest payments are
Risk company’s profitability
obligatory, and principal
and stock market
repayment is prioritised
conditions
Priority over
Last to be paid; receive
Priority during shareholders; repaid
residual assets after all
liquidation before any distribution to
debts are cleared
shareholders
Convertible debentures
No conversion rights
Conversion can be converted into
associated with equity
rights equity shares under
shares
specific terms
Have a fixed claim on the
Have a residual claim
Claim on assets company’s assets as
on the company’s assets
creditors
Debentures are typically
Shares represent a
issued for a fixed term,
Significance permanent ownership
after which they are
interest in the company
redeemed
The company is not
The company is obligated
obligated to pay
Company’s to pay interest to
dividends to
obligation debenture holders as per
shareholders as it is a
the agreed schedule
discretionary benefit
45
 No protection of capital;Capital is generally
Capital
shareholders may loseprotected unless the
protection
their entire investment company defaults
Shareholders may faceDebenture holders do not
Dilution of
dilution if the companyface ownership dilution as
ownership
issues additional shares they do not own equity
Role inShareholders can
Debenture holders have
company’s influence the company's
no control over the
growth anddecisions through
company’s operations
decisions voting
Shareholders’ Debenture prices are less
investments are highly volatile and are primarily
Market
sensitive to marketinfluenced by interest
sensitivity
conditions andrates and the company’s
company performance credit rating

Discuss on winding up of a company by tribunal.

Winding up by court/tribunal
Chapter XX of the Companies Act, 2013 in part I deals with the
winding up of a company by a court or tribunal. When a company
is wound up by the order of a court or tribunal, it is called winding
up by the court or tribunal. This mode of winding up is also called
compulsory winding up of a company. The provisions with respect
to the same are explained below.

Who can file a petition for the winding up of a company

According to Section 272 of the Companies Act, 2013, the
following persons can present a petition for the winding up of a
company to the Tribunal:

Company
According to Section 272(1)(a), a petition for winding up can be
presented by a company itself. However, before presenting a
petition, the company must pass a special resolution in this
regard. In the case of BOC India Ltd. Zinc Products & Co. (P) Ltd.
(1996), a petition for winding up was presented by a person not
authorised to do so by the board of directors and hence, the
petition was declared as incompetent.

46
Any contributory
According to Section 2(26) of the Act, a contributory is a person
who is liable to contribute towards assets of the company in case
it is wound up. However, according to Section 272(2), a
contributory will be allowed to present a petition for winding in
spite of him being the holder of fully paid up shares or the company
has no surplus assets left for distribution among its shareholders
after satisfying all the liabilities. One important requirement is that
the shares in respect of which a person is a contributory were
allotted or registered under him for at least 6 months during the
period of 18 months before the commencement of winding up or
such shares devolved on him by the death of the former holder.

All or any persons mentioned above

The petition for winding up can also be presented by the company
and the contributories together or separately.

Registrar
The registrar can file a petition for the winding up of a company
under the following circumstances:
 Actions of the Company were against the interests of
sovereignty and integrity of the country, Security of States,
friendly relations, morality etc.
 If the tribunal is of the opinion that the company was formed
with a fraudulent aim and unlawful purpose or its affairs
have been conducted in a fraudulent manner or the persons
who formed the company are guilty of fraud or misconduct.
 There was a default in filing the financial statements or
annual returns of the company with the Registrar.
 It is just and equitable for the tribunal to wound up the
company.

However, a registrar cannot file a petition for winding up of a

company to a tribunal, if a company has decided that it will be
wound up by a tribunal by a special resolution.

The registrar is also required to obtain previous sanction from the

Central Government before filing a petition. The government will
not accord the sanction unless the company is given a reasonable
opportunity to make the representations. Also, a petition
presented by a company for winding up will be admitted by the
tribunal only if it is accompanied by a statement of affairs.
47
Person authorised by central government
Section 272(1)(e) provides that a petition for winding up can also
be filed by any person who is authorised by the Central
Government to do so.

Central or State government

The Central or State government can also present a petition for
winding up of a company if its actions are against the sovereignty
and integrity of the country, public order, morality, decency,
foreign relations etc.

Grounds for winding up by court

Section 271 deals with circumstances under which a tribunal can
order for winding up of a company. These are:

Special resolution
According to Section 271(a), a petition for the winding up of a
company can be prevented if a special resolution has been passed
by the company in this regard.

Sovereignty, integrity, and other factors

A company can be wound by a tribunal if it acts against the
sovereignty and integrity of India, the security of the state, foreign
relations, public order, morality etc. This is given under Section
271(b) of the Act.

Fraudulent conduct of the company.

According to Section 271(c), if the tribunal on the application filed
by the registrar is of the opinion that the company was formed with
a fraudulent aim and unlawful purpose or its affairs have been
conducted in a fraudulent manner or the persons who formed the
company are guilty of fraud or misconduct, it can order for winding
up of the company.

Default in filing financial statements or audit returns

Section 271(d) provides that where the company defaults in filing
its financial statements or audit returns with the registrar, the
tribunal can order for winding up of the company.

48
Just and equitable
A tribunal can order for winding up of a company if it is just and
equitable to do so in the following circumstances:
 Deadlock: When two or more people cannot agree with each
other and reach an agreement, the situation is known as
deadlock. In case of deadlock between the management of the
company, it is just and equitable for the tribunal to wind up
the company. In the case of Etisalat Mauritius Ltd. V. Etisalat
DB Telecom (P) Ltd. (2013), there was a deadlock and
irretrievable breakdown between major shareholders of the
company which further hampered its performance and work
and no scheme or solution could be propounded, the tribunal
ordered to wind up the company.
 Loss of Substratum: When the object of the company fails,
it leads to loss of substratum. In the case of Dunlop India Ltd.
re (2013), the company was unable to show its long or short
term business plans and the company was not conducting its
business for quite some time and so the company was
ordered to wind up. In the case of Seth Mohan Lal v. Grain
Chambers Ltd. (1968), the Supreme Court observed that
when the object of the company for which it was formed fails
substantially, it leads to loss of substratum.
 Losses: if a company is suffering loss and cannot carry on its
business, it is just and equitable to wind up the company. A
company was asked to wind up on this ground in the case
of Bachharaj Factories v. Hirjee Mills Ltd. (1955).
 Oppression of minority: another just and equitable ground
for a tribunal to order winding up is where the principal
shareholders adopt aggressive or oppressive policies towards
the minority shareholders.
 Fraudulent purpose: a tribunal can also order for winding
up of a company if it has been formed for an unlawful or
illegal purpose.
 Public interest: if it is in the public interest to wind up a
company, it is a just and equitable ground. In the case
of Millennium Advanced Technology Ltd., re, (2004), the
company was ordered to wind up due to multiple undesirable
practices like false invoicing etc.
 Company was a bubble: When the company was a bubble,
i.e. it was never in real business, then also it classifies as just
and equitable ground of winding up.

49
Steps for compulsory winding up or winding up by a tribunal

The Companies (Winding Up) Rules, 2020 provides the rules

governing compulsory winding up process of a company along with
required forms and particulars. This, the steps involved in the
process are:
 Step 1- the petition for winding up must be presented in Form
WIN 1 or Form WIN 2. The petition must be verified by an
affidavit by a person making the petition or if the petition is
made by the company by its director, secretary or any other
authorised person. The affidavit must be in accordance with
Form WIN 3.
 Step 2- the statement of affairs has to be filed within 30 days
in accordance with Section 274 of the Companies Act, 2013.
It must contain the information till the date when the
statement is filed. The statement must be filed in Form WIN
4 and accompanied by an affidavit of concurrence of the
statement.
 Step 3- the petition will be posted before the tribunal and a
date will be fixed for hearing the petitioners. If the petition is
not made by the company, notice will be sent to the company
and an opportunity to be heard must be given before
advertisement directions to be given with respect to the
petition.
 Step 4- according to Rule 6, every contributories will be
served a copy of the petition by the person making the
petition within 24 hours of making payment in this regard.
 Step 5- notice of the petition will be given in advertisement
14 days before fixing a date of hearing in a daily newspaper
which is widely circulated in the state where the office of
registrar is located. The newspaper must be either in English
or any vernacular language of such area. Further, rule 8
provides that an application for winding up cannot be
withdrawn without the permission of the tribunal
 Step 6- Any objection can be filed in the form of an affidavit
in objection within 30 days from the date of order and the
same will be served to the petitioner.
 Step 7- The reply to the objection must be filed in the form of
an affidavit within 7 days before the date fixed for hearing of
petition.
 Step 8- provisional liquidator will be appointed after the
admission of petition by the tribunal and upon sufficient
50
 grounds for his appointment in accordance with Rule 14. The
order of appointment of provisional liquidator will also
contain restrictions and limitations on his powers. The same
will also be intimated to the provisional liquidator and the
registrar of companies within 7 days from the date of order of
appointment.
 Step 9- order of winding up by the tribunal will be in
accordance with Form WIN 11 and will be sent by the
registrar to the company liquidator and the registrar of the
companies within 7 days and the same will also be
advertised.
 Step 10- after the affairs of the company have wound up
completely, the company liquidator will apply for the
dissolution of the company within 10 days along with audited
final accounts and auditors certificates and the tribunal will
order for dissolution. The process of winding up will be
concluded on the day on which the order of dissolution has
been reported to the registrar of the company.

Appointment of official liquidator

The official liquidator is an officer who is appointed to proceed with
the winding up of a company and its affairs. Section 275 provides
that in order to wind up a company, the tribunal will appoint an
official liquidator from a panel maintained by the Central
Government which consists of names of advocates, Chartered
Accountants, Company Secretaries, Cost Accountants etc. having
at least ten years of experience in the matters related to the
company. However, if a provisional liquidator is appointed, his
powers will be restricted by an order of appointment by the
tribunal. A provisional liquidator is a person appointed by the
court or tribunal to carry on the process of winding up of a
company.

The central government also has the power to remove the name of
any person from the panel on the grounds of misconduct, fraud,
breach of duties, professional incompetence etc, but before doing
so an opportunity to be heard must be given to him. The liquidator
so appointed must within seven days of appointment make a
declaration regarding conflict of interest or lack of independence
with respect to his appointment with the tribunal.

51
According to Section 276, a provisional liquidator or a company
liquidator appointed by the tribunal can be removed by the
tribunal on the following grounds:
 Misconduct;
 Fraud or misfeasance;
 Professional incompetence or failure to exercise due care and
diligence;
 Inability to act as a liquidator;
 Conflict of interest or lack of independence during the term
of appointment

Appointment of advisory committee

According to Section 287, the tribunal can direct the appointment
of an advisory committee in order to advise the company
liquidator. The committee will consist of a maximum of 12
members. The company liquidator will convene a meeting of
creditors and contributories within thirty days from the date order
or winding up has been passed by the tribunal in order to
determine the member of the committee.
The committee has been empowered to inspect the books of
accounts and other documents along with assets and properties of
the company under liquidation. The Section provides that the
committee will be chaired by the company liquidator and the
provisions related to convening of meetings, the procedure to be
followed in the meetings and conduct of the business of the
committee will be prescribed accordingly.

Powers of liquidator
According to Section 277(5), a company liquidator will be the
convener of meetings of the winding up committee which will assist
in the liquidation proceedings and related functions like:
 Take over the assets.
 Examination of statement of affairs.
 Recovery of property and other assets of the company.
 Review of audit reports and accounts.
 Sale of assets.
 Finalising the list of creditors and contributories.
 Compromise and settlement of claims.
 Payment of dividends.
 Any other function.
The company liquidator is also required to submit a report along
with minutes of meetings of the committee before the tribunal. The
52
report will be submitted on a monthly basis and will be signed by
the members present in the meeting till a report for dissolution of
the company is submitted (Section 277(6)). He will also prepare a
draft final report for the approval of the winding up committee
(Section 277(7)).
According to Section 290, the Company liquidator will have the
power to:
 Manage the business of the company for the process of
winding up.
 Execute deeds, receipts and other documents on behalf of the
company and use its seal if necessary.
 Sell the immovable and movable property and actionable
claims of the company, either by public auction or private
contract.
 Sell the undertaking of the company.
 Raise money required for the security of assets of the
company.
 Institute or defend suits or other legal proceedings, whether
civil or criminal, on behalf of the company.
 Settle claims of creditors, employees or any other claimant
and distribute the sale proceeds.
 Inspect the records and returns of the company.
 Draw, accept, make and endorse any negotiable instrument
which includes a cheque, bill of exchange, hundi or
promissory note on behalf of the company.
 Obtain any professional assistance from any person or
appoint any professional for the protection of assets of the
company.
 Take actions and steps and sign, execute and verify papers,
deeds, documents, applications etc for winding up of the
company, distribution of assets and discharge of duties and
obligations of liquidator.

Duties of company liquidator

According to Section 288, it is the duty of the company liquidator
to make periodical reports to the Tribunal and make reports at the
end of each quarter regarding the progress of winding up of the
company. Section 292 deals with the exercise and control of
powers of company liquidators. The company liquidator is required
to give regard to the directions given by the creditors or
contributories in a resolution at any general meeting or by the
advisory committee. The directors of creditors and contributories
53
will override those given by the advisory committee in case of
conflict. The company liquidator can also:
 Summon the meetings of creditors or contributories.
 Summon meetings as and when directed or requested by the
contributories and creditors in writing by not less than one-
tenth.
If a person is aggrieved by the decision or any act of the company
liquidator, he can make an application to the tribunal, which can
further confirm, reverse or modify the decision. Section 294 of the
Act further provides another duty of the company liquidator to
maintain proper and regular books of accounts, receipts and
payments which will be presented to the tribunal two times in each
year during his tenure. The tribunal can cause the accounts to be
audited, and the company liquidator will have to furnish such
vouchers and information to the tribunal as required. One copy of
the audited accounts will be filed with the tribunal and the other
will be delivered to the registrar. If the account refers to a
government company, the company liquidator will give a copy to
the:
 Central Government if it is a member of the government
company.
 State government if it is a member of the company
 Both the governments, if they are members of the company.
Submission of reports by the liquidator
According to Section 281, when the tribunal has made an order for
the winding up of a company or appointed a liquidator in this
regard, he will within sixty days, submit a report to the tribunal
containing the following particulars:
 Nature and details of assets of the company which includes
their value and also state the cash balance separately.
However, the valuation must be obtained from the registered
valuers.
 Amount of capital issued, paid up and subscribed.
 Existing and contingent liabilities of the company which
include names, addresses, and occupations of the creditors.
The amount of secured and unsecured debts must also be
stated separately. For secured debts, particulars of securities
and their value and dates on which they were given must also
be provided.
 All debts due to the company along with the necessary details
like names, addresses and occupations of persons to whom
they are due along with the amount.
54
  Guarantees extended by the company.
 List of contributories and dues to be paid by them and details
of unpaid calls.
 Details of trademarks and intellectual properties owned by a
company.
 Legal cases filed by or against the company and their details.
 Any other information which the tribunal or company
liquidator considers necessary.
The manner in which the company was promoted or formed and
whether there has been any fraud by any officer of the company
must be included in the report. He will also make a report on the
viability of the business of the company or steps for maximising
the value of assets of a company. According to Section 281(4), a
company liquidator can also make further reports. Further
subsection 5 provides that a person who describes himself as a
creditor or contributory can inspect the report submitted under
the Section and take copies or extracts.

Section 282 of the Act deals with the directions of the tribunal on
the report submitted by the company liquidator and provides that
on the basis of the report submitted by the liquidator, a time limit
will be fixed by the tribunal to complete the entire proceedings and
can revise the same. It will also order for sale of the company as a
going concern or its assets on examination of the report and can
also appoint a sale committee consisting of creditors, promoters,
and officers of the company to assist the company liquidator in the
sale. If the report discloses that fraud has been committed in the
company, the tribunal will order for investigation or direct the
company liquidator to file a criminal complaint. The tribunal will
also take necessary steps to protect, preserve or enhance the value
of the assets of the company.

Consequences of winding up
According to Section 278 of the Act, the order of winding up will
operate in favour of all creditors and contributories as if it has been
made on their joint petition. Section 279 further provides that no
suit or any other legal proceeding can be initiated against a
company against whom an order of winding up has been passed
without any permission from the tribunal, against whom the order
of winding up has been passed. An application in this regard will
be decided within 60 days.

55
Dividend.

Dividend is a return on the investment made in the share capital

of a company, as distinct from the return on borrowed capital,
which is in the form of interest. In commercial usage, the term
“Dividend” refers to the share of profits of a company that is
distributed amongst its members. The term “Dividend” has been
inclusively defined in the Act to the effect that it includes Interim
Dividend. The Act neither specifically defines the term Dividend
nor makes any distinction between Interim and Final Dividend.

Companies licensed under Section 8 of the Companies Act, 2013

or corresponding provisions of any previous enactment thereof are
prohibited by their constitution from paying any Dividend to its
Members.

The “Secretarial Standard on Dividend” (SS-3), formulated by the

Secretarial
Standards Board (SSB) of the Institute of Company Secretaries of
India (ICSI) and issued by the Council of the ICSI, has been
effective from 1st January 2018.

Adherence to SS-3 is recommendatory.

For the purposes of SS-3, capitalization of profits in the form of

bonus shares is not Dividend.

SS-3 prescribes a set of principles in relation to the declaration

and payment of Dividend and matters related thereto. These are
equally applicable to Final as well as Interim Dividend unless
otherwise stated.
The principles set out in SS-3 relate to declaration and payment of
Dividend on equity as well as preference share capital in
accordance with the provisions of the Act and are in respect of
Dividend as it relates to a going concern.

Distribution of any amount of profits or assets by the liquidator

during winding up or liquidation will not be construed as Dividend.

The principles enunciated in SS-3 are in conformity with the

provisions of the Act. In addition, the provisions of the Securities
Contracts (Regulation) Act, 1956 and the SEBI (Listing Obligations
56
and Disclosure Requirements) Regulations, 2015 are applicable to
listed companies. Any specific provision relating to Dividend in the
Income-tax Act, 1961 or under any other statute shall also be
applicable. If due to subsequent changes in the Act or other
applicable laws, a particular Standard or any part thereof becomes
inconsistent with the Act or other applicable laws, the provisions
of the Act or such applicable laws shall prevail.

The following terms are used in this Guidance Note with the
meaning specified: “Act” means the Companies Act, 2013 (Act No.
18 of 2013) or any previous enactment thereof, or any statutory
modification thereto or re-enactment thereof and includes any
Rules and Regulations framed thereunder. “Dividend” means a
distribution of any sums to Members out of profits and wherever
permitted out of free reserves available for the purpose. “Final
Dividend” means the Dividend recommended by the Board of
Directors and declared by the Members at an Annual General
Meeting. “Interim Dividend” means the Dividend declared by the
Board of Directors. “Free Reserves” means such reserves which, as
per the latest audited balance sheet of a company, are available for
distribution as Dividend.

Dividend Policy
While considering the financial statements for declaration of
Dividend, the Board should take into account the Dividend Policy
of the company, if any.

The various determinants of the Dividend Policy ordinarily

include:

(a) Legal and contractual restrictions: This includes the

restrictions/
conditions imposed under the applicable laws or by the financial
institutions/banks in the loan agreement;
(b) Earnings of the company: Current earnings provide the best
index of
what a company can pay;
(c) Cash position and liquidity: The cash position of a company is
an
important consideration in paying Dividends, the greater the cash

57
availability and overall liquidity the greater is the ability to pay
Dividend;
(d) Financial needs: There are many financial needs of a company
such
as meeting the cost of capital borrowed, non-availability of external
capital and making provisions for any expansion or growth plans
of the
company;
(e) Tax considerations: The tax burden is a determining factor in
the
formulation of a Dividend Policy.

The Board should recommend the Dividend to be declared by the

Members in
GUIDANCE NOTE ON DIVIDEND, the Annual General Meeting on
being satisfied that the company has sufficient profits to be
distributed as Dividend, i.e. sufficient profits remain after all
charges against the current income (e.g. taxation, depreciation,
etc.) and after making provision for past losses, unabsorbed
depreciation for past years, transfers to reserves, if any, or for any
other purposes as may be warranted and as may be required by
the Dividend Policy of the company.

The Securities and Exchange Board of India (SEBI), vide its

notification dated 8th July 2016, inserted Regulation 43A to the
Listing Regulations making it mandatory for the top 500
companies to formulate a “Dividend Distribution Policy”.

Regulation 43A of the SEBI Listing Regulations provides as under:

(1) The top five hundred listed entities based on market
capitalisation
(calculated as on March 31 of every financial year) shall formulate
a
Dividend Distribution Policy which shall be disclosed in their
annual
reports and on their websites.
(2) The Dividend Distribution Policy shall include the following
parameters:
(a) the circumstances under which the shareholders of the listed
entities may or may not expect Dividend;
(b) the financial parameters that shall be considered while
declaring
58
Dividend;
(c) internal and external factors that shall be considered for
declaration of Dividend;
(d) policy as to how the retained earnings shall be utilised; and
(e) parameters that shall be adopted with regard to various classes
of shares:
Provided that if the listed entity proposes to declare Dividend on
the basis of
parameters in addition to clauses (a) to (e) or proposes to change
such additional parameters or the Dividend distribution policy
contained in any of the parameters, it shall disclose such changes
along with the rationale for the
same in its annual report and on its website.

(3) The listed entities other than the top five hundred listed entities
based on market capitalisation may disclose their Dividend
Distribution Policies on a voluntary basis in their annual reports
and on their websites.

Considering the above, a Model Dividend Distribution Policy is

placed at
Annexure-III.

GUIDANCE NOTE ON DIVIDEND

Dividend shall be declared only at an Annual General Meeting.
Dividend shall be declared only at an Annual General Meeting of
the Company
and not at an Extra-ordinary General Meeting or by way of a postal
ballot.
The cumulative effect of all the provisions of the Act is that the
declaration of
Dividend should be made at the Annual General Meeting of the
Company.

[Raghunandan Neotia v. Swadeshi Cloth Dealers Ltd., (1964) 34

Comp. Cases
570 (Cal.)]

Dividend shall relate to a financial year and shall be declared by

the Members
at the Annual General Meeting of the company after adoption of
the financial
59
statements of the company. Members may declare a lower rate of
Dividend
than the rate recommended by the Board but have no power to
increase the
amount or rate of Dividend recommended by the Board.

The company in general meeting may declare Dividends, but no

Dividend
shall exceed the amount recommended by the Board. [Regulation
80 of Table
F of Schedule I to the Act].

 No Dividend shall be declared on equity shares for previous

years in respect of which annual financial statements have
already been adopted at the respective Annual General
Meetings.
 Interim Dividend shall be declared at a meeting of the Board
 Distribution of discount coupons to all the Shareholders shall
not be treated as deemed Dividend.
 A company is prohibited to issue Bonus shares in lieu of
Dividend.
 Dividend to be paid only to the registered holders of shares
entitled to Dividend or to their order or to their bankers.
 Preference Shareholders shall be paid Dividend before
Dividend is paid to the equity Shareholders of the company.
 Arrears of Dividend on cumulative preference shares shall be
paid before payment of any Dividend on equity shares.
 Dividend on equity shares shall be paid in accordance with
the
rights of the respective classes, if any, of such shares.
 Dividend shall be deposited in a separate bank account
within five days from the date of declaration and shall be paid
within thirty days of declaration. The intervening holidays, if
any, falling during such period shall be included.
 Payment of Dividend to be rounded off to the nearest rupee.
 Taxes as applicable on distribution of Dividend shall be paid
by the company within the prescribed time.
 Dividend shall be paid in cash and not in kind.
 Initial validity of the Dividend cheque or warrant shall be for
three months.

60
  A duplicate Dividend cheque or warrant shall be issued only
after obtaining requisite indemnity/ declaration from the
concerned Member and after ascertaining the encashment
status of the original Dividend cheque or warrant.
 The Dividend cheque or warrant shall be accompanied by a
statement in writing showing the amount of Dividend paid,
Folio no./DP ID and Client ID nos., number of shares held by
the concerned Member as on the record date, amount paid
up on each share and the financial year to which the Dividend
pertains.
 Dividend shall be paid proportionately on the paid-up value
of shares.
 No Dividend shall bear interest against the company except
in case of default in payment of Dividend or despatch of
Dividend warrant/ cheque within the prescribed period.

AUDITORS :
Auditor is a person or can be a firm of C.A. who is appointed
by a company to having an independent and objective to
examine the financial statements of the Company. According
to Companies Act, 2013, defines as an auditor “an individual
or a firm, including a limited liability partnership (LLP), who
is appointed by the company to conduct an audit of its
financial statements, as required under the Companies Act.”

Appointment of Auditor according to Companies Act, 2013

Section 139(1) of the said act deals with the appointment of a
subsequent auditor and the manner of appointment.

According to this section, every company shall appoint an auditor

in its first AGM who shall hold office from the conclusion of that
meeting until the conclusion of the sixth AGM. After that, the
company shall appoint an auditor for a term of five consecutive
years at a time, subject to ratification by the members at every
AGM.

Manner of Auditor’s appointment

The manner of appointment of an auditor is as follows:

61
Appointment by Board of Directors: The Board of Directors shall
appoint the first auditor within 30 days of the registration of the
company.
Appointment by Members: The members of the company shall
appoint the subsequent auditors at every AGM.
Eligibility Criteria: The auditor appointed by the company must be
a Chartered Accountant in practice.
Intimation to Registrar of Companies (ROC): The company shall
intimate the ROC about the appointment of the auditor within 15
days of the AGM.
Removal of Auditor: The auditor can be removed from the office
before the expiry of his term only by a special resolution of the
company after obtaining the prior approval of the Central
Government.
Rotation of Auditors: The said act has also introduced the concept
of rotation of auditors. As per this, an auditor can hold office for a
maximum of 5 consecutive years in a company. After that, he has
to be rotated with another auditor who is not associated with the
same firm.
Section 139(1) mandates the appointment of an auditor in the first
AGM of the company and subsequent auditors for a term of five
consecutive years at a time. The appointment of the auditor can be
made by the Board of Directors or the members of the company,
and certain eligibility criteria and procedures need to be followed.

Appointment of First Auditor in case of a Company other than

a Government Company.
In accordance with section 139(6) of the said act, if a company
other than a government company, if the Board of Directors fails
to appoint the first auditor, then the members of the company shall
appoint the first auditor within 90 days at an Extraordinary
General Meeting (EGM).

The following steps must be followed for the appointment of the

first auditor in case of a company other than a government
company:

The Board of Directors shall propose the name of an auditor to be

appointed as the first auditor of the company.
The proposed auditor shall provide his consent and eligibility
certificate as per the provisions of the Act.

62
If the Board of Directors fails to appoint the first auditor, the
company shall hold an EGM within 90 days of the incorporation of
the company to appoint the first auditor.
The members of the company shall pass an ordinary resolution to
appoint the first auditor, and the appointed auditor shall hold
office until the conclusion of the first AGM.
The appointed auditor shall also provide his consent and eligibility
certificate to the company.
It is essential to appoint the first auditor of the company within
the stipulated time to ensure the proper functioning and
compliance of the company with the provisions of the Companies
Act, 2013. The appointment of an auditor in the first AGM of the
company is mandatory under the Act, and any delay in the
appointment of the auditor may result in the company facing
penalties and non-compliance issues.

Appointment of First Auditor in case of a Government Company

Section 139(7) of the said act deals with the appointment of the
first auditor in the case of a government company. In this section,
the Comptroller and Auditor-General (CAG) of India shall appoint
the first auditor of a government company within 60 days from the
date of registration of the company.

The CAG may either appoint an auditor from the panel of auditors
maintained by the CAG, or he may appoint any other auditor
qualified to be appointed as an auditor of a government company.

Once the CAG appoints the first auditor of the government

company, the Board of Directors of the company shall take
necessary steps to convene the AGM of the company to appoint the
auditor for the first financial year. In the AGM, the shareholders of
the company shall appoint the auditor for the first financial year,
who shall hold office until the conclusion of the first AGM.

The appointment of the auditor in the case of a government

company is different from the appointment of the auditor in the
case of a non-government company. In the case of a government
company, the CAG appoints the first auditor, whereas, in the case
of a non-government company, the Board of Directors proposes the
name of the auditor, and the shareholders appoint the auditor in
the first AGM.

63
Rotation of an Auditor
Sections 139(2), 139(3), and 139(4) of the said act are known as
Rotation of an Auditor and these are as:

Section 139(2) – Appointment of a Subsequent Auditor: This

section mandates every company to appoint an auditor in each
AGM after the first AGM until the conclusion of the sixth AGM. The
appointment shall be made by the shareholders of the company.
Section 139(3) – Remuneration of Auditor: This section states that
the remuneration of the auditor shall be fixed by the Board of
Directors or the Audit Committee. The remuneration should be in
accordance with the prescribed guidelines and should be approved
by the shareholders.
Section 139(4) – Eligibility of an Auditor: This section lays down
the eligibility criteria for an auditor. The auditor must be a
Chartered Accountant in practice and should not be disqualified
under Section 141.

Role of an Auditor
The role of an auditor under the said act is outlined in various
sections of the act. The key sections that define the role of an
auditor are:

Section 143: Powers and Duties of Auditors and Auditing

Standards- This section outlines the powers and duties of
auditors, which include accessing all the relevant books, records,
and documents of the company, making enquiries and seeking
explanations from the company’s officers, and reporting on any
material fraud or non-compliance with laws and regulations. It
also mandates the use of auditing standards by auditors.
Section 144: Auditor’s Report- This section mandates the
preparation of an auditor’s report by the auditor. The auditor’s
report must include a statement on the company’s financial
statements, an opinion on the true and fair view of the company’s
financial position, and a statement on any material misstatements
or omissions in the financial statements.
Section 145: Auditor to Sign Audit Report- It deals with the signing
of audit reports by the auditor. The auditor must sign the audit
report in the following manner:
Where the auditor is a firm, the report must be signed in the name
of the firm by a partner or partners of the firm.
64
Where the auditor is an individual, the report must be signed by
that individual.

In addition to signing the audit report, the auditor must also

provide the following details:

The auditor’s name.

The auditor’s membership number, if applicable.
The auditor’s registration number, if applicable.
The date of the audit report.
By signing the audit report and providing the required details, the
auditor is certifying that they have conducted the audit in
accordance with the auditing standards and have expressed an
opinion on the true and fair view of the company’s financial
position.

Disqualifications of an Auditors
In accordance to section 141 of the said act lays down
disqualifications of an Auditor, which prevent a person/ firm from
acting as an auditor. These disqualifications are as follows:

If the person is not eligible to be appointed as an auditor under

Section 139(4) of the Companies Act, 2013.
If the person is indebted to the company or its subsidiary or its
holding company or any other subsidiary of such holding
company, or has given any guarantee or provided any security in
connection with the indebtedness of any third party to the
company, its subsidiary or its holding company, or any other
subsidiary of such holding company, exceeding the prescribed
limit.
If the person, or any partner or director of the audit firm, or any
relative of such partner or director, is a director or holds any other
office of profit in the company, its subsidiary or its holding
company, or any other subsidiary of such holding company.
If the person or the audit firm, or any partner or employee of the
audit firm, has any business relationship with the company, its
subsidiary or its holding company, or any other subsidiary of such
holding company, which may reasonably be perceived to impair
their independence and objectivity.
If the person or the audit firm, or any partner or employee of the
audit firm, has any pecuniary relationship with the company, its
subsidiary or its holding company, or any other subsidiary of such
65
holding company, other than remuneration for the audit or other
services rendered by the audit firm.
If the person or the audit firm, or any partner or employee of the
audit firm, has been convicted by a court of an offence involving
fraud or any other offence punishable with imprisonment for a
term exceeding six months.
If the person or the audit firm, or any partner or employee of the
audit firm, has been held guilty by the Securities and Exchange
Board of India (SEBI) or any other regulatory body for violation of
any securities law.
If the person or the audit firm, or any partner or employee of the
audit firm, has been disqualified from acting as an auditor of any
other company.
Removal, Resignation and Replacement of an Auditor
As per section 142 of the said act, provides the procedures for
removal, resignation, and replacement of an auditor. The auditor
can be removed by passing a special resolution and obtaining the
approval of the Central Government. In case of resignation, the
auditor should intimate the company and the ROC in writing. The
company should appoint a new auditor within 30 days of the
resignation or removal.

Audit Committee
Section 139(11) of the said act requires every company to
constitute an Audit Committee, which shall consist of a minimum
of three directors, and in the case of a company having a paid-up
share capital of Rs. 10 crore or more, it shall consist of a majority
of independent directors.

The Audit Committee is responsible for overseeing the financial

reporting process, ensuring the integrity of the company’s financial
statements, and reviewing the effectiveness of the company’s
internal control and risk management systems. The Audit
Committee is also responsible for recommending the appointment,
remuneration, and terms of appointment of the auditors to the
Board of Directors.

AUDITOR NOT TO RENDER CERTAIN SERVICES (PROHIBITED

SERVICES)- Section 144.
An auditor shall provide to the company only such other services
as are approved by the Board of Directors/ the audit committee,
but which shall not include any of the following services (whether
66
such services are rendered directly or indirectly to the company or
its holding company or subsidiary company, namely:
1. accounting and book keeping services;
2. internal audit;
3. design and implementation of any financial information
4. system;
5. actuarial services;
6. investment advisory services;
7. investment banking services;
8. rendering of outsourced financial services;
9. management services; and
10. any other kind of services as may be prescribed.

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Rule in Foss v. Harbottle
Foss v. Harbottle is a landmark English case in the company law,
which is known for the propounding of ‘proper plaintiff rule’ and
‘majority rule’. While the rule in Foss v. Harbottle is well laid, there
exist certain exceptions to it of which personal rights enjoy a rather
strong immunity to its application.
In the case, a legal action was pursued by two minority
shareholders (Richards Foss and Edward Starkie Turton) on their
own, against the directors of a company alleging conduct of
concerted and illegal transactions resulting in the loss of the
company’s property.
It was alleged that the directors had misappropriated the company
assets and had falsely mortgaged the company property thereby
adversely affecting the company and its original purpose of “laying
and maintaining an ornamental park” as laid down in the Act for
its incorporation by the parliament (“Act”).
The main issue in the case thus was whether a company’s right to
sue can be exercised by its shareholders on their own, that is,
whether the shareholders could file an action for a wrong done to
the company.
Herein, it was contended by the petitioners that the company was
not an ordinary company as its genesis was in the Act which
conferred right on the members or outsiders to file an action
against the directors. It was submitted that certain illegal
transactions were being conducted by the directors of the company
by way of misappropriation of funds and improper mortgages on
the company property, thereby causing property wastage and loss
to the company. It was further prayed for the court to direct the
directors to make good the losses suffered by the company.
To this, it was contended by the defendants that the petitioners
did not have any locus standi to file any legal action against the
directors on behalf of the company. It was submitted that the Act
did not confer any rights on the petitioners to institute any legal
proceedings for the loss suffered by the company.
udgment The Court of Chancery rejected the claim of the
petitioners and held that since the impugned actions had caused
loss to the company, only the company had the right to sue, that
is to say that, the company was the ‘proper plaintiff’ in the given
case and not the shareholders. It was further held that the
68
minority shareholders could not bring action for a wrong which
could be ratified by the majority shareholders.
In the process, two rules were propounded –
(1) ‘proper plaintiff rule’ which provides that in case of any wrong
done to a company, only the company has the right to sue for it,
that is, only the company is the proper plaintiff; and
(2) ‘majority rule’ which provides that decisions of the majority
shareholders are binding on the company and the court would not
interfere in case of a wrong which could be ratified by the majority
shareholders. The ‘proper plaintiff rule’ is also known as ‘the rule
in Foss v. Harbottle’.
Exceptions to the rule in Foss v. Harbottle
Considering the severity of the rules propounded in the case,
it was observed that though the minority shareholders were
conferred substantive rights, they were denied remedy on
procedural grounds. Exceptions were, thus, introduced to the rule
in Foss v. Harbottle to reduce the effect of harshness and
unjustness on the minority shareholders. Under the current
circumstances, the rule in Foss v. Harbottle is not applicable to
the acts of majority shareholders done to oppress, suppress or
depress the minority shareholders, that is, it is not applicable in
the case of “ultra vires and illegal acts; breach of fiduciary duties;
fraud or oppression against the minority shareholders; variation of
class rights; scheme of compromise or arrangement; oppression
and mismanagement; rights of dissentient shareholders under
takeover bids, and; class action suits”. It is to be noted that the
rule in Foss v. Harbottle is applicable only in case of
infringement of corporate right of a member and is not
applicable in case of denial of his individual right.

During the war all the members of a private company, while in

general meeting. were killed by a bomb. Does the company
cease to exists? Decide.
An incorporated company never dies, except when it is wound up
as per law. A company, being a separate legal person is unaffected
by death or departure of any member and it remains the same
entity, despite total change in the membership.
Perpetual succession, means that the membership of a company
may keep changing from time to time, but that shall not affect its
69
continuity. The membership of an incorporated company may
change either because one shareholder has sold/transferred his
shares to another or his shares devolve on his legal representatives
on his death or he ceases to be a member under some other
provisions of the Companies Act.
Thus, perpetual succession denotes the ability of a company to
maintain its existence by the succession of new individuals who
step into the shoes of those who cease to be members of the
company. Professor L.C.B. Gower rightly mentions, “Members may
come and go, but the company can go on forever.
During the war all the members of one private company, while in
general meeting, were killed by a bomb, but the company survived
— not even a hydrogen bomb could have destroyed it.*********

The article of association of a company provides that, a

member who became bankrupt shall offer sale of his shares to
other shareholders at a certain price. Decide the validity of
the provision.
In the case of Borland’s Trustee v. Steel Bros. & Co. Ltd. (1901),
the AOA stated that in case any member of the company went
bankrupt, their share would be sold at the price decided by the
Directors of the company. Thus, when the member Borland
declared bankruptcy, Borland’s Trustee (the plaintiff, in this case)
asked to sell Borland’s shares at their original value. The trustee
further contended that since he was not a member, he was not
restricted by the AOA.

It was, however, held that while the trustee may not be bound by
the AOA, the shares that were bought were bound by its
provisions. In simpler terms, the sale of the shares was to follow
as per the provisions given under the Articles.

Explain various kinds of company under Companies Act 2013.

Firstly what does company mean? :

As per section 2(20) of the CA, 2013 “company” means a company
incorporated under this Act or under any previous company law.
Commonly a company may be defined as “an incorporated

70
association which is an artificial person, having a separate legal
entity, with a perpetual succession, a common seal (if any), and a
common capital compromised of transferable shares and limited
liability.”
TYPES OF COMPANY — ANALYSIS A. Types of Company on the
basis of Incorporation
1. Statutory Companies: These companies are constituted by a
special Act of Parliament or State Legislature. These companies are
formed mainly with an intention to provide the public services.
Though primarily they are governed under that Special Act, still
the CA, 2013 will be applicable to them except where the said
provisions are inconsistent with the provisions of the Act creating
them (as Special Act prevails over General Act). Examples of these
types of companies are Reserve Bank of India, Life Insurance
Corporation of India, etc.

2. Registered Companies: Companies registered under the CA,

2013 or under any previous Company Law are called registered
companies. Such companies comes into existence when they are
registered under the Companies Act and a certificate of
incorporation is granted to it by the Registrar.

B. Types of Company on the basis of Liability

1. Companies limited by shares: A company that has the liability
of its members limited by the memorandum to the amount, if any,
unpaid on the shares respectively held by them is termed as a
company limited by shares. The liability can be enforced during
existence of the company as well as during the winding up. Where
the shares are fully paid up, no further liability rests on them. For
example, a shareholder who has paid 75 on a share of face value
100 can be called upon to pay the balance of 25 only. Companies
limited by shares are by far the most common and may be either
public or private.
2. Companies limited by guarantee: Company limited by guarantee
is a company that has the liability of its members limited to such
amount as the members may respectively undertake, by the
memorandum, to contribute to the assets of the company in the
event of its being wound-up. In case of such companies the liability
of its members is limited to the amount of guarantee undertaken
by them. The members of such company are placed in the position
of guarantors of the company’s debts up to the agreed amount.
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Clubs, trade associations, research associations and societies for
promoting various objects are various examples of guarantee
companies.
3. Unlimited Liability Companies: A company not having a limit on
the liability of its members is termed as unlimited company. Here
the members are liable for the company’s debts in proportion to
their respective interests in the company and their liability is
unlimited. Such companies may or may not have share capital.
They may be either a public company or a private company.

C. Types of Company on the basis of number of members

1. Public Company: Defined u/s 2(71) of the CA, 2013 – A public
company means a company which is not a private company.
Section 3(1) of the CA, 2013– Public company may be formed for
any lawful purpose by 7 or more persons. Section 149(1) of the CA,
2013 – Every public company shall have minimum 3 director in its
Board. Section 4(1)(a) of the CA, 2013 – A public company is
required to add the words “Limited” at the end of its name. It is the
essence of a public company that its shares and debentures can
be transferable freely to the public unlike private company. Only
the shares of a public company are capable of being dealt in on a
stock exchange. A private company that is a subsidiary of a public
company, will be considered a public company.
2. Private company: Defined u/s 2(68) of the CA, 2013 – A private
company means a company which by its articles— a. Restricts the
right to transfer its shares; b. Limits the number of its members to
200 hundred (except in case of OPC) Note: Persons who are in the
employment of the company; and persons who, having been
formerly in the employment of the company, were members of the
company while in that employment and have continued to be
members after the employment ceased, shall be excluded. Where
2 or more persons hold 1 or more shares in a company jointly they
shall be treated as a single member. Prohibits any invitation to the
public to subscribe for any securities of the company; Section 3(1)
of the CA, 2013 – Private Company may be formed for any lawful
purpose by 2 or more persons. Section 149(1) of the CA, 2013 –
Every Private company shall have minimum 2 director in its Board.
Section 4(1)(a) of the CA, 2013 – A private company is required to
add the words “Private Ltd” at the end of its name. Special
privileges – Private Companies enjoys several privileges and
exemptions under the Companies Act.

72
3. One Person Company (OPC): With the enactment of the
Companies Act, 2013 several new concepts was introduced that
was not in existence in Companies Act, 1956 which completely
revolutionized corporate laws in India. One of such was the
introduction of OPC concept. This led to the avenue for starting
businesses giving flexibility which a company form of entity can
offer, while also offering limited liability that sole proprietorship or
partnerships does not offers. Defined u/s 2(62) of the CA, 2013 –
One Person Company means a company which has only one
person as a member. Section 3(1) of the CA, 2013 – OPC (as private
company) may be formed for any lawful purpose by 1 persons.
Section 149(1) of the CA, 2013 – OPC shall have minimum 1
director in its Board, its sole member can also be director of such
OPC. Some Feature explained! – Single-member: OPCs can have
only 1 member or shareholder, unlike other private companies.
Nominee: A unique feature of OPCs that separates it from other
kinds of companies is that the sole member of the company has to
mention a nominee while registering the company. Since there is
only one member in an OPC, his death will result in the nominee
choosing or rejecting to become its sole member. This does not
happen in other companies as they follow the concept of perpetual
succession. Special privileges: OPCs enjoys several privileges and
exemptions under the Companies Act.
D. Types of Company on the basis of Domicile
1. Foreign company: Defined u/s 2(42) of the CA, 2013 – “foreign
company” means any company or body corporate incorporated
outside India which,— has a place of business in India whether by
itself or through an agent, physically or through electronic mode;
and conducts any business activity in India in any other manner.
Section 379 to Section 393 of the CA, 2013 prescribes the
provisions which are applicable on such companies.
2. Indian Company: A company formed and registered in India is
known as an Indian Company.

