PAPER – I

COMPANY LAW
(Paper Code: K-401)
The course shall comprise of the following:
I. Formation of Companies:
(1) History of Company Legislation in India
(2) Meaning and Nature of Company with Emphasis on its Advantages and Disadvantages over
Other Forms of Business Organizations.
(3) Kinds of Companies (4) Corporate Personality and Lifting the Corporate Veil
(5) Promotion of Companies:
(a) Promoters and Pre-Incorporation Contracts
(b) Registration of Companies
(6) Memorandum of Association and Articles of Association:
(a) Meaning, Nature and Contents and Relationship Between the two
(b) Objects Clause and Doctrine of Ultra-vires
(7) Prospectus and Statement in Lieu of Prospectus (8) Membership of Company - Its Acquisition
and Termination.
II. Corporate Capital:
(1) Share and Share Capital: Meaning, Nature and Kinds; Various Rights and Duties Attached to
these Shares.
(2) Issuance and Allotment of Shares (3) Alteration of Share Capital:
(a) Increase in Share Capital
(b) Reduction of Share Capital
(c) Pre-Emptive Rights and Variation of Class Rights
III. Company Management and Administration:
(1) Company and its Various Organs Including Division of Powers between Boards of Directors
and Company in General Meeting.
(2) Company Meetings and Resolutions : Types / Kinds of Meetings, Essential Conditions of a
Valid Meeting, Procedure for Calling Company Meetings, Resolution Kinds and Procedures
Relating Thereto.
(3) Directors and Managing Director: Appointment and Legal Position. (4) Oppression and
Mismanagement (5) Investigation into the Affairs of Companies (6) Reconstruction and
Amalgamation (7) National Company Law Tribunal: Composition and Powers

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Part I. Formation of Companies:

Quest: - Discuss the brief history of Company Law in India

Ans:-

1) Joint stock companies Act of 1850: Companies legislation in India owes its origin to the
English Company law. The companies acts passed from time to time in India have been
following the English companies acts with certain modifications to suit Indian conditions. The
first legislative enactment for "Registration of Joint stock companies" was passed in the year
1850. This Act was based on the English companies Act, 1844 (known as the Joint stock
companies Act 1844) which recognized company as a distinct legal entity, but did not grant to
it the privilege of limited liability.
2) Joint Stock Companies Act of 1857: The Joint stock companies’ act of 1850 was replaced by
the Joint stock companies’ act of 1857. This act of 1857 conferred, for the first time in India
the benefit of limited liability on the members of companies. But this act did not extend the
benefit of limited liability to the members of banking companies and insurance companies.
3) Joint Stock Companies Act of 1860: The Joint stock companies’ act of 1857 was replaced by
the Joint stock companies’ act of 1866. The Joint stock companies Act of 1860 extended the
benefit of limited liability to the members of Banking companies and insurance companies.
4) The companies Act of 1866: The Joint stock companies Act of 1860 was replaced by the
companies Act of 1866. The companies Act of 1866 was the first comprehensive companies
Act passed in India. The companies Act of 1866 was based on the English companies Act of
1862. The companies Act of 1866 was intended to consolidate and amend the law relating to
the incorporation, regulation and winding up of trading companies and other associations.
5) Companies Act of 1913: The Indian Companies Act, 1913 did not take into account the
peculiar features of the Indian trade and commerce and some peculiar institution such as
"managing agency.” The Act was, therefore, found to be highly unsatisfactory in the course of
its operation. As such, this Act was subjected to a large number of amendments from time to
time.
6) Companies Act of 1956: After the end of World War II, the need for a further revision of the
company law was felt. Many changes had taken place in the organization and management of
Joint stock companies. The government of India, therefore, appointed on 25th October, 1950.
A committee of 12 members representing various fields under the chairmanship of Shri. H. C.
Bhabha for a comprehensive review of the Indian companies Act 1913. The committee

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 submitted its report on all aspects of company law in April 1952. Based on the
recommendation of the Bhabha Committee companies Act of 1956 was passed. The companies
Act of 1956 was based on the English companies Act of 1948, with some modifications to suit
the Indian conditions. The companies Act of 1956 came into force from 1st April, 1956. This
act contains 658 sections and 14 schedules.
7) Companies Act of 2013: Companies Act 2013 is an Act of the Parliament of India which
regulates incorporation of a company, responsibilities of a company, directors, and dissolution
of a company. The 2013 Act is divided into 29 chapters containing 470 sections as against 658
Sections in the Companies Act, 1956 and has 7 schedules. The Act has replaced The
Companies Act, 1956 (in a partial manner) after receiving the assent of the President of
India on 29 August 2013. The Act came into force on 12 September 2013 with few changes
like earlier private companies maximum number of member was 50 and now it will be 200. A
new term of "one person company" is included in this act that will be a private company and
with only 98 provisions of the Act notified. On 27 February 2014, the MCA stated that Section
135 of the Act which deals with corporate social responsibility will come into effect from 1
April 2014. On 26 March 2014, the MCA stated that another 183 sections will be notified from
1 April 2014.
The Ministry of Company Affairs thereafter proposed a draft notification for exempting private
companies from the ambit of various sections under the companies’ act----------------

Quest:-Define ‘Company’. What are its essential characteristics?

Ans: - Meaning and Nature of Company

Meaning

Literally the word company means a group of persons associated for any common object such as
business, charity, sports, and research, etc. The word company ordinarily means an association of a
number of individuals formed for some common object. When such an association is registered
under the Companies Act, it becomes an artificial person with perpetual succession and a common
seal.

A company in a broad sense is a group of persons who have come together or who have contributed
money for some common purpose and have incorporated themselves into distinct legal entity.
Company is the amalgamation of two distinct words- “com” and “pain”, the former meaning
with/together and the later meaning “bread”

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The definition given in the companies Act is not exhaustive and does not reveal the true
characteristics of a company. Lord Justice Lindley has given a comprehensive definition of a
company. According to him, a company is, “An association of many person who contribute money
or money’s worth to a common stock and employed for a common purpose. The common stock so
contributed is denoted in money and is capital of the company. The persons who contribute it or to
whom it belongs are members. The proportion of capital to which each member is entitled is his
share. Shares are always transferable although the right to transfer them is often more or less
restricted.”

Characteristics of a Company

A company as an entity has several distinct features, which together make it a unique organization.
The following are the defining characteristics of a company: -

1. Separate Legal Entity

On incorporation under law, a company becomes a separate legal entity as compared to its
members. The company is different and distinct from its members in law. It has its own name and
its own seal, its assets and liabilities are separate and distinct from those of its members. It is
capable of owning property, incurring debt, and borrowing money, having a bank account,
employing people, entering into contracts and suing and being sued separately. The importance of
the separate entity of the company was however firmly established in the following case.

Salomon v. Salomon & co. Ltd.(1897) A.C. 22. S sold his boots business to a newly formed
company for £ 30,000. His wife, one daughter and four sons took up one share of £ 1 each. S took
23,000 shares of £1 each and £ 10,000 debentures in the company. The debentures gave S a charge
over the assets of the company as the consideration for the transfer of the business. Subsequently
when the company was wound up, its assets were found to the worth £ 6,000 and its liabilities
amounted to £ 17,000 of which £ 10,000 were due to S (secured by debentures) and £ 7,000 due to
unsecured creditors, the unsecured creditors claimed that S and the company were one and the same
person and that the company was a mere agent for S and was hence they should be paid in priority
to S. Held, the company was, in the eyes of the law, a separate person independent from S and was
not his agent. S, though virtually the holder of all the shares in the company, was also a secured
creditor and was entitled to repayment in priority to the unsecured creditors.

2. Limited Liability

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The liability of the members of the company is limited to contribution to the assets of the company
up to the face value of shares held by him. A member is liable to pay only the uncalled money due
on shares held by him when called upon to pay and nothing more, even if liabilities of the company
far exceeds its assets. On the other hand, partners of a partnership firm have unlimited liability i.e.
if the assets of the firm are not adequate to pay the liabilities of the firm, the creditors can force the
partners to make good the deficit from their personal assets. This cannot be done in case of a
company once the members have paid all their dues towards the shares held by them in the
company. For example, if the face value of the share in a company is Rs. 10 and a member has
already paid Rs. 5 per share, he can be called upon to pay not more than Rs. 5 per share during the
lifetime of the company.

3. Perpetual Succession

A company does not die or cease to exist unless it is specifically wound up or the task for which it
was formed has been completed. Membership of a company may keep on changing from time to
time but that does not affect life of the company. Death or insolvency of member does not affect the
existence of the company.

4. Separate Property

A company is a distinct legal entity. The company’s property is its own. A member cannot claim to
be owner of the company’s property during the existence of the company.

5. Transferability of Shares

Shares in a company are freely transferable, subject to certain conditions, such that no shareholder
is permanently or necessarily wedded to a company. When a member transfers his shares to another
person, the transferee steps into the shoes of the transferor and acquires all the rights of the
transferor in respect of those shares.