E. Other Types of Company:

1. Section 8 Company: A section 8 company is registered as a
limited company under section 8 of the CA, 2013 and holds the
licence from Central Government (CG) and has in its objects the
promotion of commerce, art, science, sports, education, research,
social welfare, religion, charity, protection of environment or any
such other object;

73
intends to apply its profits, if any, or other income in promoting its
objects; and intends to prohibit the payment of any dividend to its
members. Proviso to Section 4(1)(a) of the CA, 2013 – Section 8
Company is exempted from clause (a) of Section 4(1) which means
Section 8 Company is neither required to add the word “Ltd” nor
words “Private Ltd” at the end of its name. Section 8 of the CA,
2013 also laid down the provision related to Incorporation,
application for licence as section 8 company, grant of licence by
CG and revocation of licence by CG. Special privileges: Section 8
Company enjoys several privileges and exemptions under the
Companies Act.

2. Government Company: Defined u/s 2(45) of the CA, 2013 –

“Government company” means any company in which not less
than 51 % of the paid-up share capital is held by the Central
Government, or by any State Government or Governments, or
partly by the Central Government and partly by one or more State
Governments, and includes a company which is a subsidiary
company of such a Government company. Explanation – “paid-up
share capital” shall be construed as “total voting power”, where
shares with differential voting rights have been issued. Special
privileges: Government Company enjoys several privileges and
exemptions under the Companies Act.

3. Small Company: Defined u/s 2(85) of the CA, 2013 – “small

company” means a company, other than a public company,—
1. paid-up share capital of which does not exceed 50 lakh rupees
or such higher amount as may be prescribed which shall not be
more than 10 crore rupees; and
2. turnover of which as per profit and loss account for the
immediately preceding financial year does not exceed 2 crore
rupees or such higher amount as may be prescribed which shall
not be more than 100 crore rupees Provided that nothing in this
clause shall apply to— a holding company or a subsidiary
company; a company registered under section 8; or a company or
body corporate governed by any special Act; Special privileges:
Small Company enjoys several privileges and exemptions under
the Companies Act.

4. Subsidiary Company: Defined u/s 2(87) of the CA, 2013

– “subsidiary company” or “subsidiary”, in relation to any other

74
company (that is to say the holding company), means a company
in which the holding company—
1. controls the composition of the Board of Directors; or
2. exercises or controls more than one-half of the total voting power
either at its own or together with one or more of its subsidiary
companies: Provided that such class or classes of holding
companies as may be prescribed shall not have layers of
subsidiaries beyond such numbers as may be prescribed.

Explanation: For the purposes of this clause- 1. a company shall

be deemed to be a subsidiary company of the holding company
even if the control referred to in sub-clause (i) or sub-clause (ii) is
of another subsidiary company of the holding company;
2. the composition of a company’s Board of Directors shall be
deemed to be controlled by another company if that other company
by exercise of some power exercisable by it at its discretion can
appoint or remove all or a majority of the directors;
3. the expression “company” includes any body corporate;
4. “layer” in relation to a holding company means its subsidiary or
subsidiaries.
5. Holding Company: Defined u/s 2(46) of the CA, 2013 –“holding
company”, in relation to one or more other companies, means a
company of which such companies are subsidiary companies;
Explanation: For the purposes of this clause, the expression
“company” includes any body corporate.
6. Associate Company: Defined u/s 2(6) of the CA, 2013 –
“associate company”, in relation to another company, means a
company in which that other company has a significant influence,
but which is not a subsidiary company of the company having
such influence and includes a joint venture company.
Explanation: For the purpose of this clause:
1. the expression “significant influence” means control of at least
20% of total voting power, or control of or participation in business
decisions under an agreement;
2. the expression “joint venture” means a joint arrangement
whereby the parties that have joint control of the arrangement
have rights to the net assets of the arrangement;

7. Producer Company: Common parlance- A producer company

can be defined as a legally recognized body of farmers/
agriculturists with the aim to improve the standard of their living,

75
and ensure a good status of their available support, incomes and
profitability.

Definition- “Producer Company” means a body corporate having

objects or activities specified in section 581B and registered as
Producer Company under the Companies Act, 1956. Proviso to
section 465(1) of the CA, 2013 prescribes – that the provision of
Part IX A of the Companies Act, 1956 shall be applicable mutatis
mutandis to a Producer Company in a manner as if the Companies
Act, 1956 has not been repealed until a special Act is enacted for
Producer Companies. Note: Recently the Companies (Amendment)
Bill, 2020 was introduced in LokSabha i.e. on March 17, 2020.
Thus with this bill aims to remove these provisions and adds a new
chapter in the Act with similar provisions on producer companies.
Some Conditions for Producer Company explained! : Only persons
engaged in an activity connected with, or related to, primary
produce can participate in the ownership. The members have
necessarily to be primary producers.
Name of the company shall end with the words “Producer
Company Limited“. On registration, the Producer Company shall
become as if it is a private limited company for the purpose of
application of law and administration of the company, However it
shall comply with the specific provisions of part IXA until a special
Act is enacted for Producer Companies.
To incorporate Producer Company any of the following
combination of producers is required:
10 or more producers (individuals); or
2 or more producer institutions; or Combination of the above 2.
Every Producer Company shall have at least 5 director but not
more than 15. (Provided that in the case of an inter-State co-
operative society incorporated as a Producer Company, such
Company may have more than 15 directors for a period of one year
from the date of its incorporation as a Producer Company.)
PART IXA of Companies Act 1956 comprises of XII Chapters which
prescribes different provisions to be complied by Producer
Company.

8. Dormant Company: In case of company is formed and

registered under this Act for a future project or to hold an
asset or intellectual property and has no significant
accounting transaction, such a company or an inactive
company may make an application to the Registrar for
76
 obtaining the status of a dormant company. Thereafter
Registrar on consideration of the application shall allow the
status of a dormant company to the applicant and issue a
certificate. “Inactive company” means a company which has
not been carrying on any business or operation, or has not
made any significant accounting transaction during the last
two financial years, or has not filed financial statements and
annual returns during the last two financial years. In case of
a company which has not filed financial statements or annual
returns for two financial years consecutively, the Registrar
shall issue a notice to that company and enter the name of
such company in the register maintained for dormant
companies. Registrar have power to strike off the name of a
dormant company from the register of dormant companies,
which has failed to comply with the requirements of this
section.

Discuss the binding force of "Memorandum of association and

articles of association”.

The Memorandum and Articles of Association (MoA and AoA) are

the two most important documents that govern the constitution
and operation of a company.

The following are the binding effects of the MoA and AoA:
Binding Effect of Memorandum and Articles of Association on
the Company and its Members
The MoA and AoA are binding on the company and its members.
This means that the company and its members are legally
obligated to comply with the provisions of these documents.
In Wood v. Odessa Waterworks Co, it was held that the articles
of a company constitute a contract between the company and its
members, and the company is bound to carry out its provisions.

Members Bound to the Company

The members of a company are bound by the provisions of the MoA
and AoA. This means that they cannot do anything that is in
contravention of the provisions of these documents. In Borland’s
Trustees v. Steel Bros. & Co. Ltd., it was held that a member of

77
a company cannot rely on the articles of association to justify an
action that is in breach of a contract.

Binding Between Members

The MoA and AoA are also binding between the members of a
company. This means that the members are legally obligated to
comply with the provisions of these documents in their dealings
with each other. In Rayfield v Hands, it was held that the articles
of association are binding on the members in their capacity as
members of the company.

No Binding in Relation to Outsiders

The MoA and AoA are not binding on outsiders, such as customers,
suppliers, and creditors of the company. This means that these
parties cannot rely on the provisions of these documents in their
dealings with the company. In Browne v La Trinidad, it was held
that the articles of association are not binding on a person who is
not a member of the company.
In summary, the MoA and AoA are binding on the company and
its members, but not on outsiders. They are also binding between
the members of the company. The provisions of these documents
must be followed by the company and its members in all their
dealings with each other. Any breach of these provisions may lead
to legal consequences.

What is the doctrine of Constructive Notice?

Doctrine of Constructive Notice is a legal concept that applies to
the registration of companies and states that all persons dealing
with a registered company are deemed to have knowledge of its
Memorandum of Association and Articles of Association, as these
documents are available for public inspection. This means that any
person who enters into a transaction with the company is deemed
to have constructive notice of the provisions of these documents,
even if they have not actually read them.
The doctrine of constructive notice is based on Section 399 of the
Companies Act, 2013, which provides that any person dealing with
a registered company shall be deemed to have notice of the
company’s MoA and AoA.
The doctrine of constructive notice plays an important role in
ensuring that persons dealing with a registered company are aware
of its MoA and AoA, and that they comply with the provisions of
these documents. However, it is also subject to certain limitations,
78
particularly in cases where there are irregularities in the internal
management of the company.

Difference between Memorandum of Association (MOA) and

Articles of Association (AOA)
The major differences between the Memorandum of Association
(MOA) and the AOA are given below:
Articles of
Basis of Memorandum of
S.No Association
Differentiation Association (MOA)
(AOA)
Lays down the
provisions for
Lays down the internal
fundamental regulations of the
On the basis of
1 principles upon company,
Content
which the company including the
is incorporated. rights and
obligations of its
members.
Acts as a rulebook
Acts as an that regulates the
informative relationship
document for the between the
2 Objective benefit and clarity company and its
of the public, the members, as well
creditors, and the as amongst the
shareholders. members
themselves.
Establishes the
Establishes the rules, regulations
scope beyond and by-laws based
3 Functions which the on which the
company’s conduct company
becomes void. conducts its
workings.
Lays down the Prescribes rules
scope or the and other details
4 Jurisdiction parameters within within the
which the AOA is to parameters set by
function. the MOA.

79
 MOA has a very
rigid procedure for
alteration and can
only be altered in Can be altered in
specific an easier manner
5 Alteration circumstances. than MOA, by
Permission of the passing a special
Central resolution.
Government is also
required in certain
cases.
AOA cannot
The MOA cannot be
include provisions
in contravention of
contrary to the
Position or the Companies Act.
6 MOA. It is
status It is only a
subsidiary to both
subsidiary of the
the Companies Act
Companies Act.
and the MOA.
Any conduct or
actions beyond the
Any conduct or
provisions of the
actions beyond the
AOA can be
scope of the MOA
ratified by the
Ratification will be
7 shareholders as
when breached considered ultra
long as such
vires and cannot be
conduct/action is
ratified even by the
not in
shareholders.
contravention of
the MOA.

Procedure for Alteration of Articles of Association (AOA)

As mentioned earlier, Section 14 of the Companies Act, 2013 states
the requirements for the alteration of Articles of Association, which
may include addition, deletion, substitution or modification of the
clauses in the aforesaid document.

To alter the Articles, there are four types of procedures that the
company can follow:

80
As per the steps prescribed in the Articles of Association: If the
company has provided special steps to be followed for alteration in
the Articles of Association itself, then they shall be followed.

As per the procedure of special resolution: This step of alteration

includes the passing of a resolution of at least 75% of the votes in
favour of the alterations in the general meeting of shareholders, as
per Section 114(2) of the Companies Act, 2013.

As per the votes of the Board of Directors: The Directors also have
the power to alter the Articles of Association as per the clauses
given in the AOA. However, such alteration needs to be ratified by
the shareholders in the next general meeting or else the alteration
will lose its legitimacy.

As per the Order of the Tribunal: The Articles of Association can

also be altered by the National Company Law Tribunal (NCLT),
given that the alteration is either subtraction or declaration of a
clause as void due to any contravention with the Memorandum of
Associations of the company or any legislation of the country. The
main power of alteration is mostly only in the hands of the
shareholders and Directors of the company and the Tribunal can
only do so if there are any contraventions of the clauses with law
or if the alteration is necessary for the functioning of the company
or to protect the interests of the shareholders from unfair
exploitation. Even in case of any mistake in the Articles of
Association, be it clerical or otherwise, it can only be rectified by
the shareholders.

Before the initiation of any procedure of alteration in the Articles

of Association, a notice of at least 7 days is required to be given for
the Board meeting of Directors as per Section 173 of the
Companies Act.

Once the Board meeting of the Directors is held and

recommendations for alterations as well as approval are granted,
the notice is issued for the general meeting in accordance with
Section 101 of the said Act, which may extend to however much is
mentioned in the clauses in the Articles of Association itself.

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Filing alteration for registration
After the general meeting of the shareholders is held a special
resolution is passed for the approval of the alteration. If the
resolution fails to reach the required amount of 75%, then the
alteration will not proceed any further. But if it does pass
successfully, then the company has to file form
MGT-14 with the Registrar of Companies (ROC) within 30 days of
passing of such resolution with the required documents,
consisting of certified copies of passing of the special resolution as
per Section 117, a copy of the notice of the general meeting as well
as a printed copy of the new and altered AOA.

The printed version of altered Articles of Association must also be

provided to every shareholder of the company once it is approved
by the Registrar of Companies.

Define prospectus. Briefly explain its contents.

A prospectus is a document that provides all the essential

information about the company at the time of raising an
investment from the public. It can be understood as an invitation
to offer the securities of the company. The public intending to
invest in the company can make an offer above the offered price
but within the price band. It is upon the company to allot shares
to the public in the manner it deems fit. Every time a company has
to raise an investment from the public, it is the duty of the
company to inform the public about its financial position and the
purpose of the investment. A prospectus is the first document
through which a company publicises or discloses its financial and
other relevant information.

Section 28(2) of the Companies Act, 2013 provides that any

document through which an offer for sale is made to the public
shall be deemed a prospectus. It is pertinent to note that the
document has to be issued to the public and not a particular set
of persons. Even if an advertisement is made in a newspaper
regarding certain shares left for purchase by the company, it shall
constitute a prospectus, as has been held by the Hon’ble Calcutta
High Court in Pramatha Nath Sanyal v. Kali Kumar Dutt (1924).
From the perspective of the Investor.

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In order to be able to make an informed decision regarding an
investment, an investor must have access to all the information
about a company before investing in it. Institutional investors
might receive such information without much trouble. However, it
is the retail investors whose interest might be compromised if such
information is not provided in due course. Thus, a prospectus
becomes the most crucial document for any investor intending to
invest in a company. This is also the reason why the company law
mandates the filing of a prospectus every time before raising a
public investment. It can also be safe to infer here that issuing a
prospectus is one of the means of ensuring good corporate
governance practices in a company as it encourages transparency,
accountability and responsibility.

Golden Rule by VC Kinderseley

The ‘Golden Rule’ of the prospectus was propounded by Judge VC
Kinderseley in the landmark judgement of The New Brunswick
Railway Company v. Muggeridge (1859). In this case, it was held
that “Prospectus is one of the means by which the investor is
informed about the soundness of the company’s venture.” The
essence of the rule is that it is mandatory on part of the company
to issue a prospectus; it is not only required to accurately put forth
all the relevant facts and information but also ensure that it does
not hide any information which might affect the decision of an
investor. The rule is also known as the ‘Golden Legacy’ as has been
described by Judge Pagewood in Henderson v. Lacon (1865).

This aforementioned rule has been reflected under various

provisions of the Companies Act, 2013 which seeks to protect the
interests of investors by providing comprehensive and elaborative
guidelines and requiring relevant disclosure of material facts to
ascertain the financial soundness of a company.
Essentials for a document to be called as a prospectus
The essential conditions required to be fulfilled for a document to
be considered as a prospectus under the Indian company law are
as follows:
1. Invitation to the Public – One of the most important points
that one must remember is that a prospectus is an invitation
to offer rather than an offer itself. This means that a company
makes an open declaration to the public at large that some of
its securities are available for subscription. A document shall
be deemed to be an invitation to the public only if it is open
83
 for any person to subscribe, though there may be a possibility
that ultimately the securities may not be issued to him owing
to oversubscription or any other disqualification.
2. Invitation by the company – The prospectus must be issued
by the company itself that wishes to raise the funds. Even if
all the requisite disclosures are made available by the public
by some other authority, that would not satisfy the criteria
for making the invitation. However, an entity, on behalf of the
company or on the authorisation of the company, may follow
the stipulated process in order to make an invitation to offer
to the public. Hence, an invitation to offer must be made by
the company itself or on behalf of the company by some other
authority authorised by the company.
3. Nature of document and particulars therein – A
prospectus shall be in the nature of an invitation to offer,
allowing subscription to the securities of the company. Any
document merely disclosing the details of the securities shall
not be considered a prospectus. It must fulfil all the required
stipulations that have been provided under the Companies
Act, which have been discussed in the later section of the
article.
4. Information regarding securities of the company – A
prospectus is required to contain all the details regarding the
securities. The prospectus must specify the nature of
securities, whether equity-based or debt-based. It must also
specify the category as to whether it is an equity or preference
share, debenture, bond, warrant, etc. It must specify the
number of securities available for subscription. It must also
provide for other particulars, such as redemption, rate of
interest, etc., as may be applicable to the category of
securities.

Advertisement for a prospectus under Company Law-

Section 30 of the Act provides for certain particulars to be
mentioned whenever a prospectus is being advertised in any
manner for call for subscription to securities. These particulars
include specifying the contents of the memorandum regarding the
primary object for raising funds, liability of the members, amount
of total share capital, names of the signatories and the number of
shares subscribed by each of them, and the capital structure of
the company.

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Types of prospectus under Company Law
o Shelf prospectus
o Red Herring prospectus
o Abridged prospectus
o Deemed Prospectus

The definition of prospectus under Section 2(70) is an inclusive

definition. It provides that a prospectus shall include a Shelf
Prospectus (as mentioned under Section 31), a Red Herring
Prospectus (as mentioned under Section 32), or any other
document inviting applications for subscription/purchase of
securities of the company. The various categories of prospectus
under the Companies Act, 2013 have been discussed hereafter.

Shelf prospectus
Drafting a prospectus is a cumbersome process as it requires a
number of disclosures and information to be passed on to the
investor. It may also be possible that a company makes multiple
public offers in one financial year itself. In such a case, it will
become nearly impossible for the company to draft an entirely new
prospectus every time. Yet, it is also crucial to note that significant
changes may take place in the financial status of the company. To
balance the interests of the company as well as that of investors,
the law provides for the concept of shelf prospectus.

Explanation to Section 31 of the Companies Act, 2013 provides

that “the expression “shelf prospectus” means a prospectus in
respect of which the securities or class of securities included therein
are issued for subscription in one or more issues over a certain
period without the issue of a further prospectus.” A company issues
a shelf prospectus when it has to offer for subscription by the
public, more than one round of issue. Shelf prospectus is a single
prospectus that can hold good for multiple public offers.

The Securities Exchange Board of India (SEBI) shall have the

power to prescribe the class or classes of listed companies that
may be allowed to file a shelf prospectus. The validity of a shelf
prospectus shall not exceed one year from the date of the first offer.
The provision also provides a more stringent rule for disclosures
by the company issuing a shelf prospectus.
An information memorandum has to be filed by the company while
filing a shelf prospectus, containing the following material facts:
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  new charges created;
 all the changes in the financial position that have occurred
after the first offer of securities or the previous offer of
securities and before the succeeding offer of securities; and
 such other changes as may be prescribed.
Such an information memorandum must be filed with the
Registrar within the prescribed time period (three months) prior to
the issue of the second or subsequent offer made under the shelf
prospectus.

Further, it is also the obligation of the company to inform an

investor about the changes if they have been allotted the securities
in advance before the adjustments. Further, based on such
information, an investor has also given the right to withdraw their
application and they will be refunded their money within fifteen
days thereof.

Red Herring prospectus

Though most of us imagine big companies when talking about
investments and funding, mid-size and small companies also
require investments and they also make public offers. To safeguard
their rights and enable them to have better access to finance, the
law provides for red herring prospectus. Explanation to Section 32
of the Companies Act, 2013 provides the definition of a red herring
prospectus as “the expression “red herring prospectus” means a
prospectus which does not include complete particulars of the
quantum or price of the securities included therein.” A red herring
prospectus is a prospectus wherein information regarding either
the quantity of securities or the price of securities is not disclosed
by the company. Rather, the company only provides a price band.
This enables a company to gauge the worth of its securities and
enables them to achieve the requisite minimum subscription,
which may not otherwise be possible had they already supplied the
entire information .

A red herring prospectus is subjected to same regulations as a

prospectus. It has to be filed before the Registrar of Companies at
least three days before the issue has to be made public. Further,
the company must file the complete details of the issue with the
Registrar and the SEBI after the securities has been duly
subscribed to.
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Abridged prospectus
A prospectus could run into hundreds of pages in a single issue,
which may prove to be a hectic task for retail investors. Retail
investors, having limited access to financial knowledge as well as
resources, might not be competent enough to understand the
intricate details mentioned in the prospectus. A solution to this
problem is an abridged prospectus.

Section 2(1) of the Companies Act, 2013 defines an abridged

prospectus as a memorandum containing the salient features of
an issue. The features to be included in an abridged prospectus
are to be provided by SEBI. Further, Section 33 of the Act
mandates for annexing an abridged prospectus along with form for
application of purchase of securities. However, the proviso to sub-
section (1) provides that this requirement may be dispensed with
where the form of application was issued for:
 “in connection with a bona fide invitation to a person to enter
into an underwriting agreement with respect to such securities;
or
 in relation to securities which were not offered to the public.”
Section 33(3) of the Act provides that if the company fails to comply
with the provisions of abridged prospectus as discussed above, it
shall be subjected to a penalty of up to Rs.50,000 for every default.

Deemed Prospectus
When a company wishes to issue its securities through an
intermediary, the document containing the details of such
securities is considered a deemed prospectus. Section 25(1) of the
Companies Act, 2013 governs the deemed prospectus. The
document shall be a deemed prospectus for the company whose
securities are being offered to the public.

Process for filing and issuing a prospectus under Company Law

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

As per Section 26(4) of the Companies Act, 2013, the company

issuing the prospectus has to deliver a copy of the prospectus,
signed by every person whose name has been mentioned in the
prospectus as a director of the company or the attorney of the
director, to the Registrar on or before the date of publication.

Delivery of a copy of the prospectus to the registrar

As per Section 26(6) of the Companies Act 2013, the prospectus
shall duly state that a copy of the prospectus has been served to
the registrar. It should also mention the documents submitted to
the registrar along with the prospectus.

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Write a note on certificate of incorporation.

Certificate of Incorporation: Meaning and Significance:

1. Issuance Authority: The Certificate of Incorporation is
typically issued by the government agency or regulatory body
responsible for company registrations in a specific
jurisdiction. In the United States, for example, this might be
the Secretary of State's office. In India, it would be the
Registrar of Companies (RoC).
2.
3. Contents: The Certificate of Incorporation includes important
details about the company, such as its name, registered office
address, authorized share capital, details of directors and
shareholders, and the date of incorporation.
4. Legal Recognition: Once the Certificate of Incorporation is
issued, the company gains legal recognition as a separate
legal entity from its owners, shareholders, and directors. It
can conduct business, enter into contracts, own property,
and sue or be sued in its own name.
5. Limited Liability: The Certificate of Incorporation also
provides limited liability protection to the company's
shareholders. This means that the shareholders are generally
not personally liable for the company's debts and obligations
beyond their investment in the company.
6. Validity: The Certificate of Incorporation remains valid as
long as the company complies with ongoing legal and
regulatory requirements, including filing annual reports and
maintaining accurate records.
7. Public Record: The Certificate of Incorporation is a public
record, which means that it is available for public inspection.
Anyone can access this document to verify the legal existence
and details of the company.
8. Requirement for Business Operations: The Certificate of
Incorporation is often required to open bank accounts, enter
into contracts, apply for licenses and permits, and engage in
other business activities.
9. Unique Identification: The Certificate of Incorporation
typically includes a unique identification number or code that
distinguishes the company from others. In the case of
companies in India, this is known as the Corporate
Identification Number (CIN).

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 10. Use in Legal Proceedings: The Certificate of
Incorporation is used as evidence of the company's legal
existence and status in legal proceedings, such as litigation
or disputes.
11. Annual Compliance: After obtaining the Certificate of
Incorporation, the company is required to fulfill annual
compliance obligations, including filing annual financial
statements, holding annual general meetings, and updating
any changes in company details with the regulatory
authorities.

12. Conclusive evidence : A certificate of incorporation is

conclusive evidence of the legal existence or presence of the
company as per Section 7 of Companies Act, 2013. The
certificate serves as legal proof that all the legal requirements
mandated for the incorporation of the company have been
complied with.
13. In the case of Moosa v. Ibrahim (1912), a company had
been incorporated, but later it was found that there were
certain procedural irregularities as the MoA had been signed
by a guardian of five minor members. However, the Court
held that the certificate of incorporation was valid and
conclusive proof of the company’s lawful formation.
14. Similarly, in the case of Jubilee Cotton Mills v. Lewis
(1924), a company filed for registration before the Registrar
of Companies. The documents required for registration were
submitted to the registrar on January 6th. On January 8, the
registrar issued a certificate of incorporation, but he
mentioned the date of incorporation as January 6 on the
certificate. The company had allotted certain shares to Lweis
on January 6th itself, and the validity of the allotment was
challenged before the House of Lords. The Court held that the
company came into existence on the date mentioned on the
certificate of incorporation and thus, the allotment was
legally valid.

Consequences of Incorporation -
1. Legal Existence: The Certificate of Incorporation confirms the
legal existence of the company as a separate entity distinct
from its shareholders, directors, and promoters. This legal
personality allows the company to conduct business, own

90
 assets, enter into contracts, and engage in various activities
in its own name.
2. Limited Liability: The Certificate of Incorporation provides
limited liability protection to the shareholders. This means
that the personal assets of shareholders are generally
shielded from the company's debts and liabilities.
Shareholders' liability is limited to the amount they have
invested in the company.
3. Perpetual Succession: The issuance of the Certificate of
Incorporation ensures the company's perpetual succession.
This means that the company continues to exist even if there
are changes in ownership, management, or the death of
shareholders. The company's operations are not affected by
such changes.
4. Separate Legal Identity: With the Certificate of Incorporation,
the company gains its own legal identity. It can own property,
sue or be sued, and undertake legal actions in its own name.
This separation prevents the company's actions from being
attributed directly to its shareholders or directors.
5. Access to Contracts and Transactions: The Certificate of
Incorporation enables the company to enter into contracts,
agreements, and transactions. It can engage in business
activities, sign leases, make investments, and negotiate with
other parties as a distinct legal entity.
6. Ability to Raise Capital: The issuance of the Certificate of
Incorporation allows the company to raise capital through
various means, such as issuing shares, debentures, or loans.
Investors and lenders are more likely to engage with a legally
recognized entity.
7. Share Trading and Ownership: For companies with
shareholders, the Certificate of Incorporation enables the
issuance and trading of shares. Shareholders can buy, sell,
and transfer shares, allowing for ownership changes and
investments.
8. Taxation and Reporting: The Certificate of Incorporation has
implications for taxation. The company becomes subject to
taxation as a separate entity, and it must fulfill tax reporting
requirements based on the jurisdiction's laws.
9. Corporate Governance: With the Certificate of Incorporation,
the company is expected to follow corporate governance
standards, maintain proper records, and fulfill regulatory
obligations. This includes holding annual general meetings,
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 maintaining financial records, and submitting annual
financial statements.
10. Legal Rights and Obligations: The company gains legal
rights and obligations, similar to those of an individual. It can
enforce contracts, protect intellectual property, and engage
in legal proceedings.
11. Investor Confidence: The issuance of the Certificate of
Incorporation enhances investor confidence. It provides
assurance that the company is a legally recognized entity
adhering to legal and regulatory standards.
The Certificate of Incorporation marks the official recognition of a
company as a separate legal entity with its own rights,
responsibilities, and liabilities. It opens doors for the company to
engage in business activities, raise capital, and interact with
stakeholders as a distinct entity under the law.

92
Legal position of directors of a company.
Ans:
Legal position of directors
1. Directors as an agent
2. Director as a trustee
3. Director as a managing partner
4. Director as an employee/officer

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

In the case of Ferguson v. Wilson (1904), it was established that

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

In the case of Kirlampudi Sugar Mills Ltd. v. G. Venkata Rao

[2003], it was noticed that if the CEO of the company executes a
promissory note and borrows money from outside for the
company’s use, it cannot be said that he has borrowed money for
himself. Even if the company fails to pay the amount promised,
there shall incur no liability on the one who borrowed money as an
agent of the company. However, in the case of H.P. State Electricity
Board v. Shivalik Casting (P.) Ltd. [2003], it was established that if
a director gives surety in his own capacity/personal capacity and
not for and/or on behalf of the company, then the company cannot
be sued for the amount of surety. There were some circumstances
that were pointed out in the case of Vineet Kumar Mathur v. Union
93
of India [1996] in which the directors incurred liability on
themselves-

In cases where directors contract in their own names rather than

the company.
In cases where directors omit or use the company’s name
incorrectly.
In cases where directors sign the contracts or agreements in such
a manner that it is not evident whether it is the company
(principal) or the director (agent) who is signing and who shall be
liable for future circumstances.
In cases where directors exceed the allowed limit and borrow in
excess of funds.
There are ways in which unauthorised actions can be ratified. In
Bhajekar v. Shinkar [1933], it was mentioned that if a transaction
made by the director exceeds the power given to him but falls
within the ambit of the power held by the company, then it can be
ratified by passing a resolution of the company. However, if the
company has been struck off by the registrar and dissolved, then
it cannot ratify its actions. This is because a non-existent entity
cannot initiate action in the first place.

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

As observed by the Madras High Court in the landmark case of

V.S. Ramaswami Iyer v. Brahmayya and Co. (1966), the directors
can be rendered liable as trustees with reference to their power to
apply funds of the company. A director may misuse these in many
94
ways. Due to this, if legal action is taken against a director with
reference to the mentioned offence, then the cause of action will
survive even after the death of the director against his legal
representative. In both the cases of Percival v. Wright (1902) and
Peskin v. Anderson (2001), it was held that the directors of a
company owe their duty to the company as a whole, and are not
trustees for individual shareholders or owe them a fiduciary duty
merely by virtue of their offices. They may purchase their shares
without disclosing pending negotiations for the sale of the
company’s undertaking.

Director as a managing partner

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

Director as an employee/officer
Shareholders elect directors in a general meeting held by the
company. Once the director is elected, he then enjoys the rights
and powers that are given to him as per the Act. These powers and
rights cannot be taken away by the shareholders and they cannot
interfere in the decision-making of the directors as such. Since
directors possess such powers and rights, they cannot be termed
employees of the company. This is because employees have limited
authority vested in them and always work under the directions of
the employer and cannot interfere in the employer’s decision-
making.

In the case of Lee Behrens & Co., Re [1932], it was seen that it is
the shareholders who elect their representatives who shall engage
in directing the affairs of the company on their behalf. This means
that they are acting in the capacity of an agent in this scenario. It
can also be seen that they are not the employees or servants of the
company. However, in the case of R.R. Kothandaraman v. CIT
(1957), was held by the Madras High Court that since there is
nothing mentioned in the law, no one can prevent the director from
accepting his position as an employee under a special contract
made with the company.
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Directors are also treated as an officer in a company for certain
matters. They can be held liable for penalties for failure to comply
with the law. To summarize the legal position of directors in a
company, Jessel M.R can be quoted from Forest of Dean Coal
Mining Co., Re [1878], “Directors have sometimes been called as
trustees or commercial trustees, and sometimes they have been
called managing partners; it does not matter much what you call
them so long as you understand what their real position is, which
is that they are really commercial men managing a trading concern
for the benefit of themselves and of all the shareholders in it. They
stand in a fiduciary position towards the company in respect of
their powers and capital under their control.”

96
Prevention of Oppression and Mismanagement Under the
Companies Act, 2013.

Meaning Of Oppression
Oppression is the exercise of authority or power in an unjust
manner against the consent of the other party. In the Black Law
Dictionary, the term ‘oppression’ is defined as ‘the act or an
instance of unjustly exercising power.’ It can also be viewed as an
act or instance of oppression and the feeling of being heavily
burdened, mentally or physically, by troubles, adverse conditions,
and anxiety.

In the case of Dale and Carrington Investment Pvt Ltd. v P. K.

Prathapan, it was held that increasing the capital of a company
with the sole purpose of gaining control over can be termed as
oppression.

Application to Tribunal for relief in cases of Oppression

The aggrieved shareholder may approach the National Company
Law Tribunal set up under the Company legislations.
Application against oppression and mismanagement
Earlier under the Companies Act, 1956 section 397 dealt with the
application against oppression and mismanagement. The
Companies Act, 2013 lays down the provision to make an
application against the oppression under section 241. The
chapter XVI of the Company Act clearly specifies who can raise a
complaint and under which circumstances a complaint may be
raised of oppression and mismanagement.

First let’s consider a situation when a member of the company

makes a complaint regarding the affairs of the company when the
affair may seem shady affecting the interest of the public at large
or the company, or when the affairs of the company is oppressive
in nature and against the member making the complaint or any
other member of the company. The member may also make a
complaint regarding the material change in the management or
control of the company which may seem to be prejudicial to the
company. The Central government may, by itself, file the
oppression and mismanagement application before the tribunal
against a company if it believes that the affairs of the company are
prejudicial in nature.

97
Who can file an application against Oppression and
Mismanagement?
The Provision of Section 244 of Companies Act is also crucial as it
describes who has a right to file such an application. The right is
broadly divided between the company and entitlement to one
member, to file on behalf of the other members. In a company, the
right may further be differentiated based upon the companies
having a share capital and companies not having a share capital.
The share capital of the member complaining, may be calculated
based upon share capital’s number or its value. When it comes to
number, it should be 100 or 1/10 of the total members and when
it comes to the value, it must be the members holding 1/10th of
the share capital value. In companies not having a share capital,
1/5th of the total members may apply. Coming back to the
entitlement to one member, to file on behalf of the other members,
it is posed with only one precondition that the person doing so
must have the consent of others in written form.

Power of Tribunal: Section 242 of the Companies Act, 2013

The tribunal is the special adjudicatory body brought about to deal
with the matters pertaining to the Companies Act in order to get
efficient and immediate relief. Section 242 deals with the powers
of the tribunal and the same have been examined and explained
for your kind perusal.
 The first power granted upon it by the legislation is to pass
an order. Such order may be passed if it is of the opinion that
the affairs of the company have been or are being conducted
in a prejudicial manner. It has been mentioned that the
winding up of the company will not be ordered radically, but
it is the oppression and mismanagement which is aimed to
be stopped.
 The same provision also confers powers upon the tribunal
regarding three issues which are concerning the 1)
shareholders 2) Company and 3) others.
 With respect to shareholders, a tribunal may order to
purchase shares of members by other members or by the
company.
 A tribunal may as well order a reduction of the share capital
or even enforce restriction on transfer of shares because
oppression and mismanagement at root cause depends upon
the coagulation of shares at the hands of individual or few
members.
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  Regarding the management of the company which is a crucial
part of a company, a tribunal may terminate or modify
agreements made between company and management or
agreement between the company and any other person.
 The tribunal in case of management of the company may even
remove the Managing Director, Manager, and Director, the
tribunal may recover undue gains made by such official and
also appoint another MD, manager, and director.
 In certain cases, the tribunal may appoint a person who shall
report to the tribunal regarding the activities of oppression
and mismanagement by the management to curb such
oppression from taking place further.
 Lastly, the tribunal has certain other powers such as
regulation of the conduct of the affairs of the company,
setting aside the transfers of any property of the company
and the tribunal may even impose costs. The procedural
details are that the tribunal has to send a copy of its order to
the registrar and if the order has not been finalised, it may
provide an interim order to the registrar. Pertaining to
changes made in MOA (Memorandum of Association) and
AOA (Article of Association) the changed documents must be
submitted to the registrar. The punishment prescribed in
abeyance of the law is set at 1 Lakh to 25 Lakh for a company
and 25000 to 1 Lakh for an officer in default and such officer
may also be liable for a term of imprisonment of 6 months.

Oppression of the Minority

The management of a Company is based on the majority rule, but
at the same time, the interests of the minority can’t be completely
overlooked. While talking of majority and minority, we are not
talking of numerical majority or minority but of the majority or
minority voting strength. The reason for this distinction is that a
small group of shareholders may hold the majority shareholding
whereas the majority of shareholders may, among them, hold a
very small percentage of share capital. Once they acquire control,
the majority can, for all practical purposes, do whatever they want
with the Company with practically no control or supervision,
because even if they are questioned on their acts in the general
meeting, they always come out winners because of their greater
voting strength. So, the modern Companies Acts contain a large
number of provisions for the protection of the interests of
minorities in companies.
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Appeals against the Orders of the Tribunal and variation of the
Order of the Tribunal
The Award pronounced by the NCLT (National Company Law
Tribunal) may be appealed before the NCLAT (National Company
Law Appellate Tribunal). The procedure and provision granting
such right to appeal is Section 421 and the same is explained
below.
 The appeal may be preferred by any person who is aggrieved
by the decision of the tribunal.
 No appeal shall be entertained when the decision is given by
the tribunal based upon the consent of the parties.
 Appeals must be made within a period of forty-five days from
the disputed order passed by the tribunal and the extension
may be given only when sufficient cause for such delayed
filing is brought before the court by such party and such
extension shall only be for another 45 days.
 On receiving such appeal, the appellate tribunal must give a
reasonable opportunity to the parties and then pass an order
confirming or modifying or setting aside the order appealed
against.

Maintainability of Petitions under Sections 241 & 421

 The validity of a petition must be judged from the facts as
they were, at the time of its presentation, and a petition which
was valid when presented cannot cease to be maintainable by
reason of events subsequent to its presentation.
 For the purposes of the petition under Sections 241 and 421,
it was only necessary that members who were already
constructively before the court should continue the
proceedings. The provision under the Companies Act
provides substantive provisions regarding an application that
is to be made when there is complaint of oppression and
mismanagement. It clearly specifies who may complain and
when.
 As discussed before, member shareholders may make a
complaint when the company affairs are conducted
prejudicial to the company and its shareholders.
 The central government may even take suo-moto action
regarding the same under the aforementioned provisions.
Under the provision Section 421 of Company Act, one could

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 make an appeal from an order of the tribunal if such a person
is aggrieved by the decision.
 The time duration of 45 days has been fixed as maximum
period within which appeal shall lie from the order of
company tribunal, but the appeal may be further extended to
a maximum of another 45 days on convincing court of the
sufficient cause of delay.
 Then the appellate tribunal finally gives the appellant a
reasonable opportunity to present their case again, to either
uphold or overrule the previous decision of the tribunal. This
appeal provision is based upon the intrinsic right to appeal,
which is provided to the aggrieved party in order to do
complete justice.

Class action
The word class action is defined under Section 245 of Company
Act. A class action is where number of claimants with common
grievance against the company are allowed to file a lawsuit against
the company.
Claimants can collectively use their resources such as share
attorney’s services and save their litigation costs to a great extent.
The financial scale attached to the class action suit is perceived as
a saving grace for individuals with limited resources.

The funding of a class action suit is usually made from the

Investor Education Protection Fund. This funding is subject to the
feasibility of reimbursement from the IEPF which is usually
considered an acid test under the Company Act, 2013. The
application is usually made regarding the conduct of the affairs of
the company being prejudicial to the interest of the company or
the members and its depositors. A class action may even be filed
against the directors or auditors of the company for misleading the
members by furnishing misleading reports.

Under the Security Class Action, group of people affected by the

changes made to the MOA/AOA must bring a suit of class action
instead of filing application of class action.

Numbers of members/ depositors who may bring class action suit:

 In case of companies having a share capital, not less than
100 members of the company may bring a class action suit;
or not less than 10% of the total number of members
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 whichever is less may bring a class action suit, or any
member individually or jointly holding 10% of the share may
bring a class action suit provided, all such shareholder
members have paid up all the share dues.
 If the company is not having a share capital, then not less
than 1/5th of the members can bring a class action.
 For a company having deposit capital, a class action suit may
be brought by not less than 100 depositors of the company
or by a minimum of 10% of the total depositors whichever is
less, or a class action suit may also be brought by any
depositor individually or depositors jointly who are holding
10% of the outstanding deposit of the company.

Appointment of directors under companies act, 2013.

The Companies Act, 2013 does not contain an exhaustive

definition of the term “director”. Section 2 (34) of the Act prescribed
that “director” means a director appointed to the Board of a
company. A director is a person appointed to perform the duties
and functions of director of a company in accordance with the
provisions of the Companies Act, 2013.

Minimum/Maximum Number of Directors in a Company-

Section 149(1)

Section 149(1) of the Companies Act, 2013 requires that every

company shall have:
 a minimum number of 3 directors in the case of a public
company,
 two directors in the case of a private company,
 and one director in the case of a One Person Company.
A company can appoint maximum 15 fifteen directors. A company
may appoint more than fifteen directors after passing a special
resolution in general meeting and approval of Central Government
is not required. A period of one year has been provided to enable
the companies to comply with this requirement.

Number of directorships- Section 165

 Maximum number of directorships, including any alternate
directorship a person can hold is 20.
 It has come with a rider that number of directorships in
public companies/ private companies that are either holding
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 or subsidiary company of a public company shall be limited
to 10.
 Further the members of a company may restrict
abovementioned limit by passing a special resolution. Any
person holding office as director in more than 20 or 10
companies as the case may be before the commencement of
this Act shall, within a period of one year from such
commencement, have to choose companies where he wishes
to continue/resign as director.
 There after he shall intimate about his choice to concerned
companies as well as concerned Registrar.
 Such person shall not act as director in more than the
specified number of companies after despatching the
resignation or after the expiry of one year from the
commencement of this Act, whichever is earlier.

Residence of a director In India:

Section 149 (3) of the Act has provided for residence of a director
in India as a compulsory i.e. every company shall have at least one
director who has stayed in India for a total period of not less than
182 days in the previous calendar year.

Woman Director:
 Every listed company shall appoint at least one woman
director within one year from the commencement of the
second proviso to Section 149(1) of the Act.
 Every other public company having paid up share capital of
Rs. 100 crores or more or turnover of Rs. 300 crore or more
as on the last date of latest audited financial statements,
shall also appoint at least one woman director within 1 years
from the commencement of second proviso to Section 149(1)
of the Act.
 A period of six months from the date of company’s
incorporation, has been provided to enable the companies
incorporated under Companies Act, 2013 to comply with this
requirement.
 It is better to say that existing companies (under the previous
companies act) has to comply the above requirements within
one year and new companies (under the new companies act)
has to comply within 6 months from the date of its
incorporation.
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Independent Directors
Section 2(47) of the Act prescribed that “Independent director”
means an independent director referred to in sub section (5) of
section 149 of the Act. In fact reference should have been made to
sub section (6) of 149 as it specified the qualifications of
independent director with clarity
Every listed public company shall have at least one-third of the
total number of directors as independent directors (fraction is to
be rounded off to one). Central Government has prescribed under
Rule 4, public companies with specified limits as on the last date
of latest audited financial statements mentioned below shall also
have at least 2 directors as independent directors:-
 paid up share capital of Rs. 10 crore or more; or
 turnover of Rs. 100 crore or more; or
 in aggregate, outstanding loans/borrowings/ debentures/
deposits/ exceeding Rs. 50 crore or more.

Write a note on kinds of meeting of a company.

1.Meetings of shareholders or members

 General meeting
 Class meeting
2.Meetings of directors
 Board of directors
 Committee of directors
3.Other meetings
 Debenture holders meeting
 Creditors meeting

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Now that we have seen the pictorial representation of company
meetings, let us have a look at each of the meetings in a more
detailed manner.
Meetings of shareholders or members
The first main type of meeting is a meeting of shareholders or
members of the company. It is further divided into two categories,
namely:
1. General meeting, and
2. Class meeting.
The first category is further divided into three subcategories, each
of which is discussed in detail below.
General meeting
The general meeting is subdivided into three categories. Let us
have a look at the nitty-gritty of each of them.

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Statutory meeting
Before the enactment of the Companies Act, 2013, the
requirements laid down for statutory meetings and reports
under Section 165 were legit. However, after its enactment,
the same has been dropped.
The following is just for the readers’ information.
What is statutory meeting
A statutory meeting is a type of general meeting that must be held
by every company limited by shares and every company limited by
guarantee with a share capital within not less than a month and
not more than six months from the date it was incorporated.
Private companies are exempt from conducting a statutory
meeting. In this meeting, a report known as the ‘statutory report’
is discussed by the directors of the company.

Which companies do not need to conduct a statutory meeting

The following companies do not have any obligation to conduct a
statutory meeting:
1. Private company,
2. Company limited by guarantee having no share capital,
3. Unlimited liability company,
4. A public company that was registered as a private company
earlier,
5. A company that has been deemed as a public company under
Sec. 43 A.
What is notice of the meeting
The board of directors of a company is duty-bond to forward a
notice of the meeting to all the shareholders or members of the
company. This has to be done at least 21 days prior to holding the
meeting, and an explicit mention of ‘statutory meeting’ of the
company has to be made in the notice. If the board of directors
does not name it the ‘statutory meeting’, it will be a breach of the
provision.

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What is statutory report
Now that a mention of the statutory report was made above, you
might wonder, what exactly is it? Let’s find out.
The board of directors is obliged to forward a report known as the
‘statutory report’ at least 21 days before the date of the statutory
meeting. A copy of the report has to be forwarded to the registrar
for registration. This report has to be drafted by the board of
directors of the company and certified and amended by at least two
of them.

What are the particulars of a statutory report

Under Section 165(3) of the Companies Act, 1956, a prior mention
of the contents of a statutory report has been made; it says the
report must contain:
1. The total number of fully paid-up and partly paid-up shares
allotted
2. The sum of the amount of cash received by the company with
respect to the shares;
3. Information on the receipts, distinguishing them on the basis
of their sources and mentioning the amount spent for
commission, brokerage, etc.
4. The names of the directors, auditors, managers and
secretaries along with their address and occupation, and
changes of their names and addresses, if any.
5. The particulars of agreements that are to be presented in the
meeting for approval, with suggested amendments, if any.
6. The justifications in cases where any underwriting agreement
was not executed.
7. The arrears due on calls from directors and other individuals.
8. The details on the amount of honoraria paid to the directors,
managers and others for selling shares or debentures.
What is the procedure to carry out a statutory meeting
Now that we know about the statutory report and its particulars,
you might wonder what the proper procedure is for conducting a
statutory meeting. The answer is in the below pointers.
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The board of directors has to send a statutory report to every
member of the company, as mentioned above. The members who
attend this meeting may carry out discussions on matters relating
to the formation of the company or matters that are incorporated
in the statutory report. Below are some of the points one must
note:
1. While conducting the statutory meeting, no resolution can be
taken.
2. The main motive of conducting such a meeting is to
familiarise all the members of the company with matters
relating to the development and origination of the company.
3. The shareholders, perhaps, the members of the company, will
receive particulars relating to the following:
1. Shares taken up,
2. Money received,
3. Contracts entered into,
4. Preliminary expenses incurred, etc.
4. The members or shareholders also have the opportunity to
carry out a discussion on several business ideas and ways to
prosper the business, along with the future prospects of the
company.
5. Moreover, if a decision is not reached at the statutory
meeting, an adjournment meeting is called.
6. According to Section 433 of the Companies Act, 1956, if the
company errs in submitting the statutory report or in
conducting the statutory meeting within the specified time, it
may be subjected to winding up.
7. However, the court, instead of directly winding up the
company, has the authority to instruct the company to
submit a statutory report and conduct a statutory meeting,
along with levying a fine on the individuals who erred in
conducting the meeting.
What will be the effect of non-compliance with the provisions on
conducting a statutory meeting
The following are the repercussions of not complying with the
provisions on conducting a statutory meeting:
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 1. If there is any mistake in complying with the provision for
holding a statutory meeting under Section 165, the directors
or other officers of the company who are at fault will be liable
to pay a fine that is extendable up to ₹500.
2. Under Section 43(6) of the Companies Act, 1956, in case the
company errs in conducting the statutory meeting or if the
statutory report is not in compliance with the provisions of
the Act, the company may be compulsorily wound up if the
court orders the same. However, under Section 443(3) of the
Companies Act, 1956, the court may pass an order to
conduct a statutory meeting or to send the statutory report,
as the case may be, instead of winding up the company.

Annual General Meeting (AGM)

The annual general meeting is defined under Section 96 of the
Companies Act, 2013. As the name suggests, an annual general
meeting is one of the general meetings held once a year. As per
Section 96 of the Companies Act, 2013, all companies have to hold
an AGM within the stipulated time. An AGM provides a chance for
the members of the company to review the workings of the
company and express their opinions on the management and
workings of the company.
Purpose of conducting an annual general meeting
The main purpose of conducting an AGM is to transact the
ordinary business of the company. Ordinary business includes the
following:
1. Consideration of financial statements and reports from the
directors and auditors.
2. Making declarations on dividends.
3. Appointing a replacement of director or directors in place of
those who have retired.
4. Appointing and setting up the amount of remuneration for
the auditors of the company.
5. It also includes annual accounts, crucial reports, and audits.
Importance of conducting an annual general meeting

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Under corporate law, an annual general meeting is regarded as one
of the most important institutions for protecting the members of
the company. It is at this meeting— even though it is held only
once in a fiscal year- that the members of the company get the
opportunity to question the management on matters relating to the
following:
1. The affairs of the company,
2. The business of the company, and
3. The accounts of the company.
It is only at this meeting that the members of the company have
the chance not to re-elect those directors in whom they have lost
faith or confidence. Further, as auditors also retire at this meeting,
members of the company have another opportunity to think about
the re-election of these auditors.
Last but not least, it is at the AGM that members disclose the
amount of dividend payable by the company. While talking about
dividends, it may be noted that the board of directors makes
recommendations on the amount of dividend, whereas the
members at the AGM declare the dividend. Further, the dividend
cannot surpass the recommended amount by the board of
directors.
The three rules of conducting an annual general meeting
1. The meeting must be conducted on an annual basis.
2. A maximum duration of 15 months is permitted between
holding two annual general meetings.
3. The meeting must be conducted within six months of
preparing the balance sheet.
If any of these rules are not complied with, the same will be said
to be an offence under the Companies Act, 2013. It has been
discussed in the upcoming passages.
Notice of conducting the annual general meeting
The company has to send a clear 21 days’ notice to its members to
conduct the annual general meeting. The notice must mention the
day, date, and location of the meeting, along with the hour at
which it is decided to be held. The notice should explicitly mention

110
the business to be conducted at the AGM. A company is obligated
to send the AGM notice to the following:
1. All the members of the company, including the legal
representatives of a deceased member and the assignee of an
insolvent member.
2. The statutory auditors of the company.
3. All the directors of the company.
The notice can be sent either by speed or registered mail or even
through electronic means like email.
Date, time, and place of conducting an annual general meeting
Usually, an annual general meeting can be conducted at any time,
provided it is during business hours (between 9 am and 6 pm) and
the day of the meeting is not a national holiday. Now, talking about
the location of the meeting, it can be held either at any pre-decided
place within the area of the jurisdiction of the registered office or
at the registered office itself.
Below are some of the noteworthy pointers in context to the date,
time, and place of holding an annual general meeting:
1. A public company or a private company that acts as a
subsidiary of a public company may determine the timing of
the meeting as per the articles of association.
2. At a general meeting, a resolution can also be passed for
determining the time of holding subsequent meetings.
3. In the case of private companies, the time and location are
determined by passing a resolution at any of the meetings.
4. For a private company meeting, the location may not be
within the area of jurisdiction of the registered office of the
company.
Further, as per Section 101 of the 2013 Act, if any member files an
application in case a company errs in holding an annual general
meeting, the time frame for notice to call for the meeting can be
reduced to less than 21 days (21 days is the time frame to send a
notice to call for an annual general meeting) with the agreement of
members who are entitled to vote.
First annual general meeting and relaxations

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As per Section 96 of the Companies Act, 2013, a general meeting
must be held annually, as the name suggests. It is mandatory that
all companies hold such meetings at regular intervals. When the
annual general meeting is held for the first time after the
company’s incorporation, it has to be held within a period of nine
months from the date of the closing of the financial year of the
company, and in other cases, within six months from the date of
the closing of the financial year. Further, as per Section 96 of the
Companies Act, 2013, a company has no obligation to hold any
general meetings until it holds its first annual general meeting.
Such a relaxation is provided so that the company can set up its
final reports for a longer duration. Another provision that is
provided under Section 166(1) is that, with proper authorization
from the registrar, the company can postpone the date of the
annual general meeting. The registrar has the authority to
postpone the date for a further three months at the most, however,
such a relaxation does not apply in the case of the company’s first
annual general meeting. Further, a company may not hold an
annual general meeting in a year provided the registrar has
consented to it, however, the justification for such an extension
should be reasonable and genuine.
Gaps between two annual general meetings
According to Section 96 of the Companies Act, the gap between two
annual general meetings must not exceed fifteen months. Further,
Section 210 of the Act states that a company must provide a report
on the accounts of all the profits and losses of the company, and
if the company does not have any profits, an income and
expenditure report must be submitted.
Furthermore, the following pointers are crucial to note in cases of
gaps between two annual general meetings:
1. When a company presents its report on profits and losses
incurred, it has to mention all the profits and losses
endured by the company right from the day of incorporation.
2. The account shall have an update of at least 9 months from
the date of the last annual general meeting.
3. A balance sheet along with the account report has to be
submitted, as well.
Also, after conducting the first annual general meeting, the next
AGM must be held within 6 months from the end of the financial
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year. If, due to any unforeseeable circumstance, the company fails
to hold the meeting, the tribunal may grant an extension of 3
months.
Quorum
Public company
The quorum in the case of a public company shall consist of the
following:
1. 5 if the company has less than 1000 members,
2. 15 if the members are between 1000 and 5000, and
3. 30 if the number of members exceeds 5000.
Private company
In the case of a private company, only two members who are
present will constitute the quorum.
Proxy in annual general meetings
Any member of the company who has the authority to vote at a
meeting will be entitled to appoint a proxy, i.e., another person to
attend and vote instead of himself. The appointment of a proxy
shall be in Form No. MGT.11. Further, an individual cannot act as
a proxy on behalf of members exceeding a total of 50 and holding
in aggregate not more than 10% of total capital with the authority
to vote.
Procedure to be followed after conducting the annual general
meeting and penalty if the company fails
After conducting the annual general meeting, a report in the form
of MGT-15 within a period of 30 days has to be filed. Further,
under Section 121, the report will include how the meeting was
convened, held, and conducted as per the provisions of the 2013
Act. If the company errs in doing so, a penalty of ₹1 lakh shall be
imposed. Further, on every officer who has erred in following the
procedure of the meeting, a penalty of ₹25,000 minimum shall be
imposed, and in case the issue persists, a penalty of ₹500 for every
day after the failure persists can be imposed, and the same shall
be for a maximum of ₹1 lakh.
Penalty for not holding an annual general meeting

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If a company errs in holding an annual general meeting in
accordance with Section 99 of the Companies Act, 1956, the act
shall be considered a serious offence in the eyes of the law. Every
member of the company who is at fault shall be deemed to be a
defaulter.
Further, a fine extendable to ₹100,000 may be levied on the
defaulters. Moreover, as per Section 99 of the Companies Act, if
the defaulters persist with the same mistakes, and if the provisions
under Sections 96 and 97 are not complied with, a fine of ₹5000
will be imposed on the defaulter until the problem continues.
Power of NCLT (National Company Law Tribunal)
The National Company Law Tribunal, commonly known as NCLT,
has the authority to call or direct a meeting under Section 97 of
the Companies Act, 2013, in case an application is filed by a
member in matters relating to the failure to conduct the meeting.
Extraordinary general meeting (EGM)
In a company, there are certain matters that are so crucial to be
discussed that they need to be addressed immediately to the
members, which is where an extraordinary general meeting comes
into play. Such meetings are discussed under Section 100 of the
Companies Act, 2013. An extraordinary general meeting is any
general meeting apart from the statutory meeting, an annual
general meeting, or any adjournment meeting. Such a meeting is
held to discuss special business, especially those businesses that
do not fall under the ordinary business that is discussed at annual
general meetings. Such meetings are usually called for matters
that are urgent and for those that cannot be discussed at annual
general meetings. Extraordinary general meetings are usually
called by the following:
1. The directors or the board of directors of the company,
2. The shareholders of the company who hold 1/10th of the
paid-up shares.
Calling of extraordinary general meeting
While dealing with the above heading, one might wonder when and
by whom an extraordinary general meeting can be called. Let’s find
out.

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An extraordinary general meeting can be called in the following
circumstances:
By the board of directors suo moto
In cases when the board of directors has some urgent matters to
discuss and such matters cannot be postponed until the next
general meeting, the board of directors may hold an extraordinary
general meeting if need be. The same is discussed under Section
100 (1) of the 2013 Act.
By the Board on the requisition of members
The board of directors may call an extraordinary general meeting
on the requisition of the following number of members:
1. In case of a company having a share capital
Members who own 1/10th of the paid-up share capital of the
company on the date of receipt of the requisition on the date of
exercising the voting rights.
2. In case of a company not having a share capital
Members who own 1/10th of the paid-up share capital of the
company on the date of receipt of the requisition on the date of
exercising the voting rights.
By requisitionists
Under Section 100(4) of the Company Act, 2013, if a board does
not, within 21 days from the date of receipt of a valid requisition
in relation to any matters thereto, take any steps to call a meeting
to consider the matter not later than forty-five days from the date
of receiving such a requisition, then the meeting may be called
upon and conducted by the requisitionists themselves within a
time span of three months from the date of the requisition.
Further, it is important to note the following pointers for a better
understanding of the topic:
 Notice
The notice must specify the date, day, time, and place of holding
the meeting, and must be held in the same city as the registered
office and on a working day.
 Notice to be signed

115
The notice has to be duly signed by all the requisitionists or on
behalf of those requisitionists who have permission to sign in place
of the requisitionists, provided the permission is in writing. This
can also be done via an electronic request attached to a scanned
copy to give such permission.
 No need of an explanatory statement to be attached to
the notice
There is no need for any explanatory statement under Section 102
to be attached with the notice of an extraordinary general meeting
that is convened by the requisitionists and the requisitionists.
 Serving notice of the meeting
The notice of the meeting has to be served on all those members
whose names are on the list of registered members of the company.
It should be served within three days of the requisitionists
depositing a valid request for conducting an EGM in the
company.
 Method of serving the notice
The notice of the meeting can be sent through speed mail,
registered mail, or even electronic means like emails. If there is an
issue with serving the notice or if some member does not receive
the notice for any reason, the meeting shall not be invalidated by
any member.
By the tribunal
According to Section 98 of the Companies Act, 2013, if it is not
possible to conduct a meeting in the company, the tribunal may
either suo moto or through an application submitted by any
director or member of the company who has the authority to vote
at the meeting-
1. Instruct to hold and conduct a meeting in a manner the
tribunal thinks fit, and
2. Provide ancillary or consequential instructions as the
tribunal deems fit, including any directives thus amending or
supplementing in matters relating to the calling, holding and
conducting the meeting, the operation of the clauses of the
Act or articles of the company.
Such instructions may also incorporate any command that a
member of the company present in person or via proxy shall be
116
deemed to compose a meeting. The meeting held pursuant to such
orders shall be referred to as a meeting of the company that is duly
called, held, and conducted.
Place of conducting an extraordinary general meeting
An extraordinary general meeting can be held at the registered
office or any other location in the city where such a registered office
is located.
Notice for extraordinary general meeting
The notice of an extraordinary general meeting must be served in
writing or through an electronic mode in at least 21 days of
conducting such a meeting.
Penalty for not holding an extraordinary general meeting properly
In cases where an extraordinary general meeting is not conducted
properly, a fine of ₹10,000 within a prescribed time can be levied
on the defaulters. Moreover, in case the issue persists, a fine of
₹1000 per day shall be levied. Additionally, the maximum fines in
cases of erring in conducting an EGM successfully are:
1. ₹50,000 for a member of the company, and
2. ₹200,000 for the company itself.
Class meeting
Company meetings come under two broad categories, namely:
1. General meetings, and
2. Class meetings.
We have already talked about the different types of general
meetings above, let’s now discuss what these class meetings are!
Class meetings, as the name suggests, are meetings conducted for
shareholders of the company that hold a particular class of shares.
Such a meeting is conducted to pass a resolution that is binding
only on members of the concerned class. Also, only members
belonging to that particular class of shares have the right to attend
and vote at the meeting. Usually, the voting rules are applicable to
class meetings as they govern voting at general meetings.
Such class meetings can be conducted whenever there is a need to
alter or change the rights or privileges of that class as stated in the
articles of association. In order to execute such changes, it is
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crucial that these amendments be approved in a separate meeting
of the shareholders and supported by passing a special resolution.
Under Section 48 of the Companies Act, 2013, which talks about
variations in shareholders’ rights, class meetings of the holders of
the different classes of shares must be conducted in case there are
any variations. Similarly, under Section 232, which discusses
mergers and amalgamations of companies, where a scheme of
arrangement is proposed, there is a requirement that meetings of
several classes of shareholders and creditors be conducted.
Meetings of directors
1. Board of directors
2. Board meetings
As per Section 173 of the Companies Act, 2013, a company has to
hold the meeting of board of directors in the following manner:
1. The first board meeting has to be conducted within a span of
thirty days from the date of incorporation.
2. In addition to the above meeting, every company has to hold
a minimum of four board meetings annually, and there shall
not be a gap of more than one hundred and twenty days
between consecutive two meetings.
Please note: With the issuance of Secretarial Standard 1 (SS-1), a
circular by ICSI, a clarification was given that the board shall
conduct a meeting at least once every six months with a maximum
gap of one hundred and twenty days between two consecutive
board meetings. Further, the SS also specified that it will be
sufficient if a company holds one meeting in every renaming
calendar quarter in the year of its incorporation in addition to the
first meeting, which is to be held within thirty days from the date of
incorporation.
3. In matters relating to Section 8 of the Companies Act, with
an exemption by MCA dated 5.06.2015, it was held that the
sub clause (1) of Section 173 will be applicable only to the
extent that the board of directors of such companies hold at
least one meeting in every six months.
Purpose of holding a board meeting
Board meetings are held for the following purposes:
1. For issuing shares and debentures.
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 2. For making calls on shares.
3. For forfeiting the shares.
4. For transferring the shares.
5. For fixing the rate of dividend.
6. For taking loans in addition to debentures.
7. For making an investment in the wealth of the company.
8. For pondering over the difficulties of the company.
9. For making decisions of the policies of the company.
Notice of board meetings
As per Section 173(3) of the Companies Act, 2013-
1. A notice of not less than seven days must be sent to every
director at the address that is registered with the company.
2. Such notice can be sent either via speed post, by hand
delivery, or through any electronic means.
3. The SS-1 (mentioned above) states that if the company sends
the notice by speed post, or registered post, or by courier, an
additional two days shall be added to the notice served
period.
4. In situations when the board meeting is called at shorter
notice, it has to be conducted in the presence of at least one
independent director.
5. Further, if the independent director is absent, the decision
occurred at must be circulated to all the directors, and it shall
be final only after ratification of decision by at least one
independent director.
6. Moreover, in cases where a company does not have its own
independent director, the decision shall be said to be final
only if it is ratified by a majority of directors, unless a majority
of directors gave their approval at the meeting itself.
Some important pointers on the requirements and procedures for
convening and conducting a valid board meeting
1. Directors can join the meeting-
1. In person,

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2. Through video conferencing, or
3. Other audio visual means.
2. Rule 3 of the Companies (Meetings of Board and its Powers)
Rules, 2014, has provisions related to the requirements and
procedures, along with the procedures needed for board
meetings in person for matters relating to conveying and
conducting board meetings via video conferencing.
3. While conducting virtual meetings, it is necessary that
companies make proper arrangements to avoid any issues at
the last moment.
4. The chairperson and the secretary of the company have to
ensure that they take necessary precautions in matters
relating to video conferencing, like proper security, recording
the proceedings and preparing the minutes of the meeting,
having proper audio visual equipment, etc.
5. The notice for holding the meeting must be in accordance
with the provisions laid under Section 173, subsection 3 of
the Act.
6. While beginning the meeting, the chairperson has the duty to
roll call every director participating through video
conferencing or other such means to record the following:
1. Name of the director;
2. The place from where the director is participating;
3. An affirmation that the director can completely see, listen,
and communicate with the other participants in the meeting;
4. A confirmation that the director has received the agenda and
all the relevant material related to the meeting;
5. A proclamation that no other individual other than the
director is attending or has access to the proceedings of the
meeting at the palace mentioned in pointer (b).
7. After the roll call, the chairperson or the secretary has to
inform the board about the names of the members who are
attending the meeting at the request or with the authorization
of the chairman and affirm that the required quorum is
complete.

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 8. There are some matters that must not be dealt with through
video conferencing or other audiovisual means, namely:
1. An approval of the annual financial statements;
2. An approval of the report of the board;
3. An approval of the prospectus;
4. The audit committee meetings for consideration of
statements related to finance, including a consolidated
financial statement, if any, that needs an approval from the
board under subsection (1) of Section 134 of the Act; and
5. An approval on matters related to the amalgamation, merger,
demerger, acquisition, and takeover.
Agenda
The word “agenda” can be described as things to be done. In the
case of company meetings, it can be said to be a statement of the
business that must be transacted at a meeting, along with the
order in which the business must be dealt with. Even though there
is no explicit mention or provision in the Companies Act, 2013, for
the secretary to send an agenda or include the same in the notice
of the board meeting, it is necessary by convention for the agenda
to be mentioned with the notice served to conduct the meeting.
When an agenda is attached to the notice, the director is aware of
the proposed business and the objects of conducting the meeting,
thus, he can come duly prepared for the discussion to be held in
the meeting.

Allotment of shares under Company Law

Allotment of shares is the formation and distribution of new shares
by a company. New shares can be issued either to new or current
shareholders. Offers for shares are made on application forms
provided by the company. When the application is accepted, it is
called an allotment. The company offering to take shares is the
same as the term “allotment.”
The allotment is initiated by an Initial Public Offering (IPO). This
process is followed when the company sells its stock of shares to
the public. Then the interested investors subscribe to the shares

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and make an application to the company to whom the shares are
allotted.
In simple words, an allotment of shares is the acceptance of a
public offer made by the public company, where the investors
make an application as an offer to take up the company’s shares.
For an allotment to be valid it has to abide by the requirements
and instructions of the Companies Act, 2013 and the principles of
the law of contract under the Indian Contract Act, 1872 relating to
the acceptance of offers.
Allotment of shares means the company allots shares to the
general public. The allotment is distributing the shares among the
applicants. When a company issues the shares to the public, it
indicates the invitation to the general public to subscribe to its
shares. The general public apply for shares of the company, they
are known as share applicants. And the final decision is given by
the board of directors by passing a resolution. The process of
appropriation of a certain number of shares and distribution
among those who have submitted the return applications of shares
is known as the allotment of shares. Private companies allot shares
after filing a Return of Allotment of Shares.
Further, in the case of public companies shares can be allotted
anytime but after filing the return within 14 days of allotment. The
allotment is followed by a few processes such as by oral or written
contract, followed by the provisions of the constitution of the
company, and by the exchange for payment of dividend to a
shareholder.
General principles for allotment of shares under Company Law
An allotment to be effective must comply with the requirements of
the law of contract relating to the acceptance of an offer.
1. Allotment by the proper authority
An allotment should be made by a resolution of the Board of
directors. Allotment is the primary duty of the directors, and this
duty cannot be delegated except in accordance with the provisions
of the articles.
2. Within a reasonable time
Allotment should be made within a reasonable time; otherwise, the
application fails. Reasonable time should remain a question of fact
in each case. The interval of six months between application and
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allotment has been held unreasonably. If the reasonable time
expires, Section 6 (Revocation how made) of the Indian Contract
Act, 1870, applies and the application must be revoked.
3. Must be communicated
The allotment should be properly communicated to the applicant.
Posting a properly addressed and stamped letter of allotment is
sufficient communication, even though the letter is lost or held up.
4. Absolute and unconditional
Allotment should be absolute and according to the terms and
conditions of the application, if any.
5. Allotment should be made only against the application
An allotment should be made in the form of writing and only be
made by an application. No oral request can be accepted by any
applicant. According to Section 2(55) of the Act, a person should
write an application inorder to become a member.

6. No contravention
The process of allotment should not be in contravention of any
other law. In cases where shares are allotted to a minor, the
allotment can be considered void.
7. Nature of the shares under Company Law
According to Section 44 of the Companies Act, 2013, the shares of
a company are immovable property and, according to the articles
of the company, are transferable in the manner specified therein.
In the case of Vishwanath vs. East India Distilleries,(1956), the
Madras High Court stated that the nature of the share was
incorporeal and had a bundle of rights and obligations.
The Act states the principle by which shares, debentures, or any
other interest of any member of the company will be transferred
according to the discretion of the company through articles. This
section holds the obligation that by any means, a company will not
be held liable to set off any amount paid or payable on any shares
against any amount that is due to the company from the
shareholder. It also provides for the indemnity of the company
against any liability arising from the issue of shares or
debentures.

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 8. Notice of allotment of shares
An allotment is considered as a process of accepting an offer of
shares by an applicant that needs to be communicated. The notice
of allotment of shares is a formal communication given by a
company to all shareholders who allocate the shares through the
process of allotment. In this step, no binding contract is made
except that the acceptance is made by a communication. Therefore
the notice must be given to the allottee for the allotment. The main
reason for giving this notice is to inform shareholders about the
allotment and their allotted shares. After the allotment letter is
given, it is addressed and stamped. A contract will arise even if the
letter of allotment is delayed or gets lost and delayed during
transit. The letter of allotment contains details such as the number
of shares applied, the recipient details, the number of shares that
need to be allotted, the price of shares allotted, the money that
needs to be paid within a specified time to the bankers’ company
unless any partial allotment is made and allotment is suitable out
of the excess application money. The notice will also include the
time when they will receive the share certificate, the rights and any
obligation linked with allotted shares, the legal notice and
disclosures required by specified laws and, the notice needs to be
sealed by an authorised officer of the company.
Provisions of the Companies Act relating to the issue and
allotment of shares [Section 39]
Section 39 of the Companies Act, 2013 ensures that during the
process of issuing and alloting shares transparency and fairness
are maintained. This provides a clear process of allotment and
fundraising. Ensuring timely payments and imposing penalties on
those who do not abide by the rules and regulations of the
company. To uphold the principles of the company and the
integrity of the capital market. These provisions ensure that a
minimum subscription is required to allot shares. The application
money should be payable on the basis of the nominal value
provided by the company. To allot shares within a time frame and
also file returns within the specified time period. Also, the
Securities and Exchange Board of India(SEBI) and Registrar of
Companies(Roc) needs to ensure that companies follow the
guidelines provided by them. Some of the important points as per
the aforementioned provision is mentioned as under;

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  A public company should file a prospectus or declaration in
lieu of a prospectus inviting the public offers for the purchase
of shares.
 After reading the prospectus, the public applies for company
shares in printed forms. The company can ask the issue price
to be paid in full, together with the application money, or to
be paid in instalments as share application money, share first
call, second call, etc. The application money must be paid at
least five per cent of the nominal value of the share. [Section
39(2)]
 The allotment of shares cannot be made unless the minimum
amount which is the minimum subscription stated in the
prospectus, is subscribed or applied. The minimum
subscription should be mentioned in the prospectus. [Section
39(1)]
 The company must return and refund the entire subscription
amount instantly if within 30 days the total sum is not
received from the date of issue of the prospectus or such
other date specified by the Securities Exchange Board.
[Section 39(4)]
After allotment of shares, the company can call for the full amount
or instalments which are due on shares from the shareholders
according to the rules mentioned in the prospectus. Usually, the
articles of the company include provisions regarding calls of the
total amount of due shares is required to be distributed. If there
are no such provisions, then these provisions are applicable:
1. No call should be made for more than 25% of the nominal
value of each share.
2. The interval between two calls should not be less than one
month.
3. At least 14 days should be provided to each member for the
call, mentioning the amount, date, and place of payment.
4. Calls should be made on a uniform basis to the entire body
of shareholders falling under the same class.
Rules of allotment of share
The general procedure that is accepted in the law of contract also
applies to the allotment of shares. These are:
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  The resolution of the board of directors must be done prior to
allotment. The directors cannot be delegated this duty, and it
becomes very important that a valid resolution is passed by
the board for allotment in a valid meeting.
 According to Section 6 of the Indian Contract Act, 1872, it is
important that the allotment of shares is done within a
reasonable period of time, but this reasonable time varies
from case to case. The refusal to accept the shares by the
applicant is the choice if the allotment is made after a very
long time to him. The same thing happened in the case
of Ramsgate Victoria Hotel Company vs. Montefiore
(1866), wherein the allotment of the share was made at an
interval of six months between application and allotment,
and it was held unreasonable.
 Moreover, the allotment must be unconditional and absolute
and must be allotted on the same terms upon which they
were agreed upon during the acceptance of the application.
 Acceptance is the key to allotment and without acceptance of
valid allotment cannot be made just on an oral request.
Statutory restrictions on the allotment of shares
Minimum subscription and application money[Section 39(4)]
The first essential requirement for a valid allotment is that of
minimum subscription. The amount of the minimum subscription
has to be declared in the prospectus at the time when shares are
offered to the public. Shares cannot be allotted unless at least so
many amounts have been subscribed and the application money,
which must not be less than 5% SEBI may decide the various
percentages of the nominal value of the share, has been received
by cheque or other instruments. It has been established by various
cases that it is a criterion to valid allotment that the entire
application money should be paid to and received by the company
by cheque or other instruments. If the shares allotments are made
without application money being paid, it is invalid. If the minimum
subscription has not been received within thirty days of the issue
of the prospectus, or any such period as specified by SEBI, the
amount has to be returned within such time and manner as
prescribed. Application money can be appropriated towards
allotment, or it has to be returned or refunded. [Section 39(4)]

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  Return of allotment [Section 39(4)] – A return of allotment has
to be filed with the registrar in the prescribed manner
whenever a company makes an allotment of shares having a
share capital.
 Penalty for default [Section 39 (5)] – In case of default, the
company and its officer who is in default are liable to a
penalty for each default of Rs 1000 for each day during which
the default continues or Rs 1,00,000 whichever is less.
Shares to be dealt in on the stock exchange [Section 40]
Every company, aiming to offer shares or debentures to the public
by the issue of the prospectus, has to make an application before
the issue of shares to anyone. Also, before accepting the stock
exchange permission for the shares or debentures need to be dealt
with during the exchange. The need is not merely to apply, but also
to obtain permission. In the prospectus, the name or names of the
stock exchanges to which the application is made must be stated.
The aforementioned requirement is precedent for listing the shares
and the application money needs to be deposited in a separate
bank account before that which will be used only for adjustment
against the allotment of shares. And in case the shares need
permission to be dealt with in the specified manner in the
prospectus. Hence, the money will be used for the repayment to
applicants within the time specified by SEBI, if the company has
not been able to allot shares for any other reasons. [Section 40
(3)].
The object of this section is that it will help shareholders to find a
ready market so that they can convert their investments into cash
whenever they like. In the Supreme Court case of Union of India
vs. Allied International Products Ltd,(1970), this objective of the
Section was explained.
Over-subscribed prospectus
In cases when stock exchanges give permission, the allotment is
valid and the given prospectus gets oversubscribed, in such case
the portion which is oversubscribed and the money which is
received will be returned to the applicants within the given period
of time
Effect of Irregular Allotment

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An allotment can be considered irregular if any allotment is made
without complying with any conditions prescribed to regular
allotment as contained under Section 39 of the Companies Act,
2013. The allotment can be considered irregular in certain cases,
as mentioned below:
1. In a case in which allotment is made before gaining the
minimum subscription or before gaining the money, which is
subject to a minimum of five per cent of the nominal value of
the share, or without having filed a declaration or statement.
2. In lieu of declaration with the Registrar of Companies, the
allotment will be considered void at the point of the allottee’s
or applicant’s submission.
3. If the process of allotment is defective, for the reason that it
was allotted before the expiry of the 5th day or after the
publication of the declaration issued, the allotment shall
remain valid, but the officers will be in default and will be
liable to a fine.
4. The allotment will be considered defective if no permission is
obtained from the Stock Exchange by making any application
and if the application was made but the Stock Exchange has
not agreed to list the shares, then in such cases the allotment
will remain void.
Return of allotment to be filed with the Register
Once the process of allotment of shares has been completed by the
company, a return of allotment is required to be filed with the
Registrar of Companies, by filing Form No. 2 within 30 days of the
allotment. The Return should include specific details, such as
In case of shares are allotted for cash:
1. Total number of shares allotted.
2. Name, address and occupation of all allottees.
3. The total amount paid or payable on each share.
In the case of shares, other than bonus shares, are allotted as fully
or partly paid up, consideration for allotment of shares is paid by
property, goods or services; in such case, the return must include:
1. A contract which is a written format includes the title of the
allottee to the shares.

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 2. Contract of sale or any other services and consideration for
which the allotment was initiated.
3. A return includes numbers and shares that are allotments
paid up and the consideration for which they were allotted.
Where a company puts forward to issue bonus shares by
capitalising undistributed profits or free reserves, it must take
permission from the Controller of Capital Issues before making
that allotment and, after the allotment, prepare a return of
allotment in the prescribed Form 2 and file it with the Registrar of
Companies together with the filing fee and with a copy to be
submitted of the resolution authorising the issue of such shares.
If shares are issued at a discount, the Return in Form 2 with a
copy of the resolution authorising the share issued and the order
of the Tribunal authorising the issue must be filed with the
Registrar. In the case of re-issuance of forfeited shares, no return
is needed to be filed so that allotment is not performed.
Reference case and other important case laws
The term allotment has not been defined in the Companies Act,
2013. The meaning can be interpreted from various cases that
were decided in India, some of the cases are:
Shri Gopal Jalan and Company vs. Calcutta Stock Exchange
Association Limited (1963)
Facts
In this case, Shri Gopal Jalan and Company v Calcutta Stock
Exchange Association Limited, (1963), the Calcutta Stock
Exchange Association Ltd issued capital of 277 fully paid shares
of Rs 1000 each. 70 shares were forfeited by the Calcutta Stock
Exchange Association, and those forfeited shares were reissued
later on.
Under Section 75(39) of the Companies Act, 1956, the Calcutta
Stock Exchange Association did not file the return for such
forfeited shares that were re-issued. This made Shri Gopal Jalan
& Company approach the court requesting an order stating that
the Calcutta Stock Exchange Association needs to file the return
of the allotment with regard to the re-allotted shares.
Issue

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  Whether the company is obliged to file any return on the
allotment of shares that were re-initiated after being forfeited
by the respondent?
 Under Section 75(1) of the Companies Act 1956, what does
the term ‘allotment’ specify?
Judgement
The Supreme Court held that the appeal which has been filed by
Shri Gopal Jalan company is dismissed because, for the Calcutta
Stock Exchange, it is not compulsory to file returns under Section
75 of the Companies Act, 1956. As this section, read with Sub-
section (5), upholds the principle of ‘ex abundanti cautela’ that is
out of abundant caution which states to put a stop to an argument
from being raised that if shares are forfeited on any non-payment
of calls or re-issued, a return is required to be filed and at the same
time held dismissed.
The court also stated that Jalan’s argument was based on the
doctrine ‘expressio unius est exclusion alterious’. The statement
means when a thing is not expressly stated then the other things
having the same meaning will not be included and, thus cannot be
applied in the case. The court held that the term ‘allotment’ is
primarily used to alert the process of forestalling any potential
contention arising from the return of shares that have been
forfeited due to the non-payment of calls.
Khoday Distilleries vs. CIT (2008)
Facts
In this case Khoday Distilleries vs. CIT (2008), the Khoday
Distilleries issued rights shares, but twenty out of twenty-seven
shareholders did not subscribe to their rights. Khoday Distilleries
then made the decision to share the remaining unclaimed shares
with seven investment companies. The Assessing Officer (A.O)
stated that the allotment of shares was to evade taxes, no
consideration was made, and it was deemed a gift under Section
4(1) of the Gift-Tax Act, 1958, which was taxable. The Assessing
Officer also explained the difference between the share value and
face value.
Based on this decision, the Commission of Income Tax (CIT) made
an appeal stating that the whole thing was to evade wealth tax and
to claim that the entire tax liability would fall under existing
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shareholders who have renounced their rights and not the Khoday
Distilleries and ought to have initiated gift tax proceedings to the
existing shareholders. The CIT also stated that the Khoday
Distilleries did the whole exercise in order to avoid paying wealth
tax and held that the company is liable to pay gift tax for the
transfer of the said shares to the seven investment companies.
The Tribunal, on the other hand, reversed the CIT decision, stating
that there is no element of a gift present in this case based on
Section 4(1)(a), as any kind of transfer of property was not made
as stated under Section 2(xxiv) of the Gift-Tax Act, 1958, and
allotted rights do not include transfer but consideration. Based on
this decision, an appeal was made to the high court claiming that
there is a taxable gift in allotted shares.
Issue
 Whether under Section 2(xii) of the Gift Tax Act, 1958, that
‘gift’ qualifies as a taxable gift in the case of the allotted
shares.
 Did the bonus shares in the ratio 1:23 also include ‘gift’ under
section 2(xii) of the Gift Tax Act?
Judgement
It was held that the contention that the allotment of right and
bonus shares by the company in an inappropriate manner was
done because it was a gift was outright rejected. The creation of
shares by an appropriation to a particular person out of the
appropriate share capital is known as the allotment. The court
gave an explanation that issuance of the bonus shares does not
mean treating it as a gift under the Gift Tax Act. The shares that
the shareholder received were the company’s profit that is
accumulated in the structure of additional share capital, not a gift.
It was also held that according to Section 4(1)(a) of the Gift Tax
Act, an allotment is not a transfer and it does not attract this
section. The company which issued the bonus shares was nothing
but the capitalisation of the profits of the company.
Importance of allotting shares in a company
 To uphold the foundation of the company and meet the strong
needs the process of allotment is required.
 It is considered a crucial step to raise capital and creates a
better funding income. When a company offers new shares it
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 means to raise capital. A company follows the process by
offering stock for sale to the public through an Initial Public
Offering(IPO).
 It helps to build a financial structure and make the best
decision for the company’s future. Allotting shares is not just
to fund the company but to raise the capital but to give
reward to shareholders in the company.
 Allotment is important in a company to increase the value for
which shareholders can increase their stake in the company.

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Types of debentures.
As per Section 2(30) of the Companies Act, 2013, a “debenture” is
any security issued by a company, including bonds, debenture
inventory, and other securities, irrespective of it constituting a
charge on the assets of the company.
Additionally, it is stipulated that:
1. the instruments listed in Chapter III-D of the Reserve Bank
of India Act, 1934; and
2. any other instrument that may be authorised by the central
government in conjunction with the Reserve Bank of India,
issued by a corporation.
Types of Debentures:
a) Secured or mortgage debentures
b) Unsecured debentures
c) Non-convertible debentures
d) Convertible debentures
e) Fully convertible debentures
f) Partially convertible debentures
g) Redeemable debentures
h) Irredeemable debentures
i) Registered debentures
j) Bearer debentures
k) Specific coupon rate debentures
l) Zero-coupon rate debentures

Features of debentures
 Commitment: It is a commitment made by a firm that it
would pay the holder of the debenture a specific amount of
money.
 Face Value: A debenture’s face value often bears a large
denomination. It is a multiple of 100 or is 100.
 Repayment: They are issued with a due date that is specified
on the debenture certificate. At the time of maturity, the
debenture’s principal is paid back.
 Priority in Repayment: Debenture holders have preference
over all other claims to the company’s capital when it comes
to repayment.
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 Assurance of Repayment: A debenture is a long-term
obligation. They come with a guarantee of payment by the
due date.
 Interest: For debentures, an agreed-upon set rate of interest
is paid on a regular basis. The corporation has a set
obligation to pay interest. Regardless of whether the firm
earns a profit or not, it must be paid by the company.
 Parties to Debentures:
 Company: This is the entity that borrows money.
 Trustees: If a business offers debt securities to more than
500 individuals, a debt trustee must be appointed. A trust
deed is an agreement made between the entity and trustees.
It includes the company’s duties, debenture holders’ rights,
the trustee’s authority, etc.
 Debentureholders: These are the individuals or
organisations that make loans and obtain a “debenture
certificate” as proof.
 Authority to issue debentures: The Board of Directors has
the authority to issue debentures, as stated in Section
179(3) of the Companies Act (2013).
 Status of debenture holder: His legal status is that of a
creditor of the firm. Due to the fact that a debenture is a loan
taken out by the corporation, interest is accrued until it is
redeemed at a pre-determined rate and interval.
 No Voting Right: In accordance with Section 71(2) of the
Companies Act 2013, no firm may issue debentures that
include a voting right. Debenture investors are not permitted
to cast ballots at the annual general meeting.
 Security: Debentures are often secured by a fixed or floating
charge on the company’s assets. The holder of a debenture
may dispose off the firm’s chargeable property in order to
recoup their investment if the company is unable to pay
interest or return capital.
 Issuers: Debentures may well be issued by both public
limited companies and private companies.
 Transferability: Using the instrument of transfer,
debentures are easily transferable.
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On the basis of security of instrument
Secured or mortgage debentures
These are the debentures that have a charge placed against the
company’s assets as security. They are also called mortgage
debentures. Secured debenture holders have the right to demand
repayment of their principal as well as any unpaid interest on
those debentures from the company’s mortgaged assets. Section
71(3) of the Companies Act, 2013 deals with the issues of secured
debentures. There are two categories of secured debentures:
 First mortgage debentures: Debentures with first
mortgages provide their holders priority access to the assets
pledged.
 Second mortgage debentures: The holders of second
mortgage debentures have a second claim on the assets
charged.
Unsecured debentures
 Unsecured debentures are debt instruments issued by
enterprises that allow investors to contribute money for
investments or large-scale expenditures in return for a
certificate acknowledging the debt and a written commitment
to pay back the principal at a pre-determined time with a pre-
determined interest rate.
 Unsecured debentures are by definition those that are not
backed by any assets, revenue streams, or holdings of the
firm. Holders of unsecured debentures have the same rights
as other unsecured creditors of the issuing corporation in the
event of default.
 To avoid making the repayment of the debentures
subordinate to the repayment of secured loans, corporations
typically promise to investors in debentures that they would
not secure other loan agreements with their assets prior to
the debenture issue.
 As no government buildings or assets ensure bond
repayment, government bonds issued under the nation’s seal
are equivalent to unsecured debentures.
On the basis of convertibility of instrument
Non-convertible debentures
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  Certain debentures provide the option, at the owner’s
discretion, to convert debentures into shares after a set
period of time. Non-convertible debentures are those
debentures that cannot be converted into shares or equity.
 Companies utilise non-convertible debentures as a
mechanism to obtain long-term capital through a public
offering.
 When compared to convertible debentures, lenders often
receive a greater rate of return to make up for the
disadvantage of non-convertibility.
 Additionally, they provide the owner with a number of other
advantages such as high mobility through the stock market
listing, source tax exemptions, and security because they can
be issued by businesses with a solid credit rating in
accordance with the RBI’s issuing guidelines.
 These must typically be issued in India with a minimum
maturity of 90 days. Housing loan firms, gold loan
companies, and non-banking financial companies are the
main participants in the NCD market. With the systemic fall
in interest rates, these companies discovered it to be a useful
source of funding.
 Banks, mutual funds, and insurance firms, in addition to
ordinary investors, also invest in non-convertible debentures.
Convertible debentures
 According to Section 71(1) of the Companies Act, 2013,
convertible debentures are those debentures which have the
option of conversion into shares at the time of redemption.
Insofar as main collateral is concerned, a convertible
debenture is often an unsecured bond or loan.
 They are long-term debt securities that provide bondholders
with interest payments.
 Convertible debentures have the distinction of being
convertible into shares at certain intervals. By providing
some security, it may help the bondholder mitigate some of
the risks associated with investing in unsecured debt. It is a
hybrid security that aims to balance debt and equity.