6. Common Seal

A company is a artificial person and does not have a physical presence. Therefore, it acts through its
Board of Directors for carrying out its activities and entering into various agreements. Such
contracts must be under the seal of the company. The common seal is the official signature of the
company. The name of the company must be engraved on the common seal. Any document not
bearing the seal of the company may not be accepted as authentic and may not have any legal force.

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7. Capacity to sue and being sued

A company can sue or be sued in its own name as distinct from its members.

8. Separate Management

A company is administered and managed by its managerial personnel i.e. the Board of Directors.
The shareholders are simply the holders of the shares in the company and need not be necessarily
the managers of the company.

Disadvantages of incorporation

1) Lifting of corporate veil- though for all purposes of law a company is regarded as a separate
entity it is sometimes necessary to look at the persons behind the corporate veil.

a) Determination of character- The House of Lords in Daimler Co Ltd. v.

Continental Tyre and Rubber Co., held that a company though registered in England would
assume an enemy character if the persons in de facto control of the company are residents of an
enemy country.

b) For benefit of revenue- The separate existence of a company may be disregarded when the
only purpose for which it appears to have been formed is the evasion of taxes. –
Sir DinshawManeckjee, Re / Commissioner of Income Tax v. Meenakshi Mills Ltd.

c) Fraud or improper conduct- In Gilford Motor Co v. Horne, a company was restrained

from acting when its principal shareholder was bound by a restraint covenant and had incorporated
a company only to escape the restraint.

d) Agency or Trust or Government company- The separate existence of a company may be

ignored when it is being used as an agent or trustee. In State of UP v. Renusagar Power Co, it was
held that a power generating unit created by a company for its exclusive supply was not regarded as
a separate entity for the purpose of excise.

e) Under statutory provisions- The Act sometimes imposes personal liability on persons
behind the veil in some instances like, where business is carried on beyond six months after the
knowledge that the membership of company has gone below statutory minimum(sec 45), when
contract is made by misdescribing the name of the company(sec 147), when business is carried on
only to defraud creditors(sec 542).

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2) Formality and expense- Incorporation is a very expensive affair. It requires a number of
formalities to be complied with both as to the formation and administration of affairs.

3) Company not a citizen- In State Trading Corporation of India v. CTO, the SC held that a
company though a legal person is not a citizen neither under the provisions of the Constitution nor
under the Citizenship Act ----------------------------------------------------------

Quest: - What are the various kinds of companies. Explain in brief?

Ans: - Companies may be classified into different kinds or types from different points of view:

1. Classification of companies from the point of view of incorporation or registration: From

the point of view of their incorporation, companies can be classified into three types. They are.

a) Chartered companies: If a Company is incorporated under a special charter granted by the

monarch it is called a chartered company and is regulated by that charter. Chartered companies
were common in the 17th and 18th centuries. For e.g. British East India companies, Bank of
England, Chartered Bank of Australia etc. is examples of chartered companies. This form of
organization does not exist in India, as there is no monarchy.

b) Statutory Companies: A statutory Company is a company which is incorporated under a

special or separate act of the legislature (i.e.., parliament). A statutory company requires special
powers and privileges which it does not get under the companies Act. So, it is registered under a
special act of the legislature. The powers and activities of statutory companies are regulated by
the special act under which it is established. This method of incorporation is adopted for
companies of national importance and public utility companies, such as railway companies,
electricity supply companies, etc. The RBI, SBI, LIC, UTI, etc are examples of statutory
companies.

c) Registered Companies: A company is brought into existence by registration with the registrar
of companies under the companies Act of 1956, is called a registered company. The activities of
these companies are governed by the companies Act. These constitute the most important Joint
stock companies.

2. Classification of Registered Companies on the basis of the liability of members: From the
point of view of the liability of the members, registered companies may be classified into three
categories. They are:

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a) Companies Limited by Shares: Companies limited by share are companies in which the
liability of a member is limited to the nominal or face value of the shares held by him. In short,
these are the companies in which the liability of a member is limited only to the amount unpaid
on the shares held by him. These companies are mostly trading companies. Most of the
companies registered under the companies Act are of this type.

b) Companies Limited by Guarantee: Companies limited by guarantee are companies in which

the liability of each member is limited to a fixed amount which he has guaranteed ie., agreed to
contribute to the assets of the company to meet the liabilities of the company in the event of its
winding up. The amount guaranteed by each member is mentioned in the Memorandum of
Association or Articles of Association of the Company. The members are required to pay the
amount guaranteed by them, not during the life of the company but only when the company is
wound up and the assets of the company are not sufficient to meet the liabilities of the company.
These are mostly non-trading companies formed for the purpose of promoting art, culture,
charity, science and education, etc.

c) Unlimited Companies: Unlimited companies are companies in which the liability of members
is unlimited i.e., members are liable for the debts of the company to an unlimited extent in the
event of its winding up. Each member is liable to contribute from his private assets in
proportion to his capital, in the company towards the amount required for the payment of the
entire or full liabilities of the company. If any of the members is unable to contribute anything
from his private assets, then, that additional deficiency is to be shared among the remaining
members in proportion to their respective capital in the company.

3. Classification of companies on the basis of ownership: On the basis of ownership, companies

may be classified into two kinds. They are:

a) Government companies: A Company in which not less than 51% of the share capital is held by
the central government and or by any state government or governments is called a government
companies. It may be a public company or a private company. Some of the prominent
government companies are: Hindustan Machine Tools, Bharat Electronic Limited, Indian
Telephone Industries and Hindustan Aeronautics limited.

A Government company may be permitted by the central government to drop the words
“Private Limited" or the word "Limited" from its name. The Central Government can by

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 notification in the official gazette, restrict or modify the application of certain provision of the
companies Act in regard to government companies.

b) Non- Government companies: A non-government company is a company which is owned and

managed by private investors.

4. Classifications of companies on the basis of nationality: On the basis of nationality,

companies may be classified into two kinds, They are.

a) Domestic companies: A Domestic company is a company which is inccrporated in India

.Today most of the Joint stock companies in India are domestic companies.

b) Foreign Company: A foreign Company is a Company which is incorporated in a foreign

country, but which has established a place of business in India. Although; foreign Companies
are not registered or incorporated in India, some of the provisions of the companies Act, are
applicable to them. The companies (Amendment) Act, 1974, has made several sections of the
Act applicable to foreign companies in order to bring into the ambit of the provisions applicable
to Indian companies.

5. Classification of companies on the basis of control: On the basis of control companies may
be classified into

Holding Companies and Subsidiary Companies: As per section 4 of the companies Act of 1956,"
a holding Company is a company which is controlling a subsidiary company". In other words, a
holding company is a company

a) Which holds more than 70% of the nominal value of The equity share capital of another
company or

b) Which controls the composition of the board of directors of another Company

c) Which controls more than 50% of the total voting power of another Company

d) Where a Company is a subsidiary of another Company which is a subsidiary of a holding

Company, that is, Company C is a subsidiary of Company B, whereas Company B is a
subsidiary of holding Company A.

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As per section 4 of the companies Act of 1956, “a subsidiary Company is a Company which is
controlled by a holding Company". In other words, a Company becomes the subsidiary of another
Company if:

a) The other Company holds more than 50% of the nominal value of its equity share capital or

b) The other Company controls the composition of its board of directors or

c) The other Company controls more than 50% of its total voting powers

d) It is a subsidiary of another Company which is subsidiary of the controlling company

Eg. When Company A has a control over company B, company A is known as a holding company
and company B which is so controlled is known as a subsidiary company.

6. Classification of companies on the basis of number of members: Registered companies with

share capital may be divided into two classes from the point of view of the the number of
members

i) Private Companies: Section 3(1) (iii) of the companies Act of 1956 defines a private company as
a company which by its articles of association,

a) Restricts the right of its members to transfer shares, if any,

b) Limits the number of its member to fifty, excluding those members who are its present or
past employees

c) Prohibits any invitation to the public to subscribe to its shares or debentures

ii) Public Companies: Section 3 (I) (iv) of the companies Act of 1956 states that a "Public
company is a company which is not a private company". In other words, a public company is a
company

a) Which has at least 7 members

b) Which has no maximum limit to the number of members,

c) Which can invite the public to subscribe to its shares or debenture, and which generally does
not restrict the right of its members to transfer shares.

7. Other Kinds of Companies:

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 a) One Man Companies / Family Companies: One man company refers to a company in
which one man holds practically the hole of or the substantial no. of shares of the
companies, and has controlling powers over the company and some dummy members who
are mostly his relations or friends, hold one or two shares each. The dummy members are
included only to comply with the statutory requirements of the minimum no. of members.

b) Licensed Companies: Association formed not for profit, but for promoting non trading
purposes, such as art, science, education, sports, religion, charity, etc., can obtain a licence
from the central layout and get themselves registered as companies with limited liability
under Sec. 25 (U/S 25) of the companies act. They are called companies not for profit or
licence companies. ----------------------------

Quest:-Describe briefly the procedure for effecting the conversion of a Private Company into
a Public Company. How does a Private Company different from Public Company.
Ans: - Conversion of Private. Company into Public Company

 By Default Where the maximum no. of members exceeds fifty, it allow to transfer shares freely,
incites subscription from public for its shares or debenture & accepts deposits from the public
the company law Board may relieve the company from being treated as a Pub. Co. on such
terms & conditions as it thinks just & equitable, if it is of opinion that the default was due to
accidental or some other sufficient cause.

 By Deliberate Conversion A private company may, at any time, pass a special resolution
deleting from its articles the four compulsory restrictions as to membership, transfer of shares,
public subscription, & acceptance of deposits from public and then from the date of alteration it
becomes a public company. Within 30 days of such Alteration, a copy of special resolution, a
copy of altered articles, together with a copy of prospectus must be filed with the registrar. After
becoming a Public Co. the company will have to increase the number of its members to at least
seven and to its directors at least 3.
Conversion of Public Company into Private Company
A public company may be converted into a private company without resorting to winding up of the
company for such purpose, a special resolution will be passed to alter the articles so as to
incorporate the four restrictions imposed upon a Private Company, and a copy of the same shall be
filed with the registrar of companies within 30 days of passing the resolution and reduce the no. of

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 members up to 2. The approval of central Govt. must be necessary. A Pub. Co. works as a Pvt. Co.
from the date of the order of approval.
Quest: - Discuss the difference between company and partnership.
Ans.

Basis Company Partnership

1. Regulating It is regulated under companies It is governed by the Indian

Act. Act. 1956. partnership Act. 1932.

2. Legal status A company is a legal person in A firm is not a legal person in the
the eye of law. eyes of law.

3. Minimum Minimum number is 2 in private The minimum number of partners in a

Numbers company whereas in public firm is 2.
company it is 7.
4. Maximum The max no. of members in a Max. No. of partners in a firm
Number put company is 50 & there is no carrying banking business can be 10
limit in public company. and in any other business is 20.

Winding up of an insolvent The insolvency of a parternership

5. Insolvency company does not make the firm means insolvency of all the
members insolvent. members.
If company owes a debt from If a partner who owned money by his
6. Debts any of its members he can claim firm cannot prove against the firm’s
payment out of its assets. assets in competition with its other
creditors.
7. Dissolution Companies dissolved according Partnership may be dissolved at any
to the provisions of the time by any partner’s death,
companies Act. 1956. insolvency or retirement

Quest: - What formalities are required for the formation of a company?

It involves many steps which may be as followed;

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a) Promotion
b) Incorporation
c) Floatation or raising of capital ; and
d) In case of public ltd. Company securing a certificate of commencement.

Promotions: It is the preliminary stage wherein necessary steps are taken for the registration of the
company. It is the process of organizing and planning the finances of a business enterprise under the
corporate form. The people who undertake the task of promotion are called promoters.

Meaning of Promoter

Promoter

The Company Act, 1956, does not provide a common definition of Promoter. Although few section like
62, 69, 76, 478, 519 of Company Act and SEBI Guidelines 2000 Chapter VI Explanation I to III to
clause 6.4.2(k) does discuss about promoter, but definition provided under those section would be
restricted to the area of those section. Resent Company Bill does have the definition of Promoter in the
definition clause under section 2(zzq), it says that “promoter means a person who has

(a) Been named as such in a prospectus; or

(b) Control over the affairs of the company, directly or indirectly whether as a shareholder, director”.
Even the English law does not provide the definition. Joseph H. Gross in his celebrated article ‘Who is a
Company Promoter?' found that it was rather intentional to not providing definition in English
Legislation, because if legislation tries to define it then someone might escape from the liability that
enjoy the place of promoter but not come under the definition of promoter

According to Bowen J., the ‘Promoter' is not the term of law but it is a term of business, who play main
role in the setup of a company. Whereas Cockburn CJ in Twycross v Grant observed that a promoter is
‘one who undertakes to form a company with reference to a given project and to set it going and who
takes the necessary steps to accomplish that purpose'. Promoters are the people who are involved in the
formation of a company. They deal with the required formalities of a company's registration from
finding directors and share holders to doing negotiations for business contracts for the new company.

The term "promoter" is said to be a business, not a legal term, "usually summing up in a single word a
number of business operations, familiar to the commercial world, by which a company is generally
brought into existence"."A promoter is a person who brings about the incorporation and organisation of

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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." Thus the term does
not have any definite meaning. Whether a person is a promoter or not depends upon the role that he
plays in the business of promotion. There may be a professional promoter or the promoter of his own
company like Salomon.

A person who acts in ministerial capacity is not a promoter. A solicitor, who prepares on behalf of the
promoters the primary documents of the proposed company, an accountant or a valuer who helps the
promotion in his professional capacity, is not a promoter. But a person who helps the company in getting
a purchaser of its patent, or its shares, or in getting personnel for the company is a promoter.

Duty and liability: Fiduciary relation

A promoter is not an agent or trustee of the company, because the company before incorporation is a
non-enfity. But he "is in the situation akin to that of agent or trustee of the company, and his dealings
with it must be open and fair. Their position was explained by Lord CAIRNS in Erlanger v New
Sombrero Phosphate Co: ''They stand, in my opinion, undoubtedly in a fiduciary position. They have in
their hands the creation and moulding of the company. They have the power of defining how and when
and in what shape and under what supervision it shall start into existence and begin to act as a trading
corporation." The first and foremost duty of a promoter is that if he starts a company for the purpose of
buying his property and wants to draw his payment from the money obtained from shareholders, he must
faithfully disclose all facts relating to the property. He should disclose to the company his position, his
profit and his interest in the property which is subject of purchase or sale. It was held by the House of
Lords in Erlanger v New Sombrero Phosphate Co that this disclosure should be made to a board of
directors who can exercise an intelligent and independent judgment on the transaction. A disclosure to
directors who are under the promoter's control is not sufficient.

But in certain circumstances like those of Salomon's company it is impossible to constitute an

independent board of directors. In such circumstances the real truth should be disclosed to those who are
invited to become the shareholders, and not merely to the first few shareholders.

Details of property, including the price paid for it, purchased from promoters within the preceding two
years has to be disclosed in the prospectus in accordance with the requirements of Schedule II.

In conclusion, one can say that promoter connote any individual, syndicate, association, partnership or a
company, which takes all the necessary steps to create company and mould a company and set it going.

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Function of Promoters

I. Discovery of Idea: Promotion starts with the discovery of idea to set up a business or to expand
the existing one. They also analyses the amount of capital required the degree of risk involved in
it.

II. Detailed Investigation: He starts doing details investigation regarding cost, profitability fraud
process, demand of the product.

III. Assembling of Resources: The promoters starts collecting all the resources necessary to form
company. Promoters makes contract for purchase of material land machinery etc.

IV. Preparing Preliminary Documents: After assembling the physical &financial resources he
prepares the necessary documents which are compulsory for the formation of a Co.

V. Entering into Preliminary Contracts: Promoters sign a contract with different parties before
incorporation by the Co. after corporation.

VI. Naming a Company : He has to select a name of the Company keeping in mind that the name
should not be identical to the name of any other Company.

VII. Appointment of Bankers, Brokers, Solicitors & Underwriters : He appoints them to ensure
the availability of Capital by sale of Co.’s securities.

Pre-Incorporation Contract

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

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

One might question that ‘why is company not liable, even if it a beneficiary to contact' or one might also
question that ‘doesn't promoter work under Principal-Agent relationship'.

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Answer to those entire questions would be simple. The company does not in legal existence at time of
pre-incorporation contract. If someone is not in legal existence, then he cannot be a party to contract,
and ‘Privity to Contract' doctrine excludes company from the liability. In Kelner v Baxter, Phonogram
Limited v Lane this position was confirmed.

In pure common law sense, Pre-incorporation contract does not bind the company. But there are certain
exceptions to this contract, and these exceptions were developed in USA, India and later in England.

Liability of Promoter Concerning Pre-Incorporation Contract

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

Effects of pre-incorporation contracts

 Company cannot be sued on pre-incorporation contracts A company, when it comes into

existence, cannot be sued on pre-incorporation contracts. In English and Colonial Produce Co,
Re, a solicitor on the request of promoters prepared a company’s documents and spent time and
money in getting it registered. But the company was not held to be bound to pay for those services
and expenses.
 Company cannot sue on pre-incorporation contracts- A company cannot by adoption or
ratification obtain the benefit of a contract made on its behalf before the company came into
existence. In Natal Land and Colonization Co v. Pauline Colliery Syndicate, the promoters of a
proposed company obtained an agreement from a landlord that he would grant lease of coal mining
rights to the company. The company could not, after incorporation, enforce this contract.
 Agents may incur personal liability- The agents who contract for a proposed company may
sometimes incur personal liability. In Kelner v. Baxter, the promoters of a projected hotel
company purchased wine from the plaintiff on behalf of the company. The company came into
being but, before paying the price went into liquidation. They were held personally liable to the
plaintiff

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Commencement of Business

A private Co. can start business from the date of incorporation. But a public Co. having shares
Capitals has to obtain a certificate of commencement before it can start business.