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  An investor will receive a fixed rate of return and the chance
to profit from a rise in stock price. He can retain the bond
until it matures and earns interest even if the issuer’s stock
price declines.
 In the case of Deputy Commissioner of Income Tax v. I.T.C.
Hotels Ltd. (2003), the Karnataka High Court came to the
conclusion that even if the convertible debentures were to be
converted into shares at a later time, the expense incurred on
such convertible debentures had to be treated as revenue
expenditure.
 A convertible debenture is a highly practical financing tool for
startups.
Fully convertible debentures
At the expiration of the time period provided, the investors may
completely convert these debentures into equity shares. The
holders of these debentures eventually become shareholders of the
firm after being converted. Additionally, only up to the date of
conversion, the interest on these debentures will be paid. Besides,
the ability of the firm to compel the conversion into equity shares
in accordance with the notice is a key distinction between a fully
convertible debenture and other debentures. Even startups with
no prior track record might benefit from a fully convertible
debenture.
Features of fully convertible debentures
 The price at which holders change their debentures into
shares is known as the conversion price. It is determined by
a number of variables, including the book value at the time
of conversion, the market price, the anticipated growth in the
value of equity shares, etc.
 The number of equity shares that the holder receives in
return for a fully convertible debenture is known as the
conversion ratio.
 A proportion of the face value is designated as the number of
debentures to convert. Additionally, based on pricing, the
total money to be converted is converted into the number of
equity shares.
 The investor’s right to receive equity shares determines the
conversion value of the debentures. They must thus multiply
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 the conversion ratio by the current market rate per equity
share in order to arrive at the fully convertible value.
 It begins on the day when the debentures were allocated. The
issuer may also exercise the option to convert them into
equity shares when the tenure has ended.
 A completely convertible debenture’s coupon payments are
determined by the interest rate and creditworthiness of the
issuer. The issue’s condition specifies whether the
corporation will make coupon payments every six months or
every year.
Partially convertible debentures
Debt instruments known as partially convertible debentures allow
investors to convert only a portion of their investment into
business equity shares at the end of the pre-determined period. At
maturity, the investor has the option to redeem the remaining
amount of the debenture. Additionally, at the time of issuance, the
enterprise chooses the conversion ratio for these debentures.
Moreover, the holders of these debentures become shareholders in
the corporation to the extent of their holdings after being partially
converted into equity.
These are appropriate for businesses with a proven track record.
As the conversion results in a smaller equity capital base, they are,
thus not particularly well-liked by investors.
Features of partially convertible debentures
 The price at which the real equity share was granted and
assigned to the holder is known as the conversion price. The
conversion price is determined by a number of variables,
including the book value at the time of conversion, the market
price, the anticipated growth in the value of equity shares,
etc. Therefore, it is important to avoid setting these
conversion prices too high or too low.
 The quantity of equity shares the holder acquires in exchange
for these debentures is known as the conversion ratio.
 The amount of convertible debentures is expressed as a
percentage of face value. Additionally, based on pricing, the
partial conversion value is transformed into the number of
equity shares.

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  The investor’s right to acquire equity shares determines the
debentures’ conversion value. As a result, they must multiply
the conversion ratio by the present market price per equity
share to get the convertible value.
 It fluctuates based on the expiration of the debentures, which
typically ranges from one year to five years from the date of
allocation.
 The coupon payments are determined by the current interest
rate and the creditworthiness of the issuing corporation. The
issue’s condition specifies whether the corporation will make
coupon payments every six months or every year.
 The market price of these debentures is influenced by the
conversion value and investment value. This product thus
combines financing and an opportunity to purchase an equity
stake in a company.
On the basis of the ability of redemption
Redeemable debentures
As the necessity of repayment is one of a debenture’s most
important characteristics, not all debentures, however, have a set
repayment deadline. Debenture issuers generally have the option
to pay down such debts at any point before fully winding up.
However, this is not the case in terms of redeemable debentures,
which have a set repayment deadline. The Issuer is required to pay
back such a loan to the original lender or debenture holder by a
certain date. Companies can draw in more investors with a
redeemable debenture because of this feature. This is so that
investors may rest easier knowing they will be paid back.
The company has the authority to keep the redeemed debentures
alive for the sake of re-issues if there is no clause contrary to the
Articles of Association or the terms of the issue, or if there is no
resolution indicating a willingness to cancel them. The same
debentures or alternative debentures may be issued again by the
company. The holder of the debentures retains the same rights and
privileges after such re-issuance as if the debentures had never
been redeemed. In addition, a redeemable debt has many of the
same characteristics as a fixed-income product, such as monthly
interest payments to investors and the lack of market volatility.
The interest they produce is often lower than that of regular
debentures, though, a redeemable debenture has a pre-
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determined payment date. Such a system does not mimic market
instability.
Features of redeemable debentures
 Repayment: Repayment is the main characteristic that sets
this loan instrument apart. The method of repayment,
however, might differ. An issuer has the option to redeem all
of its debentures in a single go. Alternatively, a business may
decide to make monthly payments or instalments over the
course of the loan.
 Redemption value: Another crucial aspect of a redeemable
debt is the amount at which it Is redeemed. A Company or
issuer can redeem at par its lot of such debentures. On the
other hand, it can also choose to redeem at a premium. That
means paying a price that is higher than the face value of
such debentures.
Irredeemable debentures
One form of debenture that is categorised based on the ability of
redemption is the irredeemable debenture. Such debentures
cannot be redeemed while the issuing firm is still in existence. To
put it another way, irredeemable debentures may only be
redeemed once the issuing firm dissolves. Section 120 of
the Companies Act, 1956 dealt with irredeemable debentures.
However, there is no such provision in correspondence with the
Companies Act, 2013.
They can also be redeemed when they run out or if the firm issuing
them is prepared to pay back the borrowed money. However, such
a thing does happen pretty seldom. These bonds are also known
as perpetual debentures or perpetual bonds since the corporation
issuing them does not have a plan for repaying the money
borrowed. Additionally, they don’t have a pre-determined
redemption date at the time of issuance. It should be mentioned
that the issuing enterprises are obligated to pay the pre-
determined interest on the debt instruments.
It is seen as a financially advantageous method of borrowing.
Moreover, the call option is available to issuers, and the timing for
it is specified every five years after issuance. These debentures are
often issued by major manufacturing entities or financial
institutions.

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Features of irredeemable debentures
 Perpetual bonds do not have a maturity date, as was
previously said. However, the right to issue callable
debentures is reserved for issuers.
 On these bonds, investors are entitled to interest. Notably,
the payout is based on how profitable the issuing firm was in
the previous year.
 High liquidity risk and low to moderate credit risk are
associated with irredeemable debentures. The debt
instrument is further exposed to a moderate interest rate
risk.
 Rs. 10 lakh is the minimum investment value for this debt
product. It should be emphasised that high net-worth
investors (HNI) or retail investors can get irredeemable
debentures in the resale market, with the maximum
investment value being Rs.560 lakh or higher. Additionally,
the price is largely influenced by the interest rate that will be
charged, both now and in the future.
On the basis of registration
Registered debentures
These debentures are listed in the debenture-holders register of
the entity with each holder’s complete information. Any securities
of the Company that are issued and exchanged for the debentures
in accordance with the Registration Rights Agreement and contain
terms identical to the debentures are referred to as registered
debentures. However, these securities will be registered under
the Securities Contracts (Regulation) Act (1956) and will not
contain terms relating to transfer restrictions. In simple words,
these debentures are such in which all information, including
addresses, names, and holding details of the debenture holder, is
recorded in a register maintained by the company as per Section
88 of the Companies Act, 2013.
These bonds are payable to registered holders, or those whose
names are included in the register. Debentures that are registered
are not negotiable. These bonds cannot be transferred by simple
delivery. Similar to shares, these debentures are transferable in
accordance with Section 56 of the Companies Act, 2013. These

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cannot be transferred to someone else unless the company’s board
approves the standard instrument of transfer.
The registry of debenture holders contains the names of these
holders as well as information about the quantity, face value, and
kind of debentures they currently possess. The register is filled out
with the buyer’s name. Only the people whose names the
debentures are recorded receive the interest coupons.
Bearer debentures
Debentures that may be transferred by simple delivery and are
paid to the bearer of the instrument are known as bearer
debentures. The registry of debenture holders does not keep track
of bearer debentures, and registration of transfer is not required.
These debentures are transferable, like negotiable instruments by
means of simple delivery. In the case of Calcutta Safe Deposit Co.
Ltd. v. Ranjit Mathuradas Sampat (1970), the Calcutta High Court
observed that the debenture holder is entitled to recover the
principal and interest in case of due. When it is not paid, he or she
can seek winding up and if the suit is otherwise competent, the
company cannot ask him to explain how he came by the debenture
or why he did not collect the interest for a long time. Further, the
Court highlighted that Section 118 of the Negotiable Instruments
Act (1881) applies and therefore, every holder of a bearer
debenture is presumed to be a holder in due course unless the
contrary is proved.
Features of Bearer debentures
 Bearer debentures are printed on paper and issued in
physical form.
 The Bearer debenture holder must present the interest
payment coupons that are physically linked to the security to
the bank or the issuing corporation in order to collect interest
payments.
 Bearer debentures may be redeemed within 30 days of the
maturity date.
 When selling bearer debentures, there is no need for a third
party or middleman, making the process relatively simpler.
As a result, it may be easily transferred by just giving the
other person the certificate.
On the basis of coupon rate
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Specific coupon rate debentures
 Debentures are categorised as specified coupon rate
debentures when the interest rate is pre-determined at a
certain rate, or the coupon rate, which may be fixed or
floating.
 In most cases, the bank rate and the floating interest rate are
related.
Zero-coupon rate debentures
 There is no set interest rate on these debentures. Such
debentures are issued at a significant discount in order to
recompense the investors, and the difference between the
issue price and the nominal value is regarded as the amount
of interest associated with the length of the debentures.
 Debentures with a zero-coupon rate have no coupon rate, or
we may argue that there is no coupon rate at all. In these
kinds of debentures, the holder will not get any interest. The
discrepancy between the issue price and the debenture’s face
value is the implicit interest or advantage. These debentures
must be redeemed for their full face value. These are also
known as “Deep discount bonds.”
 For instance, a debenture having a face value of Rs. 100, is
issued at a 50% discount. In this scenario, the investor
simply has to spend Rs. 50 to subscribe to the debenture.
She does, however, receive Rs. 100 back when the loan
matures.

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Write a note on buy back of shares.
Definitions:- Buy-back is the process by which Company
buy-back it’s Shares from the existing Shareholders usually
at a price higher than the market price.
When the Company buy-back the Shares, the number of
Shares outstanding in the market reduces/fall. It is the
option available to Shareholder to exit from the Company
business.
It is governed by section 68 of the Companies Act, 2013.
Reasons of Buy-back:-
 To improve Earning per Share;
 To use ideal cash;
 To give confidence to the Shareholders at the time of falling
price;
 To increase promoters shareholding to reduce the chances
of takeover;  To improve return on capital ,return on net-
worth;
 To return surplus cash to the Shareholder.

Modes of Buy-back:-
A Company may buy-back its Shares or other specified
Securities by any of the following method-
 From the existing shareholders or other specified holders
on a proportionate basis through the tender offer;
 From the open market through--- 1. Book-Building process
2. Stock Exchange Provided that no buy-back for fifteen
percent or more of the paid up capital and reserves of the
Company can be made through open market.
 From odd-lot holders.
Sources of Buy-back:-
A Company can purchase its own shares and other specified
securities out of –
 its free reserve; or
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 the securities premium account; or
 the proceeds of the issue of any shares or other specified
securities.
However, Buy-back of any kind of shares or other specified
securities cannot be made out of the proceeds of the earlier
issue of same kind of shares or same kind of other specified
securities.
Conditions of Buy-back:-
As per Section 68 of the Companies Act, 2013 the conditions
for Buy-back of shares are-
 Articles must authorise otherwise Amend the Article by
passing Special Resolution in General Meeting.
 For buy-back we need to pass Special Resolution in General
Meeting, but if the buy-back is upto 10%, then a Resolution
at Board Meeting need to be passed .
 Maximum number of Shares that can be brought back in a
financial year is twenty-five percent of its paid up share
capital.
 Maximum amount of Shares that can be brought back in a
financial year is twenty-five percent of paid up share capital
and free reserves (where paid up share capital includes equity
share capital and preference share capital; & free reserves
includes securities premium).
 Post buy-back debt-equity ratio cannot exceed 2:1.
 Only fully paid-up shares can be brought back in a financial
year.
 Company must declare its insolvency in Form SH-9 to
Register of Companies, signed by At least 2 Directors out of
which one must be a Managing Director, if any.
 The notice of the meeting for which the Special Resolution
is proposed to be passed shall be accompanied by a
explanatory statement stating
a) a full and complete disclosure of all the material facts;
b) the necessity of buy-back;
c) the class of shares intended to be bought back;
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 d) the amount invested under the buyback;
e) the time limit for completion of buyback;
 The Company must maintain a Register of buy-back in
Form SH-10.
 Now, Submit Return of buy-back in Form SH-11 Annexed
with Compliance Certificate in Form SH-15, Signed by 2 Directors
out of which One must be a Managing Director, if any.
 A Company should extinguish and physically destroy
shares bought back within 7 days of completion of the buy-back.
Restrictions on Buy-back of Securities in certain
circumstances According to section 70 of the Companies Act,
2013, A Company should not buy-back its securities or other
specified securities , directly or indirectly –
 Through any subsidiary including its own subsidiaries; or
 Through investment or group of investment Companies; or
 When Company has defaulted in repayment of deposits or
interest payable thereon, or in redemption of debentures or
preference shares or repayment of any term loan. The prohibition
is lifted if the default has been remedied and a period of 3 years
has elapsed after such default ceased to subsist.
 When Company has defaulted in filing of Annual Return,
declaration of dividend & financial statement.

Write a note on dividend.

The dividend is the return on the share capital that shareholders
subscribe to and pay to a company. Section 2(35) of
the Companies Act of 2013 defines the term ‘dividend’ as “dividend
includes any interim dividend”.
A dividend, according to the dictionary, is a sum paid to creditors
of an insolvent estate or an individual’s share of it as loan interest
or profit. However, in business parlance, a dividend is the portion
of the company’s profit distributed to its members.
According to clause 81 of Table F of the Companies Act of 2013,
the board may, subject to Section 123, pay interim dividends to
members as it deems appropriate in light of the company’s profit.
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Declaration of dividend :
No specific power has been granted to the companies registered
under the act to declare and pay any dividend. The power to pay
dividends is a permanent existing characteristic in a company that
is neither derived from the Companies Act, 2013 nor from the
Memorandum of Association or Articles of Association.
However, the manner in which the dividends are to be declared is
regulated by the Articles of Association.
Clause 1 of Section 123 provides sources through which dividends
can be declared or paid by a company. (Discussed in detail below).
Clause 2 of Section 123 provides that in accordance to Schedule
II, depreciation shall be disbursed.
Clause 3 of Section 123 provides that the Board of Directors of a
company may declare an interim dividend from the surplus in the
profit and loss account or from profits generated in the current
financial year, provided that it does not exceed the average
dividend declared by the company during the preceding three
financial years.
Clause 4 of Section 123 provides that the amount of the dividend
must be deposited into a separate bank account within five days
from its declaration.
Clause 5 of Section 123 provides that it must be paid out to the
registered shareholder, and should be given in cash. A bonus issue
may be issued if approved, but cash dividends can also be paid by
cheque, or electronic means.
Clause 6 of Section 123 provides that if any provisions of Section
73 and 74 are not met, then no equity dividend can be declared
until full compliance is resumed.
Sources of dividend:-
There are three sources of dividend as per Section 123(1):
1. Out of the profits of the company of the present year, after
providing for depreciation.
2. Out of the profits of the company for any previous financial
year, after providing for depreciation.
3. Any received for the payment of dividend from the Central
Government or State Government.
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Who is eligible to receive a dividend
A dividend on a share must be paid to the registered shareholder
or his bankers. When a dividend is payable, it must be distributed
within 30 days of the declaration under Section 127 of the
Companies Act of 2013.
In accordance with Section 127 provision, dividends are not
required to be paid within 30 days in the following circumstances:
 when a shareholder has given the company instructions
regarding the dividend payment but these instructions
cannot be followed;
 in cases where the right to receive dividends is in dispute;
 in cases where the dividend has been lawfully adjusted by the
company to offset any shareholder-due amount.
Revocation of dividend
Once declared, a dividend, including an interim dividend, becomes
a debt and cannot be revoked without shareholder approval. A
dividend that is declared and distributed to shareholders cannot
be altered by a subsequent resolution.
However, if a dividend was declared fraudulently, the directors
would be justified in withholding the dividend. The directors are
personally liable and accountable to the company if a dividend
declared fraudulently is paid.
Directors, shareholders, and auditors are all responsible for
improper dividend payments. In the event that an improper
dividend payment results in a loss for the business, the directors
are generally responsible for paying it back. They must
compensate the business for the loss, for example, if they paid
dividends out of capital.
On the other hand, if a shareholder knows that a dividend is paid
out of capital, he or she is responsible for covering the company’s
loss, and the directors can get back the dividends. The directors
can be prevented from paying an improper and illegal dividend at
the request of any shareholder (Hoole v. Great Western Railway Co.
(1867) 3 Ch.) App. 262).

148
What are the grounds of winding up of a company by tribunal
?
Ans:
Winding up by court/tribunal
Chapter XX of the Companies Act, 2013 in part I deals with the
winding up of a company by a court or tribunal. When a company
is wound up by the order of a court or tribunal, it is called winding
up by the court or tribunal. This mode of winding up is also called
compulsory winding up of a company. The provisions with respect
to the same are explained below.
Who can file a petition for the winding up of a company
According to Section 272 of the Companies Act, 2013, the
following persons can present a petition for the winding up of a
company to the Tribunal:
 Company
According to Section 272(1)(a), a petition for winding up can be
presented by a company itself. However, before presenting a
petition, the company must pass a special resolution in this
regard. In the case of BOC India Ltd. Zinc Products & Co. (P) Ltd.
(1996), a petition for winding up was presented by a person not
authorised to do so by the board of directors and hence, the
petition was declared as incompetent.
 Any contributory
According to Section 2(26) of the Act, a contributory is a person
who is liable to contribute towards assets of the company in case
it is wound up. However, according to Section 272(2), a
contributory will be allowed to present a petition for winding in
spite of him being the holder of fully paid up shares or the company
has no surplus assets left for distribution among its shareholders
after satisfying all the liabilities. One important requirement is that
the shares in respect of which a person is a contributory were
allotted or registered under him for at least 6 months during the
period of 18 months before the commencement of winding up or
such shares devolved on him by the death of the former holder.
 All or any persons mentioned above
The petition for winding up can also be presented by the company
and the contributories together or separately.
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  Registrar
The registrar can file a petition for the winding up of a company
under the following circumstances:
 Actions of the Company were against the interests of
sovereignty and integrity of the country, Security of States,
friendly relations, morality etc.
 If the tribunal is of the opinion that the company was formed
with a fraudulent aim and unlawful purpose or its affairs
have been conducted in a fraudulent manner or the persons
who formed the company are guilty of fraud or misconduct.
 There was a default in filing the financial statements or
annual returns of the company with the Registrar.
 It is just and equitable for the tribunal to wound up the
company.
However, a registrar cannot file a petition for winding up of a
company to a tribunal, if a company has decided that it will be
wound up by a tribunal by a special resolution.
The registrar is also required to obtain previous sanction from the
Central Government before filing a petition. The government will
not accord the sanction unless the company is given a reasonable
opportunity to make the representations. Also, a petition
presented by a company for winding up will be admitted by the
tribunal only if it is accompanied by a statement of affairs.
 Person authorised by central government
Section 272(1)(e) provides that a petition for winding up can also
be filed by any person who is authorised by the Central
Government to do so.
 Central or State government
The Central or State government can also present a petition for
winding up of a company if its actions are against the sovereignty
and integrity of the country, public order, morality, decency,
foreign relations etc.

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Grounds for winding up by court
Section 271 deals with circumstances under which a tribunal
can order for winding up of a company. These are:
 Special resolution
According to Section 271(a), a petition for the winding up of a
company can be prevented if a special resolution has been passed
by the company in this regard.
 Sovereignty, integrity, and other factors
A company can be wound by a tribunal if it acts against the
sovereignty and integrity of India, the security of the state, foreign
relations, public order, morality etc. This is given under Section
271(b) of the Act.
 Fraudulent conduct of the company.
According to Section 271(c), if the tribunal on the application filed
by the registrar is of the opinion that the company was formed with
a fraudulent aim and unlawful purpose or its affairs have been
conducted in a fraudulent manner or the persons who formed the
company are guilty of fraud or misconduct, it can order for winding
up of the company.
 Default in filing financial statements or audit returns
Section 271(d) provides that where the company defaults in filing
its financial statements or audit returns with the registrar, the
tribunal can order for winding up of the company.
 Just and equitable
A tribunal can order for winding up of a company if it is just and
equitable to do so in the following circumstances:
 Deadlock: When two or more people cannot agree with each
other and reach an agreement, the situation is known as
deadlock. In case of deadlock between the management of the
company, it is just and equitable for the tribunal to wind up
the company. In the case of Etisalat Mauritius Ltd. V. Etisalat
DB Telecom (P) Ltd. (2013), there was a deadlock and
irretrievable breakdown between major shareholders of the
company which further hampered its performance and work
and no scheme or solution could be propounded, the tribunal
ordered to wind up the company.

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  Loss of Substratum: When the object of the company fails,
it leads to loss of substratum. In the case of Dunlop India Ltd.
re (2013), the company was unable to show its long or short
term business plans and the company was not conducting its
business for quite some time and so the company was
ordered to wind up. In the case of Seth Mohan Lal v. Grain
Chambers Ltd. (1968), the Supreme Court observed that
when the object of the company for which it was formed fails
substantially, it leads to loss of substratum.
 Losses: if a company is suffering loss and cannot carry on its
business, it is just and equitable to wind up the company. A
company was asked to wind up on this ground in the case
of Bachharaj Factories v. Hirjee Mills Ltd. (1955).
 Oppression of minority: another just and equitable ground
for a tribunal to order winding up is where the principal
shareholders adopt aggressive or oppressive policies towards
the minority shareholders.
 Fraudulent purpose: a tribunal can also order for winding
up of a company if it has been formed for an unlawful or
illegal purpose.
 Public interest: if it is in the public interest to wind up a
company, it is a just and equitable ground. In the case
of Millennium Advanced Technology Ltd., re, (2004), the
company was ordered to wind up due to multiple undesirable
practices like false invoicing etc.
 Company was a bubble: When the company was a bubble,
i.e. it was never in real business, then also it classifies as just
and equitable ground of winding up.
Steps for compulsory winding up or winding up by a tribunal
The Companies (Winding Up) Rules, 2020 provides the rules
governing compulsory winding up process of a company along with
required forms and particulars. This, the steps involved in the
process are:
 Step 1- the petition for winding up must be presented in Form
WIN 1 or Form WIN 2. The petition must be verified by an
affidavit by a person making the petition or if the petition is
made by the company by its director, secretary or any other

152
 authorised person. The affidavit must be in accordance with
Form WIN 3.
 Step 2- the statement of affairs has to be filed within 30 days
in accordance with Section 274 of the Companies Act, 2013.
It must contain the information till the date when the
statement is filed. The statement must be filed in Form WIN
4 and accompanied by an affidavit of concurrence of the
statement.
 Step 3- the petition will be posted before the tribunal and a
date will be fixed for hearing the petitioners. If the petition is
not made by the company, notice will be sent to the company
and an opportunity to be heard must be given before
advertisement directions to be given with respect to the
petition.
 Step 4- according to Rule 6, every contributories will be
served a copy of the petition by the person making the
petition within 24 hours of making payment in this regard.
 Step 5- notice of the petition will be given in advertisement
14 days before fixing a date of hearing in a daily newspaper
which is widely circulated in the state where the office of
registrar is located. The newspaper must be either in English
or any vernacular language of such area. Further, rule 8
provides that an application for winding up cannot be
withdrawn without the permission of the tribunal
 Step 6- Any objection can be filed in the form of an affidavit
in objection within 30 days from the date of order and the
same will be served to the petitioner.
 Step 7- The reply to the objection must be filed in the form of
an affidavit within 7 days before the date fixed for hearing of
petition.
 Step 8- provisional liquidator will be appointed after the
admission of petition by the tribunal and upon sufficient
grounds for his appointment in accordance with Rule 14. The
order of appointment of provisional liquidator will also
contain restrictions and limitations on his powers. The same
will also be intimated to the provisional liquidator and the
registrar of companies within 7 days from the date of order of
appointment.

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  Step 9- order of winding up by the tribunal will be in
accordance with Form WIN 11 and will be sent by the
registrar to the company liquidator and the registrar of the
companies within 7 days and the same will also be
advertised.
 Step 10- after the affairs of the company have wound up
completely, the company liquidator will apply for the
dissolution of the company within 10 days along with audited
final accounts and auditors certificates and the tribunal will
order for dissolution. The process of winding up will be
concluded on the day on which the order of dissolution has
been reported to the registrar of the company.

Explain the duties and powers of tribunal with respect to

amalgamation of company.

Section 232. Merger and amalgamation of companies- Effective from

15-12-2016.
(1) Where an application is made to the Tribunal under section
230 for the sanctioning of a compromise or an arrangement
proposed between a company and any such persons as are
mentioned in that section, and it is shown to the Tribunal—
(a) that the compromise or arrangement has been proposed for the
purposes of, or in connection with, a scheme for the reconstruction
of the company or companies involving merger or the
amalgamation of any two or more companies; and
(b) that under the scheme, the whole or any part of the
undertaking, property or liabilities of any company (hereinafter
referred to as the transferor company) is required to be transferred
to another company (hereinafter referred to as the transferee
company), or is proposed to be divided among and transferred to
two or more companies, the Tribunal may on such application,
order a meeting of the creditors or class of creditors or
the members or class of members, as the case may be, to be called,
held and conducted in such manner as the Tribunal may direct
and the provisions of sub-sections (3) to (6) of section 230 shall
apply mutatis mutandis.

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(2) Where an order has been made by the Tribunal under sub-
section (1), merging companies or the companies in respect of
which a division is proposed, shall also be required to circulate the
following for the meeting so ordered by the Tribunal, namely:—
(a) the draft of the proposed terms of the scheme drawn up and
adopted by the directors of the merging company;
(b) confirmation that a copy of the draft scheme has been filed with
the Registrar ;
(c) a report adopted by the directors of the merging companies
explaining effect of compromise on each class of shareholders, key
managerial personnel , promoters and non-promoter shareholders
laying out in particular the share exchange ratio, specifying any
special valuation difficulties;
(d) the report of the expert with regard to valuation, if any;
(e) a supplementary accounting statement if the last annual
accounts of any of the merging company relate to a financial
year ending more than six months before the first meeting of the
company summoned for the purposes of approving the scheme.
(3) The Tribunal, after satisfying itself that the procedure specified
in sub-sections (1) and (2) has been complied with, may, by order,
sanction the compromise or arrangement or by a subsequent
order, make provision for the following matters, namely:—
(a) the transfer to the transferee company of the whole or any part
of the undertaking, property or liabilities of the transferor
company from a date to be determined by the parties unless
the Tribunal, for reasons to be recorded by it in writing, decides
otherwise;
(b) the allotment or appropriation by the transferee company of any
shares, debenture , policies or other like instruments in the
company which, under the compromise or arrangement, are to be
allotted or appropriated by that company to or for any person:
Provided that a transferee company shall not, as a result of the
compromise or arrangement, hold any shares in its own name or
in the name of any trust whether on its behalf or on behalf of any
of its subsidiary company or associate companies and any such
shares shall be cancelled or extinguished;

155
(c) the continuation by or against the transferee company of any
legal proceedings pending by or against any transferor company
on the date of transfer;
(d) dissolution, without winding-up, of any transferor company;
(e) the provision to be made for any persons who, within such time
and in such manner as the Tribunal directs, dissent from the
compromise or arrangement;
(f) where share capital is held by any non-resident shareholder
under the foreign direct investment norms or guidelines specified
by the Central Government or in accordance with any law for the
time being in force, the allotment of shares of the transferee
company to such shareholder shall be in the manner specified in
the order;
(g) the transfer of the employees of the transferor company to the
transferee company;
(h) where the transferor company is a listed company and the
transferee company is an unlisted company,—
(A) the transferee company shall remain an unlisted company until
it becomes a listed company;
(B) if shareholders of the transferor company decide to opt out of
the transferee company, provision shall be made for payment of
the value of shares held by them and other benefits in accordance
with a pre-determined price formula or after a valuation is made,
and the arrangements under this provision may be made by
the Tribunal:
Provided that the amount of payment or valuation under this
clause for any share shall not be less than what has been specified
by the Securities and Exchange Board under any regulations
framed by it;
(i) where the transferor company is dissolved, the fee, if any, paid
by the transferor company on its authorised capital shall be set-
off against any fees payable by the transferee company on its
authorised capital subsequent to the amalgamation; and
(j) such incidental, consequential and supplemental matters as are
deemed necessary to secure that the merger or amalgamation is
fully and effectively carried out:

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Provided that no compromise or arrangement shall be sanctioned
by the Tribunal unless a certificate by the company’s auditor has
been filed with the Tribunal to the effect that the accounting
treatment, if any, proposed in the scheme of compromise or
arrangement is in conformity with the accounting
standards prescribed under section 133.
(4) Where an order under this section provides for the transfer of
any property or liabilities, then, by virtue of the order, that
property shall be transferred to the transferee company and the
liabilities shall be transferred to and become the liabilities of the
transferee company and any property may, if the order so directs,
be freed from any charge which shall by virtue of the compromise
or arrangement, cease to have effect.
(5) Every company in relation to which the order is made shall
cause a certified copy of the order to be filed with the Registrar for
registration within thirty days of the receipt of certified copy of the
order.
(6) The scheme under this section shall clearly indicate
an appointed date from which it shall be effective and the scheme
shall be deemed to be effective from such date and not at a date
subsequent to the appointed date.
(7) Every company in relation to which the order is made shall,
until the completion of the scheme, file a statement in such form
and within such time as may be prescribed with the Registrar
every year duly certified by a chartered accountant or a cost
accountant or a company secretary in practice indicating
whether the scheme is being complied with in accordance with the
orders of the Tribunal or not.
(8) If a company fails to comply with sub-section (5), the company
and every officer of the company who is in default shall be liable to
a penalty of twenty thousand rupees, and where the failure is a
continuing one, with a further penalty of one thousand rupees for
each day after the first during which such failure continues,
subject to a maximum of three lakh rupees.
Explanation.—For the purposes of this section,—
(i) in a scheme involving a merger, where under the scheme the
undertaking, property and liabilities of one or more companies,
including the company in respect of which the compromise or
arrangement is proposed, are to be transferred to another existing
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company, it is a merger by absorption, or where the undertaking,
property and liabilities of two or more companies, including the
company in respect of which the compromise or arrangement is
proposed, are to be transferred to a new company, whether or not
a public company , it is a merger by formation of a new company;
(ii) references to merging companies are in relation to a merger by
absorption, to the transferor and transferee companies, and, in
relation to a merger by formation of a new company, to the
transferor companies;
(iii) a scheme involves a division, where under the scheme the
undertaking, property and liabilities of the company in respect of
which the compromise or arrangement is proposed are to be
divided among and transferred to two or more companies each of
which is either an existing company or a new company; and (iv)
property includes assets, rights and interests of every description
and liabilities include debts and obligations of every description.

mutatis mutandis:- making necessary alterations while not

affecting the main point at issue.
Write a note on modes of winding up of a company.
Who can file a petition for the winding up of a company
According to Section 272 of the Companies Act, 2013, the
following persons can present a petition for the winding up of a
company to the Tribunal:
 Company
According to Section 272(1)(a), a petition for winding up can be
presented by a company itself. However, before presenting a
petition, the company must pass a special resolution in this
regard. In the case of BOC India Ltd. Zinc Products & Co. (P) Ltd.
(1996), a petition for winding up was presented by a person not
authorised to do so by the board of directors and hence, the
petition was declared as incompetent.
 Any contributory
According to Section 2(26) of the Act, a contributory is a person
who is liable to contribute towards assets of the company in case
it is wound up. However, according to Section 272(2), a
contributory will be allowed to present a petition for winding in
spite of him being the holder of fully paid up shares or the company
158
has no surplus assets left for distribution among its shareholders
after satisfying all the liabilities. One important requirement is that
the shares in respect of which a person is a contributory were
allotted or registered under him for at least 6 months during the
period of 18 months before the commencement of winding up or
such shares devolved on him by the death of the former holder.
 All or any persons mentioned above
The petition for winding up can also be presented by the company
and the contributories together or separately.
 Registrar
The registrar can file a petition for the winding up of a company
under the following circumstances:
 Actions of the Company were against the interests of
sovereignty and integrity of the country, Security of States,
friendly relations, morality etc.
 If the tribunal is of the opinion that the company was formed
with a fraudulent aim and unlawful purpose or its affairs
have been conducted in a fraudulent manner or the persons
who formed the company are guilty of fraud or misconduct.
 There was a default in filing the financial statements or
annual returns of the company with the Registrar.
 It is just and equitable for the tribunal to wound up the
company.
However, a registrar cannot file a petition for winding up of a
company to a tribunal, if a company has decided that it will be
wound up by a tribunal by a special resolution.
The registrar is also required to obtain previous sanction from the
Central Government before filing a petition. The government will
not accord the sanction unless the company is given a reasonable
opportunity to make the representations. Also, a petition
presented by a company for winding up will be admitted by the
tribunal only if it is accompanied by a statement of affairs.
 Person authorised by central government
Section 272(1)(e) provides that a petition for winding up can also
be filed by any person who is authorised by the Central
Government to do so.

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  Central or State government
The Central or State government can also present a petition for
winding up of a company if its actions are against the sovereignty
and integrity of the country, public order, morality, decency,
foreign relations etc.
Grounds for winding up by court
Section 271 deals with circumstances under which a tribunal
can order for winding up of a company. These are:
 Special resolution
According to Section 271(a), a petition for the winding up of a
company can be prevented if a special resolution has been passed
by the company in this regard.
 Sovereignty, integrity, and other factors
A company can be wound by a tribunal if it acts against the
sovereignty and integrity of India, the security of the state, foreign
relations, public order, morality etc. This is given under Section
271(b) of the Act.
 Fraudulent conduct of the company.
According to Section 271(c), if the tribunal on the application filed
by the registrar is of the opinion that the company was formed with
a fraudulent aim and unlawful purpose or its affairs have been
conducted in a fraudulent manner or the persons who formed the
company are guilty of fraud or misconduct, it can order for winding
up of the company.
 Default in filing financial statements or audit returns
Section 271(d) provides that where the company defaults in filing
its financial statements or audit returns with the registrar, the
tribunal can order for winding up of the company.
 Just and equitable
A tribunal can order for winding up of a company if it is just and
equitable to do so in the following circumstances:
 Deadlock: When two or more people cannot agree with each
other and reach an agreement, the situation is known as
deadlock. In case of deadlock between the management of the
company, it is just and equitable for the tribunal to wind up

160
 the company. In the case of Etisalat Mauritius Ltd. V. Etisalat
DB Telecom (P) Ltd. (2013), there was a deadlock and
irretrievable breakdown between major shareholders of the
company which further hampered its performance and work
and no scheme or solution could be propounded, the tribunal
ordered to wind up the company.
 Loss of Substratum: When the object of the company fails,
it leads to loss of substratum. In the case of Dunlop India Ltd.
re (2013), the company was unable to show its long or short
term business plans and the company was not conducting its
business for quite some time and so the company was
ordered to wind up. In the case of Seth Mohan Lal v. Grain
Chambers Ltd. (1968), the Supreme Court observed that
when the object of the company for which it was formed fails
substantially, it leads to loss of substratum.
 Losses: if a company is suffering loss and cannot carry on its
business, it is just and equitable to wind up the company. A
company was asked to wind up on this ground in the case
of Bachharaj Factories v. Hirjee Mills Ltd. (1955).
 Oppression of minority: another just and equitable ground
for a tribunal to order winding up is where the principal
shareholders adopt aggressive or oppressive policies towards
the minority shareholders.
 Fraudulent purpose: a tribunal can also order for winding
up of a company if it has been formed for an unlawful or
illegal purpose.
 Public interest: if it is in the public interest to wind up a
company, it is a just and equitable ground. In the case
of Millennium Advanced Technology Ltd., re, (2004), the
company was ordered to wind up due to multiple undesirable
practices like false invoicing etc.
 Company was a bubble: When the company was a bubble,
i.e. it was never in real business, then also it classifies as just
and equitable ground of winding up.

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Members’ Voluntary Winding Up
There are 3 types of liquidation:
 Creditors’ voluntary liquidation - your company cannot pay
its debts and you involve your creditors when you liquidate
it.
 Members’ voluntary winding up (liquidation) - your company
can pay its debts but you want to close it.
 Compulsory liquidation (Winding up by court) - your
company cannot pay its debts and you apply to the courts to
liquidate it.
Members’ Voluntary Winding Up:
Voluntary winding up of a company
Corporate Insolvency Resolution Process (CIRP) is a process to
resolve the corporate insolvency of a corporate debtor. It can be
initiated by filing an application to the Adjudicating Authority
under Chapter II of Part II of the Code. If this process fails, the
company initiates the process of liquidation. The process of
voluntary winding up under IBC may be started by a corporate
debtor, financial creditor or operational creditor.
When a company decides to wind up its affairs and proceed further
with the required proceedings on its own, this Act is called the
voluntary winding up of a company. Part II of Chapter XX of the
Act deals with the voluntary winding up of the companies.
Circumstances in which a company can be wound up voluntarily
Section 304 provides the circumstances under which a company
can be wound up voluntarily:
 Company passes a resolution in a general meeting regarding
voluntary winding up due to the expiry of its duration fixed
by its articles or due to the occurrence of any event for which
articles provide that the company should be dissolved;
 Company passes a special resolution regarding voluntary
winding up.
However, this Section and the provisions related to the voluntary
winding up of a company were omitted in 2016. Now,
the Insolvency and Bankruptcy Code, 2016 deals with the
voluntary winding up process.
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Meeting of creditors
It is necessary to inform the creditors of the company which can
be done through the post. A meeting is conducted where they are
notified about the amount of money due to each creditor. The
board of directors will then put forth the statement of affairs and
if the majority opines that the company should be wound up
voluntarily, the process is initiated. However, if the majority opt for
compulsory winding up of the company or winding up by a
tribunal, application must be sent in this regard to the tribunal
within 14 days and inform the same to the registrar within 10 days.
A company liquidator is appointed to carry on the process of
voluntary winding up according to the Insolvency and Bankruptcy
Code, 2016 who finally evaluates the assets of the company and
submits the report to the tribunal.
Procedure of voluntary winding up
Further, Section 59 of the Insolvency and Bankruptcy Code, 2016
deals with the voluntary liquidation of corporate persons. It
provides that a corporate person who wants to liquidate itself
voluntarily and has not committed any default may initiate the
liquidation proceedings under the Act. However, the proceedings
of a registered corporate person must satisfy the following
conditions:
 There must be a declaration from the majority of the directors
of the company which must be verified by an affidavit and
must state that:
o A full inquiry into the affairs of the company has been
made and an opinion has been formed that the company
has no debt or will be able to pay its debts in full from
selling its assets in the voluntary liquidation.
o The company is not liquidated in order to defraud any
person.
 The declaration must be accompanied by the following
documents:
o Financial statements and record of the company’s
operations for the preceding two years or since its
incorporation.
o Valuation report of the assets of the company which is
prepared by a registered valuer.
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  A special resolution regarding the voluntary winding up of the
company must be passed within four weeks of declaration or
a general resolution must be passed in a general meeting
regarding voluntary winding up due to the expiry of its
duration fixed by its articles or due to occurrence of any event
for which articles provide that the company should be
dissolved.
Further, the Section provides that the company must notify the
Registrar and Board about the resolution being passed for the
liquidation of the company within seven days from the date such
resolution is approved by the creditors. With the approval of
creditors, the liquidation proceedings of the company will be
deemed to have commenced from the date such resolution is
passed. When the affairs of a company have wound up completely
and its assets have been liquidated completely, an application will
be made by the liquidator to the Adjudicating Authority for the
dissolution of such a company. The Authority will pass an order
regarding dissolution of the company and it will be dissolved
accordingly and the copy of said order must be given to the
required authority with which the company is registered within
fourteen days.
Powers and duties of company liquidator under the Code
According to Section 35 of the IBC, a liquidator will perform the
following functions and duties:
 Verify the claims of creditors of the company.
 Take into custody all the assets, properties and actionable
claims belonging to the company.
 Evaluate the assets and property of the company and prepare
a report in this regard.
 Take measures to protect and preserve the assets and
properties of the company.
 Carry on the business for beneficial liquidation.
 He can also sell the immovable or movable property of the
company.
 Draw, accept, make and endorse any negotiable instrument
including the bill of exchange, hundi or promissory note on
behalf of the company.
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  He can also obtain any professional assistance in order to
discharge his duties.
 Institute or defend the suits by or against the company.
 Investigate the financial affairs of a company.
Duties related to dissolution of a company under the Companies
Act, 2013 prior to 2016
Before 2016, the Companies Act, 2013, under Section 318
provided that once the affairs of a company are wound up
completely, the company liquidator is required to prepare a report
of the same showing that the assets of the company have been
disposed of and the debts have been discharged and then call a
general meeting of the company in order to finally wind up the
accounts. If in case the majority of the members decide to wind up
the company after considering the report of the company
liquidator, they may pass a resolution for its dissolution.
Within two weeks of this meeting, the company liquidator must
send the following documents to the registrar and file an
application along with a report related to the winding up of the
company before the tribunal in order for it to pass an order for
dissolution of the company:
 Copy of final accounts related to winding up of the company
and make a return with respect to each meeting.
 Copy of resolutions passed in such meetings.
Power to accept shares
Under Section 319, if a company is to be wound up voluntarily and
the whole or part of its business is to be sold or transferred to any
other company, the company liquidator of the transfer or company
may with the sanction of a special resolution which conferred on
him a general authority:
 Receive shares, policies or other interest in the transferee
company by way of compensation.
 Enter into any other arrangement wherein the members of
the transferor company participate in the profits or receive
any other benefit from the transferee company with respect
to cash, shares, policies or any other like interest received.