If Co. has a shares Capitals and had issued a prospectus inviting the public to subscribe for its shares
or debentures, it cannot commence business until

 Shares payable in cash have been allotted to the extent of the minimum subscription.
 Every director has paid in cash the application & allotment money on the shares taken by him.
 No money is liable to be repaid to the applicants for failure to apply or obtain permission for the
shares or debentures to be dealt in on any recognized stock exchange;
 A statutory declaration duty verified by one of the directors or the secretary or when the Co. has
not been appointed a secretary, a secretary in the whole time practice in the prescribed from that
the above condition have been compiled has been filed with the Registrar. (S-149(1))
-----------------------------------------------

Quest:-Explain the Procedure for Registration of a Company.

Sec 33 of the Companies Act deals with registration of a company. To obtain registration an
application has to be filed to the Registrar of Companies. The application must be accompanied by
the following documents:

a) Memorandum of Association
b) Articles of Association, if necessary.
c) A copy of the agreement, if any, which the company proposes to enter into with any
individual for his appointment as the managing or the whole-time director or the manager.
d) A declaration that all the requirements of the Act have been complied with.

Articles are compulsory only for unlimited companies, companies limited by guarantee and private
companies limited by shares(s 26). The declaration must be signed by an advocate of the SC, or of a
HC, or an attorney or a pleader entitled to appear before a HC, or any proposed director, manager or
secretary of the company or by a secretary or chartered accountant who is in whole time practice
in India[s 33(2)].

Section 12, which states the mode of forming an incorporated company, enables any seven persons
(two for private company) to associate for any lawful purpose and to get themselves incorporated

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 into a company with or without limited liability. They can do so by subscribing their names to a
memorandum of association and by complying with other documents.

If the Registrar finds the documents to be satisfactory, he registers them and enters the name of the
company in the Register of Companies and issues a certificate called the Certificate of
Incorporation. Certificate of Incorporation brings the company into existence as a legal person. It is
the conclusive evidence that all the requirements under the Act in respect of registration and matters
precedent and incidental thereto have been complied with and that the association is a company
authorized to be registered and duly registered under the Act.

Certificate of Incorporation (sec 34 and 35)

Certificate of Incorporation is the certificate issued by the Registrar of Companies ion registration
of a company. It brings the company into existence as a legal person. It marks the birth of the
company, and the date mentioned on it is conclusive, even if wrong

Certificate of Incorporation is the conclusive evidence that all the requirements under the Act in
respect of registration and matters precedent and incidental thereto have been complied with and
that the association is a company authorized to be registered and duly registered under the Act(s
35). This is illustrated by the Privy Council in Moosa Goolam Ariff v. Ebrahim Goolam Ariff, in
which the memorandum of a company was signed by two adult members and by a guardian on
behalf of the other five members, who were minors. The Registrar, however, registered the
company. The plaintiff’s contention that the Certificate of Incorporation should be declared void
was rejected as the certificate is conclusive for all purposes

However, the illegal objects of the company do not become legal by the issue of the certificate.
The certificate is subject to judicial review where it happens to be issued to a company which on
account of illegal objects should not have been registered. This is so because a company cannot be
registered for illegal purposes. ----------------------------------------

Q: - What do you understand by “Memorandum of Association”? Distinguish between

Memorandum of association and ‘Article of Association.

Meaning of Memorandum of Association

Acc. to S-2 (28) of comp. Act. 1956 “Memorandum means the memorandum of Association of a
Company. as originally framed or as altered from time to time in pursuance of any previous companies

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 Law or of this Act.” It establishes the relationship of the company with the outside world. The first step
in the formation of a company is to prepare a document called the memorandum of association. This
document contains the constitution of the company. It has to be divided into five clauses. [Ss. 12 & 13]

Acc. to Lord Mc Milan “The MAO sets out the constitution of Company. It is the charter of the
Company and provides the foundation on which the structure of the Company is built”

Significance of Memorandum

 It is the basis of incorporation and a Company cannot be registered without a MAO.

 It is the charter of the Company, which defines the objects of the Company’s formation and the
utmost possible scope of its operations.
 It can be the foundation stone, upon which the future structure of the Company will stand.
 It determines the limits of a Company’s activities.
 It makes known to the shareholders the extent of their liability.
 It indicates the names and address of the people who have promoted the Company.
Clauses in Memorandum of Association

1) Name Clause: It states the name of the proposed company. The name of a company establishes its
identity and is the symbol of its existence. It does not contain the name which is undesirable by the
Central Government. . Generally, a name is undesirable when it is identical with, or too nearly
resembles, the name of another company. The name should not mislead as to the nature of the
company's business or its scale. and always bear limited or Pvt. Ltd. As the last words with the name of
the Company. . The Central Government may, however, permit a company to drop the word "limited"
from its name if: (1) the company is formed for the promotion of commerce, art, religion, science,
charity or any other useful object, and (2) the company is to apply its income in promoting its objects
and prohibits the payment of dividends to its members. Such companies are known as Section 25
companies. They have been exempted from the requirement of having a minimum amount of share
capital as required by the amendment of Section 3 by the Companies (Amendment) Act, 2000.
2) Registered Office Clause The second clause of the memorandum states the State in which the
registered office of the company shall be situate. After incorporation the exact address of the registered
office should be sent to the Registrar. Every Co. Shall have an office registered from the day on which
it begins to carry on business, or as from the day after the date of its incorporation, whichever is earlier
all Communications and notices are to be addressed to that registered off (u/s 146 (1)).

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3) Object Clause: The third clause of the memorandum states the objects of the proposed company. The
company carries on business with other people's money and, therefore, the investors must be informed
of the objects in which their money is going to be employed. People are more willing to invest in one
kind of object than in others. Secondly, the creditors of the company are paid out of the company's
assets and they feel protected when they know that the assets can be used only for the authorized
objects. Financial institutions also need information as to objects. It defines as well as confines the
spheres of business activities that the company would engage in. The object that would be pursued by
the company is divided into three classes.
 Main Object: is to be pursued by the company on its incorporation.
 Ancillary Objects: attain for the attainment of main object.
 Other Object: not included in the main object.
4) Liability Clause: The fourth clause has to state the nature of liability that the members incur. The
clause will state whether the liability of the members shall be limited, and, if so, whether limited by
shares or by guarantee, or unlimited. It states the liability of members is limited by the face value of
shares. The change in the liability can be brought by passing a special resolution to that effect.
5) Capital Clause: The last clause states the amount of capital with which the company is proposed to
be registered and the kinds, number and value of shares into which the capital is to be divided.
The Companies (Amendment) Act, 2000 has, by amending Section 3, prescribed the requirement that a
public company must have a minimum paid up capital of five lakh rupees or such higher amount as
may be prescribed. A private company is required to have a minimum paid up capital of 1 lakh rupees
or such higher amount as may be prescribed by its articles.
6) Association Clause: At the end of MOA of every Co. there is an association or subscription clause or
a declaration of association.
 Alteration of Memorandum
1) Change of Name:
a. By special resolution: A Co. may change its name by a resolution and with the approval of
the central Govt. but in case of conversion of Pvt. Into pub Co. & vice versa, approval of the
Central Government does not require.
b. By ordinary Resolutions: The Co. may change its name by ordinary resolution with the
previous approval of the Central Govt. with 12 months of its registration by its new name.
2) Change of Registered Office:
a. From one city to another: a notice in this regard is to be given within 30 days of the
change to the Registrar. u/s 146 (1)

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 b. From one State to another: a special resolution is required to be passed at a general
meeting the shareholders and a copy of it is to be passed at a general meeting of the
shareholders and a copy of it is to be filed with the Registrar with 30 days u/s 146 (7).
3) Alteration of objects clause: u/s – 17 (1) the objects of a Company may be altered by a special
resolution.
4) Change in liability clause: A Co. Limited by a shares on guarantee cannot change its
memorandum so as to impose any additional liability on the members or to compel them to be if
additional shares, unless the entire member agree in writing to such change. U/s (323). -----
 Articles of Association

Meaning

The Laws & regulations which govern the management of its internal affairs & the conduct of its
business. It defines the duties, rights, powers & authority of the management, and the mode in which
the business of the company is to be carried out. U/s 2 (2).

An article of association is the second important document Which in the case of some companies has to
be registered along with the memorandum. Companies which must have articles are unlimited
companies, guarantee companies and private companies limited by shares. [So 26]

Articles are internal regulations and by-laws. Schedule 1 of the Act sets out tables of model forms of
articles for different companies. Table A is applicable to companies limited by shares. [So 28(1)] Such
a company may either frame its own articles or adopt Table A and the Table automatically applies to
the extent to which it is not excluded. The chief advantage of adopting Table A is that its provisions are
legal beyond all doubt. The document has to be divided into paragraphs numbered consecutively and
must be signed by every subscriber.

Contents

AOA may prescribe such regulations for the company as the subscribers to the memorandum deem
expedient. The Act gives the subscribers a free hand. Any stipulations as to the relation between the
company and its members or members inter se may be inserted in the articles. But everything stated
therein is subject to the Companies Act. Usually, articles contain provisions relating to the following
matters:

1) Share capital, rights of shareholders, share certificates, payment of commission.

2) Lien on shares.

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3) Call on shares.
4) Transfer of shares.
5) Transmission of shares.
6) Forfeiture of shares.
7) Conversion of shares into stock.
8) Share warrants.
9) Alteration of capital.
10) General meetings and proceedings there at.
11) Voting rights of members, voting and poll, proxies.
12) Directors, their appointment, remuneration, qualifications, powers and proceedings of Board of
Directors.
13) Manager.
14) Secretary.
15) Dividends and reserves.
16) Accounts, audit and borrowing power.
17) Capitalization of profits. Winding up.

Importance of Articles of Association

Under sec 36, the memorandum and the articles when registered, shall bind the company and its
members to the same extent as if it had been signed by them and had contained a covenant on their part
that the memorandum and the articles shall be observed. With respect to the above section, the
importance of articles of association can be summed up as follows:

a) Binding on members in their relation to the company- the members are bound to the company
by the provisions of the articles just as much as if they had all put their seals to them.
b) Binding on company in relation to its members- just as members are bound to the company, the
company is bound to the members to observe and follow the articles.
c) Neither company, nor members bound to outsiders- articles bind the members to the company
and company too the members but neither of them is bound to an outsider to give effect to the
articles.
d) Binding between members inter se- the articles define rights and liabilities of the members. As
between members inter se the articles constitute a contract between them and are also binding on

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 each member as against the other or others. Such contract can be enforced only through the
medium of the company.

Difference b/w MOA & AOA

Basic Memorandum of Association Article of Association

Status It is the charter of the Co. & the defines the It is the rules & regulations framed to
fundamental conditions & objects of the govern the internal mgmt. of the Co.
Company.
Scope Its defines objects & powers. Rules & regulations for day to day
working of the company.
Purpose Every company must prepare and file it. A public co. limited by shares may adopt
Necessity table A.

Alteration It is the constitution of the Co. clauses of the Members have a right to alter the Articles
memorandum cannot be easily altered. by a special resolution.

Provisions Memorandum is subordinate to the companies Articles are subordinate to the companies
Act so it cannot include any clause contrary to Act as well as Moa It should be
the prov. Of the companies Act. consistent with the prov. Of Co. Act.

Defines relation b/w the Co. the Outsides. It regulate the relation b/w the Co. & its
Relationship members an b/w the members an b/w the
members
Legal Acts done beyond the scope of Moa are Acts done by the director beyond the
Effects absolutely void & ultra virus. Articles is simply irregular & can
subsequently be ratified by shareholders.
---------------------------------------------------------------Quest:-
What is a prospectus? State the various contents of a prospectus.

Ans:- Introduction

Prospectus is a document that invites the public to subscribe to the share capital or debentures of a company.
If it does not do that, it cannot be called a prospectus. According to the Companies Act, an invitation to the
public inviting deposits is also deemed to be a prospectus. Some companies do not directly to the public

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themselves, but allot the entire share capital to an intermediary, which then offers the shares to the public by an
advertisement of its own. Any document by which such offer for sale to public is made is deemed to be a
prospectus.

After getting the company incorporated, promoters will raise finances. The public is invited to purchase shares
and debentures of the company through an advertisement. A document containing detailed information about
the company and an invitation to the public subscribing to the share capital and debentures is issued. This
document is called ‘prospectuses. Private companies cannot issue a prospectus because they are strictly
prohibited from inviting the public to subscribe to their shares. Only public companies can issue a prospectus.

Definition

Section 2 (36) of the Companies Act defines prospectus as, “A prospectus means any document described or
issued as prospectus and includes any notice, circular, advertisement or other documents invent deposits from
public or inviting offers from the public for the subscription or purchase of any shares in or debentures of a
body corporate.”

Essentials of Prospectus

 There must be an invitation offering to the public.

 The invitation must be made on behalf of the company or intended company.
 The invitation must to be subscribed or purchase.
 The invitation must relate to shares or debentures

A prospectus must be filed with the Registrar of companies before it is issued to the public. The issue of
prospectus is essential when the company wishes the public to purchase its shares or debentures. If the
promoters are confident of obtaining the required capital through private contacts, even a public company
may not issue a prospectus. The promoters prepare a draft prospectus containing required information and this
document is known as ‘a statement is lieu of prospectus.’ A prospectus duly dated and signed by all the
directors should be field with Register of Company before it is issued to the public.

A prospectus brings to the notice of the public that a new company has been formed. The company tries to
convince the public that it offers best opportunity for their investment. A prospectus outlines a detail the terms
and conditions on which the shares or debentures have been offered to the public. Every prospectus contains
an application from on which an intending investor can apply for the purchase of shares or debentures. A
company must get minimum subscription within 120 days from the issue of prospectus. If it fails to obtain
minimum subscription from the members of the public within the specified period, then the amount already
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 received from public is returned. The company cannot get a certificate of commencement of business because
the public is not interested in that company.
Object of a prospectus
The objects of issuing a prospectus are as under:
a) To invite the public to invest in the shares or debenture of a market.
b) To give a bureau of a condition on which the public is invited to invest in shares and debentures.
c) To make a declaration that the directors of the company are liable for the condition stated in the
prospectus.
Nature of prospectus
As said earlier that the prospectus is an invitation to the public to invest in the shares or debentures of a
company. But the term public is nowhere defined in the Companies Act. So, far as it is related to prospectus,
public is meant to be the ordinary common people. Whether or not the invitation for investment is made to the
‘public’ depends upon some situation, such as:
 How many copies of the prospectus were printed?
 To how many members of the public were the copies distributed.
 How many members of the public accepted the copies?
 Under what conditions did the member of the public accept the prospectus?

Golden rule in prospectus

Prospectus is the basis of the contract between the company and the person’s who incest in the
company’s shares or debentures. The officers of the company have knowledge of the company’s present
status and its prospects in future or have the means to acquire such knowledge. But the potential investor
has no such knowledge, nor the means to acquire it. It, therefore, becomes the duty of those who issue
the prospectus that they not only projects the company’s image in the right perspective but also makes
sure that no vital information which could be of interest to the potential investors in the company’s
shares and debentures is left out from the company’s prospectus. it therefore become important that the
prospectus states the basic important facts about the company with utmost honesty and good faith and
that no information that is important is twisted or partially presented. That is what is refers to as the
‘golden rule for making a prospectus’
In short the following must be kept in mind when preparing the prospectus of a company:
 The prospectus must be an honest statement of the company’s profile; there must be no misleading,
ambiguous or erroneous reference to the company in its prospectus.
 Every important aspect of a contract of the company should be clarified.

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  The contents of the prospectus should conform to the provision of the Companies Act.
 The restrictions on the appointment of directors must be kept in mind.
 The conditions of civil liability as laid down must be strictly adhered to issue and registration of
prospectus or legal requirement regarding issue of prospectus[
Contents of prospectus

The main contents of a prospectus are:

1) Main object of the company with the names, addresses, description and occupation of signatories to the
memorandum and the number of shares subscribed for by them.
2) Number and classes of shares and the nature and extent of the interest of holders thereof in the property and
profits of the company.
3) The number of redeemable preference shares intended to be issued and the date of redemption or where no
date is fixed; the period of notice required for redeeming the share s and proposed method of redemption.
4) The number of shares. If any, fixed by the Article as the qualification of a director and the remuneration of
the directors for the service.
5) The names, occupation and addresses of directors, managing director and manager together with any
provision in the Articles or a contract regarding their appointment remuneration or compensation for loss
of office.
6) The time of opening of the subscription list should be given in the prospectus
7) The amount payable on application and allotment on each share should be stated. If any prospectus is
issued within two years, the details of the shares subscribed for any allotted.
8) The particular about any option or preferential right to be given to any person to subscribe for shares or
debentures of the company.
9) The number of shares or debentures which within the two preceding year been issued for a considerations
other than cash.
10) Particulars about premium received on shares within two preceding years or to be received.
11) The amount or rate of underwriting commission.
12) Preliminary expenses
13) The names and addresses of auditors, if any, of the company.
14) Where the shares are of more than one class, the rights of voting and rights as to capital and dividend
attached to several classes of shares.
15) If nay reserve or profits of the company have been capitalized, particulars of capitalizations and
particulars of the surplus arising from any revaluation of the assets of the company.