165
However, these arrangements must be entered into with the due
consent of the secured creditors. The Section further provided that
any transfer, sale or arrangement will be binding on the members
of the transferor company. If any member of the transferor
company expressed his dissent in writing and addressed the same
to the company liquidator within seven days after such resolution
is passed and also did not vote in favour of the special resolution,
may require the liquidator to:
 Abstain from carrying such resolution into effect or
 Purchase his interest at a price which will be determined by
the agreement or registered valuer.
Further, if the liquidator decides to buy a member’s interest, such
money raised by him will be determined by a special resolution and
paid before the company is dissolved. However, the provision has
been omitted in 2016.
Winding up of unregistered companies
Part II of Chapter XXI deals with the winding up of unregistered
companies. Section 375 of the Act provides that an unregistered
company cannot be wound up voluntarily under the Act. It
provides that such a company will be wound up under the
following circumstances:
 The company is dissolved or ceases to carry on the business
or is continuing to carry on the business only for the purpose
of winding up.
 The company is not able to pay its debts.
 It is just and equitable in the opinion of the tribunal to wind
up the company.
The Section further provides that an unregistered company will
include any partnership firm, limited liability partnership, society
or cooperative society, association etc but will not include:
 A railway company incorporated under any Act of Parliament
or any other Indian law.
 Any company registered under the Act.
 Any company registered under the previous company law but
not a company whose office was in Burma, Aden, or
Pakistan.

166
According to Section 376, a foreign company incorporated outside
India but carrying business in India can be wound up as an
unregistered company if it ceases to carry business in India.
Official liquidators under the Companies Act
Section 359 provides for the appointment of official liquidators for
the winding up of companies by the tribunal. It provides that the
Central Government can appoint official liquidators, joint
liquidators, and deputy or assistant official liquidators in order to
discharge the functions of an official liquidator. Section
360 further provides that the official liquidator will person such
duties and exercise such powers as prescribed by the Central
Government. It can also conduct inquiries or investigations as
directed by the tribunal or the Central Government.
Summary procedure for winding up of a company
Section 361 provides that if a company which is to be wound up
has assets of a book value not exceeding one crore rupees and
belongs to prescribed classes of companies, the central
government may order for winding up of such company. After the
order is made, the central government will appoint an official
liquidator in this regard. He will further take into his custody all
the assets, effects and actionable claims belonging to the company.
He will also submit a report to the central government in this
regard and whether any fraud is committed in the company within
thirty days of his appointment.

Define 'Company'.
Briefly explain its kind.
According to Section 2(20) of the Companies Act, 2013, a
“company” means a company incorporated under the Companies
Act, 2013 or under any previous company law. The Companies Act
of 2013 replaced the Companies Act, 1956. The Companies Act,
2013 makes provisions to govern all listed and unlisted companies
in the country. The Companies Act 2013 implemented many new
sections and repealed the relevant corresponding sections of the
Companies Act 1956. This is landmark legislation with far-
reaching consequences for all companies incorporated in India.

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Types of Company Under Companies Act, 2013
Entrepreneurs can register different types of companies under
the Companies Act, 2013 (‘Act’) in India to conduct their
business and provide a legal structure for the business.
The different types of companies are as follows:
One Person Company
The Act introduced the concept of a One Person Company (OPC).
As per the Act, an OPC is a company that has only one member.
The member can also be the director of the company. Though the
OPC should have only one member, it can have a maximum of 15
directors. An OPC can be registered in India, by only one person,
who shall act as the directors/shareholders of the company. The
maximum number of directors of an OPC is 15 and the number of
shareholder cannot go beyond one.
Private Limited Company
A private limited company is a company where there cannot be
more than 200 members. A minimum of two members are required
to establish a private limited company. The members cannot
transfer their share, and it is suitable for businesses that prefer to
register as private entities. There needs to be a minimum of two
directors, and there can be a maximum of 15 directors in a private
limited company.
Public Limited Company
A public limited company means a company where the general
public can hold the company shares. There is no maximum
shareholders limit for a public limited company, but there needs
to be a minimum of seven members to establish a public company.
The company needs to have three directors and can have a
maximum of 15 directors.
Section 8 Company (NGO)
An association of persons or individuals can register a company
under section 8 of the Act for charitable purposes. These
companies are established to promote commerce, science, art,
education, sports, research, religion, social welfare, charity, the
protection of the environment, or such other objects. The company
should apply its profits and other incomes to promote its activities.
Such companies intend to prohibit any dividend payments to their
members.
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Types of Companies Based on Size
The MSME Act classifies companies based on their size to give
benefits provided by the government for MSMEs. The
differentiation of companies based on size to obtain MSME benefits
is as follows:
Micro Companies
A micro company is a company whose investment in plant and
machinery does not exceed Rs.1 crore, and the annual turnover
does not exceed Rs.5 crore.
Small Companies
A small company is a company whose investment in plant and
machinery does not exceed Rs.10 crore, and the annual turnover
does not exceed Rs.50 crore.
However, the Companies Act, 2013, also provides many benefits
to small companies. A company with a paid-up share capital of
below Rs.4 crore and an annual turnover of below Rs.40 crore is
considered a small company under the Companies Act.
Medium Companies
A medium company is a company whose investment in plant and
machinery does not exceed Rs.50 crore, and the annual turnover
does not exceed Rs.250 crore.
Types of Company Based on Liability
The members of a company have either limited or unlimited
liability. The liability of the company member arises at the time of
bankruptcy, company loss, winding up or paying the company’s
debt. Thus, a company established under the Companies Act,
2013 can also be classified based on the liability of its
shareholders.
Limited By Shares
A company limited by shares means the liability of the company
members is limited by the Memorandum of Association (MOA). The
company members are liable only for the unpaid amount on the
shares respectively held by them. The equity shares held by a
member measure the shareholder’s ownership in the company.

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Limited by Guarantee
A company limited by guarantee means the member’s liability is
limited to the amount they guarantee to contribute towards the
company’s assets. The member’s liability is limited by the company
MOA. The members undertake in the MOA to contribute the
guaranteed amount in the event of the company being wound up.
The percentage of the member’s ownership is based on the amount
guaranteed by them.
Unlimited Company
An unlimited company means the company members do not have
any limit on their liability. If any debt arises, the member’s liability
is unlimited and extends to their personal assets. Usually, the
company entrepreneurs choose not to incorporate this type of
company.
Types of Company Based on Control
The companies can be classified based on the ownership structure
and control as follows:
Holding Company
A holding company is a company having the majority of voting
powers of another company (subsidiary company). The holding
company is the parent company controlling the subsidiary
company’s policies, assets and management decisions. However, it
remains uninvolved in the subsidiary’s day-to-day activities.
Subsidiary Company
A subsidiary company is owned by another company (holding
company) either partially or entirely. The holding company
controls the composition of the board of directors of the subsidiary
company or more than 50% of its voting powers. Where a single
holding company holds 100% voting powers, the subsidiary is
known as the Wholly Owned Subsidiary (WOS) of the holding
company.
Types of Company Based on Listing
The companies are classified into listed and unlisted companies
based on access to capital. Every listed company must be a public
company, but vice versa need not be true. An unlisted company
can be a private or public limited company.

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Listed Company
A listed company is a company which is registered on various
recognised stock exchanges within or outside India. The shares of
the listed companies are freely traded on the stock exchanges.
They have to follow the guidelines given by the Securities Exchange
Board of India (SEBI).
A company that wishes to list its shares on stock exchanges should
issue a prospectus to the general public for subscribing to its
debentures or shares. A company can list its shares through an
Initial Public Offer (IPO), while an already listed company can
make a Further Public Offer (FPO).
Unlisted Company
An unlisted company is a company that is not listed on any
recognised stock exchange, and its shares are not freely tradable
on the stock exchanges. These companies fulfil their capital
requirements by obtaining funds from friends, family members,
relatives, financial institutions, or private placement. An unlisted
company must convert to a public company and issue a
prospectus if it wishes to list its securities on the stock exchanges.
Explain the concept of 'Lifting of the corporate veil of
company' with the help of decided case.
What is Corporate Veil
A company is composed of its members and is managed by its
Board of Directors and its employees. When the company is
incorporated, it is accorded the status of being a separate legal
entity which demarcates the status of the company and the
members or shareholders that it is composed of. This concept of
differentiation is called a Corporate Veil which is also referred to as
the ‘Veil of Incorporation’.
Meaning of Lifting of Corporate Veil
The advantages of incorporation of a company like perpetual
succession, transferable shares, capacity to sue, flexibility, limited
liability and lastly the company being accorded the status of a
separate legal entity are by no means inconsiderable, under no
circumstance can these advantages be overlooked and, as
compared with them, the disadvantages are, indeed very few.

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Yet some of them, which are immensely complicated deserve to be
pointed out. The corporate veil protects the members and the
shareholders from the ill-effects of the acts done in the name of the
company. Let’s say a director of a company defaults in the name
of the company, the liability will be incurred by the company and
not a member of the company who had defaulted. If the company
incurs any debts or contravenes any laws, the concept of Corporate
Veil implies that the members of the company should not be held
liable for these errors.
Basics of Limited Liability
Organizations exist to a limited extent to shield the individual
resources of investors or shareholders from individual obligation
for the obligations or activities of a company. Almost opposite to a
sole proprietorship in which the proprietor could be considered in
charge of the considerable number of obligations of the
organization, a company customarily constrained the individual
risk of the investors. This is why Limited Liability as a concept is
so popular.
Puncturing the Veil of Incorporation commonly works best with
smaller privately held companies in which the organization has few
investors, restricted resources, and acknowledgement of the
separateness of the partnership from its investors.
Factors for courts to consider
Variables that a court may think about when deciding whether or
not to pierce the Corporate Veil include the things that are laid out
below:
 Non-appearance/Absence or mistake of corporate records;
 In case the members of the corporation are misrepresented
or concealed;
 Inability to look at corporate conventions regarding conduct
and documentation;
 Mixing of advantages enjoyed by the enterprise and the
shareholder;
 Control of assets or liabilities to concentrate them;
 Non-working corporate officials as well as chiefs;

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  Noteworthy undercapitalization of the business
(capitalization necessities fluctuate depending on the
industry, area, and specific conditions of the corporation
which may vary from one company to the other);
 Directing of corporate assets by the predominant
shareholder(s);
 Treatment by a person of the advantages of partnership as
his/her own;
 Was the enterprise being utilized as a “façade” for
predominant shareholder(s) individual dealings like we have
already seen in the article that some companies are set up
only to defraud other persons or corporations and their
incorporation serves absolutely no other purpose.
It is essential to take note that not all these elements should be
met altogether for the court to pierce the corporate veil. Even if the
corporation indulges in a few of the aforementioned bulleted
provisions, it is well under the radar for getting its veil pierced.
Further, a few courts may locate that one factor is so convincing
in a specific case that it will discover the shareholders at risk. For
instance, numerous enormous organizations don’t pay profits,
with no recommendation of corporate inappropriateness, however,
especially for a partnership firm which is small the inability to pay
profits may propose monetary impropriety.
Development of the Concept of “Lifting of Corporate Veil”
Once a company is incorporated, it becomes a separate legal
identity. An incorporated company, unlike a partnership firm
which has no identity of its own, has a separate legal identity of its
own which is independent of its shareholders and its members.
The companies can thus own properties in their names, become
signatories to contracts etc. According to Section 34(2) of the
Companies Act, 2013, upon the issue of the certificate of
incorporation, the subscribers to the memorandum and other
persons, who may from time to time be the members of the
company, shall be a body corporate capable of exercising all the
functions of an incorporated company having perpetual
succession. Thus the company becomes a body corporate which is
capable of immediately functioning as an incorporated individual.

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The central focal point of Incorporation which overshadows all
others is a distinct legal entity of the Corporate organisation.
Solomon v Solomon
What the milestone case Solomon v Solomon lays down is that “in
inquiries of property and limitations of acts done and rights
procured or liabilities accepted along these lines… the characters
of the common people who are the organization’s employees is to
be disregarded”.
Lee v Lee’s Air Farming Ltd
In Lee v Lee’s Air Farming Ltd., Lee fused an organization which
he was overseeing executive. In that limit he named himself as a
pilot/head of the organization. While on the matter of the
organization he was lost in a flying mishap. His widow asked for
remuneration under the Workmen’s Compensation Act. At times,
the court dismisses the status of an organization as a different
lawful entity if the individuals from the organization attempt to
exploit this status. The aims of the people behind the cover are
totally uncovered. They are made to obligate for utilizing the
organization as a vehicle for unfortunate purposes.
The King v. Portus Ex Parte Federated Clerk Union of Australia
In this case, Latham CJ while choosing whether or not workers of
a company which was incorporated in the name of the Federal
Government were not employed by the Federal Government
decided that the company possesses a distinct identity from that
of its shareholders. The shareholders are not at risk to banks for
the obligations of the company. The shareholders don’t claim the
property of the company.
Life insurance corporation of India v Escorts Ltd.
“It is neither fundamental nor alluring to count the classes of
situations where lifting the veil is admissible, since that must
essentially rely upon the significant statutory or different
arrangements, an outcome which is tried to be achieved, the poor
conduct, the element of public interest, the impact on parties who
may be affected by the decision, and so forth.”
This was reiterated in this particular case.

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Circumstances under which the Corporate Veil can be Lifted
There are two circumstances under which the Corporate Veil can
be lifted. They are:
1: Statutory Provisions
2: Judicial Interpretations
Statutory Provisions
Section 5 of the Companies Act, 2013
This particular section characterizes the distinctive individual
engaged in a wrongdoing or a conduct which is held to be wrong
in practice, to be held at risk in regard to offenses as ‘official who
is in default’. This section gives a rundown of officials who will be
at risk to discipline or punishment under the articulation ‘official
who is in default’ which includes within itself, an overseeing
executive or an entire time chief.
Section 45 of the Companies Act, 2013
Reduction of membership beneath statutory limit: This section
lays down that if the individual count from an organization is
found to be under seven on account of a public organization and
under two on account of a private organization (given in Section
12) and the organization keeps on carrying on the business for over
half a year, while the number is so diminished, each individual
who knows this reality and is an individual from the organization
is severally at risk for the obligations of the organization contracted
during that time.
Madan lal v. Himatlal & Co.
In this case, the respondent documented a suit against a private
limited company and its directors because he had to recover his
dues. The directors opposed the suit on the ground that at no time
did the company carried on business with individual count which
was to go below the statutory minimum and in this manner, the
directors couldn’t be made severely at risk for the obligation being
referred to. It was held that it was for the respondent being
dominus litus, to choose the people himself who he wanted to sue.
Section 147 of the Companies Act, 2013
Misdescription of name: Under sub-section (4) of this section, an
official of an organization who signs any bill of trade, hundi,

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promissory note, check wherein the name of the organization isn’t
referenced in the way that it should be according to statutory rules,
such official can be held liable on the personal level to the holder
of the bill of trade, hundi and so forth except if it is properly paid
by the organization. Such case was seen on account of Hendon v.
Adelman.
Section 239 of the Companies Act, 2013
Power of inspector to explore affairs of another company in the
same gathering : It gives that in the event that it is important for
the completion of the task of an inspector instructed to research
the affairs of the company for the supposed wrong-doing, or a
strategy which is to defraud its individuals, he may examine into
the affairs of another related company in a similar group.
Section 275 of the Companies Act, 2013
Subject to the provision of Section 278, this section provides that
no individual can be a director of in excess of 15 companies at any
given moment. Section 279 furnishes for a discipline with fine
which may reach out to Rs. 50,000 in regard of every one of those
companies after the initial twenty.
Section 299 of the Companies Act, 2013
This Section emphasises and offers weightage to the existing
proposal of the Company Law Committee: “It is important to see
that the general notice which a director is bound to provide for the
company of his interest for a specific company or firm under the
stipulation to sub-section (1) of Section 91 which is ought to be
given at a gathering of the directors or find a way to verify that it
is raised and read at the following gathering of the Board after it is
given. The section not only applies to public companies but also
applies to private companies. Inability to consent and act in
consonance to the necessities of this Section will cause
termination the Director and will likewise expose him to
punishment under sub-section (4).
Section 307 & 308 of the Companies Act, 2013
Section 307 applies to each director and each regarded director.
The register of the shareholders should contain in it, not just the
name but also how much shareholding, the description of
shareholding and the nature and extent of the right of the
shareholder over the shares or debentures.
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Section 314 of the Companies Act, 2013
The object of this section is to restrict a director and anybody
associated with him, holding any business which provides
compensation if the company supports it.
Section 542 of the Companies Act, 2013
Pretentious Conduct: If over the span of the winding up of the
company, it gives the idea that any business of the company has
been continued with goal to defraud the creditors of the company
or some other individual or for any deceitful reason, the people who
were intentionally aware of this and still agreed to the carrying on
of the business, in the way previously mentioned, will be liable on
a personal level without incurring the liabilities of the company,
and will be liable in a manner as the court may direct.
In Popular Bank Ltd, it was held that Section 542 seems to leave
the Court with attentiveness to make an assertion of risk, in
connection to ‘all or any of the obligations or liabilities of the
company’.
Judicial interpretations and pronouncements
Instances are not few in which the courts have resisted the
temptation to break through the Corporate Veil. But the theory
cannot be pushed to unnatural limits. Circumstances must occur
which compel the court to identify a company with its members. A
company cannot, for example, be convicted of conspiring with its
sole director. Other than statutory arrangements for lifting the
corporate veil, courts additionally do lift the corporate veil to see
the genuine situation.

What are pre-incorporation contracts?

Contracts that are made on behalf of the company by the
promoters before the incorporation of the company for gaining
some rights and property are called pre-incorporation contracts. A
corporate promoter is a firm or person who does the preliminary
work related to the formation of a company, including its
promotion, incorporation, and flotation, and solicits people to
invest money in the company when it is being formed. Therefore,
they are bound to promote their company at the operational level
or make sure that their company is running successfully. For that,

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they enter into various contracts. Pre incorporation contracts are
those contracts that are necessary to run a business or
incorporation. When promoters make pre-incorporation contracts,
the company is just an artificial entity which means at that time,
the company does not exist. So basically, it cannot be executed at
the time of incorporation. It will only be executed after the
incorporation is formed. Therefore, promoters who are making
these contracts before incorporation bear the liability at that time.
These contracts are formed pre and not post-incorporation, and
therefore, are called pre-incorporation contracts.
Significance of pre-incorporation contracts
As we already know, the incorporation of a company gives various
advantages to a person in a corporate structure as it helps
individual owners or shareholders to protect themselves from
financial liabilities as, after incorporation, it is the company that
goes into debt. Therefore, before the incorporation of any company,
we can consider pre-incorporation contracts to decide the roles,
functions, and liabilities of any company before its incorporation.
There are two situations where individuals can prefer to draft pre-
incorporation contracts.
Internal arrangements
Before the incorporation of the concerned company through this
agreement, we can decide about the roles, functions, and liabilities
of each and every incorporator such as who will be directors,
financial head, legal head, etc., and what are their liabilities. We
can also draft rules and regulations of the company once it is
incorporated completely. By this agreement, we can also decide
what benefits will be given to incorporated employees who are
going to be part of the company such as apartments, cars, and all
other benefits which they will receive.
Business agreements
When we incorporate any company, then it is obvious that the
company goes and deals with various other firms and companies
on a regular basis. So, a pre-incorporation contract will protect
your company’s operations before its incorporation as this contract
may specify that this company is of limited liability or not before
its actual issuance of incorporation details. This agreement also
specifies that the actual ownership will be transferred from
promoters to a company after incorporation.
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Pre-incorporation contracts are crucial documents; it is very
important to incorporate any company control or operation for the
proposed business during its pre-incorporation period. An
absolute incorporation contract helps to avoid future disputes by
drafting a pre-agreement by negotiation on complicated matters.
By drafting a pre-incorporation contract with promoters in stores
that everyone who is involved in the incorporation of this company
should be clear about the idea, strategy and have a proper
understanding of business which helps to avoid future disputes.
Key concerns to keep in mind while drafting and negotiating a pre-
incorporation contract
This agreement lays out the basic structure and function of a
company: what will be the name of the company, its purpose, its
vision, who will be the directors, what will be the roles, what
should be the capital investment of promoters, and so on.
So, while drafting any pre-incorporation contract and negotiating
it, the following are the key concerns which one should keep in
mind:
1. To include the purpose clause which defines what should be
the main purpose of the company, shareholders clause which
discusses the name of the shareholders, corporate name,
corporate address, capital contribution and all the clause
which gives the basic structure of the company.
2. While drafting and negotiating the incorporation clause, one
needs to keep in mind that it should be better if the state of
incorporation should be the same as the state in which
business is going to be carried out after incorporation.
Although all the companies are incorporated through the
Companies Act which means all of them are governed by the
law all over the country, it would be better to incorporate the
company in such states which have better corporate support
means the state which has better stamp duty acts, where
registration of the property is easy, etc. For example,
Maharashtra, Karnataka, New Delhi, etc. have a good
corporate structure.
3. While negotiating the capital contribution it should be kept
in mind that the promoters with less capital contribution
should also get equal or proportional rights in the decision
making. No decision should be taken by any partner/
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 promoter who has a major contribution without informing all
the partners.
4. Clearly negotiate about voting rights for any decision-making.
5. While negotiating, it must be decided who will be the
authorized person because he/she will be the person who is
going to sign on all the legal documents or perform all legal
actions of the company in future. Always keep in mind to
draft it in a way that he has no authority to sign anything
without prior concern of all the partners unless required.
Important clauses of a pre-incorporation contract
o Corporate name- Name of the company which is going to be
incorporated.
o Incorporation- The state in which the company is going to be
incorporated in the future.
o Corporate address- The official address of the business which
is mentioned in the memorandum of association and article
of association is mentioned here.
o Directors- Names of all the proposed directors must be
mentioned here.
o Object clause – It defines all the purposes and objects of the
company once it is incorporated. It also describes the license
which may be required for the incorporation and how it will
be received.
o Due date – The targeted date on which all the procedures of
the corporation are completed and the company is finally
going to be incorporated.
o Capital contribution – This clause discusses what will be the
total capital contribution of all the subscribers and what
should be the mode of subscription? should be discussed
here.
o Bank account – It discusses the opening of a separate
corporate bank account in the name of the company and who
will be the authorised signatory who will be responsible to
carry out all the transactions in the name of the company.

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 o Authorized person- This clause discusses who is the
authorized person to carry out all the actions of the company,
sign contracts, and borrow on the behalf of the company.
o Reimbursement of expenses- This clause talks about the
reimbursement of money of shareholders and any other
persons for handling all the incorporation matters.
o Corporate stock – It is a very important clause that discusses
all the authorised and issued share capital of the company
by the shareholders. It also discusses in detail about what is
the total authorised capital of the company, what is the
issued capital, and what is paid and unpaid capital of all the
shareholders of the company is going to be incorporated.
o Jurisdiction of court- discusses what is the jurisdiction of
court- for any matter which arises in the company in the
future.
o Confidentiality – This clause discusses how to keep safe all
the confidential information shared amongst the promoters
and others during the process of incorporation and with
whom should the liability lie in case of its breach.
o Termination – The termination clause discusses all the
circumstances in which this agreement is terminated. For
example, if any of the party declared insolvent by the band,
became insane, the death of any promoter ( in case there are
only two promoters and so on).
There are various other boilerplate clauses that are drafted in a
pre-incorporation contract such as damages to be paid, methods
of incorporating the agreement after the company is formed,
dispute Resolution, notice clause, and so on but these are some
important clauses that are present in a pre-incorporation contract.

Enforceability of pre-incorporation contracts

According to the Indian Contract Act, 1872, pre-incorporation
contracts are not valid as for the formation of any contract there
should be two parties and in the case of a pre-incorporation
contract, the company is not incorporated at the time of
agreement. Hence, no legal entity is there in the contract on whose
behalf the contract is going to be made. The second reason is that
in pre-incorporation contracts, parties form the agreement as
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agents of the company but without the presence of the principal
itself, how could parties nominate themselves as agents?
Per Section 230 of Indian Contract Act 1872, an agent cannot
personally enforce or bind the principal on their behalf as in this
case the company that is principal is not legally present as this
agreement is made before incorporation of the company.
Therefore, enforcement of pre-incorporation contracts in India
comes from the Specific Relief Act 1963. Section 15(h) of the
Specific Relief Act, 1963 says that when promoters of any company
form a contract for the purpose of the company before its
incorporation, it is said that the company has accepted the
agreement and warranted it, and also communicated this to other
parties. This section means that if promoters of the company on
behalf of it then it is said that the company has accepted the
agreement and will incur all the liabilities of the contract and it
was also assumed that promoters have communicated the same to
other parties. Hence, this section basically gives the concept of a
pre-incorporation contract. Section 19(e) of this Act says that to
give relief to the promoters of the company who entered into a
contract before its incorporation which is warranted by the term of
incorporation, then it is said that the company has accepted this
contract and also communicated it to the other parties. This
section gives relief to the promoters of the company who have
entered into a pre-incorporation contract.
Case laws
Weaver Mills LTD. v. Balkies Ammal
In this case, Madras High Court gave a judgment that can give a
broad aspect of pre-corporation contracts. In this case, motors of
the company have agreed to purchase a property on the behalf of
the company before its incorporation after that when the company
is incorporated the as zoomed the position and start the
construction of a structure on it but they have not transferred the
title of the property in the name of the company. Court held that
even in the absence of the transfer of property in the name of the
company the title of the company over any property cannot be set
aside.
Kelner v. Baxter
In this case, the promoters of a hotel company entered into a pre-
incorporation contract for the purchase of wine. Here, in this case,
wine was consumed earlier and due to some reasons, the company
went on liquidation. Another party to the contract sued the
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promoters for the non-payment of wine. Promoters claimed that as
this was pre-incorporation contract liabilities were transferred to
the company and hence they were not personally liable for it. The
court held that as the company was not incorporated at the time
of the contract that’s why it can not relieve them from the
responsibility and hence were personally promoters were liable to
compensate the other party.

Phonogram Ltd v. Lane

In this case, there was a group of people trying to incorporate a
new company that will run a group of pop artists and for that, they
took a loan from a recording company. However, due to some
reason, this company never came into existence, and hence,
money is due on them, recording company filed a suit, and then
the court held that as the company was not in existence at the time
of contract. That’s why promoters are personally liable.

This principle of liability of promoters is also followed in India. In

the case of Seth Sobhag Mal Lodha v. Edward Mill Co. Ltd.,
the Rajasthan High Court held promoters of the company
personally liable for the non-performance of obligations decided in
the pre-incorporation contract.

Prospectus and Remedies for Misrepresentation.

Meaning of Prospectus
A prospectus is a formal document issued by a company that
provides detailed information about the company's financial
condition, business operations, management, and securities being
offered for sale to the public. It serves as a comprehensive guide
for potential investors to make informed decisions before investing
in the company's securities, such as shares or debentures. The
prospectus is a crucial tool for transparency and accountability in
the process of raising funds from the public.

Key points about a prospectus:

 Disclosure: A prospectus contains essential information that
potential investors need to assess the financial health and
prospects of the company. This includes financial

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 statements, management discussions, business strategies,
risk factors, and legal details.
 Legal Requirement: In many jurisdictions, it's a legal
requirement for companies planning to offer their securities
to the public. The purpose is to protect investors by ensuring
they have accurate and sufficient information to make
informed investment decisions.
 Contents: A prospectus typically includes sections on the
company's history, business model, financial performance,
risk factors, use of proceeds, management team, and terms
of the securities being offered.
 Prospective Investors: The primary audience for a prospectus
is potential investors who are considering purchasing the
company's securities. The document aims to give them a clear
understanding of the company's operations and its financial
outlook.
 Regulatory Approval: In many jurisdictions, the prospectus
must be approved by a regulatory authority, such as the
Securities and Exchange Commission (SEC) in the United
States or the Securities and Exchange Board of India (SEBI)
in India.
 Advertising Restrictions: Companies are often restricted in
how they can promote their securities to the public. The
prospectus serves as the primary means of communication
with potential investors.
 Updated Information: If there are any material changes in the
company's financials or operations between the time of
prospectus issuance and the time of the offering, the
company may need to provide updates to potential investors
through an addendum or supplementary prospectus.
 Liability and Accuracy: Companies are legally obligated to
ensure the accuracy and completeness of the information
presented in the prospectus. Misleading or false information
can lead to legal consequences.
 Investor Protection: The prospectus serves as a critical tool
for investor protection, ensuring that investors have access
to accurate information before making investment decisions.

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  Types of Prospectus: There are different types of prospectuses
based on the nature of the offering. For example, a "red
herring" prospectus is a preliminary version that doesn't
include the final offering price. A "shelf prospectus" allows a
company to offer securities periodically over a certain period
without filing a new prospectus each time.

In summary, a prospectus is a detailed document that companies

use to communicate important information about their operations
and securities to potential investors. It plays a vital role in investor
protection and transparency in the process of raising capital from
the public.

Statement in Lieu of Prospectus

A "Statement in Lieu of Prospectus" is a document required by
companies in certain circumstances when they choose not to issue
a full-fledged prospectus to the public in connection with an offer
of securities. Instead of a comprehensive prospectus, this
statement provides key information that investors would have
found in a prospectus. The purpose is to ensure transparency and
provide investors with essential details, even when a full
prospectus is not being issued.

Here are some key points about a Statement in Lieu of

Prospectus:
 When It's Used: Companies use a Statement in Lieu of
Prospectus when they are issuing shares or securities to the
public in connection with their initial public offering (IPO) or
subsequent public offerings. It's typically used when the
company has already issued a prospectus for a previous
offering and is making a subsequent offering.
 Contents: Similar to a prospectus, a Statement in Lieu of
Prospectus contains essential information about the
company's business, financial condition, management, and
the securities being offered. It includes details that are crucial
for potential investors to make informed investment
decisions.
 Disclosure Requirements: The document is required to be
filed with the regulatory authority, such as the Securities and
Exchange Commission (SEC) in the United States or the
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 Securities and Exchange Board of India (SEBI) in India. It
must comply with the legal disclosure requirements specified
by the regulatory authority.
 Purpose: The statement serves as a way for the company to
provide key information to investors even when it's not
issuing a full prospectus. This ensures that investors have
access to relevant information to assess the investment
opportunity.
 Abbreviated Format: Since it's not a full prospectus, a
Statement in Lieu of Prospectus is usually shorter and more
focused. It includes key information without the extensive
details that a full prospectus would provide.
 Legal Requirements: Companies must ensure that the
information provided in the statement is accurate and
complete. Any false or misleading information can have legal
consequences.
 Investor Protection: The statement contributes to investor
protection by ensuring that relevant information is available
to potential investors, even when a full prospectus is not
being issued.
 Supplementary Information: If there are any material
changes in the company's financial condition or operations
between the time of filing the statement and the time of the
offering, the company may need to provide updates to
potential investors.
In summary, a Statement in Lieu of Prospectus is a document that
provides essential information to potential investors when a full
prospectus is not being issued, often in connection with
subsequent public offerings. It ensures transparency,
accountability, and investor protection in the process of raising
capital from the public.
Contents of a Prospectus
 Every Prospectus to be Dated: The prospectus must have a
clear and visible date of issuance. This is important because
it helps investors know when the document was created and
provides a reference point for assessing the timeliness of the
information provided.

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  Every Prospectus to be Registered: Before a company can
distribute a prospectus to the public, it needs to be registered
with the relevant regulatory authority. This is typically a
securities regulator such as the Securities and Exchange
Commission (SEC) in the United States or the Securities and
Exchange Board of India (SEBI) in India. Registration ensures
that the information in the prospectus is accurate, complete,
and compliant with regulatory standards.
 Expert's Consent: If the prospectus contains statements or
information that is based on the opinion of an expert, such
as an auditor, accountant, or engineer, their consent must
be obtained and included in the prospectus. This ensures
that the expert is aware of their statement being used and
agrees with its inclusion in the document.
 Disclosures to be Made: The prospectus is required to
disclose a wide range of information to provide potential
investors with a clear and comprehensive view of the
company's financial health, operations, management, and
the securities being offered.

These disclosures may include:

 Financial Statements: Audited financial statements,
including balance sheets, income statements, cash flow
statements, and notes to financials.
 Business Overview: Information about the company's history,
business model, products/services, industry trends, and
competitive landscape.
 Management: Details about key management personnel,
their experience, qualifications, and roles in the company.
 Risk Factors: A list of potential risks and uncertainties that
could affect the company's financial performance or
prospects.
 Use of Proceeds: How the funds raised from the offering will
be used by the company.
 Offering Details: Information about the securities being
offered, such as the number of shares, offering price,
underwriters, and any rights or restrictions.

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  Legal and Regulatory Compliance: Disclosures related to legal
proceedings, government regulations, and any material legal
issues.
 Market Conditions: Factors affecting the market for the
securities being offered, such as demand, liquidity, and
secondary market trading.

Formalities of Issue:
1. Preparation and Review: The company prepares the
prospectus, ensuring that all required information is
accurate, complete, and consistent. The document undergoes
thorough review to ensure compliance with legal and
regulatory requirements.
2. Date of Prospectus: The prospectus is dated, indicating the
date of issuance. This is the starting point for assessing the
timeliness of the information.
3. Registration: The prospectus is submitted to the relevant
regulatory authority for registration. The regulatory authority
reviews the prospectus to ensure it meets legal and disclosure
standards.
4. Expert's Consent: If the prospectus includes expert opinions
or statements, the company obtains consent from the experts
and includes their consent in the document.
5. Printing and Distribution: Once registered, the prospectus is
printed and made available to potential investors. It can be
distributed in physical form or electronically.
6. Public Offering: The company makes the public offering of its
securities. Interested investors can review the prospectus to
make informed investment decisions.
7. Continuous Disclosure: If there are material changes or
updates between the time of registration and the offering, the
company may need to provide supplementary or updated
information to potential investors.

In summary, the prospectus is a comprehensive document that

provides detailed information about a company and the securities
it is offering to the public. The formalities of issuing a prospectus
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include preparing, registering, and distributing the document
while ensuring compliance with regulatory requirements and
providing accurate and complete information to potential
investors.

Remedies for misrepresentation

1. Damages for Deceit:
o This remedy is available when the party knowingly
makes a false statement with the intent to deceive the
other party.
o Damages awarded aim to compensate for the actual
losses suffered as a direct result of the deceitful
misrepresentation.

2. Compensation:
o Compensation is available when the misrepresentation
was not fraudulent but still resulted in losses due to the
negligent behaviour of the party making the statement.
o The injured party must prove that the
misrepresentation was made negligently and that they
relied on it to their detriment.
o Compensation aims to put the injured party in the
position they would have been in had the
misrepresentation not occurred.

3. Rescission for Misrepresentation:

o Rescission allows the injured party to unwind the
contract, returning both parties to their original
positions before the contract was formed.
o It's available when a contract was entered into based on
a misrepresentation that induced the party to enter into
the contract.
o Rescission restores parties to their pre-contractual
positions, with consideration returned and obligations
discharged.

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 4. Liability for Untrue Statements in the Prospectus:
o If a prospectus contains false or misleading information,
investors who relied on this information to make
investment decisions may have legal remedies.
o Investors may be able to seek damages, which could
cover the financial losses suffered due to the untrue
statements.
o Regulatory authorities might also impose penalties on
those responsible for the untrue statements, ensuring
accountability.
In summary, remedies for misrepresentation provide legal
mechanisms to address situations where false statements or
incomplete information have led to losses or harm. Depending on
the nature of the misrepresentation and the intent behind it,
parties might seek damages, compensation, rescission, or take
legal action to hold those responsible accountable.

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What are the Types of Share Capital?
Share capital is the capital raised by a company through the issue
of shares to the shareholders. In simple terms, it is the money
invested by the shareholders in the company. The Companies Act,
2013 in India lays down the rules and regulations for the issuance
and management of share capital by companies. There are
different types of share capital as per the Companies Act, 2013.
These are:
 Authorized Share Capital: Authorized Share Capital is the
entire capital that a company takes from its investors by
issuing shares that are listed in the company’s official
documents. It is also known as Registered Capital or Nominal
Capital since it is used to register a company.
The maximum of Authorised Capital is specified in the
Memorandum of Association, according to Section 2(8) of the
Companies Act, 2013. The company has the option to take the
appropriate actions to expand the limit of authorised capital in
order to issue more shares, but it is not permitted to issue shares
that exceed the limit of authorised capital in any situation.
 Issued Share Capital: The portion of Authorized Share
Capital that has been issued to the public for subscription is
known as Issued Share Capital. This act of issuing shares is
referred to as issuance, allocation, or allotment. To put it
simply, Issued Share Capital is the subset of Authorized
Share Capital. A subscriber becomes a shareholder after
receiving shares.
 Subscribed Capital: Subscribed Capital is the portion of
issued Capital that has been sold to the public. The public is
not required to completely subscribe to the issued Capital. It
is the portion of the issued capital for which the company has
received an application. Let me illustrate this using an
example: If a corporation sells 16000 Rs. 100 shares and the
public only applies for 12000 shares, the issued capital is Rs
16 lakh and the subscribed capital is Rs 12 lakh. The total
number of issued shares equals the entire number of
outstanding shares plus treasury shares.
 Called-Up Capital: Called-Up Capital is a portion of the
Subscribed Capital that includes the shareholder’s payment.
The complete amount of Capital is not given to the company
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 at once. It draws on a portion of the subscribed Capital as
needed in installments. Uncalled Capital is the remainder of
the Subscribed Capital.
 Paid-Up Capital: Paid-up Capital refers to the portion of
Called-up Capital paid by the shareholder. The shareholder
is not required to pay the amount requested by the company
in question. The shareholder may pay half of the called-up
capital, which is referred to as Reserved Capital. As the term
implies, reserving funds in the company’s treasury. This is
very important if the company is going to discontinue
or winds up.
The Companies Amendment Act, 2015 altered the need for a
minimum paid-up capital in the company. That means that,
for the time being, a company can be formed with as little as
Rs.1000 in paid-up capital. The paid-up capital must always
be less than or equal to the approved share capital at all
times, and the business is not permitted to issue shares in
excess of the authorised share capital.
 Equity Share Capital: It shows the ownership in a company
and grants the shareholder to receive a share of the profits if
company is sold or liquidated, receive dividends, and vote on
company’s decisions. Equity shareholders have a residual
claim on the assets and earnings of the company, meaning
they are last in line to receive payment after all other claims
are satisfied.
Types of Equity Share Capital
Some of the different types of equity share capital are:
 Ordinary Shares: These are the most common type of equity
share capital issued by companies. It represents ownership
in the company and entitles the shareholder to vote on
company’s decisions.
 Deferred Shares: These are carrying a lower entitlement to
dividends and/or voting rights as compared to ordinary
shares. They are often used to differentiate between
shareholders who have been with the company for a longer
period of time or those who have invested a larger amount of
money.
 Founders Shares: These are issued to the founder of a
company. They often carry special voting rights or dividends
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 entitlements to provide the founders huge control over the
company.
 Management Shares: These are issued to the company’s
management team, permitting them to own a portion of the
company that they are operating. It is often come with certain
restrictions like to make sure management acts, limited
voting rights in the best interests of the Company.
 Preference Share Capital
Preference share capital is a type of share capital that entitles the
shareholder to preferential treatment over equity shareholders in
terms of receiving dividends or receiving the proceeds from the sale
or liquidation of the company. Preference shareholders have a fixed
rate of return and are entitled to receive their dividends before
equity shareholders. Preference shares do not usually carry voting
rights and are therefore less influential in the management of the
company.
Types of Preference Share Capitals
There are certain types of Preference Share capitals are as:-
 Cumulative Preference Shares: Cumulative preference
shares are a type of preference share capital that entitles the
shareholder to receive unpaid dividends from previous years
before any dividends are paid to equity shareholders.
 Redeemable Preference Shares: Redeemable preference
shares are a type of preference share capital that can be
redeemed by the company after a specific period or at a
specific date. They are often used as a short-term financing
option.
 Participating Preference Shares: Participating preference
shares are a type of preference share capital that entitles the
shareholder to receive a share of the profits in addition to
their fixed dividend payment. They are also entitled to receive
their fixed dividend payment before equity shareholders.
 Non-Cumulative Preference Shares: Non-cumulative
preference shares are a type of preference share capital that
does not entitle the shareholder to receive unpaid dividends
from previous years. If a company does not declare a dividend
in a particular year, the shareholder does not receive any
payment for that year.
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  Sweat Equity Shares: Sweat equity shares are shares issued
to employees or directors of the company as a reward for their
contribution to the company’s growth. Sweat equity shares
can be issued at a discount or for consideration other than
cash.
 Rights Issue: A rights issue is an offer of shares to the
existing shareholders of the company in proportion to their
existing shareholding. The purpose of a rights issue is to raise
capital without diluting the ownership of the existing
shareholders.
 Bonus Issue: A bonus issue is an issue of free shares to the
existing shareholders of the company in proportion to their
existing shareholding. The purpose of a bonus issue is to
reward the existing shareholders for their investment in the
company.
 Employee Stock Option Plan (ESOP): An employee stock
option plan (ESOP) is a scheme where the company offers its
employees the option to purchase shares of the company at
a discounted price. The purpose of an ESOP is to motivate
and retain employees by providing them with a stake in the
company’s growth.
Why do Companies Issue Share Capital?
Companies issue share capital for various reasons, including:
 Raising Funds: One of the primary reasons why companies
issue share capital is to raise funds. By issuing shares,
companies can raise money from investors without incurring
debt or interest expenses. This capital can be used to fund
their operations, invest in new projects, or expand
their business.
 Diluting Risk: When a company has a large number of
shareholders, it can dilute the risk associated with
ownership. This means that if the company faces losses, the
losses are spread out among a larger group of people,
reducing the risk for each shareholder.
 Rewarding Shareholders: Companies may issue shares to
reward their existing shareholders by giving them the
opportunity to increase their ownership stake in the

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 company. This can also help to build shareholder loyalty and
support.
 Building Reputation: Companies that issue shares publicly
are often viewed as more reputable and trustworthy
compared to private companies. This is because they are
subject to greater scrutiny and regulation, which can improve
investor confidence and help to attract more investors.
 Avoiding Debt: Companies that do not want to take on debt
may choose to issue shares instead. This can be beneficial as
the company is not required to make fixed payments to
shareholders and the capital raised does not need to be
repaid.
The decision to issue shares is often based on the cost and
availability of other forms of financing, such as loans or bonds.
Merits of issuing the Share Capital
Here are some of the merits of issuing share capital for a company:
 Long-term Funding: Share capital provides a long-term
source of funding for a company as shareholders are typically
invested in the company for the long term.
 No Interest Payments: Unlike debt financing, there are no
interest payments associated with share capital. This means
that the company can save money on interest payments and
have more funds available for other purposes.
 Limited Liability: Shareholders have limited liability, which
means that they are not personally liable for the company’s
debts and obligations. This reduces the risk for shareholders
and can make the company more attractive to investors.
 Improved Credit Rating: Issuing share capital can improve
a company’s credit rating as it shows that the company has
a diverse range of funding sources.
 Increased Public Profile: Issuing shares can increase a
company’s public profile and provide exposure to potential
investors.
 Flexibility: Issuing shares provides a company with
flexibility in terms of how it uses the funds raised. The
company can choose to invest in new projects, pay off debt,
or use the funds for other purposes.
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Demerits of issuing the Share Capital
Here are some of the demerits or disadvantages of issuing share
capital for a company:
 Dilution of Ownership: Issuing new shares can dilute the
ownership of existing shareholders, which can lead to a loss
of control over the company.
 Dividend Payments: Issuing shares creates an obligation for
the company to pay dividends to shareholders, which can
reduce the company’s profits and limit its ability to reinvest
in the business.
 Cost of Issuing Shares: Issuing shares can be costly, as the
company may need to pay fees to investment bankers,
lawyers, and accountants. Additionally, the company may
need to pay dividends or other incentives to attract investors.
 Increased Scrutiny: Issuing shares can increase the level of
scrutiny on the company, as shareholders and regulatory
authorities may closely monitor the company’s activities and
financial performance.
 Share Price Volatility: The price of a company’s shares can
be volatile and subject to fluctuations due to changes in
market conditions, investor sentiment, and other factors.
This can create uncertainty for shareholders and make it
more difficult for the company to raise capital in the future.
 Regulatory Compliance: Companies that issue shares are
subject to various regulations and requirements, which can
be complex and time-consuming to navigate.

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Explain the essentials of a valid meeting of a company.
Meetings are an integral part of corporate governance and play a
vital role in the functioning of companies. The Companies Act
2013, which replaced the Companies Act 1956 in India, has laid
down comprehensive provisions regarding various types of
meetings that companies must hold. These meetings serve as
platforms for decision-making, communication, and transparency
within the organization. This article will delve into the different
types of meetings mandated by the Companies Act 2013 and their
significance in corporate governance.
Types of Meetings
Under the Companies Act 2013, several types of meetings are
specified, each serving distinct purposes:
1. Board Meetings (Section 173): Board meetings are essential
for the management and administration of the company.
They must be held at least once every three months, with a
minimum of four meetings in a calendar year. The quorum
for a board meeting typically includes one-third of the total
directors or two directors, whichever is higher. These
meetings are crucial for strategic decision-making, financial
planning, and overall management of the company.
2. General Meetings (Section 96): General meetings are
gatherings of the company’s shareholders. These include
Annual General Meetings (AGMs) and Extraordinary General
Meetings (EGMs). An AGM must be held once a year, while
EGMs are called for specific urgent matters. AGMs are
important for discussing financial statements, appointing
auditors, and approving dividend distribution.
3. Annual General Meeting (Section 96): The AGM is perhaps
the most significant meeting for shareholders. It provides a
platform for shareholders to discuss the company’s
performance, approve financial statements, declare
dividends, and appoint or reappoint directors. The quorum
for an AGM is typically a minimum of 5 members present in
person.
4. Extraordinary General Meeting (Section 100): EGMs are
convened for urgent matters that cannot wait until the next
AGM. These can include changes in the company’s
constitution, modification of the objects clause, and
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 alteration of share capital. The notice period for an EGM is
shorter compared to an AGM, and the quorum is typically
higher.
5. Meeting of Creditors (Section 230): In cases of mergers,
amalgamations, or reconstruction, the Companies Act
mandates meetings of creditors. These meetings allow
creditors to express their views on the proposed agenda and
vote on it. The decision at such meetings can significantly
impact the company’s future.
6. Meetings of Debenture Holders (Section 71): Companies
that issue debentures must hold meetings of debenture
holders. These meetings are essential for discussing matters
related to the debentures, such as interest rates, redemption,
and security.
General provisions to know about conducting valid company
meetings
1. Authority to convene meetings
A meeting must be called by the board of directors of the
company in order to be valid. A resolution must be adopted
by the board in order to decide to call a general meeting and
give notice of it.
2. Notice
A proper notice must be given by the board of directors in
order for a meeting to be conducted lawfully. This means that
such a notice must be as per the provisions of the 2013
Companies Act. Additionally, notice must be sent to all
members who are qualified to attend the meeting Sand cast
votes, mentioning in detail the meeting’s location, date, time,
and a summary of the business to be discussed must all be
included.
3. Quorum
A quorum is defined as the minimal number of participants
needed to hold a given meeting in accordance with the
Companies Act 2013 and its rules. Any business made during
a meeting that doesn’t have a quorum is regarded to be
invalid. The main object of having a quorum is to avoid taking
decisions by a small minority of members that may not be
accepted by the vast majority. Every meeting has a different
quorum requirement.
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 4. Agenda
Agenda can be viewed as the list of matters to be discussed
during any meeting. An agenda is crucial for conducting a
business meeting in a structured manner and according to a
planned order. Every member who is qualified to attend a
meeting gets the agenda as well as a notice of the meeting.
The agenda must be followed exactly, and the order of the
agenda discussed in the meeting can only be changed with
the appropriate approval of the members present in the
Meeting.
5. Minutes
The minutes of the meetings contain a just and accurate
summary of the proceedings of the meeting. The Minutes
must be prepared and signed within 30 days of the
conclusion of the meeting. Further, the Minutes books must
be kept at the Registered Office of the company or any place
where the board of directors has given their approval.
6. Proxy
A proxy is a person appointed by the shareholder of a
company to represent him at a general meeting of the
company. Further, it also refers to the process through which
such an individual is named and permitted to attend the
meeting.
7. Resolutions
Business transactions in company meetings are carried out
in the form of resolutions. There are two kinds of resolutions,
namely:
 Ordinary resolution, and
 Special resolution.
CONCLUSION
Meetings under the Companies Act 2013 play a pivotal role in
shaping the corporate landscape in India. They promote
transparency, accountability, and stakeholder participation,
which are essential for the healthy functioning of companies.
Adherence to the provisions of the Companies Act 2013 regarding
meetings is not just a legal obligation but also a crucial step
towards building a robust and ethical corporate environment.
Companies that value effective meetings are better positioned to
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navigate challenges, make informed decisions, and foster trust
among their stakeholders.

Explain the methods of winding up of a company.

The process of ending the life of a company by administering its
properties for the benefit of shareholders & creditors of the
company is known as winding up of a company. A company is a
corporate body which is an association of people for some common
purpose of carrying on the business and earning profits. A
company has to be incorporated and registered according to the
Companies Act 2013.
Chief Justice Marshall defines a company as “a corporation which
is an artificial being, invisible, intangible and exists only in
contemplation of law.”
Modes of winding up of a company
According to Section 270 of the Act, a company can be wound up
by either of the two modes. These are:
 Winding up by the Tribunal ( NCLT)/ Compulsory winding-
up
 Voluntary winding up of a company
Chapter XX of the Companies Act, 2013 deals with the winding up
of a company. Part I provides for winding up by the tribunal, while
Part II provides provisions for the voluntary winding up of a
company. However, Part II has been omitted by the Insolvency and
Bankruptcy Code, 2016.

Compulsory Winding Up of Company

Compulsory winding up is one of the modes of winding up a
company; it is initiated by a court order, usually upon the petition
of a creditor, the company itself, or the Registrar of Companies.
The conditions under which a court can order the winding up of a
company include:
 Inability to Pay Debts: If a company is unable to pay its
debts and a creditor has demanded payment and not received
it within three weeks, the creditor can petition for winding
up.

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  Special Resolution: If the company has resolved by a special
resolution that it should be wound up by the court.
 Default in Holding Statutory Meeting: If the company has
not held its statutory meeting or filed its statutory report.
 Acts Against Sovereignty and Integrity: If the company is
found to be acting against the sovereignty and integrity of
India or public order.
 Fraudulent Conduct: If the business of the company is being
conducted fraudulently or for an unlawful purpose.
Once a winding-up order is made, an official liquidator is
appointed by the court to take control of the company’s assets and
liabilities.
Voluntary Winding Up of Company
Voluntary winding up can be initiated by the members of the
company without court intervention. There are two types of
voluntary winding up:
 Members’ Voluntary Winding Up: This occurs when the
company is solvent and able to pay its debts in full within a
specified period. The directors must make a declaration of
solvency, followed by a resolution passed by the members in
a general meeting. An official liquidator is then appointed to
wind up the company’s affairs.
 Creditors’ Voluntary Winding Up: This occurs when the
company is insolvent and unable to pay its debts. The process
begins with a resolution by the members, followed by a
meeting of the creditors. The creditors have a significant role
in appointing the liquidator and overseeing the winding-up
process.
In both types of voluntary winding up, the liquidator is responsible
for collecting the company’s assets, paying off its liabilities, and
distributing any remaining assets to the members.
Winding Up under the Supervision of the Court
In certain situations, even if a company is undergoing voluntary
winding up, the court may intervene and place the winding up
under its supervision. This usually happens if the court believes
that the process is not being conducted properly or if it is in the
interest of justice to do so. The process then continues under the
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oversight of the court, which can make orders and directions as
necessary.
Procedure for Winding Up a Company in India
Winding up a company is a structured process involving several
key steps to ensure an orderly closure of the company’s operations,
settlement of liabilities, and distribution of assets. Here is a
detailed procedure for different modes of Winding up of a Company
in India:
Resolution or Petition
 Voluntary Winding Up: Initiated by passing a resolution in
the general meeting of the company. In the case of a Members’
Voluntary Winding Up, a declaration of solvency must also be
made by the directors.
 Compulsory Winding Up: Initiated by filing a petition in the
court, usually by a creditor, the company itself, or the
Registrar of Companies.
Appointment of Liquidator
 A liquidator is appointed to manage the winding-up process.
o Voluntary Winding Up: The members or creditors
appoint the liquidator.
o Compulsory Winding Up: The court appoints the
official liquidator.
Notice of Resolution or Petition
 The winding-up resolution or court order must be published
in the Official Gazette and a local newspaper to inform the
public and stakeholders.
Collection and Realization of Assets
 The liquidator takes control of the company’s assets, books,
and records.
 The liquidator collects and sells the company’s assets to
generate funds.
Settlement of Liabilities
 The proceeds from the sale of assets are used to pay off the
company’s debts and liabilities.

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  The liquidator prioritizes the payment of secured creditors,
followed by unsecured creditors, employees, and other
claimants.
Distribution of Remaining Assets
 After settling all liabilities, any remaining assets are
distributed among the members or shareholders according to
their shareholding or claims.
Final Meeting and Dissolution
 Voluntary Winding Up: A final meeting of the members or
creditors is held to present the liquidator’s report on the
winding-up process.
 Compulsory Winding Up: The liquidator submits a final
report to the court.
 After the final meeting or report, the company is formally
dissolved, and its name is struck off the register of
companies.
Filing of Final Documents
 The liquidator files the final accounts and returns with the
Registrar of Companies, including a statement of accounts,
the liquidator’s report, and a return of the final meeting.
Official Dissolution
 Upon satisfaction that the winding up has been properly
conducted and all procedures have been followed, the
Registrar of Companies issues a certificate of dissolution.
 The company is officially dissolved, ceasing to exist as a legal
entity.
Conclusion
Winding up a company in India is a structured process governed
by legal frameworks to ensure fair treatment of creditors,
members, and other stakeholders. Whether through court
intervention, voluntary action by members, or under court
supervision, each winding up of a company aims to systematically
close down the company’s operations, settle debts, and distribute
any remaining assets.

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Difference between winding up and dissolution of a company
Dissolution means that something ceases to exist. Thus, the
dissolution of the company means that its existence has come to
an end. Section 302 of the Act deals with the dissolution of a
company by the tribunal. It provides that when a company and its
affairs have wound up completely, the company liquidator can
apply to the tribunal for dissolution of the company. The tribunal
if satisfied can order for dissolution of a company. A copy of the
order is to be sent to the registrar within 30 days. This will be done
by the company liquidator, but if he fails to do so he will be
punished.
However, winding up and dissolution are not the same but
different terms with different meanings. Winding up doesn’t mean
that the company has dissolved. It only paves the way for the
dissolution of the company, which further means that the
company has ceased to exist. The difference between the two is as
follows:
Basis of Dissolution of
Winding up
difference company

Dissolution of the
It is the process by which
company means that
Meaning the dissolution of a
the company has
company is initiated.
ceased to exist.

After winding up, the legal Dissolution means

Existence
entity of a company that even the legal
of
continues to exist, and it entity of a company
company
can be sued. comes to an end.

Under the process of

Business winding up, a company is
Ceases on
of allowed to continue its
dissolution.
company business for the benefit of
winding up.

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Corporate Social Responsibility (CSR) under Companies Act,
2013.
Concept of corporate social responsibility (CSR)
One of the most important provisions related to ESG in the present
times is that of corporate social responsibility (CSR) as given
in Section 135 of the Companies Act 2013, read with The
Companies (Corporate Social Responsibility Policy) Rules, 2014. It
mandates companies with a specific net worth or turnover to
annually spend at least 2% of their average net profits of the last
three financial years on CSR. India is one of the few nations in the
world to have a dedicated mandatory provision for the business
entities for abiding by their corporate social responsibility.
In India, having a CSR law reflects the country’s commitment to
operate in a manner that is economically, socially, and
environmentally sustainable. CSR involves taking into account the
impact of actions of a company on its various stakeholders, such
as its employees, customers, community, and the environment.
The goal of CSR is to go beyond financial success and contribute
positively to society and the environment. According to the United
Nations Industrial Development Organization (UNIDO), CSR, as
based on the ‘Triple Bottom Line’ approach, can help countries to
advance their socio-economic growth and to become more
competitive in the present era.
CSR activities
CSR motivates the companies to contribute socially, economically
and environmentally by engaging in acts like :
 Engaging members of the local community
 Using “Socially Responsible Investment” (SRI)
 Developing cordial relationship with the employees as well as
the consumers
 Engaging in actions/ activities for the protection and
sustainability of the environment eg. using chain of
sustainable manufacturing/production practices
 Paying fair wages to the workers
 Supporting reforms in the social justice policy

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  Innovating the products to solve any environmental or a
social issue
 Undertaking to reduce the carbon footprint
 Contributing appreciable profits to any charitable cause
Section 135 of the Companies Act, 2013
Section 135 of the Companies Act, 2013 provides for the mandate
for constitution of a Corporate Social Responsibility Committee
(CSR Committee) of the Board, its obligations and the contribution
that must be made by the specified entities towards its CSR
policy.
Corporate social responsibility committee
Sub-section 1 of Section 135 states that every company that has a
net worth equal to or more than Rs. 500 crore, or a turnover equal
to or more than Rs. 1000 crore, or a net profit equal to or more
than Rs. 5 crore during any financial year, is required to constitute
a CSR Committee of the Board which shall consist of three or more
directors, amongst whom at least one director should be an
independent director.
It says that the Board must disclose the composition of such a
committee under its report to be laid before the company in its
general meeting as mandated by Section 134(3).
Functions of the committee
Sub-section 3 of Section 135 further provides the responsibilities
of the committee. It says that the committee shall:-
 Formulate and recommend a CSR Policy to the Board,
mentioning the activities which are to be undertaken by the
company as specified in Schedule VII of the Act;
 Recommend the expenditure amount which is to be spent on
the activities referred hereinabove; and
 Monitor the company’s CSR policy from time to time.
The provision also states that after considering the
recommendations made by the CSR Committee, the Board has to
approve the CSR policy and disclose the contents of the policy in
its report. Moreover, it must also be ensured that the contents are
also placed on the company’s website in the manner prescribed by
the Government. In addition, the Board must ensure that the
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activities as envisioned in the policy are actually undertaken by
the company because if the activities are not undertaken in
practice, it will defeat the whole purpose of this provision.
Contribution towards CSR policy
Sub-section 5 of Section 135 states that in pursuance of its CSR
Policy, the Board of every company, as referred to hereinabove
(company having a net worth equal to or more than Rs. 500 crore,
or a turnover equal to or more than Rs. 1000 crore, or a net profit
equal to or more than Rs. 5 crore during any financial year), is
required to ensure that in every financial year, the company is
spending at least 2% of the company’s average net profits made
during the past three financial years. Moreover, in case the
company has not completed three years since its incorporation,
the average will be taken out proportionately.
It also states that for spending such an amount as specified for the
CSR activities, preference shall be given by the company to the
local area(s) around it, where such company carries its operations.
Non-compliance of this provision
The provision further states that if the company fails in spending
such an amount towards the CSR activities as laid down by the
CSR policy, the company’s Board has to specify the reasons
therewith, in its report as mentioned under Section 134(3)(o).
Average net profit
Explanation attached to Section 135 of the Act states that the
“average net profit” of the company is to be calculated in
conformity to Section 198 of the Act. Section 198 provides that the
computation of a company’s net profits in a financial year must
conform to the following things:-
Sums to be credited
Firstly, credit must be given to the bounties and subsidies received
from the Central or State Government or any public authority
constituted or authorised by any government in this behalf, except
in cases where the Central Government directs otherwise.
Sums to not be credited
Section 198(3) provides that the following sums must not be
credited :

207
  Profits occurred by way of premium on the company’s shares
or debentures issued or sold;
 Profits on sale of forfeited shares of the company;
 Profits of capital nature which also includes profits from the
sale of the company’s undertaking(s);
 Profits from the sale of any immovable property or fixed
assets of a capital nature comprised in the company’s
undertaking(s), unless the company’s business, wholly or in
part, consists of buying and selling of such property/assets;
and
 Any change in the carrying amount of an asset or liability that
is recognised in the equity reserves, which also includes any
surplus in the ‘profit and loss account’ measuring such asset
or liability at a fair value.
Sums to be deducted
According to Section 198(4), following sums shall be deducted
while computing the net profit :
 All usual working charges;
 Remuneration of the directors;
 Bonus/commission paid or payable to any staff member, or
to any engineer, technician or a person employed by the
company on a whole/ part time basis;
 Any notified as a tax on excess or abnormal profits by the
Central Government;
 Any tax imposed on business profits for special reasons/in
special circumstances as notified by the Central
Government;
 Interest on debentures issued by the company;
 Interest on mortgages executed by the company and on loans
and advances secured by a charge on the fixed or floating
assets of the company;
 Interest on unsecured loans and advances of the company;
 Company’s expenses on the repair of immovable or to
movable property, provided that the repairs must not be of a
capital nature;
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  Outgoings including the contributions made under Section
181 (contribution to bona fide and charitable funds);
 Depreciation to the extent as specified in Section
123 (declaration of dividend);
 The excess of expenditure over the income, having arisen
while computing the net profits in compliance with this
provision in any year, to the extent that such excess amount
has not been deducted in any subsequent year preceding the
year for which the net profits have to be determined;
 Any damages or compensation to be paid in lieu of any legal
liability which also includes any liability arising from a
contractual breach, and any sum paid as insurance against
the risk of meeting any liability for it;
 Bad debts and debts written off or adjusted during the year
of accounting.
Sums that shall not be deducted
Sub-section 5 of Section 198 provides for the sums that shall not
be deducted:
 Income-tax and super-tax payable by the company under
the Income Tax Act, 1961, or any other tax on the company’s
income not falling under:-
o Any tax notified to be in the nature of a tax on excess or
abnormal profits by notification of the Central
Government ;
o Any tax imposed on business profits for special
reasons/in special circumstances as notified by the
Central Government;
 Any compensation, damages or payments made voluntarily,
i.e. except any damages or compensation to be paid in lieu of
any legal liability which also includes any liability arising
from a contractual breach, and any sum paid as insurance
against the risk of meeting any liability for it;
 Loss of a capital nature including loss on sale of the
undertaking(s) of the company, not including any excess of
the written-down value of any asset that is
sold/discarded/demolished/destroyed over its sale proceeds
or its scrap value;
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  Any change in carrying amount of an asset or a liability as
recognised in the equity reserves which also includes the
surplus in profit and loss account on measurement of such
asset or liability at fair value.
Schedule VII
This schedule mentions the activities that may be included by
companies in their corporate social responsibility policies. It states
that the activities may be relating to:
 Eradicating extreme hunger and poverty;
 Promotion of education;
 Promoting gender equality and women empowerment;
 Reducing child mortality and enhancing maternal health;
 Combating human immunodeficiency virus, acquired
immune deficiency syndrome (AIDS), malaria and other
diseases;
 Ensuring environmental sustainability;
 Employment improving vocational skills;
 Social business projects;
 Contribution to the PM’s National Relief Fund (PMNRF) or any
other fund set up by the Central or State Government for
socio-economic development and relief and funds for the
welfare of the SCs, the STs, OBCs, minorities and women;
and
 Any other prescribed matters.

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What is Article of Association (AOA).
An AOA is often compared to a rulebook of a company since it
regulates the internal management of a company while also giving
powers and obligations to its officers and employees. This includes
regulations for several details of the company and its workings,
such as rights of the shareholders, qualifications of directors,
binding effect of contracts, etc. Moreover, the Articles of
Association even establishes contracts between, firstly, members
of the company, and secondly, members and the company.
However, it must be noted that while the AOA establishes the
regulations of the company, it is still subordinate to the
Memorandum of Association (hereinafter also referred to as MOA).
MOA acts as a constitutional document of the company that
supersedes all other documents within the company. If the AOA
exceeds the scope laid down in the provisions of the MOA, then it
would be considered ultra vires, as laid down by the Calcutta High
Court in the landmark judgement of Shyam Chand v. Calcutta
Stock Exchange (1945). Thus, in the event of a conflict between the
two, the provisions laid down in the Memorandum of Association
would prevail. Further, in case of any uncertainty of such provision
in the MOA, it shall be read along with the AOA for a more
harmonious interpretation and understanding.
Under the Companies Act of 2013, Section 2(5) covers the
definition of Articles of Association. According to the aforesaid
Section, AOA or ‘Articles’ contain all the rules and regulations
framed by the Directors of the company to govern the internal
management and governance, which can also be altered from time
to time. In a nutshell, as mentioned earlier, it is a rulebook that
regulates the inner workings of the company while binding the
company to its workers and vice versa.
Difference between Memorandum of Association (MOA) and
Articles of Association (AOA)
The major differences between the Memorandum of Association
(MOA) and the AOA are given below:
Articles of
Basis of Memorandum of
S.No Association
Differentiation Association (MOA)
(AOA)

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 Lays down the
provisions for
Lays down the internal
fundamental regulations of the
On the basis of
1 principles upon company,
Content
which the company including the
is incorporated. rights and
obligations of its
members.

Acts as a rulebook
Acts as an that regulates the
informative relationship
document for the between the
2 Objective benefit and clarity company and its
of the public, the members, as well
creditors, and the as amongst the
shareholders. members
themselves.

Establishes the
Establishes the rules, regulations
scope beyond and by-laws based
3 Functions which the on which the
company’s conduct company
becomes void. conducts its
workings.

Lays down the Prescribes rules

scope or the and other details
4 Jurisdiction parameters within within the
which the AOA is to parameters set by
function. the MOA.

MOA has a very

rigid procedure for
alteration and can Can be altered in
only be altered in an easier manner
5 Alteration specific than MOA, by
circumstances. passing a special
Permission of the resolution.
Central
Government is also
212
 required in certain
cases.

AOA cannot
The MOA cannot be
include provisions
in contravention of
contrary to the
Position or the Companies Act.
6 MOA. It is
status It is only a
subsidiary to both
subsidiary of the
the Companies Act
Companies Act.
and the MOA.

Any conduct or
actions beyond the
Any conduct or
provisions of the
actions beyond the
AOA can be
scope of the MOA
ratified by the
Ratification will be
7 shareholders as
when breached considered ultra
long as such
vires and cannot be
conduct/action is
ratified even by the
not in
shareholders.
contravention of
the MOA.

Objective of Articles of Association (AOA)

While the Memorandum of Association contains the fundamental
elements based upon which the company is incorporated, the
Articles of Association acts as a complementary document to the
Memorandum that fulfils the following objectives:
 To act as a governing document that regulates the internal
affairs and operations of the company with the rules and
regulations framed in its articles;
 To provide clarity in regards to the procedures and rules that
the company must follow, which should also be accessible by
the shareholders of the company;
 To regulate the relationship between the company and its
members (shareholders, directors, employees, etc.) along
with the relationship among the members;

213
  To clarify the legal rights and obligations of the different
classes of shareholders as well as the directors and other
members;
 To cover any additional matters that the Company considers
necessary for its governance and management.
In simple terms, the Articles of Association play a vital role in the
workings of the company by ensuring that the internal affairs of
the company are being conducted lawfully. It further ensures that
the aforesaid affairs of the company align with the interests and
objectives of the business of the company.

A company has its registered office at Hubballi. Due to some

reasons company wishes to shift is registered office at New
Delhi. Advise the company.
Process to Shift Registered Office of company from one State
to other
Pursuant to the Section 13(4) of the Companies Act, 2013 the
alteration of the memorandum of association of the company
relating to the place of the registered office from one state to
another shall not have any effect unless it is approved by the
Central Government (nowadays powers are delegated to Regional
Directors) on an application in E-form INC-23 and manners as
prescribed under Rule 30 and Rule 31 of the Companies
(Incorporation) Rules, 2014.
The shifting of registered office shall not be allowed if any inquiry,
inspection or investigation has been initiated against the Company
or any prosecution is pending against the Company under the Act.

Meaning of Registered Office:

A company’s registered office is where any and all official
correspondence, including notices, reminders, and letters from
any and all government, non-government, or regulatory bodies,
will be sent. According to Section 7 of the Companies Act, 2013
(the “Act”), all registered companies are required to have a
registered office address in India from the start of business or
within fifteen days (as amended by the Companies Amendment
Act, 2017) of the date of incorporation, whichever comes first.
214
However, the proposed company is required to inform the address
of its proposed registered office at the time of incorporation itself
under the incorporation process that is in effect as of the date.
The majority of stakeholders usually live near a registered office.
Their convenience is the only reason for this. However, there are
times when this occurs, necessitating the relocation of the
registered office to a different location for improved company
management. The moving can be inside the neighborhood furthest
reaches of same city, outside as far as possible inside same city,
from locale of present ROC to ward of another ROC (in
Maharashtra and Tamilnadu1) and now and again, starting with
one state then onto the next.
Moving the Registered Office from One State to Another in
Compliance with the Companies Act of 2013 Section 13(4) of the
Companies Act of 2013 outlines the requirements for moving the
registered office from one state to another in detail in rule 30 of the
Companies (Incorporation) Rules of 2014. This procedure has been
explained in this article step by step to make it easy for readers to
understand.
Detailed Procedure For Shifting Of Registered Office Of A
Company Step By Step:
1. Call and Hold a Board Meeting:
To think about the proposition for moving of enlisted office.
Update the General Meeting’s date, time, and location.
Declare a general meeting and accept the notice of an
extraordinary general meeting.
Give the CS or Director permission to submit an application to the
RD to change Clause II of the Memorandum of Association, within
whose jurisdiction the company’s registered office is located (before
the change).
The Board will approved the Chief and the Secretary severally to
see that the assent of the Loan boss and debenture holders if any
and so on. is gotten or that adequate arrangements is made for the
release of their obligations or sufficient security is made area 13(5).
Give the Director or CS permission to move an application to the
CG for approval.

215
 1. In addition to the Explanatory Statement (Section-102), Proxy
Form, Route Map, and Attendance Slip, send a notice of the
general meeting to each member.
2. Call a General Meeting and pass a Special Resolution
authorizing the shifting with the RD’s approval.
D, make the General Meeting and Extraordinary General Meeting
minutes.
1. In the wake of taking the endorsement of the individuals,
record an ensured duplicate of the extraordinary goal
alongside the logical proclamation and modified duplicate of
MOA in the span of 30 days of passing of Unique Goal in
structure MGT-14 (Filling of Goal and consent to the
enlistment center under segment 117) with ROC.
Attachments: (Attachments of e-form MGT-14)
– Copy(s) of Special Resolution(s) along with copy of explanatory
statement under section 102.
– Altered Memorandum of Association [MOA].
– Minutes of EGM. – Shorter Notice consent if any.
1. Publication of Notice in News Paper:
Distribute a notice using Form No. INC.26, something like once
vernacular paper in the foremost vernacular language in the locale
in which the enrolled office of the organization is arranged, and no
less than once in English language in an English paper circling in
that region.
1. Prepare a list of CREDITORS and DEBENTURE HOLDERS
and intimate them accordingly.
The list needs to be attached to the application.
An affidavit should be used to properly verify the list.
The company’s Statutory Auditor should check the list.
The list shouldn’t be more than a month old when the petition was
filed (the list shouldn’t be older than one month after the petition
was filled out).

216
List Contain the Information:
The names and addresses of every company creditor and holder of
debentures;
The nature of their debts, claims, or liabilities, as well as the
amounts due to them for each:
AFFIDAVIT:
According to Rule 30 Sub Rule 2 of the Companies (Incorporation)
Rules, 2014 (Affidavit should be signed by the Company Secretary
of the Company, if any, and not less than two directors of the
Company, one of whom shall be managing Director, where there is
one, to the effect that they have made a full equity into the affairs
of the Company and, having done so, have formed an opinion that
the list of creditors is correct, that the estimated value as given in
the list of the debts.
1. Prepare List of Employees:
The Application on oath from the overseers of the organization that
no worker will be saved as a result of moving of the enlisted office
starting with one state then onto the next state.
a) Prepare List of ApAlong with the necessary documents, the
company will prepare the application for moving the
registered office.
b) Set up an Application in and all important annexure to be
loaded up with the Provincial Chief for looking for
endorsement for moving of the enrolled office starting with
one state then onto the next.
c) Request an acknowledgment for sending the notice by
sending a copy of the application and the complete annexure
to the Chief Secretary of the state in which the registered
office is located at the time of filing.
d) The petition and its attachment should be serially numbered,
and a scanned copy should be submitted to the Registrar of
Companies on Form GNL-2.
e) The First Application U/s 13(4) alongside all Fundamental
Annexure for looking for endorsement of the [1]Central
Government (Provincial Chief) for moving of Enlisted office
starting with one State then onto the next will be recorded in

217
 Structure INC-23 alongside the expense and the
accompanying archives:-plication:
f) An Affidavit Verifying the application (On Stamp Paper duly
notarized)
g) The List of Creditors and Debenture Holders entitled to object
to the application;
h) An Affidavit Verifying The List of Creditors; (On Stamp Paper
duly notarized)
i) The document relating to payment of application fee;
j) Copy of News Paper Advertisement.
k) Affidavit by Director verifying non-retrenchment of
employees
l) Affidavit verifying the Publication of News Paper Notice.
m) Memorandum of Appearance and Board resolution
authorizing company secretary / Chartered Accountant or
advocate
n) A copy of Board Resolution Or Power Of Attorney or the
executed Vakalatnama, as the case may be (in the favour of
Professional)
o) An Affidavit verifying the list of Employees.(On Stamp Paper
duly notarized)
p) Copy of the latest audited balance sheet and profit and loss
account of the company along with auditors’ and directors’
report.
q) Affidavit proving the dispatch and service of notice to the
Chief Secretary.
r) Board resolution authorizing the director to submit the
petition.
s) Form MGT-14 along with paid challan.
Further, Hard copy of the petition is to be submitted with
Concerned Regional Director Office.
AFFIDAVIT: An affidavit verifying the petition on a non judicial
stamp paper, which is notarized, shall be attached. Five affidavits
are to be given along with the petition.

218
 1. One affidavit is verifying the petition;
2. One affidavit is verifying publication of notice
iii. One affidavit verifying the creditors.’
1. One affidavit verifying the Non retrenchment of Employee
2. One Affidavit from Director in terms of rules
3. One Affidavit from Director that there is no enquiry,
inspection, investigation and prosecution is pending against
the Company
Where the Third, Forth & Fifth affidavit shall be given by two
directors of the company.
Petition should not be prepared in the letter head.
The hearing will take place at the Regional Director’s office after
the application and its attachments have been checked. The
company, a practicing professional, or an advocate should
represent the applicant. The banks, if any and the agents of the
organization may likewise address and are heard prior to making
any request.
Ability to Investigate: At the company’s registered office, a properly
authenticated copy of the creditors’ list is kept, and anyone who
wants to look at it can do so at any time during normal business
hours for a fee of not more than ten rupees per page to the
1. Response to any objections: Where any complaint of any
individual whose interest is probably going to be impacted by
the proposed application has been gotten by the candidate, it
will serve a duplicate thereof to the Focal Government at the
latest the date of hearing .Assuming that protest is gotten,
Focal Government will, prior to passing any request,
guarantee that the organization has either gotten assent of
the individual who had a problem with the change or his
obligation or guarantee has been released not entirely settled,
or has been gotten as per the general inclination of the Focal
Government.
(i) Within sixty days of filing the application, the Central
Government must hold a hearing or hearings as necessary and
direct the company to file an affidavit to record the consensus
reached at the hearing. Upon executing the affidavit, the Central
Government must issue an order approving the relocation.
219
(ii) where no agreement is reached at the hearings the organization
will document a sworn statement determining how protest is to be
settled inside a distinct time span, properly holding the first locale
to the dissenter for chasing after its lawful cures, even after the
enlisted office is moved, upon execution of which the Focal
Government will pass a request affirming or dismissing the change
in something like sixty days of the recording of utilization.
1. Where No Objection Is Received:
On the date of the hearing, the Central Government (Regional
Director) will confirm the change of registered office and submit an
application for the necessary orders if no one objects.
The application may be put up for orders without a hearing if no
objections have been raised in any way, such as in response to the
notice or advertisement, and the order approving or rejecting the
application must be issued within fifteen days of its receipt.
1. The Regional Director will make an order confirming the
alteration on such terms and conditions, if any, as it thinks
fit, and may make such order as to costs as it thinks proper:
2. Obtain certified copies of the order confirming the shifting of
registered office from one state to another, passed by the
Central Government,
3. File e-form INC-28 with ROC within 30 days of confirmation
of shifting by Central Government along with following
Documents:
4. Confirmation given by Central Government for change of
registered office.
5. File e-form INC-22 with ROC within 15 days of confirmation
of shifting by Central Government along with following
Documents:
6. Registered document of the title of the premises of the
registered office in the name of the company; or (b) Notarized
copy of lease / rent agreement in the name of the company
along with a copy of rent paid receipt not older than one
month;
7. Authorization from the owner or authorized occupant of the
premises along with proof of Ownership or occupancy

220
 authorization, to use the premises by the company as its
registered office.
8. Document of connection of any utility service like telephone,
gas, electricity, etc. depicting the address of the premises in
the name of the owner/document as the case may be which
is not older than 2 months.
9. The list of all other companies with their CIN, having the
same unit/tenement/premises as their registered office
address.
10. NOC from the owner of premises.
If the documents are in order, Registrars of both states will approve
the forms and registered office change will be updated in register
of Registrar and new Certificate of Incorporation will be issued by
the Registrar of the State within 30 days, where the company’s
registered office is going to be shifted.
STEPS AFTER OBTAINING NEW CERTIFICATE FROM ROC:
In each Memorandum copy, make changes to the MOA that relate
to the state.
every bill, invoice, banner, sign, and other piece of stationery ought
to show the new location and essential exhortation ought to be
shipped off investors, debenture holders, and other concerned
parties.
Letterheads, books, records, and other elements must be altered
as necessary. of the business. The fundamental changes are
expected to be made in Dish. TAN, ST2, etc., and notify all
departments of the government, banks, customers, and others
whenever necessary.
Tail Piece: Provided that the shifting of registered office shall not
be allowed if any inquiry, inspection or investigation has been
initiated against the company or any prosecution is pending
against the company under the Act
Proof of Registered Office Includes:
– Conveyance
– Lease Deed
– Rent Agreement (along with rent receipt not older than 1 (one)
month.
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Utility Bill:Depicting the address of the premises in the name of
the owner and documents
Should note be older than 2 (Two) months.
– Telephone Bill
– Gas Bill
– Electricity Bill etc
VERIFICATION OF REGISTERED OFFICE:
(Rule- 25 of the Companies (Incorporation) Rules, 2014
1. If Premises is on the name of company: The registered
document of the title of the premises of the registered office
“in the name of company”.
2. If Premises is not on the name of company, not on rent and
not on Lease: Than Authorization from the owner of the
premises + along with the proof of ownership and NOC in the
favour of Company for use of the premises by the company
as its registered office.
III. If premises is taken on Lease: The Notarized Copy of Lease deed
in the name of the company along with a copy of rent paid receipt
not older than one month.
1. If premises taken on Rent: The Notarized Copy of Rent
Agreement in the name of the company along with a copy of
rent paid receipt not older than one month.
[1] Power of Central Government has been delegated to Regional
Director.

'T' was the transferee of a share certificate issued under the

seal of 'C' company. The cerlificate was issued by the company
secretary, who had affixed the seal of the company and forged
their signature of two directors. What is the validity of that
share certificate? Decide.
Ans:
Share certificate is not binding on company as it contained forged
signatures. Thus no title could be transferred to A even if he is a
bona fide purchaser since as per the general rule forgery is nullity

222
(It means if any signatures are forged, it shall be taken as if no
signatures are there, thus no tile can be transfer to transferee).
This view was also held in the case of Rubben v Great Fingal
Consolidated. Hence B would not succeed in having the shares in
his name.
Transactions involving forgery are void ab initio (null and void)
since it is not the case of absence of free consent; it is a situation
of no consent at all. This has been established in the Ruben V
Great Fingall Consolidated case [1906] 1 AC 439. A person was
issued a share certificate with a common seal of the company. The
signature of two directors and the secretary was required for a
valid certificate. The secretary signed the certificate in his name
and also forged the signatures of the two directors. The holder
contented that he was not aware of the forgery, and he is not
required to look into it. The Court held that the company is not
liable for forgery done by its officers.

A chemical manufacturing company distributes 5 lakhs rupees

for the charity purposes to the scientific institutions. ls that
valid ? Advice him.
Ans:
Distribution of Rupees Five Lacs by a company engaged in
Chemical manufacturing is not 'Ultravires' since it was conducive
to the continued growth of the company as chemical
manufacturers (Evans vs Brunner, Mood & Co. Ltd.1921). In order
for a contract to be ultra vires, it would be essential to refer to its
objects clause. Restrictions of the type mentioned in the question
are not an item of the Objectives Clause. Hence, the issue of ultra
vires does not arise to such a donation.

'A' holds almost all shares except one in a Timber Company.

'A' insured the company's timber in his own name. Timber
having been destroyed by fire, he claims compensation from
the insurance company. Will he succeed? Decide.
Ans:
Macaura v. Northern Assurance Co. Ltd. (1925):

223
Mr. Macaura was the holder of nearly all the shares, except one, of
a timber company. He was also the substantial creditor. He
insured the company’s timber in his own name.
The timber was destroyed by fire. It was held that the insurance
company was not liable to compensate as Macaura had no
insurable interest in the property which belonged to the company
only.

Explain the fundamental clauses of Memorandum of

Association of a company.
Content of Memorandum of Association
1. Name Clause
2. Registered Office Clause
3. Object Clause
4. Liability Clause
5. Capital Clause
6. Subscription Clause
7. Association Clause

Name Clause
The first clause states the name of the company. Any name can be
chosen for the company. But there are certain conditions that need
to be complied with.
Section 4(1)(a) states:
If a company is a public company, then the word ‘Limited’ should
be there in the name. Example, “Robotics”, a public company, its
registered name will be “Robotics Limited”.
If a company is a private company, then ‘Private Limited’ should
be there in the name. “Secure”a private company, its registered
name will be “Secure Private Limited”.
This condition is not applicable to Section 8 companies.
Registered Office Clause
The Registered Office of a company determines its nationality and
jurisdiction of courts. It is a place of residence and is used for the
purpose of all communications with the company.

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Section 12 of the Companies Act, 2013 talks about Registered
Office of the company.
Before incorporation of the company, it is sufficient to mention
only the name of the state where the company is located. But after
incorporation, the company has to specify the exact location of the
registered office. The company has to then get the location verified
as well, within 30 days of incorporation.
It is mandatory for every company to fix its name and address of
its registered office on the outside of every office in which the
business of the company takes place. If the company is a one-
person company, then “One-person Company” should be written
in brackets below the affixed name of the company.
Change in place of Registered Office should be notified to the
Registrar within the prescribed time period.
Object Clause
Section 4(c) of the Act, details the object clause.The Object Clause
is the most important clause of Memorandum of Association. It
states the purpose for which the company is formed. The object
clause contains both, the main objects and matters which are
necessary for achieving the stated objects also known as incidental
or ancillary objects. The stated objects must be well defined and
lawful according to Section 6(b) of the Companies Act, 2013.
By limiting the scope of powers of the company. The object clause
provides protection to:
Shareholders – The object clause clearly states what operations
will the company perform. This helps the shareholders know their
investment in the company will be used for what purpose.
Creditors – It ensures the creditors that capital is not at risk and
the company is working within the limits as stated in the clause.
Public Interest – The object clause limits the number of matters
the company can deal with thus, prohibiting diversification of
activities of the company.
Liability Clause
The Liability Clause provides legal protection to the shareholders
by protecting them from being held personally liable for the loss of
the company.

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There are two kinds of limited liabilities:
Limited By Shares – Section 2(22) of the Companies Act, 2013
defines a company limited by shares. In a company limited by
shares, the shareholders only have to pay the price of the shares
they have subscribed to. If for some reason they have not paid the
full amount for the shares and the company winds up then their
liability will only be limited to the unpaid amount.
Limited By Guarantee – It is defined in Section 2(21) of the
Companies Act, 2013.A company limited by guarantee has
members instead of shareholders. These members undertake to
contribute to the assets of the company at the time of winding up.
The members give guarantee of a fixed amount that they will be
liable for.
Non-profit Organizations and other charities usually have a
structure of companies limited by guarantee.
Capital Clause
It states the total amount of share capital in the company and how
it is divided into shares. The way the amount of capital is divided
into what kind of shares. The shares can be equity shares or
preference shares.
Illustration: The share capital of the company is 80,00,000 rupees,
divided into 3000 shares of 4000 rupees each.
Subscription Clause
The Subscription Clause states who are signing the memorandum.
Each subscriber must state the number of shares he is subscribing
to. The subscribers have to sign the memorandum in the presence
of two witnesses. Each subscriber must subscribe to at least one
share.
Association Clause
In this clause, the subscribers to the memorandum make a
declaration that they want to associate themselves to the company
and form an association.
What’s the use of Memorandum of Association?
1. It defines the scope & powers of a company, beyond which
the company cannot operate.
2. It regulates company’s relation with the outside world.
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 3. It is used in the registration process, without it the company
cannot be incorporated.
4. It helps anyone who wants to enter into a contractual
relationship with the company to gain knowledge about the
company.
5. It is also called the charter of the Company, as it contains all
the details of the company, its members and their liabilities.
Subscription of Memorandum of Association
Subscribers are the first shareholders of the company. They are
the people who agreed to come together and form the company.
The name of each subscriber along with their particulars are
mentioned in the memorandum.
Different kinds of companies require different number of
subscribers for incorporation.
1. Private Company: In case of a private company, the minimum
number of subscribers required are 2.
2. Public Company: In case of a public company, 7 or more
subscribers are required.
3. One-Person-Company: In case of one-person-company, only
one person is required.
Who can Subscribe?
Rule 13 of the Companies (Incorporation) Rules, 2014 describes
the provisions of subscribing to the memorandum.
There are specific kinds of persons (natural or artificial) who can
subscribe to the memorandum. These are:
1. Individuals – An individual or a group of individuals can
subscribe to the memorandum.
2. Foreign citizens and Non Resident Indians – Rule 13(5) of the
Companies (Incorporation) Rules, states that for a foreign
citizen to subscribe to a company in India, his signature,
address and proof of identity will need to be notarized.
The foreign national must have visited India and should have a
Business Visa.