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16) A reasonable time and place at which copies of all accounts on which the report of auditors is based may
be inspected. ---------------------------------------------------
Quest:- Write a short notes on Statement in Lieu of Prospectus
Ans:-
Introduction
If a company does not want to issue a prospectus to the public for subscription of the shares, this statement is
required to be issued to the public for necessary information. It must be signed by every person named in it as
director or by his agent authorized in writing.The nature of the information of this document is more or less
similar to that given in the prospectus. A copy of this statement must be filed with registrar within prescribed
time. This provision does not apply to private company.
Contains
A statement in lieu of the prospectus contains the information as described below:-
1- Name of the company
2- Statement of capital
3- Description of the business
4- Names, addresses, and occupation of directors
5- Estimated initial expenses
6- Names of vendors and details of property
7- Material contracts
8- Director's interest
9- Minimum subscription
When issued
Section 70(1) requires a public company having a share capital to file with the Registrar of Companies a
statement called “Statement in lieu of prospectus” in the following cases:
a) Where it does not issue a prospectus (because it feels that it can raise enough capital without inviting a
subscription from the public); or
b) Where it issues a prospectus but has not proceeded to allot any of the shares offered to the public for
subscription (because the issue has been a failure and the minimum subscription has not been received)

Statement in lieu of prospectus must be filed with Registrar of Companies at least three days before any
allotment of shares or debenture is made.

Consequences/Penalty for misstatement in, or not filing of, statement in lieu of prospectus: If the
allotment of shares or debenture is made without filing the statement in lieu of prospectus.

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 a) The allottee may avoid the allotment within two months after the statutory meeting, or where no such
meeting is held, within two months of the allotment [section 71(1)]
b) The person who authorized the delivery of SLP may be punished with imprisonment upto 2 years or
with fine Rs. 50,000 or with both. [section 70(5)]

Form of statement in lieu of prospectus: Schedule III contains a model form of a statement in lieu of
prospectus in pursuance of section 70; Schedule IV contains a model form of a statement in lieu of
prospectus when a private company is converted into a public company in pursuance of section 44

Conclusion
A public company raises its capital from the public and it issues prospectus for this purpose.
Sometimes, the promoters of a company decide not to approach the public for raising necessary
capital. They are hopeful of raising funds from the friends and relations or through underwriters. In
that case a prospectus need not be issued but a Statement in Lieu of Prospectus must be filed with the
registrar at least three days before the first allotment of shares. Such a statement must be signed by
every person who is named therein as a director or proposed director of the company. This statement
will be drafted strictly in accordance with the particulars set out in a part I of Schedule III of the Act
---------------------------------------------------

Quest: - What are the various through which a person may become members of a company?
Ans: - Introduction
A company has to maintain register of members. The inclusion of a name in the register differentiate
the term ‘member ‘and ‘shareholder’. Usually, both the term are used interchangeably. Generally,
every shareholder is a member and every member is a shareholder. There may be certain exception
like, a person ‘X’ become the shareholder by transfer i.e. he may hold the share of ‘ Y’ but he is not a
member until this transfer is not written on the register of the company. Similarly, ‘x’ will remain as
member in the company though he does not hold the share until his name is removed from the register
and write the name of ‘Y’ in the register of the company
All the subscribers of the Memorandum of Association shall be deemed to Membership have agreed to
become members of the company and on registration of a company shall be entered as members in the
Register of members
Section 41 deals with definition of member which provide as under:—

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a) The subscribers of the Memorandum of a company shall be deemed to have agreed to become
members of the company, and on its registration, shall be entered as members in its register of
members
b) Every other person who agrees in writing to become a member of a company and whose name is
entered in its register of members, shall be a member of the company
c) Every person holding equity share capital of a company and whose name is entered as beneficial
owner in the records of the depository shall be deemed to be a member of the concerned
company.
Modes of Acquiring Membership A person may become a member of the company in any
following ways:
a) By subscribing to the memorandum of association.
b) By agreeing to take qualification shares.
c) By application and allotment.
d) By transfer of shares.
e) By transmission of shares.
f) By holding out as a member.
a) Membership by subscription: Every subscriber to the memorandum of association is deemed to
have agreed to become its member and on its registration must be put on the register of members.
Two conditions are necessary to make such a person a member: (i) He will subscribe his name to
the memorandum of association. (ii) The company must be registered under the companies act.
In their case neither allotment of shares not registration of their names in the register of members
is essential. He acquires as soon as the company is registered the full status of a member with all
the rights and liabilities. A subscriber cannot repudiate his contract on the ground of
misrepresentation or that he subscribed to the memorandum subject to certain reservations.
b) Membership by Qualification shares: Directors of the company on delivering to the registrar
written undertaking to take their qualification shares and to pay for them become members of the
company, and they are in the same position as if they were subscribers to the memorandum.
They are deemed to have become members automatically on the registration of the company.
c) Membership by application and allotment: A person may become a member of a company by
an application for shares subject to the formal acceptance by the company. The ordinary law of
contracts applies to the agreement to take shares in a company. An application for share may be
absolute or conditional. If it is absolute, a simple allotment and notice thereof to the applicant
will constitute the agreement. If it is conditional, the allotment must be on the basis of the

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 conditions specified. Where there is a conditional allotment of shares and an unconditional
allotment, there is no contract constituted.
d) Membership by transfer: The shares of a company are transferable but the mode of transfer is
left to be decided by the articles of the company. A person may purchase shares and apply to the
company to register him as a member. On transfer of shares duly affected the transferee becomes
a member of the company.
e) Membership by Transmission: On the death of a member his shares vest in his legal
representatives. The legal representatives can sell the shares without being registered, but subject
to the provisions of the articles he is entitled to be put on the register of members if he so
chooses. The official assignee is likewise entitled to be a member in place of a shareholder who
is adjudicated insolvent. This process of acquiring membership is known as transmission. It takes
place on the death or insolvency of a member or if the member is a company on its going into
liquidation. In these cases no instrument of transfer need be delivered to the company.
f) Membership by holding Out: A person is deemed to be a member of the company who allows
his name to appear in the register of members apart from any agreement to become a member, to
be on the register of members or otherwise hold himself out or allows him to be held out as a
member. A person may not have applied for the shares but if he assents to his name being on the
register, he is to be considered as a member of the company.
 Termination of Membership

A person will cease to be a member of the company when his name is removed from the register of
members. It may take place in any of the following ways:

a) When a person transfers his shares. In such a case the transferor ceases to be a member as
soon as the transferee is registered but not before

b) When his shares are validly forfeited by the company.

c) When a person makes a valid surrender of his shares of the company.

d) . When a company sells the shares in exercise of its right of lien over them.

e) When he dies.

f) When he is declared insolvent and the official assignee either disclaims or transfers the
shares.

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 g) When he repudiates the contract on the ground of false or misleading statement in the
prospectus of the company.

h) When he is holding redeemable preference shares and such shares are redeemed.

i) When share-warrants are issued in exchange of fully paid-up shares and the articles do not
recognize holders of share-warrants as members.

j) When the share are sold in execution of a decree of the court. When the company is wound-
up. But he remains liable as a contributory.-----------------------------------------------

Quest: - Explain the meaning and consequences of Doctrine of Ultra Vires .

Meaning

This doctrine implies that those transactions or acts of a Company which are outside the ambit of its
objects clause or which are beyond the power of the Company. Therefore, all such transactions
which are ultra virus the memorandum of Association shall be completely null void and can never be
ratified.

The Company has only capacity to do only those things which it is implored to do by the object
clause of its memorandum of Association:

Effects of Ultra Vires Transactions

1. Personal liability of directors: The funds of a Company, under the Act can only be applied in
carrying out its authorized objects. If a director of a Company makes any ultra vires payment then he
can be compelled to refund the money to the Company. Director will also be personally liable to
anyone who suffers any loss because of “breach of warranty of authority” on their part.
2. Ultra Vires acquired Property: If the money of Company’s has been spent in purchasing some
ultra vires property, the Company’s right over that property must be secure. The asset, which is
wrongly acquired, would be represents as the corporate capital.
3. Ultra Vires Contracts: A contract which is ultra vires the Company is wholly void and of no legal
effect. As a result if anyone entering into an ultra vires, contract then he cannot make the company
liable for his claim.
4. Ultra Vires lending: Person borrowing money from the Company under a contract which is ultra
Vires, can be sued by the Company to recover the amount so lent.

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5. Ultra Vires torts: A Company cannot be by its officers in connection with a business which is
entirely outside its objects. It can be made liable in torts only if these are consisted in the course of
intra vires activities by its servants or officers within the course of their employment.