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For a Non Resident Indian, the photograph, address and identity
proof should be attested at the Embassy with a certified copy of a
passport. There is no requirement of Business Visa.
1. Minor – A minor can only be a subscriber through his
guardian.
2. Company incorporated under the Companies Act – The
company can be a subscriber to the memorandum. The
Director, officer or employee of the company or any other
person authorized by the board of resolution.
3. Company incorporated outside India – Foreign Company is
defined in Section 2(42) of the act, it states that a foreign
company is a company incorporated outside India. A
company registered outside India can also subscribe to the
memorandum by fulfilling the additional formalities.
4. Society registered under the Societies Registration Act, 1860.
5. Limited Liability Partnership – A partner of a limited liability
partnership can sign the memorandum with the agreement
of all the other partners.
6. Body corporate incorporated under an Act of Parliament or
State Legislature can also be a subscriber to the
memorandum.
Subscription to Memorandum of Association
Every subscriber should sign the memorandum in presence of at
least one witness. The following particulars of the witness should
also be mentioned.
1. Name of the witness
2. Address
3. Description
4. Occupation
If the signature is in any other language then, then an affidavit is
required that declares that the signature is the actual signature of
the person.
According to Circular No. 8/15/8, dated 1-9-1958. The subscriber
can also authorize another person to affix the signature by
granting a power of attorney to the person. Department Circular

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No. 1/95, dated 16th February 1995 states that only one power of
attorney is required.
The person who is granted the power of attorney may be known as
an agent.
He should also state the following particulars in the memorandum:
1. Name of the agent
2. Address
3. Description
4. Occupation
Particulars to be Mentioned in Memorandum of Association
Rule 16 of the Companies (Incorporation) Rules, 2014 details the
particulars that are to be mentioned in the memorandum.
Every Subscriber’s following details should be mentioned.
 Name (includes last name and family name), a photograph
should be affixed and scanned with the memorandum.
 Father’s Name and Mother’s Name
 Nationality
 Date of Birth
 Place of Birth
 Qualifications
 Occupation
 Permanent Account Number
 Permanent and Current Address
 Contact Number
 Fax Number (Optional)
 2 Identity Proofs in which Permanent Account Number is
mandatory.
 Residential Proof (not older than 2 months)
 Proof of nationality, if subscriber is a foreign national

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  If the subscriber is a current director or promoter, then his
designation along with Name and Company Identity Number
If a body corporate is subscribing to the memorandum then the
following particulars should be mentioned.
1. Corporate identity number of the company or registration
number of the body corporate.
2. Global location number, which is used to identify the location
of the legal entity. (Optional)
3. The name of the body corporate.
4. The registered address of the business.
5. Email address.
In case the body corporate is a company, then a certified copy of
Board resolution which authorizes the subscription to the
memorandum. The particulars required in this case are,
1. Number of shares to be subscribed by a body corporate.
2. Name, designation and address of the authorized person.
In case the body corporate is a limited liability partnership. The
particulars required are,
1. A certified copy of the resolution.
2. The number of shares that the firm is subscribing to.
3. The name of the authorized partner.
In case the body corporate is registered outside the country. The
particulars required are,
1. The copy of certificate of incorporation.
2. The address of the registered office.

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Certain directors held a meeting of the Board. But they
prevented some lawfully constituted directors from attending
the meeting. A quorum was however present. Whether the
Board meeting is valid ?
Ans: Board Meeting is valid…
Section 174. Quorum for meetings of Board
(1) The quorum for a meeting of the Board of Directors of
a company shall be one third of its total strength or two directors,
whichever is higher, and the participation of the directors by video
conferencing or by other audio visual means shall also be counted
for the purposes of quorum under this sub-section.
Provided that the quorum shall not be less than two members.
(2) The continuing directors may act notwithstanding any vacancy
in the Board; but, if and so long as their number is reduced below
the quorum fixed by the Act for a meeting of the Board, the
continuing directors or director may act for the purpose of
increasing the number of directors to that fixed for the quorum, or
of summoning a general meeting of the company and for no other
purpose.
(3) Where at any time the number of interested directors exceeds
or is equal to two thirds of the total strength of the Board of
Directors, the number of directors who are not interested directors
and present at the meeting, being not less than two, shall be the
quorum during such time.
Explanation.—For the purposes of this sub-section, “interested
director” means a director within the meaning of sub-section (2) of
section 184.
(4) Where a meeting of the Board could not be held for want of
quorum, then, unless the articles of the company otherwise
provide, the meeting shall automatically stand adjourned to the
same day at the same time and place in the next week or if that
day is a national holiday, till the next succeeding day, which is not
a national holiday, at the same time and place.

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Describe the general principles and statutory restrictions for
the allotment of share.
Nature of the shares under Company Law
According to Section 44 of the Companies Act, 2013, the shares of
a company are immovable property and, according to the articles
of the company, are transferable in the manner specified therein.
In the case of Vishwanath vs. East India Distilleries,(1956), the
Madras High Court stated that the nature of the share was
incorporeal and had a bundle of rights and obligations.
The Act states the principle by which shares, debentures, or any
other interest of any member of the company will be transferred
according to the discretion of the company through articles. This
section holds the obligation that by any means, a company will not
be held liable to set off any amount paid or payable on any shares
against any amount that is due to the company from the
shareholder. It also provides for the indemnity of the company
against any liability arising from the issue of shares or
debentures.
Notice of allotment of shares
An allotment is considered as a process of accepting an offer of
shares by an applicant that needs to be communicated. The notice
of allotment of shares is a formal communication given by a
company to all shareholders who allocate the shares through the
process of allotment. In this step, no binding contract is made
except that the acceptance is made by a communication. Therefore
the notice must be given to the allottee for the allotment. The main
reason for giving this notice is to inform shareholders about the
allotment and their allotted shares. After the allotment letter is
given, it is addressed and stamped. A contract will arise even if the
letter of allotment is delayed or gets lost and delayed during
transit. The letter of allotment contains details such as the number
of shares applied, the recipient details, the number of shares that
need to be allotted, the price of shares allotted, the money that
needs to be paid within a specified time to the bankers’ company
unless any partial allotment is made and allotment is suitable out
of the excess application money. The notice will also include the
time when they will receive the share certificate, the rights and any
obligation linked with allotted shares, the legal notice and
disclosures required by specified laws and, the notice needs to be
sealed by an authorised officer of the company.
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Modes of allotment of shares under Company Law
Allotment of Shares is the relevance of certain shares to an
application and giving the shares to the shareholders who have
submitted the relevant application. It is governed by the
Companies Act, 2013 with relevant acts and regulations providing
certain guidelines for the mode of allotment. The mode of allotment
also varies depending upon the various circumstances such as the
need for any rules and regulations in a company to maintain
capital investment, the demands of market conditions and the
preferences of the company’s management and shareholders.
The mode of allotment of shares states the method by which shares
are allocated to investors by a company. The allotment of shares is
done by the types of the company through various means such as
 A public company allot shares to the public by public offer
through private placement and through the right issue or a
bonus issue.
 A private company issues the shares by right issue or a bonus
issue and also through private placement or preferential
placement.
Private placement
In the process of private placement, shares are allotted in the
process of offering shares to certain investor groups. The investors
who participate in the giving prospectus are mainly institutional
investors; individuals with high net worth, accredited investors,
and well-known venture capital firms identified by the company.
In the private sector, there is less public involvement and public
offering rather the company uses the process of raising capital
without getting into complexities and more cost which can be an
issue involving the public.
Initial Public Offering
In the process of Initial Public Offering (IPO), a company tries to
offer the shares to the general public. The process happens when
a private company gives shares in the stock exchange by which the
interested investors apply for the shares through the process of
application and then allotted shares are given based on certain
conditions such as available market price, rising demand and also
by following the regulatory compliance and scrutiny of the
company.
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Right issue
In this case of right issue, the existing shareholders are given the
right to purchase any additional shares comparable to the current
market price or to their existing shareholding. This process is
followed by the company to raise the capital from the existing
shareholdings, giving them an opportunity to work through the
new shares at a certain price, as discussed. The right issue allows
companies to raise capital from existing shareholder bases and
allow them to maintain proportional ownership.
Preferential allotment
Preferential allotment is a process where shares are allotted to
specific investors such as promoters, directors, strategic investors,
and institutional investors on a preferential basis with a certain
price. This method is followed to raise the capital in a faster way
so that more strategic investors can show interest in joining, which
will bring great value to the business with a critical shareholder.
Secondary offering
A secondary offering is a process when a company is listed in the
public and issues more shares additionally to raise more capital.
The purpose lies in expansion, corporate purpose, or repaying
debt. It can also dilute other existing shareholders present.
Procedure for allotment of shares under Company Law
In the process of business and corporate finance, shares play an
important part. In raising the money or distributing the ownership,
the most important thing is to allot the shares. To allot this, there
are a few procedures that are required to be followed such as:
 Details of the shareholders and shareholdings: The first
and foremost step is to confirm the total number of existing
shareholdings and the details of how many shares must be
introduced. The final structure of shareholding to
shareholders. Details of new shareholders such as their
name, date of birth, nationality, residential address, ID proof,
and relationship with other shareholders.
 Appointment of the allotment committee: After the final
structure of shareholding and the shareholders is completed
the secretary informs the Board of Directors to make the final
statement for allotment of shares. The allotment committee
consists of the board and the secretary. The committee
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 regulates the reason for the allotment and submits the report
to the Board. Once the final preparation is completed the
formula is made for allotment of shares.
 Conduct of Board meeting: A board agreement is essential
for allotting shares. The secretary, after confirming the list of
shareholders, all the shareholdings, and the new structure of
shares that is to be distributed, makes the necessary
arrangements for the board meeting. The board meeting,
which has to be confidential, includes all the new structure
of shares, and how it will be distributed, detailed information
about shareholders and the application, and allotment lists
that are made. This list should contain the allottee’s names
and also it must be signed by the chairman and secretary.
 Passing Resolution for allotment to the Board: The board
takes the decision regarding the allotment of shares, and
hence the board meeting is conducted with regard to it. A
resolution is passed in the board meeting which authorises
the secretary to issue the letters of allotment.
 Collection of allotment money: The allotment letter states
the amount that needs to be paid by the applicant on the
allocation of shares. The secretary should make the
necessary arrangements with the company’s bank within a
stipulated period for collecting the allotment money. The
money must also be paid within the given period in the bank.
 Issue new share certificates and prepare the register of
members: The new share certificate needs to be shared in the
companies, especially with the shareholders, with the details
of the new structure of shares within the two months of
allotment of shares. All previously issued share certificates
will remain cancelled once the new certificate is provided. The
secretary prepares the register of members according to the
allotment lists and updates all the members who have paid
the amount for the allotment of shares.
Difference between allotment of shares and issue of shares
 The allotment of shares means the allocation of authorised
shares of stock to investors in a company. The issuing of
shares is a way of distributing the shares to potential
shareholders by offering ownership.

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  The parties and the method used for share allotment will be
according to the prior issue of shares. Also, the issue of share
will be based on the criteria of allotment.
 The allocation of shares is completed once the shares have
been applied for. The issue of shares is complete through the
process of offering shares for sale or by subscription.
 The board of directors in the company decides how many
shares need to be allotted to all shareholders. The
management gives the final say in the terms and conditions
that are followed in offering shares.
 The allocation of shares is followed by the number of
applications received. The issue of shares is done by the
process of making shares available to the market where the
purchaser is required to purchase.
How are shares allocated during an IPO
Hearing the news of IPO launches by renowned companies,
investors usually get excited. IPOs are an important financial tool
for raising funds from the public for some companies that require
them. It is raised by companies when they feel confident about
their future performances.
From time to time, companies’ IPOs are announced among the
public and investors who are waiting for this opportunity.
Companies, by issuing public share ownership, raise capital from
the public through IPO. Although there are various risks
associated with announcing an IPO, only when the company feels
that it has reached a certain maturity stage, where it can benefit
the targeted public, does it announce an IPO.
The number of IPO defaults on a yearly basis depends entirely on
the economy. For example, during the 2008 financial crisis, the
IPO market was destroyed completely.
Although the company announces an IPO to the public at large, it
does not mean that everyone is qualified to receive an IPO. Only on
the basis of the share volume of each investor does the company
offer an IPO. The Securities and Exchange Board of India
(SEBI) governs the rules of allotment of shares.
Provisions of the Companies Act relating to the issue and allotment
of shares [Section 39]
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Section 39 of the Companies Act, 2013 ensures that during the
process of issuing and alloting shares transparency and fairness
are maintained. This provides a clear process of allotment and
fundraising. Ensuring timely payments and imposing penalties on
those who do not abide by the rules and regulations of the
company. To uphold the principles of the company and the
integrity of the capital market. These provisions ensure that a
minimum subscription is required to allot shares. The application
money should be payable on the basis of the nominal value
provided by the company. To allot shares within a time frame and
also file returns within the specified time period. Also, the
Securities and Exchange Board of India(SEBI) and Registrar of
Companies(Roc) needs to ensure that companies follow the
guidelines provided by them. Some of the important points as per
the aforementioned provision is mentioned as under;
 A public company should file a prospectus or declaration in
lieu of a prospectus inviting the public offers for the purchase
of shares.
 After reading the prospectus, the public applies for company
shares in printed forms. The company can ask the issue price
to be paid in full, together with the application money, or to
be paid in instalments as share application money, share first
call, second call, etc. The application money must be paid at
least five per cent of the nominal value of the share. [Section
39(2)]
 The allotment of shares cannot be made unless the minimum
amount which is the minimum subscription stated in the
prospectus, is subscribed or applied. The minimum
subscription should be mentioned in the prospectus. [Section
39(1)]
 The company must return and refund the entire subscription
amount instantly if within 30 days the total sum is not
received from the date of issue of the prospectus or such
other date specified by the Securities Exchange Board.
[Section 39(4)]
After allotment of shares, the company can call for the full amount
or instalments which are due on shares from the shareholders
according to the rules mentioned in the prospectus. Usually, the
articles of the company include provisions regarding calls of the

237
total amount of due shares is required to be distributed. If there
are no such provisions, then these provisions are applicable:
1. No call should be made for more than 25% of the nominal
value of each share.
2. The interval between two calls should not be less than one
month.
3. At least 14 days should be provided to each member for the
call, mentioning the amount, date, and place of payment.
4. Calls should be made on a uniform basis to the entire body
of shareholders falling under the same class.
Rules of allotment of share
The general procedure that is accepted in the law of contract also
applies to the allotment of shares. These are:
 The resolution of the board of directors must be done prior to
allotment. The directors cannot be delegated this duty, and it
becomes very important that a valid resolution is passed by
the board for allotment in a valid meeting.
 According to Section 6 of the Indian Contract Act, 1872, it is
important that the allotment of shares is done within a
reasonable period of time, but this reasonable time varies
from case to case. The refusal to accept the shares by the
applicant is the choice if the allotment is made after a very
long time to him. The same thing happened in the case
of Ramsgate Victoria Hotel Company vs. Montefiore
(1866), wherein the allotment of the share was made at an
interval of six months between application and allotment,
and it was held unreasonable.
 Moreover, the allotment must be unconditional and absolute
and must be allotted on the same terms upon which they
were agreed upon during the acceptance of the application.
 Acceptance is the key to allotment and without acceptance of
valid allotment cannot be made just on an oral request.
Statutory restrictions on the allotment of shares
Minimum subscription and application money[Section 39(4)]
The first essential requirement for a valid allotment is that of
minimum subscription. The amount of the minimum subscription
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has to be declared in the prospectus at the time when shares are
offered to the public. Shares cannot be allotted unless at least so
many amounts have been subscribed and the application money,
which must not be less than 5% SEBI may decide the various
percentages of the nominal value of the share, has been received
by cheque or other instruments. It has been established by various
cases that it is a criterion to valid allotment that the entire
application money should be paid to and received by the company
by cheque or other instruments. If the shares allotments are made
without application money being paid, it is invalid. If the minimum
subscription has not been received within thirty days of the issue
of the prospectus, or any such period as specified by SEBI, the
amount has to be returned within such time and manner as
prescribed. Application money can be appropriated towards
allotment, or it has to be returned or refunded. [Section 39(4)]
 Return of allotment [Section 39(4)] – A return of allotment has
to be filed with the registrar in the prescribed manner
whenever a company makes an allotment of shares having a
share capital.
 Penalty for default [Section 39 (5)] – In case of default, the
company and its officer who is in default are liable to a
penalty for each default of Rs 1000 for each day during which
the default continues or Rs 1,00,000 whichever is less.
Shares to be dealt in on the stock exchange [Section 40]
Every company, aiming to offer shares or debentures to the public
by the issue of the prospectus, has to make an application before
the issue of shares to anyone. Also, before accepting the stock
exchange permission for the shares or debentures need to be dealt
with during the exchange. The need is not merely to apply, but also
to obtain permission. In the prospectus, the name or names of the
stock exchanges to which the application is made must be stated.
The aforementioned requirement is precedent for listing the shares
and the application money needs to be deposited in a separate
bank account before that which will be used only for adjustment
against the allotment of shares. And in case the shares need
permission to be dealt with in the specified manner in the
prospectus. Hence, the money will be used for the repayment to
applicants within the time specified by SEBI, if the company has
not been able to allot shares for any other reasons. [Section 40
(3)].
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The object of this section is that it will help shareholders to find a
ready market so that they can convert their investments into cash
whenever they like. In the Supreme Court case of Union of India
vs. Allied International Products Ltd,(1970), this objective of the
Section was explained.
Over-subscribed prospectus
In cases when stock exchanges give permission, the allotment is
valid and the given prospectus gets oversubscribed, in such case
the portion which is oversubscribed and the money which is
received will be returned to the applicants within the given period
of time
Effect of Irregular Allotment
An allotment can be considered irregular if any allotment is made
without complying with any conditions prescribed to regular
allotment as contained under Section 39 of the Companies Act,
2013. The allotment can be considered irregular in certain cases,
as mentioned below:
1. In a case in which allotment is made before gaining the
minimum subscription or before gaining the money, which is
subject to a minimum of five per cent of the nominal value of
the share, or without having filed a declaration or statement.
2. In lieu of declaration with the Registrar of Companies, the
allotment will be considered void at the point of the allottee’s
or applicant’s submission.
3. If the process of allotment is defective, for the reason that it
was allotted before the expiry of the 5th day or after the
publication of the declaration issued, the allotment shall
remain valid, but the officers will be in default and will be
liable to a fine.
4. The allotment will be considered defective if no permission is
obtained from the Stock Exchange by making any application
and if the application was made but the Stock Exchange has
not agreed to list the shares, then in such cases the allotment
will remain void.
Return of allotment to be filed with the Register
Once the process of allotment of shares has been completed by the
company, a return of allotment is required to be filed with the
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Registrar of Companies, by filing Form No. 2 within 30 days of the
allotment. The Return should include specific details, such as
In case of shares are allotted for cash:
1. Total number of shares allotted.
2. Name, address and occupation of all allottees.
3. The total amount paid or payable on each share.
In the case of shares, other than bonus shares, are allotted as fully
or partly paid up, consideration for allotment of shares is paid by
property, goods or services; in such case, the return must include:
1. A contract which is a written format includes the title of the
allottee to the shares.
2. Contract of sale or any other services and consideration for
which the allotment was initiated.
3. A return includes numbers and shares that are allotments
paid up and the consideration for which they were allotted.
Where a company puts forward to issue bonus shares by
capitalising undistributed profits or free reserves, it must take
permission from the Controller of Capital Issues before making
that allotment and, after the allotment, prepare a return of
allotment in the prescribed Form 2 and file it with the Registrar of
Companies together with the filing fee and with a copy to be
submitted of the resolution authorising the issue of such shares.
If shares are issued at a discount, the Return in Form 2 with a
copy of the resolution authorising the share issued and the order
of the Tribunal authorising the issue must be filed with the
Registrar. In the case of re-issuance of forfeited shares, no return
is needed to be filed so that allotment is not performed.
Reference case and other important case laws
The term allotment has not been defined in the Companies Act,
2013. The meaning can be interpreted from various cases that
were decided in India, some of the cases are:
Shri Gopal Jalan and Company vs. Calcutta Stock Exchange
Association Limited (1963)
Facts

241
In this case, Shri Gopal Jalan and Company v Calcutta Stock
Exchange Association Limited, (1963), the Calcutta Stock
Exchange Association Ltd issued capital of 277 fully paid shares
of Rs 1000 each. 70 shares were forfeited by the Calcutta Stock
Exchange Association, and those forfeited shares were reissued
later on.
Under Section 75(39) of the Companies Act, 1956, the Calcutta
Stock Exchange Association did not file the return for such
forfeited shares that were re-issued. This made Shri Gopal Jalan
& Company approach the court requesting an order stating that
the Calcutta Stock Exchange Association needs to file the return
of the allotment with regard to the re-allotted shares.

Due to Covid - 19 Lockdown and subsequen.t developments 'A

‘company suspends its business for more than one year. A
shareholder in that company submits an application to the
court for its winding up. Will he succeed?
a shareholder can put a company into liquidation and in the case
of voluntary liquidation processes, shareholders have to pass an
ordinary or special resolution in order for the liquidation process
to start. The shareholders then have to appoint a liquidator to
liquidate the company.

X' has subscribed the MOA of a Company of 100 shares the

company was duly registered but ultimately took 10 shares
the company was bound up what is the extent of X liability
X's liability in this scenario depends on the type of shares
subscribed and the company's legal structure. If X subscribed to
100 shares but ultimately only took 10 shares, their liability will
typically be limited to the amount unpaid on the 10 shares they
took.
In the case of a company limited by shares, X's liability would be
limited to the unpaid amount on the 10 shares. However, if the
company is a company limited by guarantee, X's liability would
depend on the guarantee provided at the time of subscription.

242
It's important to consider the specific legal provisions and the
company's articles of association to determine the exact extent of
X's liability in this situation.

"Company is having an independent corporate existence".

Explain it with case law.
Once a Company is incorporated under the Law, it is said to have
an independent Corporate Existence. What is the meaning of this
phrase Independent Corporate Existence of a Company.
The phrase Independent Corporate Existence of the Company
means that the Company will have a distinct legal identity from
that of its shareholders. It will not be having the same identity as
that of its shareholders and a new body in law in the eyes of law is
created. A company, once incorporated, is not like a partnership
firm wherein the partnership firm is not separate from its
members. A company on the other hand is having a distinct
legal persona that is existing independent of its members. With
other kinds of enterprises like Partnership firm and Proprietorship
firm, the entity isn’t a different person in the eyes of law and the
partners / members of such entity are the entity and they are not
separate and different from the entity. Whereas, the same is not
the case with a Company.
Corporate Personality is the creation of law. Legal personality of
corporation is recognized both in English and Indian law. A
corporation is an artificial person enjoying in law capacity to have
rights and duties and holding property.

A corporation is distinguished by reference to different kinds of

things which the law selects for personification. The individuals
forming the corpus of corporation are called its members. The
juristic personality of corporations pre-supposes the existence of
three conditions :
(1) There must be a group or body of human beings associated for
a certain purpose.
(2) There must be organs through which the corporation functions,
and

243
(3) The corporation is attributed will by legal fiction. A corporation
is distinct from its individual members[1].
It has the legal personality of its own and it can sue and can be
sued in its own name. It does not come to end with the death of its
individual members and therefore, has a perpetual existence.
However, unlike natural persons, a corporation can act only
through its agents. Law provides procedure for winding up of a
corporate body[2]. Besides, corporations the banks, railways,
universities, colleges, church, temple, hospitals etc. are also
conferred legal personality. Union of India and States are also
recognized as legal or juristic persons [3].

In certain cases, the corpus of the legal person shall be some fund
or estate which reserved certain special uses. For instance, a trust
– estate or the estate of an insolvent, a charitable fund etc..; are
included within the term ‘legal personality’.

Corporations are of two kinds :

1. Corporation Aggregate : Is an association of human beings
united for the purpose of forwarding their certain interest. A
limited Company is one of the best example. Such a company is
formed by a number of persons who as shareholders of the
company contribute or promise to contribute to the capital of the
company for the furtherance of a common object. Their liability is
limited to the extent of their share-holding in the company. A
limited liability company is thus formed by the personification of
the shareholders. The property is not that of the shareholders but
its own property and its assets and liabilities are different from
that of its members. The shareholders have a right to receive
dividends from the profits of the company but not the property of
the company[4]. The principle of corporate personality of a
company was recognized in the case of Saloman v. Saloman &
Co[5].

2. Corporation Sole : Is an incorporated series of successive

persons. It consists of a single person who is personified and
regarded by law as a legal person. In other words, a single person,
who is in exercise of some office or function, deals in legal capacity

244
and has legal rights and duties. A corporation sole is perpetual.
Post – Master- General, Public Trustee, Comptroller and auditor
general of India, the Crown in England etc are some examples of a
corporation sole. Generally, corporation sole are the holders of a
public office which are recognized by law as a corporation.. The
chief characteristic of a corporation sole is its “continuous entity
endowed with a capacity for endless duration”. A corporation sole
is an illustration of double capacity. The object of a corporation
sole is similar to that of a corporation aggregate. In it a single
person holding a public office holds the office in a series of
succession, meaning thereby that with his death , his property ,
right and liabilities etc., do not extinguish but they are vested in
the person who succeeds him.
Thus on the death of a corporation sole, his natural personality is
destroyed, but legal personality continues to be represented by the
successive person. In consequence , the death of a corporation sole
does not adversely affect the interests of the public in general.
As soon as company has been incorporated under the act, a
company is vested with a corporate personality, which is different
from that of its members who are a part of it. Such incorporated
companies are independent of its members and have a perpetual
succession and a common seal. All the members who have so
become a part of the Company and have signed its Memorandum
of Association are a part of the Body Corporate that has been
defined under the Act. Once a Company has been incorporated it
can start doing business in its own name and does not need to be
dependent on the member / shareholder of the company. It can
take its own decisions and each and every asset or liability will be
that of a company. Whatever is purchased by the Company, will
remain of the Company and so is with the liabilities of the
Company. Having that said, a Company will not cease to exist like
a partnership firm or a proprietorship concern with the death of
one of its member / sole proprietor. It will continue until and
unless it is liquidated under the law. This is one of the most basic
reason for forming a company. A shareholder of a company is not
personally liable for any of the liabilities of the Company, even
though he may be the majority shareholder of such Company. The
liabilities are of the Company itself and have to be paid off by the
245
Company itself. Incorporation of a Company can be correlated to
the birth of a human being as a New Legal Person is born.
The House of Lords in the case of Salomon v. Salomon & Co.
Ltd., 1897 AC 22: (1895-99) All ER Rep 33 (HL), had decided a law
point regarding the Independent Corporate Existence of a
Company and the separate entity principle before them. Mr.
Salomon was a boot and shoe manufacturer. He had incorporated
a Company having his family members as the only shareholders.
As payment for transfer of the business, he took the maximum
number of shares for himself and gave one each to his family
members and also took debentures from the Company. The
Company soon went into liquidation after which the Company’s
unsecured creditors approached the Court claiming that although
the Company was incorporated under the Act, it was nothing but
Mr. Salomon itself running the business in a different name.
They contended that the majority shareholder of the Company was
Mr. Salomon and the rest of the shareholders were his family
members. Therefore, the Company does not have any independent
legal existence in the eyes of law.
Negativizing their contention, the House of Lords observed that the
Company was incorporated under the law and therefore had a
different legal existence and was a different legal person. The court
observed,
“When the memorandum is duly signed and registered, though there
be only seven shares taken, the subscribers are a body corporate
capable forthwith of exercising all the functions of an incorporated
company. It is difficult to understand how a body corporate thus
created by statute can lose its individuality by issuing the bulk of
its capital to one person. The company is at law a different person
altogether from its subscribers of the memorandum; and though it
may be that after incorporation the business is precisely the same
as before the same persons are managers, and the same hands
receive the profits, the company is not in law their agent or trustee.
The statute enacts nothing as to the extent or degree of interest
which may be held by each of the seven, or as to the proportion of
interest or influence possessed by one or majority of the
shareholders over others. There is nothing in the Act requiring that
the subscribers to the memorandum should be independent or
246
unconnected, or that they or any of them should take a substantial
interest in the undertaking, or that they should have a mind or will
of their own, or that there should be anything like a balance of power
in the constitution of the Company.”
A similar case (Kondoli Tea Co. Ltd., re, ILR (1886) 13 Cal 43,
was before the Calcutta High Court wherein a few persons had
transferred their tea estates to a company that they had
incorporated and claimed exemption from the taxes for such
transfer as they claimed to be the shareholders of the company.
The High Court observed that the Company was a separate person
and a distinct legal entity different from the persons who had
transferred the land and accordingly the Hon’ble High Court held
that they were bound to pay the taxes on such transfer as it would
be considered that the lands have been transferred from one
person to a different person.
Therefore, once a Company is incorporated under the law, as per
Section 9 of the Companies Act, 2013, the Company becomes a
seperate legal entity and has an Independent Corporate Existence
that is not dependent on its members and is different from that of
its members.
The Hon’ble Supreme Court of India (in the case of Vodafone
International Holdings NB v. Union of India, (2012) 6 SCC 613)
has traced the foundation of the concept of separate entity
principle from the legal fiction propounded by Pope Innocent IV
wherein he had said that corporate bodies could not be
excommunicated because they existed only in abstract.

247
 If someone says it is impossible, it is their limitation not yours

Leading Cases on Company Law

As the trend of asking questions have been changed by ICAI, I thought this might
be useful. I compiled these decided case laws from various sources like RTP,
study module, compilation of suggested answers. I am laying down only those
which I feel important from examination point of view. These caselaws make the
concept even clearer because example is a better teacher.

Cases on separate legal entity

Kandoli tea company Ltd(1886)
Facts – Certain persons transferred their properties in the name of company on
which tax was payable.
Petition – Petitioners claimed exemption from such tax on the ground that the
transfer was from them individually to themselves in another name.
Judgment – Company is separate from its shareholders and this should be
treated as transfer.

Saloman Vs. Saloman & Co. Ltd. (1895 - 99)

Facts - Saloman sold his business to a company named Saloman & Company
Ltd., which he formed. Saloman took 20,000 shares. The price paid
by the company to Saloman was £ 30,000, but instead of paying him, cash, the
company gave him 20,000 fully paid shares of £ 1 each & £ 10,000
in debentures. The company wound up & the assets of the company amounted
to £ 6,000 only. Debts amounted to £ 10,000 due to Saloman &
Secured by debentures and a further £ 7,000 due to unsecured creditors. The
unsecured creditors claimed that as Saloman & Co. Ltd., was really the
same person as Saloman, he could not owe money to himself and that they
should be paid their £ 7,000 first.
Judgment-
1. A Company is a "legal person" or "legal entity" separate from and capable of
surviving beyond the lives of, its members.
2. The company is not in law the agent of the subscribers or Trustee for them.
3. Saloman was entitled to £ 6,000 as the company was an entirely separate
person from Saloman.
4. The unsecured creditors got nothing.

Lee Vs. Lee's Farming Co. Ltd. (1960)

Facts - Lee incorporated a company of which he was the managing director. In
that capacity he appointed himself as a pilot of the company. While
on the business of the company he was lost in a flying accident. His widow
claimed compensation for personal injuries to her husband while in the
course of his employment. It was argued that no compensation was due because
L & lee's Air Farming Ltd. were the same person.
Judgment-

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1. L was separate person from the company he formed and compensation was
payable.
2. His widow recovered compensation under the Workmen's Compensation Act
3. A member of a company can contract with a company of which he is a
shareholder.
4. The directors are not precluded from being an employee of the company for
the purpose of workmen's compensation
legislation.

MacauraVs. Northern Assurance Co. Ltd. (1925)

Facts - M was the holder of nearly all the shares except one of a timber
company. He was also a substantial creditor of the
company. He insured the company's timber in his own name. The timber was
destroyed by fire & M claimed the loss from Insurance
Company.
Judgment-
1. The Insurance Company was not held liable to him.
2. A shareholder cannot insure the company's property in his own name even if
he is the owner of all or most of the company's
shares.

Lifting of corporate veil

Gol ford Motor Co. Vs. Home (1933)
Facts - Home was appointed as a managing director of the plaintiff company on
the condition that "he shall not at any time while he shall hold the office
of a managing director or afterwards, solicit or entice away the customers of the
company." His employment was determined under an agreement.
Shortly afterwards he opened a business in the name of a company which
solicited the plaintiffs customers.
Judgment-It was held that the company was a mere cloack or shaw for the
purpose of enabling the defendant to commit a breach of his covenant
against solicitation. The court will refuse to uphold the separate existence of the
company where it is formed for a fraudulent purpose or to avoid
legal obligations.

Daimler Co. Ltd. Vs. Continental Tyre & Rubber Co. Ltd. (1916)
Facts - In a company incorporated in England for the purpose of selling tyres
manufactured in Germany by a German Company, all
the shares except one was held by the German subjects residing in Germany.
The remaining one was held by a British. Thus the
real control of English Company was in German hands. Question arose whether
the company had become an enemy company due to
war & should be barred from maintaining the action.
Judgment-

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1. A Company incorporated in United Kingdom is a legal entity, a creation of law

with the status & capacity which the law confers.
2. It is not a natural person with mind or conscience. It can neither be loyal nor
disloyal. It can be neither friend nor enemy. But it can
assume enemy character when persons in defacto control of its affairs are
residents in any enemy country or whenever resident, are
acting under the control of enemies.
3. Held that company was an enemy company for the purpose of trading and
therefore it was, barred from maintaining the action.

Workmen employed in associated rubber industries

Facts – A subsidiary company was formed wholly by the holding company with
no assets of its own except those transferred to it by the holding company, with
no business or income of its own except receiving dividend from shares
transferred to it by the holding company.
Judgment – Court held that the new company was formed as a devide to reduce
the profitsof the holding company and thereby reduce the bonus to workmen.

F.G.Films Ltd., case

Facts – An American company produced a film in India actually in the name of
British company wherein 90% of the share capital was held by the chairman of
the American company which financed the production of the film.
Judgement – The contention of the sensor board of films refusing to register the
film on the ground that British company has acted merely as an agent of British
company was correct.

COI is conclusive evidence that all the requirements have been

complied with
Moosa Goola Arif Vs Ibrahim Goola Arif
Facts – Company registered on the basis of MOA&AOA signed by two persons
and a guardian on behalf of 5 minor members. Guardian signed separately for
each of 5 memebers. The ROC however registered the company and issued
under his hand a certificate of incorporation.
Petition – Plaintiff contended that COI should be declared as void.
Judgment – The court held the certificate to be conclusive for all purposes.

Jubilee Cotton Mills Ltd.,

Facts – The ROC issued a COI on Jan 8th but dated it Jan 6th which was the date
he received application. On Jan 6th the company made an allotment of shares to
Lewis
Judgment – Court held that certificate was conclusive evidence of incorporation
on Jan 6th and that the allotment was not void on the ground that it was made
before the company was incorporated.

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Decided case on objects clause of MOA

Crowns bank case

Facts – A company’s objects clause enabled it to act as a bank and further to
invest in securities and to underwrite issue of securities. The company
abandoned its banking business and confined itself to investment activities.
Judgment – Court held that the company was not entitled to do.

Doctrine of ultravires

Ashbury railways carriage & Iron Co Ltd Vs Riche

Facts – A railway company was formed with an object of selling railway wagons.
The directors entered into a contract with Richie to finance the construction of
railway line. The shareholders later rejected the contract as ultravires.
Judgment – The court held that the contract was ultravires and therefore null and
void.

Doctrine of indoor management / Turquand rule

Royal British Bank Vs. Turquand (1856)

Facts - The Directors of a company borrowed a sum of money from the plaintiff.
The company's articles provided that the directors might borrow on
bonds such sums as may from time to time be authorised by a resolution passed
at a general meeting of the company. The shareholders claimed
that there had been no such resolution authorising the loan and, therefore, it was
taken without their authority. The company was however held bound
by the loan. Once it was found that the directors could borrow subject to a
resolution, the plaintiff had a right to infer that the necessary resolution
must have been passed.
Judgment-
1. Persons dealing with the company are bound to read the registered
documents and to see that the proposed dealing is not
inconsistent therewith.
2. Outsiders are bound to know the external position of the company, but are not
bound to know its indoor management.
3. Company may ratify the ultra vires borrowing by the directors if it is taken
bonafide for the benefit of the company.

Exception to Turquand rule

Ruben Vs. Great Fingall Consolidated (1906)

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Facts - The plaintiff was the transferee of a share certificate issued under the
seal of a defendant company. The certificate was issued
by the company's secretary, who had affixed the seal of the company & forged
the signatures of two directors.
Judgment-
1. It is quite true that persons dealing with limited liability companies are not
bound to enquire into their indoor management and will
not be affected by irregularities of which they have no notice. But the doctrine of
indoor management, which is well established,
applies to irregularities which otherwise might affect a genuine transaction. It
can't apply to a forgery.
2. Plaintiffs suit for damages did not succeeded because turquand's rule did not
apply where the document was forged.

Anand Biharilal Vs Dinshaw and Co.,

Facts – The plaintiff accepted a transfer of the company’s property from its
accountant.
Judgment – The court held that since it is beyond the scope of an accountant’s
authority, it was held void.

The offer in prospectus should be made to public (atleast to 50

persons)

Nash Vs Lynde
Facts – Some copies of documents marked “strictly confidential” and containing
particulars of a proposed issue of shares, were sent by the managing director to
his relatives and friends. Thus the document was passed on privately through a
small circle of friends of directors.
Judgment – The court held that there was no issue to public, and it doesnot
amount to prospectus as it was not offered to public.

Who can sue on a false and misleading prospectus

Only primary market allotees
Peek Vs Gurney
Facts – A fraudulent prospectus was issued by the directors. Peek received a
copy of it and did not took any shares. After several months Peek bought few
shares from the stock exchange.
Judgment – His action against the directors for fraudulent prospectus was
rejected as he took the shares through the secondary market.

Misc. Case laws

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 If someone says it is impossible, it is their limitation not yours

Needle Industries Ltd. Vs. Needle Industries Newly (India) Holding Ltd.
(1981)
Facts - The articles of a private company contained a clause that when the
directors decided to increase the capital of the company
by the issue of new shares the same should be offered to the shareholders, and
if they
failed to take, may be offered to others. The company was a wholly owned
subsidiary of an English Company. The Govt, of India adopted a policy of
diluting foreign holdings. The company accordingly issued new shares to its
employees and relatives reducing the foreign holding to 60%. The
company became a deemed public company because more than 28% of its
share capital was held by a body corporate.
Judgment-
1. A deemed public company is neither a private company nor a public company
but a company in a third category.
2. If the power of appointing additional directors is delegated to the Board by the
articles, the Board can appoint additional directors without
taking this item on the agenda of its meeting.

Gramophone Ltd. Vs. tanley (1908)

1. "Even a resolution of a numerical majority, at a general meeting cannot impose
its will upon the directors. When the articles have confided
to them the control of the company's affairs."
2. A company will be regarded as an Indian Company even if it is incorporated in
India by promoters of foreign nationality.

T.R. PRATT Ltd. Vs. Sasson & Co. Ltd. (1936)

Facts - There were three companies, namely, 'S\ 'MT' & 'P' Company. S
company had been financing P Company for a number of years and all
transactions of loans were entered into through the agency of MT Company
which held almost all the shares of P Company. The Directors of MT
Company were also the Directors of P Company and this fact was known to S
Company. An equitable mortgage was created on the property of 'P'
Company for a loan granted by S to MT Company. In the winding up of P
Company, it was held that the official liquidator was entitled to avoid the
equitable mortgage as S Company had the knowledge of the facts through its
directors.
Judgment-
1. Just as in case of agency, a notice to agent will amount to a notice to the
principal, in the same way a notice to director will be deemed as a
notice to the company.
2. Money having borrowed and used for the benefit of the principal, i.e. company
in either paying off debts or for its legitimate business, the company
could not repudiate its liability on the ground that the agents i.e., directors had no
authority from the company to borrow.

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3. "Under the law an incorporated company is a distinct entity, and although all
the shares may be practically controlled by one person, in law a
company is a distinct entity and it is not permissible or relevant to enquire
whether the directors belonged to the same family or whether it is compendiously
described as one man company.

Ewing Vs. Butter Cut Margarine Company Ltd. (1917)

Facts - The plaintiff was an incorporated firm carrying on substantial business
under the trade name of Butter Cap Dairy Company. The defendant
company was registered to trade in similar commodities and selected the name
bonafide believing that there was no other company in existence with
a similar name. The plaintiff alleged that the name of the new company would
lead to confusion and was detrimental to the plaintiffs business.
Judgment-Plaintiff was entitled to restrain the newly registered company from
carrying on business on the ground that the public might
reasonably think that the registered company was connected with his business.

Mackinnon Mackenzee & Co. Re, (1967)

Facts - A Company desired to shift its registered office from the State of West
Bengal to Bombay. The Company's petition was resisted by the state on
the grounds of loss of revenue.
Judgment- Held that there is no statutory right of the state, as a state, to
intervene in an application made u/s 17 for alteration of the place of the
registered office of a company. To hold that the possibility of the loss of revenue
is not only relevant, but of persuasive force in regard to the change is
to rob the company of the statutory power conferred on it by Sec. 17. The
question of loss of revenue to one state would have to be considered in the
total conspectus of revenue for the Republic of India and no parochial
consideration should be allowed to turn the scale in regard to change of
registered office from one state to another within India.

Scientific Poultry Breeder's Association, Re (1933)

Facts - Memorandum of the company prohibited payment of any remuneration to
the directors. When the business of the company increased it
was found that the directors could not pay sufficient attention unless some
remuneration was paid to them.
Judgment-Company was allowed amendment to enable it to pay remuneration to
its managers, which was formerly forbidden, being necessary for
efficient management.

Re Cyclists Touring Club. (1907)

Facts - The Company's business was to promote, assist & protect cyclists on the
public roads. The company by altering the object clause
desired to include among the persons to be assisted all tourists including
motorists.
Judgment-

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1. The club not allowed to undertake protection of motorists also, as cyclists had
to be protected against motorists.
2. It was impossible to combine the two business as one of the objects of the
company was to protect cyclists against motorists.

Peveril Gold Mines Ltd. Re (1898)

Facts - The articles provided that no winding up petition could be presented
without the consent of two directors or unless a resolution to wind up
was passed at a general meeting or the petitioner held one-fifth of the share
capital. None of these conditions was fulfilled.
Judgment-
1. Restriction was invalid & the petition could be presented.
2. Sec. 439 of the Companies Act, 1956 confers the right on a shareholder to
petition for winding up of the company in certain circumstances.
This right can't be excluded or limited by the articles.
3. Each member is entitled to say that there shall be no breach of the Articles
and he is entitled to an injunction to prevent breach.

Hulton Vs. Scarborough Cliff Hotel Co. (1865)

Facts - A resolution passed at a general meeting of a company altered the
articles by inserting the power to issue new shares with preferential
dividend. The memorandum contained no such power.
Judgment-
The alteration was inoperative.

Erlanger Vs. New Sombrero Phosphate Co. (1878)

Facts - Erlanger was the head of a syndicate who purchased an Island
containing mines of Phosphate for 55,000 pounds Then formed
a company to buy this Island. A contract was made between X a nominee of the
syndicate and the company for its purchase at
1,10,000 pounds. A prospectus was then issued. Many persons took shares. The
company failed & the liquidator sued the promoter
for the refund of the profit.
Judgment-
1. Promoters stand in a fiduciary position. They have in their hands the creation
& moulding of the company.
2. The promoters is in the situation a kin to that of a trustee of the company, & his
dealings with it must be open and fair.
3. Promoter is guilty of breach of trust if he sells property to the company without
informing the company that the property belongs
to him or he may commit a breach of trust by accepting a bonus or commission
from a person who sells property to the company.

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 Answer to PTP_Final_Syllabus 2012_Jun2014_Set 3

PAPER 13 – Corporate Laws and Compliance

Time Allowed: 3 Hours Full Marks: 100

The figures in the margin on the right side indicate full marks.

SECTION A
[Q.No.1 is compulsory and attempt any 4 from the rest]

Question 1:
Mr. Anand is an auditor and he has ventured newly into this area. He is having the following
issues in his mind. You are requested to guide him in resolving his issues, stating relevant sections
and laws.
a) He wishes to undertake audit work as well as work as employee with Firm ABC, an auditing
firm.
b) He wishes to join Firm ABC as a partner, what would be his ceiling limit.
c) He wants to compute and understand which of the following companies shall be/ not be
taken into consideration for calculating specified number of audits.
i) Audit of a Private Company
ii) Guarantee Companies not having Share Capital
iii) Audit of a Non-Profit Company
iv) Special Audits
v) Audit of foreign companies
vi) Branch Audits
vii) Company Audit where he is appointed as a Joint Auditor.
d) He wants to know, that as a member of ICAI, is there any other restrictions on him as a matter
of self regulation in matter of inclusion/exclusion of audit of Private Companies for
calculating the specified number of assignments.
e) Would the rules be different from case (d) above had he joined a CA Firm.
f) He also wishes to accept an offer to become the first auditor of Xee Ltd. What are the
procedures that the Board of Directors and Mr. Anand need to undertake.
[1+2+3+1+4+4]

Answer:

(a) Restriction on Appointment [Sec.224(lB)]: No Company or its Board of Directors shall appoint
or re-appoint any person or Firm as its Auditors if -,
(a) Such person is in full time employment elsewhere, or
(b) Such person or Firm holds the office of Auditor of the specified number of Companies or
more than the specified number of Companies.
In the case of a Firm of Auditors, 'Specified Number of Companies' means the number of
Companies specified for every Partner of the Firm who is not in full time employment elsewhere.

Hence, Mr. Anand cannot undertake the work of audit and be employed with Firm ABC at the
same time.

(b) Ceiling Limit: The ceiling limit is 20 Company Audits per person. Of this 20, not more than 10
shall be in respect of Companies having Paid-Up Capital of ` 25 Lakhs or more. Further, in
addition to this, Mr. Anand has to keep the following points in mind –

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Situation Ceiling Limit

(i) If he works for Firm ABC, and Ceiling Limit shall be 20 Company Audits per Partner who is
Firm ABC is a Partnership not in full-time employment elsewhere.
Firm
(ii) When he is a Partner in a Ceiling Limit shall be 20 Company Audits on his account in
number of Firms including all the Firms together in which he is Partner or Proprietor.
Firm ABC
(iii) Where he is a Partner of Firm Ceiling Limit shall not exceed 20 Company Audits in his
ABC and also holds office in individual capacity and all Firms taken together.
his individual capacity

(c) Computation of Ceiling Limit:

Included Audits Excluded Audits
i) Part Audit: When an Auditor is i)
Branch Audit: Audit of a Branch of Company
appointed to audit even a part of a is not included in the computation of the
Company's accounts, the part will be ceiling.
considered as a unit of audit for theii) Audit of Corporations, which are not
purpose of calculation of the ceiling. Companies, shall not be included for ceiling
ii) Joint Audit: When two or more purpose.
Auditors are appointed as Auditors, iii) Audit of Foreign Companies shall not be
each of the Joint Auditors is included.
considered a Part Auditor for the iv) Guarantee Companies: Company Limited by
purpose. Hence, any joint audit held Guarantee and not having Share Capital will
by an Auditor will be included as one not be included in the ceiling.
audit unit. v) Private Companies: Audit of Private Limited
iii) Sec.25 Companies: Audit of Non- Companies will not be included for ceiling u/s
Profit Companies would be included 224(1B).
for the purpose of ceiling. vi) Special Audit u/s 233A or Investigation of
Companies will not be included for ceiling
purposes.
Hence the following would not be included in computing the ceiling limit.
i) Audit of a Private Company
ii) Guarantee Companies not having Share Capital
iii) Special Audits
iv) Audit of foreign companies
v) Branch Audits

(d) Restrictions as per ICAI Notification 53/ 2001: As per the ICAI Notification, a CA in practice will
be guilty of professional misconduct, if he holds at any time, the appointment of more than 30
audit assignments, including audit of Private Companies. This restriction is intended to uphold the
principles of fairness and to provide equitable opportunities to all practicing members. [Note:
This provision is an additional restriction under the CA Act and does not override the Companies
Act.]

(e) In case of a CA Firm:

1. In case of CA Firm, the ceiling limit is 30 Audits per Partner, including audit of Private
Companies.
2. Where a member is a Partner in more than one CA Firm, all the Firms in which he is a Partner
will be together entitled to 30 Company audits in his account.
3. Where a Partner of a Firm also accepts audits in his individual capacity / Proprietary Firm, the
total number of Company audits should not exceed 30 in his individual capacity /

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Proprietary Firm and all Partnership Firms taken together.

4. As specified in Sec. 224(1B), out of the above 30, the audits of Public Companies having
paid up capital of ` 25 Lakhs or more, shall not exceed 10.
5. For this purpose, Joint Audits held will be construed as one audit unit for each of the Joint
Auditors.
6. Audit of Head Office and Branches or one or more Branches of the same Company will be
construed as one audit only.
7. The number of Partners of a firm on the date of acceptance of audit assignment shall be
taken into account for computing the ceiling for the Firm.
8. A CA in full time employment elsewhere shall not be taken into account while computing
the ceiling for the Firm.

(f) Becoming the First auditor of Xee ltd:

In case Mr. Anand wants to be the first auditor of Xee Ltd. the following points needs to be
complied with.
1. Appointment by Board: Sec. 224(5) specifies that the Board of Directors can appoint the First
Auditor(s) of a Company.
2. Time of Appointment: The appointment shall be made by the Directors, within 1 month from
the date of incorporation of the Company.
3. Tenure of Office: The First Auditor(s) shall hold office till the conclusion of the first AGM.
4. Failure: If the Board fails to appoint the First Auditor(s) within 1 month of registration, the
Company in General Meeting is empowered to make the appointment.
5. Members' Power of Removal: The Company may, at a general meeting, remove such an
Auditor or all or any of them and appoint another or others in his or their place, on a
nomination being made by any member of the Company. For this purpose, notice should
be given to the members of the Company, not less than 14 days before the date of the
meeting.
6. Provision in Articles: An Auditor cannot be appointed as First Auditor(s) simply because his
name has been stated in the Articles of Association.
7. Intimation: The Company need not send any statutory intimation to the First Auditor(s), of
their appointment within 7 days. Notice of appointment can be sent in the ordinary course
of business within reasonable time.
8. Acceptance: The First Auditor(s) are themselves not required to inform the ROC about their
acceptance or refusal of such an appointment.

Question 2:
(a) Wee Ltd. has suffered a Net Loss for the year. The Directors however declared and paid an
Interim Dividend at 30% based on the half-yearly performance. Comment.
(b) Board of Directors of M/s. ABee Ltd, in its meeting held on 29th May 2013, declared an
interim dividend payable on paid up Equity Share Capital of the Company. In the Board
Meeting Scheduled for 10th June 2013, the Board wants to revoke the said declaration. You
are required to state with reference to the provisions of the Companies Act, 1956 whether
the Board of Directors can do so.
(c) ROC has received a complaint from a group of Creditors of a Company. The complaint
alleges that the Directors of the Company, in order to prevent the unearthing of their
embezzlement of Company's funds, are engaged in falsification and destruction of original
accounting books and records. The Complainants urged the ROC to seize the accounting
books and records of the Company so that the Directors may not be able to tamper the
same. You are required to state the powers, if any, of the ROC and inspector in this respect.
(d) Can Central Government investigate into the affairs of a company?
[4+4+6+1]

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Answer:
(a) In declaration of interim dividend, in case there is a net loss the following points needs to be
considered.
i) Factors: In declaration and payment of Interim Dividend, the Management has to
consider whether - (a) there is a favorable trend of profits in the current year as that in the
past years, and (b) there is a reasonable anticipation that the year would close with a
surplus at least as that in the previous year.
ii) Effect of Interim Dividend: The fact that the Company has suffered a Net Loss at the end
of the year indicates that the Directors have miscalculated the performance of the
Company about the second half of the year. Hence, the following possibilities arise in this
case -
Dividend out of Past The amount of profits should be sufficient enough to cover -
Accumulated Profits – where (a) Transfer to Reserves as per Rules, and
sufficient balance is available in (b) Payment of Interim Dividend of 30%.
the P&L A/c. The Auditor has to verify compliance with the Transfer to
Reserve Rules and procedure for payment of Interim
Dividend.
Dividend out of Reserves – The balance in P&L Account could be sufficient to declare
where sufficient balance is not dividend but not for Transfer of Profits to Reserves.
available in the P&L A/c. In such case, Dividend can be declared out of Reserves,
subject to a maximum of 10% only.
Hence, the Auditor has to report non-compliance with the
Rules in this case, as the actual rate of dividend is 30%.
Dividend out of Capital - where Where there is no balance in the P & L A/c and there are no
there is no balance in the P&L reserves available, the Interim Dividend constitutes a
A/c and Reserves payment out of Capital.
The Auditor should qualify his report mentioning the fact that
the Interim Dividend has been paid out of Capital.

(b)As per Sec. 2(14A), Dividend includes any Interim Dividend. Therefore, all the provisions
applicable to final dividend shall equally apply to interim dividend.

Principle: Interim Dividend, once declared, like Final Dividend, is a debt due from the Company.
Accordingly, once declared, Interim Dividend cannot be revoked except under the same
circumstances in which the final dividend can be revoked. The amount of Interim Divi dend is to
be compulsorily deposited in a separate bank account, within 5 days of passing the Board
Resolution declaring the Interim Dividend [Sec. 205(1A)].

Conclusion: As per Sec.207, dividend must be paid within 30 days of its declaration. Thus, Interi m
Dividend must also be paid within 30 days of its declaration, i.e. within 30 days of date of passing
the Board Resolution declaring the Interim Dividend. In the instant case, on declaration of
Interim Dividend by the Board in a Board Meeting held on 29th May 2013, the liability of the
Company to pay the Interim Dividend has become certain, and the payment of Interim
Dividend must be made within next 30 days, viz. on or before 28th June 2013. Therefore,
revocation of Interim Dividend in the Board Meeting held on 10th June is not possible.

(c)
Particulars Seizure by ROC u/s 234A Seizure by Inspector u/s 240A

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ROC / Inspector can inspect, if it has reasonable ground to believe that books
and papers of, or relating to, any Company or other Body Corporate, Managing
1. Belief
Director or Manager of such Company or other Body Corporate, may be - (a)
destroyed, (b) mutilated, (c) altered, (d) falsified, or (e) secreted.
2.Basis of Upon information in ROC's In the course of investigation u/s
belief possession or otherwise. 235/237/239/247.
3. ROC / Inspector may make an application to the First Class Magistrate or
Application Presidency Magistrate having jurisdiction, for an order for the seizure of such
to Magistrate books and papers.
After considering the application and hearing the ROC/Inspector", if necessary,
the Magistrate may, by order, authorize the ROC / Inspector -
(a) to enter, with such assistance as may be required the place or places where
4. Order by
such books and papers are kept,
Magistrate
(b) to search that place of those places in the manner specified in the order,
and
(c) to seize such books and papers as ROC/Inspector considers necessary.
Inspector shall retain the books and papers
5. Period of ROC shall return the books and for such period not later than the
retention papers within 30 days of such conclusion of investigation, as he considers
of books seizure, and inform the Magistrate necessary. Thereafter, he shall return the
& papers of such return. same, and inform the Magistrate of such
return.
Before returning books & papers,
ROC may -
(a) take copies of, or extracts
6.Taking
from them, or Before returning books & papers, Inspector
Copies, &
(b) place identification marks on may place identification marks on them or
other
them or any part thereof, or any part thereof.
powers
(c) deal with the same in such
other manner as he considers
necessary.
Note: Other provisions of Code of Criminal Procedure, 1898 relating to searches or seizures shall
also apply.

(d) The Central Government delegates its powers u/s 240(l)(a), u/s 240(1A), u/s 240(2)(b) and
u/s 240(3) of the Companies Act, 1956, to the Director, Serious Fraud Investigation Office only in
respect of those cases wherein the Central Government appoints officers of SFIO as Inspectors,
to investigate into the affairs of a company u/s 235 or u/s 237.

Question 3:
a) M/s Bee Ltd. a company registered in the State of West Bengal desires to shift its registered
office. State the laws and the provisions to be followed if the change occurs under the
following conditions:
i) Change from one place to another within the same city.
ii) Change from one city to another within the same state.
iii) Change of jurisdiction of ROC.
iv) Change of state.
b) The Articles of Association of a Limited Company provided that 'X' shall be the Law Officer of
the company and he shall not be removed except on the ground of proved misconduct. The
company removed him even though he was not guilty of misconduct. Decide, whether
company's action is valid.

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c) Article of a Public company clearly stated that Mr. L will be the life time solicitor of the
company. Company in its General Meeting of shareholders resolved unanimously to appoint
Mr. M in place of Mr. L as the solicitor of company by altering its AOA. State with reasons,
whether the company can do so? If L files a case against the company for removal as
solicitor, will he succeed?
d) The Secretary of a Company issued a share certificate to 'A under the Company's seal with his
own signature and the signature of a Director forged by him. ‘A’ Borrowed money from 'B' on
the strength of this certificate. 'B' wanted to realize the security and requested the company to
register him as a holder of the shares. Explain whether 'B' will succeed in getting the share
registered in his name. [9+1+3+2]

Answer:
a)
ALTERATION OF REGISTERED OFFICE CLAUSE [Section 17]
(i) Change within
1. A resolution of the Board of Directors is required to be passed.
the same city,
town or village 2. Notice of new location must be given to the Registrar within 30 days of
[Section 146] the Change under form 18.
1. Special resolution is required to be passed at a general meeting of the
(ii) Change from
shareholders.
one City, town
or village to 2. Filing of Copy of Special Resolution with ROC within 30 days
another within 3. Notice of New Location Notice of the new location must be given to
the same ROC
the Registrar within 30 days of change under form 18.
and same State
[Section 146] 4. A resolution of the Board of Directors is required to be passed.
1. Special resolution is required to be passed at a general meeting of the
shareholders.
(iii) Change from 2. Confirmation of Regional Director to be obtained. The Regional
the jurisdiction of Director must convey his confirmation within 4 weeks from the date of
one ROC to the receipt of application for such change.
jurisdiction of 3. Filing of Copy of Special Resolution with ROC within 30 days
another ROC
4. Certified copy of the confirmation by Regional director together with
within the same
a printed copy of the altered memorandum of association to be filled
State. [Section
with ROC within 2 months of the date of confirmation.
146 &17A]
5. Notice of the new location must be given to the Registrar within 30
days of change under form 18.
6. A resolution of the Board of Directors is required to be passed.
1. A special resolution is required to be passed by the company at its
general meeting. Copy thereof shall be filled with ROC within 30 days.
2. Such alteration must be confirmed by the Company Law Board
3. Copy of the order of the CLB must be filed by the company with the
(iv) Change from
ROC of both the States. Thereafter, the Registrar of each State shall
one state to
registered proposed alteration.
another
4. The Registrar of the State where the office was originally situated shall
send Registrar of the other State all records and documents relating to
company
5. When the registered office of the company is shifted to its new
location, the notice of same must be given to the Registrar of
Companies within 30 days of the shifting office under form 18.

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6. A resolution of the Board of Directors is required to be passed

b) According to the provisions of Section 36, 'X' cannot enforce the right conferred on him by
the articles against the company. Hence the action taken by the company (i.e. removal of
'X' even though he was not guilty of misconduct) is valid.

c) According to Section 36 of Company Act 1956, upon registration, the Memorandum and
Articles of Association bind the company and its members to the same extent as if they had
been signed by the company and each member respectively. -Consequences of this shall
be as follow:-
i) Members bound to the Company-This view was also held in the case of Boreland's
Trustee v Steel Brothers and Co. Ltd.
ii) Company bound to the members- Company is also bound to its members in same
manner as members are bound to it
iii) Company not liable to outsider-Section 36, only create a contract between a company
and members, thus company may alter its AOA for any term as concerned with a
contract along with an outsider
In given case Article of the Public company clearly stated that Mr. L will be the life time solicitor
of company. Company in its General Meeting of shareholders resolved unanimously to appoint
Mr. M in place of Mr. L as the solicitor of company by altering its AOA.

Conclusion: Based upon the provisions of Sec 36, we can conclude that the Company is entitled
to remove Mr. L and he cannot succeed in bringing a suit against the company

This view was also taken in leading case of [Eley v Positive Government Life Assurance Co. Ltd]

d) Share certificate is not binding on company as it contained forged signatures. Thus no title
could be transferred to A even if he is a bona fide purchaser since as per the general rule
forgery is nullity (It means if any signatures are forged, it shall be taken as if no signatures are
there, thus no tile can be transfer to transferee). This view was also held in the case of
Rubben v Great Fingal Consolidated. Hence B would not succeed in having the shares in his
name.

Question 4:
a) Rajesh, who is a resident of New Delhi, sent a transfer deed, for registration of transfer of
shares to the company at the address of its Registered Office in Mumbai on 13.05.2013. He
did not receive the shares certificates till14.09.2013. He lodged a criminal complaint in the
Court at New Delhi. Decide, under the provisions of the Companies Act, 1956, whether the
Court at New Delhi is competent to take action in the said matter.
b) 'A' commits forgery and thereby obtains a certificate of transfer of shares from a company
and transfers the shares to 'B' for value acting in good faith. Company refuses to transfer the
shares to 'B'. Whether the company can refuse? Decide the liability of 'A' and of the
company towards 'B'. In the light of the above state the meaning and consequences of a
forged transfer.
c) ABC Company refuses to register transfer of shares made by Mr. A to Mr. B. The company
does not even send a notice of refusal within the prescribed time. Has the aggrieved party
any rights against the company for such refusal. Advice.
d) The Board of Directors of a company decided to pay 5% of issue price as underwriting
commission to the underwriters. On the other hand the Articles of Association of the
company permit only 3% commission. The Board of Directors further decides to pay the
commission out of the proceeds of share capital. Are the decisions taken by the Board of
Directors valid under the Companies Act, 1956?

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e) When can a Public Company offer the new shares (further issue of shares) to persons other
than the existing shareholders of the Company? Can these shares be offered to Preference
Shareholders? [3+4+4+2+2]

Answer:
a) According to section 113(1) every company shall within two months after the application for
the registration of transfer of any such shares, deliver the certificates to its shareholders.
In the case of a listed company under the listing agreement this period has been reduced to 30
days. Hence legal steps can be taken by Rajesh.
In the case of H.V. Jaya Ram v ICICI Ltd. It was held that cause of action for failure to deliver
share certificate arises where the registered office of the company is situated and not in the
jurisdiction of the Court located in the place where the complaint resides. Accordingly in the
present case also, the Court in New Delhi cannot entertain the complaint against a company
having its registered office in Mumbai.

b) Any forged transfer does not give the transferee concerned any title to the shares.
Although the innocent purchaser acting in good faith could validly and reasonably assume that
the person named in the certificate is the owner of the shares. Still the illegality cannot be
converted into legality.
Therefore, in this case company is right to refuse to do the transfer of the shares in the name of
the transferee B.

Forged Transfer
Meaning:
 Forged Transfer means, transfer of shares made on the basis of forged transfer deed.
 The instrument of transfer is said to be forged when transferor's signatures bearing on it are
forged.

Consequences of Forged Transfer:

1. Restoration of name of: True owner can compel the company to restore his name to the
register.
2. Claim to Dividend: True owner can also claim any dividend which may not have been paid
to him during the intervening period.
3. Right of Bona fide Purchaser:
If the company had issued a share certificate to the transferee on a forged transfer and he
further sold them to another buyer who has acted in good faith, then the purchaser will
have no right to be registered as shareholder.
However, he can claim damages from the company on the ground since he has acted on
the faith of the share certificate issued by the company.
Company in turn can claim damages from the person who has submitted said forged
transfer deed to it.

c) Remedies available to aggrieved party against refusal to register the transfer of shares by
ABC Company:

1. In case ABC is a private company [Section 111]

Transferor or the transferee may prefer an appeal to Company Law Board. The appeal should
be in writing and should be filed within the prescribed time.

Meaning of Prescribe Time:

i) Where the company gives a notice of refusal: Appeal should be filed within 2 months of
the receipt of such notice, and

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ii) Where the company does not give any notice of refusal: Appeal should be filed within 4
months from the date on which the instrument of transfer was delivered to the company.

2. In case ABC is a public company [Section 111A]:

In case a public company without any sufficient cause, refuses to register a transfer of shares
within 2 months from the date on which, the instrument of transfer was delivered to the
company, the transferee may make an application to the Company Law Board to register such
transfer.

3. Right to Appeal where the transfer of security effected in contravention of certain law: Where
any transfer has been affected in contravention of provisions contained under SEBI Act, 1992 or
SICA or any other law for the time being in force. The Company, participants, investor or SEBI
may make an appeal to Company Law Board within a reasonable time to rectify the register or
records of the company or depository within.

4. Power of Company Law Board:

Company Law Board may direct the company or the depository to rectify the register or
the Records of ownership.
Company Law Board may also suspend the voting rights in respect of the securities subject
to enquiry in case enquiry has not yet completed.

d) According to the provisions of Section 76 of the Companies Act, 1956:

i) The payment of commission should be authorized by the articles.
ii) The amount of commission should not exceed, in case of shares, 5% of the price at which
the shares have been issued or the amount or rate authorized by the articles whichever is
less, and in case of debentures, it should not exceed 2½%
Based upon the provisions of the above section, we can conclude that the Board of Director’s
decision to pay 5% is not valid, since the payment cannot exceed 3% as provided in the Articles
of the company.
Secondly, decision of the Board to pay the commission out of capital is valid since underwriting
commission can be paid both out of capital as well as out of profits. [Madan Lal Fakir Chand Vs
Shree Changdeo Sugar Mills Ltd]

e) From the wordings of Section 81, of Companies Act, 1956 it is quite clear that the further issue
of shares can be issued only to equity shareholders, unless a certain specific procedure as stated
in law has been adopted for issue of these shares to outsiders. This specific procedure would
essentially include passing a special resolution in the general meeting and obtaining more votes
for the agenda than against the agenda. Therefore, in general issue of these shares cannot be
offered to preference shareholders.

Question 5:
a) K Ltd was in process of incorporation. Promoters of the company signed an agreement for
purchase of certain furniture for company and payment was to be made to the supplier of
the furniture after incorporation of the company. The company was incorporated and the
furniture was received and used by it. Shortly after incorporation, company went into
liquidation and debt could not be paid. As a result supplier sued the promoters. Examine
whether the promoters can be held liable under following situations:-
i) Where company has adopted the contract after incorporation
ii) Where company entered into a fresh contract after incorporation
b) A company was incorporated on 6th October, 2013. The certificate of incorporation of the
company was issued by the Registrar on 15th October, 2013. The company on 10th October,

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2013 entered into a contract which created its contractual liability. The company denies from
the said liability on the ground that company is not bound by the contract entered into prior
to issuing of certificate of incorporation. Decide, under the provisions of the Companies Act,
1956, whether the company can be exempted from the said contractual liability.
c) The Memorandum of Association of a company was presented to the Registrar of Companies
for registration and the Registrar issued the certificate of incorporation. After complying with
all the legal formalities the company started a business according to the object clause,
which was clearly an illegal business. The company contends that the nature of the business
cannot be gone into as the certificate of incorporation is conclusive. Answer the question
whether company's contention is correct or not.
d) The Central Government, without referring the matter to the Supreme Court of India for
inquiry, removed a member of the Competition Commission of India, on the ground that he
has become physically or mentally incapable of acting as a member. Decide under the
provisions of Competition Act, 2002 whether the removal of the member is valid.
[7+3+3+2]
Answer:
a) According to Company Act 1956, any contract which is entered into by the promoters for
and on behalf of the proposed company before its incorporation shall be regarded as Pre-
incorporation contract.

Provisions regarding these contracts can be discussed as follow:-

1. The Company is not bound by the Preliminary Contract: In case of [Re English and Colonial
Produce Ltd], it was held that Company cannot be held liable for the preliminary contracts,
A company is not bound by the preliminary contracts even if the company has taken the
benefit of the work on its behalf under the contract.
2. The Company cannot Enforce Preliminary Contracts: In the case of [Natal Land Co. v Pauline
Colliery Syndicate], it was held that other party is also not liable to company through pre-
incorporation contract, here in this stated case
The owner of a piece of land agreed to lease it to a company to be formed by
promoters.
The promoters later on formed a company.
Subsequently 'owner' refused to grant the lease to the company.
It was held that the company cannot sue 'owner' and cannot claim specific
performance as it was not even in existence when the lease was signed.
Thus, preliminary contracts cannot be enforced by or against the company.
3. Personal Liability of Promoters: In the case of (Kelner v Baxter), it was held that promoters
shall be personally liable with any such contract. This is because one cannot enter into any
contract on behalf of any person who is not in existence. Therefore, for any such contract;
promoters shall be personally liable for the performance.
However, liability of promoter shall come to an end where after incorporation company
adopt the contract according to Sec 15 and Sec 19 of Specific Relief Act 1963.
Based upon above provision, we can conclude as follow:-
i) Since in the given case company has adopted the contract after incorporation, thus
company shall be liable for the contract so entered.
ii) Situation where company enter into a fresh contract-
Where a company enter into a fresh contract after incorporation, then liability of promoters
shall come to an end and company shall become liable with this contract.
This view was also taken in case of [Howard v Patent Ivory Manufacturing Co.]

b) Section 35 provides that a certificate of incorporation issued by the Registrar is conclusive as

to all administrative acts relating to the incorporation and as to the date of incorporation.
Case of [Jubilee Cotton Mills v Lewis]

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 Answer to PTP_Final_Syllabus 2012_Jun2014_Set 3

Thus based upon the above, we can conclude that even though Certificate of
incorporation was issued on 15th Oct, however it contained a date as 6th Oct. Therefore
company shall be considered as registered on 6th only and consequently contract so
entered was a valid contract

c) Though a certificate of incorporation is a conclusive evidence of its registration, but, it does

not mean that all its objects are legal.
In Bowman v Secular Society Ltd., the court held that the statute does not provide that all or
any of the objects specified in the memorandum, if otherwise illegal, would be rendered
legal by the certificate.
Therefore, the contention of the company that the nature of business cannot be gone into
after the certificate of incorporation has been obtained is not tenable.

d) The order of removal made by Central Government is valid and lawful on the following
grounds:
i) Since CG has ordered removal under the ground, that he has become physically or
mentally incapable of acting as a member.
ii) Since removal under such ground does not require CG to refer the matter to the Supreme
Court for inquiry.

Question 6:
a) Useful Ltd. had taken a loan of ` 2 crore from ABC Bank secured by some assets. The
company has defaulted in the matter of payment of some installments of loan as per terms of
the loan agreement. The bank has filed a petition in the High Court on the ground that the
company is unable to pay its debts.
The company opposes the petition for winding up on the ground that it has employed 1000
workers, paid their salaries regularly and that it has paid all the tax dues to the Government.
The company has further contended that if the company is compelled to repay the loan
immediately, it will cripple the company causing hardships to employees and other persons
having business dealings with the company. The company is also supported by some major
creditors.
Explain the circumstances under which the company may be ordered to be wound up by
the Court on the ground of inability to pay its debts and whether the bank will succeed in this
case.
b) Young Bank is a newly formed bank. The constitution of its Board of Directors is mostly
graduates and under-graduates. Is the constitution as per The Banking Regulations Act,
1949? Discuss. Also the Bank wants to reconstitute its board and retire some of its directors.
What are the provisions as per law?
c) Mr. A was a member of the Competition Commission of India. On the basis of information
that he had acquired such financial interest as was likely to affect prejudicially his functions
as a member of the Commission, the Central Government appointed an officer to hold an
inquiry. On the basis of report of the said officer the Central Government issued an order of
removal of Mr. A. Decide whether the action of the Central Government is in order under the
provisions of the Competition Act, 2002?
d) Ajay Ltd. is being wound up by the court. All the assets of the company have been charged
to the company’s bankers to whom the company y owes 1 crore. The company owes the
following amounts to others:
i) Dues to workers – `25 lakhs
ii) Taxes payable to Government – `5 lakh
iii) Unsecured creditors - `10 lakhs
You are required to compute with reference to the provisions of the Companies Act, 1956
the amount each kind of creditors is likely to get if the amount realized by the official

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liquidators from the secured assets and available for distribution among the creditors is only `
80 lakhs. [3+6+3+3]

Answer:
a) The company is unable to pay its debts, and it has defaulted in payment of the installments
of its Bank loan.
The court may not order winding-up in this case as:
The power of the court to order winding up is discretionary.
Since the court shall consider the interest of 1000 employees, temporary cash crisis,
loss of taxes to the Government, loss of production, loss of business, probable
hardships on other creditors, and public policy.
If the court decides that it is not in the interest of justice to wind up the company.
[Tata Iron and Steel Co. V Micro Forge (India) Ltd.]

b) BOARD OF DIRECTORS TO INCLUDE PERSONS WITH PROFESSIONAL OR OTHER EXPERIENCE (Sec.

10A), as per Banking Regulation Act, 1949:

51% or more directors to be specialized in certain specified areas [Sec. 10A (2)] i.e.
 Not less than 51% of the total number of members of the Board of Directors of a banking
company shall consist of persons, who shall have special knowledge or practical
experience
 in respect of one or more of the following matters, namely:
agriculture and rural economy,
co-operation,
small-scale industry,
accountancy,
banking,
economics,
finance,
law,
any other matter the special knowledge of, and practical experience, which would, in
the opinion of RBI, be useful to the banking company.

Minimum 2 directors to be specialised in certain specified areas [Proviso to Sec. 10A (2)]
It shall also be ensured that out of the aforesaid number of Directors, not less than 2 shall be
persons having special knowledge or practical experience in respect of agriculture and rural
economy, co-operation or small-scale industry.

Reconstitution of Board if requirements not fulfilled [Sec. 10A (3)]

If, in respect of any banking company, the requirements, as laid down in sub-section (2), are
not fulfilled at any time, the Board of Directors of such banking company shall re-constitute
such Board so as to ensure that the said requirements are fulfilled.

Retirement of directors by lots to ensure reconstitution [Sec. 10A (4)]

If, for the purpose of re-constituting the Board under sub-section (3), it is necessary to retire
any Director or Directors, the Board may, by lots drawn in such manner as may be
prescribed, decides which Director or Directors shall cease to hold office and such decision
shall be binding on every Director of the Board.

c) CG has the power to remove Mr. A:

Since Sec. 11 empowers CG to remove the Chairperson or any member of the Commission on
various grounds specified u/s 11 including the ground "where the Chairperson or the member

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has acquired such financial or other interest as is likely to affect prejudicially his functions as a
Member or Chairperson."

Procedure for removal of Mr. A:

i) CG shall make a reference to the Supreme Court.
ii) The Supreme Court shall order holding of an enquiry. The enquiry shall be held in
accordance with the procedure prescribed by the Supreme Court.
iii) The Supreme Court may make an order for removal of Mr. A.

d)
(i) The amount overriding preferential payments ( `1 crore due to secured creditors and `25
lakhs due to workers), hence a total of `1.25 crore
(ii) Since the amount realized is `80 lakhs and it is not sufficient to pay the overriding preferential
payments in full, the workmen’s dues and dues payable to secured creditors shall abate in
equal proportions, i.e., the payments to workmen and secured creditors should be in the
proportion of amount owed by the company to them ( i.e. 100:25). Therefore, workers shall
be paid `16 lakhs and secrured creditos should be paid `64 lakhs.
(iii) No payments shall be made to the Government authorities towards taxes payable or to
unsecured creditors.

SECTION B
[Answer any five questions from Q.No.7 (a) to (f)]

Question 7:
a) Discuss the difficulties faced in Governance by state owned businesses.
b) Analyze CSR as a Corporate Brand
c) State the reason for failure of construction industry to embrace Whole Life Cycle Costing
d) Describe the core elements to be covered under CSR Policy
e) Write a short note on Memorandum of Understanding and Public Sector Enterprises.
f) Discuss the relevance of OECD Guidelines for Corporate Governance of State-owned
enterprises.
[5×5]

Answer:

a) Difficulties Encountered in Governance in state owned businesses

Routine governance regulations become applicable for public sector companies formed under
the Companies Act, 1956 and come under the purview of SEBI regulations the moment they
mobilize funds from the public. The typical organizational structure of PSUs makes it difficult for the
implementation of corporate governance practices as applicable to other publicly-listed
private enterprises. The typical difficulties faced are:
The board of directors will comprise essentially bureaucrats drawn from various ministries
which are interested in the PSU In addition, there may be nominee directors from banks or
financial institutions who have loan or equity exposures to the unit. The effect will be to have
a board much beyond the required size, rendering decision-making a difficult process.
The chief executive or managing director (or chairman and managing director) and other
functional directors are likely to be bureaucrats and not necessarily professionals with the
required expertise. This can affect the efficient running of the enterprise.
Difficult to attract expert professionals as independent directors. The laws and regulations
may necessitate a percentage of independent components on the board; but many

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professionals may not be enthused as there are serious limitations on the impact they can
make.
Due to their very nature, there are difficulties in implementing better governance practices.
Many public sector corporations are managed and governed according to the whims and
fancies of politicians and bureaucrats. Many of them view PSUs as a means to their ends. A
lot of them have turned sick due to overdoses of political interference, even when their
areas of operations offered enormous opportunities for advancement and growth. And
when the economy was opened up, many of them lacked the competitiveness to fight it out
with their counterparts from the private sector.

b) CSR as a Corporate Brand:

In an economy where corporates strive for a unique selling proposition to differentiate
themselves from their competitors, CSR initiatives enable corporates to build a stronger
brand that resonates with key external stake-holders – customers, general public and the
government.
Businesses are recognising that adopting an effective approach to CSR can open up new
opportunities, and increasingly contribute to the corporates’ ability to attract passionate and
committed workforces.
Corporate in India are also realising that their reputation is intrinsically connected with how well
they consider the effects of their activities on those with whom they interact. Wherever the
corporates fail to involve parties, affected by their activities, it may put at risk their ability to
create wealth for themselves and society.
Therefore, in terms of business, CSR is essentially a strategic approach for firms to anticipate and
address issues associated with their interactions with others and, through those interactions, to
succeed in their business endeavors. The idea that CSR is important to profitability and can
prevent the loss of customers, shareholders, and even employees is gaining increasing
acceptance.
Further, CSR can help to boost the employee morale in the organisation and create a positive
brand-centric corporate culture in the organisation. By developing and implementing CSR
initiatives, corporates feel contented and proud, and this pride trickles down to their employees.
The sense of fulfilling the social responsibility leaves them with a feeling of elation. Moreover it
serves as a soothing diversion from the mundane workplace routine and gives one a feeling of
satisfaction and a meaning to their lives.

c) Reason for failure of construction industry to embrace WLCC

Currently, the application of Whole Life Cycle Costing (WLCC) in the construction industry is still
hindered significantly by the lack of standard method and the excuse of lack of sound data
upon which to arrive at accurate decisions. As a result, the output from WLCC models is looked
on as unreliable. A Government report issued by the Building Research Establishment on Whole
Life Costing identified several factors that presently act as barriers to applying WLCC:
The lack of universal methods and standard formats for calculating whole life costs
The difficulty in integration of operating and maintenance strategies at the design phase
The scale of the data collection exercise, data inconsistency
The requirement for an independently maintained database on performance and cost of
building components.
These barriers might be directly related to the absence of adequate knowledge of WLCC
processes and mechanisms. There may also be a lack of willingness from stakeholders to set up
appropriate mechanisms to solve these problems. If, for example, all building occupiers were
required to submit annual running cost profiles, the risk associated with WLCC techniques could
be significantly reduced (Bird 1987). In fact, White (1991) argues the case for ‘performance
profiles’ and in particular, highlights again the requirements for a universal construction data

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information system. One could argue that a plethora of WLCC models does exist but the
common denominator in practical application and development is lack of appropriate
information or know-how to use and develop models with existing information.
It seems to be worth noting how both the academic and practical ‘schools of thought’ in the
industry need to get their own houses in order if significant steps are to be taken in the wider
applications of WLCC. Newton (1991) in his work in cost modelling procedures highlights the
need for a methodological and organised framework for such research activities. The sheer
complexity of many models lends little to practical application and in many cases, if not the
majority, the lack of available good quality data prohibits further development. In terms of the
practitioners, they need to be willing to encourage clients and building occupiers into adopting
a more holistic approach to running cost control so that procedures can be put in place to aid
all those requiring WLCC cost profiles.

d) The core elements to be covered under CSR Policy

The core elements to be covered under CSR Policy is as follows:

1. Care for all Stakeholders - The companies should respect the interests of, and be responsive
towards all stakeholders, including shareholders, employees, customers, suppliers, project
affected people, society at large etc. and create value for all of them. They should develop
mechanism to actively engage with all stakeholders, inform them of inherent risks and mitigate
them where they occur.

2. Ethical functioning - Their governance systems should be underpinned by Ethics, Transparency

and Accountability. They should not engage in business practices that are abusive, unfair,
corrupt or anti-competitive.

3. Respect for Workers’ Rights and Welfare - Companies should provide a workplace
environment that is safe, hygienic and humane and which upholds the dignity of employees.
They should provide all employees with access to training and development of necessary skills
for career advancement, on an equal and non-discriminatory basis. They should uphold the
freedom of association and the effective recognition of the right to collective bargaining of
labour, have an effective grievance redressal system, should not employ child or forced labour
and provide and maintain equality of opportunities without any discrimination on any grounds in
recruitment and during employment.

4. Respect for Human Rights - Companies should respect human rights for all and avoid
complicity with human rights abuses by them or by third party.

5. Respect for Environment - Companies should take measures to check and prevent pollution;
recycle, manage and reduce waste, should manage natural resources in a sustainable manner
and ensure optimal use of resources like land and water, should proactively respond to the
challenges of climate change by adopting cleaner production methods, promoting efficient
use of energy and environment friendly technologies.

6. Activities for Social and Inclusive Development - Depending upon their core competency
and business interest, companies should undertake activities for economic and social
development of communities and geographical areas, particularly in the vicinity of their
operations. These could include: education, skill building for livelihood of people, health, cultural
and social welfare etc., particularly targeting at disadvantaged sections of society.

e) Memorandum of Understanding and Public Sector Enterprises:

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After Independence, Public Sector Enterprises (PSEs) were set up in India with an objective to
promote rapid economic development through the creation and expansion of infrastructure by
the government. With different phases of development, the role of PSEs has changed and their
operations have extended to a wide range of activities in manufacturing, engineering, steel,
heavy machinery, machine tools, fertilizers, drugs, textiles, pharmaceuticals, petro-chemicals,
extraction and refining of crude oil and services such as telecommunication, trading, tourism,
warehousing, etc. as well as a range of consultancy services. While there have been many PSEs
that have performed very well in competition with private sector enterprises, there are also
many PSEs that have performed very poorly. In an economic environment that has changed
considerably in the last two decades, the role of PSEs has changed and they have been
increasingly guided to reduce their dependence on the Government. They have been listed on
the stock exchange and few of them have been privatized. The Government has provided PSEs
the necessary flexibility and autonomy to operate effectively in a competitive environment.
However, there are a few issues with the operation and management of PSEs which still persist
and need to be attended to. There is a need to develop a mechanism on how government can
get an efficient Indian presence in the sectors where the private sector investments are not
forthcoming especially in strategic areas where developing capabilities is essential if India has to
play its rightful role among the among the nations of the world.

f) The relevance of OECD Guidelines for Corporate Governance of State-owned enterprises:

Many of the developing countries still continue to have a dominant presence of state-owned
enterprises. Hence, OECD thought it appropriate to evolve a set of governance guidelines for
the state-owned enterprises as it did for the private enterprises in member countries. According
to OECD, A major challenge is to find a balance between the state’s responsibility for actively
exercising its ownership functions, such as, the nomination and election of the board, while at
the same time refraining from imposing undue political interference in the management of the
company. Another important challenge is to ensure that there is a level playing field in markets where
private sector companies can compete with the state-owned enterprises, and that governments
do not distort competition in the way they use their regulatory or supervisory powers.’
According to OECD, the guidelines ‘suggest that the state should exercise its ownership functions
through a centralized ownership entity, or effectively co-ordinated entities, which should act
independently and in accordance with a publicly disclosed ownership policy. The guidelines
also suggest the strict separation of the state’s ownership and regulatory functions. If properly
implemented, these and other recommended reforms would go a long way to ensure that state
ownership is exercised in a professional and accountable manner, and that the state plays a
positive role in improving corporate governance across all sectors of our economies. The result
would be healthier, more competitive, and transparent enterprises’.

The major recommendations in OECD guidelines are as discussed below:

Ensuring an effective legal and regulatory framework for state-owned enterprises
There should be a clear separation between the state’s ownership function and other state
functions that may influence the conditions for state-owned enterprises, particularly with
regard to market regulation.
State-owned Enterprises should not be exempt from the application of general laws and
regulations. Stakeholders including competitors should have access to efficient redress and
an even-handed ruling when they believe that their rights have been violated.
State-owned Enterprises should face competitive conditions regarding access to finance.
Their relations with state-owned banks, state-owned financial institutions, and other state-
owned companies, should be based on purely commercial grounds.

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