Exceptions to the Doctrine of Ultra Vires

1. Any act or transaction is beyond the limit of director but within the authority of Co., such act or
transactions can be approved.
2. Acts beyond articles, can be approved by amending it.
3. If an act, which is within the limits of the Company’s activity is done in an irregular manner, the
shareholders can approve of such act.
4. If a Co. loans any money to a third party under a contract, it can sue for the repayment of such loan.
5. If a Co. takes a loan from a third party under a contract which is beyond authority and utilizes the
amount ot pay off its business debts, the party giving such loan to the Co. is deemed to be a creditor
of the Co. in place of those creditors who have been paid off.

Part. II. Corporate Capital

Quest:-What are the Kinds of Share Capital?

A share is the interest of a shareholder in a company. The capital of a company is divided into certain
indivisible units of a fixed amount. ‘Share’ means share in the share capital of a company. A share is evidenced
by a share certificate. A share certificate is issued by a company under its common seal. Each share in a
company having share capital is distinguished by its appropriate number. Most companies are started by their
promoters with limited capital which is insufficient for running business in long term and for expansion .So
shares are issued to general public with a view to raise capital and give partial ownership of company .This
offer to public is called Public Issue.

Meaning of share and share capital:

A share is one unit into which the total share capital is divided. Share capital of the company can be explained
as a fund or sum with which a company is formed to carry on the business and which is raised by the issue of
shares. The amount collected by the company from the public towards its capital, collectively is known as
share capital and individually is known as share. A share is not a sum of money but is an interest measured by
a sum of money and this interest also contains bundle of rights and obligations contained in the contract i.e.
Article of Association. Investment in the shares of any company is a basis of ownership in the company and

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the person who invest in the shares of any company, is known as the shareholder, member and the owner of
that company.

Definition:

According to the section 2(46) of the Company’s Act 1956, share means a part in the share capital of the
company and it also includes stock except where a distinction between stock and share capital is made
expressed or implied

Nature of Shares

The shares of company are movable property and are transferable in the manner provided in the Articles of
Association. A share is undoubtedly a movable property in the same way in which a bale of cloth or a bag of
wheat is a movable property. Such commodities are not brought in to existence by legislation but a share in a
company belongs to a totally different category of property. It is incorporeal in nature and it consists merely of
a bundle of rights and obligations.

Types of Shares

Shares in the company may be related that is they may carry the same rights and liabilities and confer on their
holders the same rights, liabilities and duties. There are two types of shares under Indian Company Law that is

a) Equity shares and

b) Preference Shares.

According to Sec 85(1), of the Companies Act, 1956, a preference share is one, which carries the
following two preferential rights:
a) The payment of dividend at fixed rate before paying dividend to equity shareholders.
b) The return of capital at the time of winding up of the company, before the payment to the equity
shareholder.
Both the rights must exist to make any share a preference share and should be clearly mentioned in
the Articles of Association. Preference shareholders do not have any voting rights, but in the
following conditions they can enjoy the voting rights:
1) In case of cumulative preference shares, if dividend is outstanding for more than two years.
2) In case of non-cumulative preference shares, if dividend is outstanding for more than three years.
3) On any resolution of winding up.
4) On any resolution of capital reduction.

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Types of Preference Shares

a) Cumulative or Non-Cumulative: A non-cumulative or simple preference shares gives right to

predetermined percentage dividend of profit of each year. In case no dividend thereon is stated in
any year because of absence of profit, the holders of preference shares get zero nor can they claim
unpaid dividend in the subsequent year or years in respect of that year. Cumulative preference shares
still give the right to the preference shareholders to demand the unpaid dividend in any year during
the succeeding year or years when the profits are available for distribution. In this case dividends
which are not paid in every year are accumulated and are paid out when the profits are available.
b) Redeemable and Non- Redeemable: Redeemable Preference shares are preference shares which
have to be repaid by the company once the term of which for which the preference shares have been
issued. Irredeemable Preference shares means preference shares need not repaid by the company
apart from on winding up of the company. But, under the Indian Companies Act, a company cannot
issue irredeemable preference shares; in fact, a company restricted by shares cannot
issue preference shares which are redeemable after more than 10 years from the date of issue. In
other words the highest tenure of preference shares is 10 years. If a company is incapable to redeem
any preference shares within the specific period, it may, with consent of the Company Law Board,
issue further redeemable preference shares equivalent to redeem the old preference shares including
dividend thereon. A company can issue the preference shares which from the commencement are
redeemable on a fixed date or after definite period of time not more than 10 years provided it
comprises of following conditions :-

 It must be certified by the articles of association to make such an issue

 The shares will be only redeemable if they are completely paid up.

 The shares may be redeemed out of profits of the company which or else would be available for
dividends or out of proceeds of new issue of shares made for the purpose of redeem shares.

 If there is premium to be paid on redemption it must have provided out of profits or out of
shares premium account before the shares are redeemed.

 When shares are redeemed out of profits an amount equivalent to nominal amount of
shares redeemed is to be transferred out of profits to the capital redemption reserve account. This
sum should then be utilized for the purpose of redemption of redeemable preference shares. This
reserve can be used to issue of wholly paid bonus shares to the members of the company.

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c) Participating Preference Share or Non-Participating Preference Shares:

Participating Preference shares are allowed to a preferential dividend at a fixed rate with the right
to participate further in the profits either along with or after payment of certain rate of dividend
on equity shares. A non-participating share is one which does not such right to take part in the profits of
the company after the dividend and capital has been paid to the preference shareholders.

Equity shares:

According to section 85 (2), of Companies Act, 1956, Equity share can be defined as the share, which is
not preference shares. In other words equity shares are those shares, which do not have the following
preferential rights:

a) Preference of dividend over others.

b) Preference for repayment of capital over others at the time of winding up of the company.

These shares are also known as ‘Risk Capital’, because they get dividend on the balance of profit if
any, left after payment of dividend on preference shares and also at the time of winding up of the
company, they are paid from the balance asset left after payment of other liabilities and preference share
capital. Apart from this they have to claim dividend only, if the company in its A. G. M. declares the
dividend. The rate of dividend on such shares is not pre-determined, but it depends on the profit earned
by the company. The equity shareholders have the right to vote on each and every resolution placed
before the company and the holders of these shares are the real owners of the company.

Key Differences between Equity Shares and Preference Shares

1. Equity shares cannot be converted into preference shares. However, Preference shares could be
converted into equity shares.

2. Equity shares are irredeemable, but preference shares are redeemable.

3. The next major difference is the ‘right to vote’. In general, equity shares carry voting rights,
although preference shares do not carry voting rights.

4. If in a financial year, dividend on equity shares is not declared and paid, then the dividend for that
year lapses. On the other hand, in the same situation, the preference shares dividend gets
accumulated which is paid in the next financial year except in the case of non-cumulative
preference shares.

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5. The rate of dividend is consistent for preference shares, while the rate of equity dividend depends
on the amount of profit earned by the company in the financial year, thus it goes on changing.

Sub-division of share capital:

The word capital in connection with a company may mean any of the following divisions of capital:

a) Authorized capital: An authorized capital refers to that amount which is stated in the ‘Capital
Clause’ of the Memorandum of Association as the share capital of the company. This is the
maximum limit of the company which it is authorized to raise and beyond which company cannot
raise unless the capital clause in the Memorandum is altered in accordance with the provisions of
Sec. 94 of the Companies Act, 1956.
b) Issued capital: An issued capital refers to the nominal value of that part of authorized capital,
which has been (1) subscribed for by the signatories to the Memorandum of Association, (2)
allotted for cash or for consideration other than cash and (3) allotted as Bonus shares.
c) Subscribed capital: Subscribed capital refers to the paid-up value of the issued capital i.e. the
total amount called by the company less calls-in-arrear. It is only the actual liability for the
company hence it will be only be added while totalling the liability side.
d) Called Up Capital It is that part of subscribed capital, which is called by the company to pay on
shares allotted. It is not necessary for the company to call for the entire amount on shares
subscribed for by shareholders. The amount, which is not called on subscribed shares, is called
uncalled capital.
e) Paid-up Capital It is that part of called up capital, which actually paid by the shareholders.
Therefore it is known as real capital of the company. Whenever a particular amount is called and
a shareholder fails to pay the amount fully or partially, it is known an unpaid calls or calls in
arrears.
Paid-up Capital = Called up capital - calls in arrears
f) Reserve Capital It is that part of uncalled capital which has been reserved by the company by
passing a special resolution to be called only in the event of its liquidation. This capital can not be
called up during the existence of the company.It would be available only in the event of
liquidation as an additional security to the creditors of the company

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Procedures regarding Allotment of Shares:

The company secretary has to see that the statutory conditions regarding the allotment of shares are
fulfilled before the Board proceeds to allot the shares. The following are the statutory conditions
which need to be fulfilled:

a) Valid offer and acceptance: There should be a valid offer and acceptance for the allotment to be a
valid one. Here the company is the offertory and the acceptors are the general public. If there is no
company to offer then there would be no public to accept.
b) Unconditional Allotment: The allotment must be absolute and unconditional and also as per the
terms and conditions mentioned in the application. The allotment should be unbiased, and not
according to the caste, creed, religion. It is not that rich shareholders pay more on the shares and the
poor share holders pay less on the shares. All have to pay the same price on the shares.
c) Collection of minimum subscription amount: The minimum subscription amount as noted in the
prospectus has been received within 120 days of the issue of prospectus.
d) Receipt of application money: Not less than 5% of the nominal value of the share has been
secured and has been received along with the applications.
e) Deposition of application of money in a scheduled bank:All application money received along
with the applications must be deposited in a scheduled bank. It cannot be withdrawn until the
company gets trading certificate or where such certificate is already received or till the minimum
subscription amount is received.
f) Filing of prospectus with the registrar: A copy of the prospectus or statement in lieu of
prospectus has been duly filed with the registrar and at least three days have elapsed after such
filing before the allotment is taken up.
g) Time of allotment: No allotment of shares can be effected until the beginning of the fifth day from
the date of issue of prospectus. The subscription list must be opened for at least 3 days as disclosed
in the prospectus.
h) Proper communication: The allotment must be duly communicated to the applicant through post
i.e. registered post with necessary details.
i) Allotment strictly as per documents issued: The Board of Directors have to make the allotment
of shares strictly as per the documents issued which include the prospectus and the application
form. The provisions made in the Memorandum of Association and the Articles of Association
must also be given due consideration

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Procedure of issue of shares

When company has been registered, the following procedure is adopted by the company to collect
money from the public by issuing of shares:

Step-1

Issue of prospectus: When a Public company intends to raise capital by issuing its shares to the
public, it invites the public to make an offer to buy its shares through a document called
‘Prospectus’. According to Section 60 (1), a copy of prospectus is required to be delivered to the
Registrar for registration on or before the date of publication thereof. It contains the brief
information about the company, its past record and of the project for which company is issuing
share. It also includes the opening date and the closing date of the issue, amount payable with
application, at the time of allotment and on calls, name of the bank in which the application money
will be deposited, minimum number of shares for which application will be accepted, etc.

Step-2

To receive application: After reading the prospectus if the public is satisfied then they can apply to
the company for purchase of its shares on a printed prescribed form. Each application form along
with application money must be deposited by the public in a schedule bank and get a receipt for the
same. The company cannot withdraw this money from the bank till the procedure of allotment has
been completed (in case of first allotment, this amount cannot be withdrawn until the certificate to
commence business is obtained and the amount of minimum subscription has been received). The
amount payable on application for share shall not be less than 5% of the nominal amount of share.

Step-3

Allotments of shares: Allotments of shares means acceptance by the company of the offer made by
the applicants to take up the shares applied for. The information of allotment is given to the
shareholders by a letter known as ‘Allotment Letter’, informing the amount to be called at the time
of allotment and the date fixed for payment of such money. It is on allotment that share come into
existence. Thus, the application money on the share after allotment becomes a part of share capital.
Decision to allot the share is taken by the Board of Directors in consultation with the stock
exchange. After the closure of the subscription list, the bank sends all applications to the company.
On receipt of applications, each application is carefully scrutinised to ascertain that the application
form is properly filled up and signed and the money is deposited with the bank.

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Step-4

To make calls on shares: The remaining amount left after application and allotment money due
from shareholders may be demanded in one or more parts which are termed as ‘First Call’ and
‘Second Call’ and so on. A word ‘Final’ word is added to the last call. The amount of call must not
exceed 25% of the nominal value of the shares and at least 1 month have elapsed since the date
which was fixed for the payment of the last preceding call, for which at least 14 days notice
specifying the time and place must be given.

Modes of issue of shares:

A company can issue shares in two ways:

1. For cash.

2. For consideration other than cash.

Issue of shares for cash: When the shares are issued by the company in consideration for cash
such issue of shares is known as issue of share for cash. In such a case shares can be issued at par or
at a premium or at a discount. Such issue price may be payable either in lump sum along with
application or in instalments at different stages (e.g. partly on application, partly on allotment,
partly on call).

Issue of shares at par: Shares are said to be issued at par when they are issued at a price equal to
the face value. For example, if a share of Rs. 10 is issued at Rs. 10, it is said that the share has been
issued at par. Issue of shares at premium: When shares are issued at an amount more than the face
value of share, they are said to be issued at premium. For example, if a share of Rs. 10 is issued at
Rs. 15; such a condition of issue is known as issue of shares at premium. The difference between
the issue price and the face value [i.e. Rs. 5 (Rs.15 – Rs.10)] of the shares is called premium. It is a
capital profit for the company and will show credit balance; hence it will be shown in the liability
side of the Balance Sheet under the heading ‘Reserves and Surplus’ in a separate account called
‘Security Premium Account’. Shares of those companies can be issued at premium which offer
attractive rate of dividend on their existing shares, having a good profit track for last few years and
whose shares are in demand. The amount of premium depends upon the profitability and demand of
shares of such company.

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Note: The Company may collect the amount of security premium in lump sum or in instalments.
Premium on shares may be collected by the company either with application money or with the
allotment money or even with one of the calls. In absence of any information, the amount of the
premium is to be recorded with allotment.

.------------------------------------------

III. Company Management and Administration:

Directors and Managing Director: Appointment and Legal Position

Quest:- What is the legal position of a director in a company

Introduction

A corporation is an artificial being, invisible, intangible and existing only in contemplation of law.
It has neither a mind nor a body of its own. “A living person has a mind which can have
knowledge or intention and he has hands to carry out his intention. A corporation has none of
these; it must act through living persons “and such living person is known as director.

Section 252 requires that every public company shall have at least three and every private
company at least two directors. By an amendment of the section by the Amendment Act, 2000 it
has been provided that a public company having a paid up share capital of rupees five crore or
more; one thousand or more small shareholders, should have a director elected by the small
shareholders. The manner of such election is to be prescribed. A small shareholder for this purpose
means a person having shares of the nominal value of twenty thousand rupees or less in a public
company.

Meaning and Definition of Director

U/s- 2(13) a director as including “any person occupying the position of Director, by whatever
name called”

A person is considered as a director, if he does whatever a director does normally. Thus, where a
person performs the functions of a director, he will be treated as a director for the purposes of the
act, though he may be called by a different name and is not actually appointed on the board of the
company.

Position of directors

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Directors as agents

It was clearly recognized as early as 1866 in Ferguson v Wilson that directors are, in the eyes of
law, agents of the company. The court said: “The Company has no person; it can act only through
directors and the case is, as regards those directors, merely the ordinary case of principal and
agent.” In this case the directors allotted certain shares to the plaintiff. They were held not liable
when the company, having exhausted its shares, failed to give effect to the allotment. Similarly,
where the plaintiff supplied certain goods to a company through its chairman, who promised to
issue him a debenture for the price, but never did so and the company went into liquidation, he was
held not liable to the plaintiff.

Directors as trustees

“Although directors are not properly speaking, trustees, yet they have always been considered and
treated as trustees of money which comes to their hands or which is actually under their control;
and ever since joint stock companies were invented directors have been held liable to make good
moneys which they have misapplied upon the same footing as if they were trustees.” Their office is
of fiduciary nature.

Most of their powers are powers in trust. The power to make calls, to forfeit shares, to issue further
capital, to approve transfer of shares, are all powers in trust which have to be exercised in good
faith for the benefit of the company. Yet directors are not trustees in the real sense of the word. It
is only some of their functions and duties which are like those of trustees.

Directors as agents

The relationship between the company and the directors is that of principal and agent and the
general principles of agency will govern their relations. Consequently, where the directors enter
into contracts on behalf of the company, it is the company and not the directors who are liable
there under. But the directors will be personally liable only in the following cases:

 Where a director acts in his own name.

 Where a director contract on behalf of the company without using the words ‘Limited’ or
 ‘Private limited’ as a part of the name of a company.
 Where a director enters into any agreement or contract in which it is not made clear as to
whether the director is signing in his personal capacity or as an agent of company.

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Directors as officers of the company

Amongst other persons, a director is also included in the definition of an ‘officer’ of the company
Whether or not a director is in the employment of the company, he shall always be treated as an
officer of the company.

Director as employee

Ordinarily, a director is elected by the shareholders in general meeting, and once so elected; he
enjoys well-defined rights and powers under the Act or the articles. Even the shareholders who elect
them cannot interfere with their rights or powers except under certain circumstances. An employee
appointed by the company under a contract of service is a servant of the company. He does not
enjoy any powers other than those vested in him by the employer, who can always direct his actions
and interfere in his work.

Directors as managing partners

The persons holding this view consider a company as large partnership, directors being charged
with the responsibility of managing the affairs. The other shareholders are virtually dormant
partners. By virtue of the various provisions in the Memorandum and Articles, they enjoy vast
powers of management and act as the supreme policy and decision making body.

Quest:-Briefly state the provision of the companies Act regarding the appointment of the
directors of a company.

Appointment [Ss. 254-257]

The success of the company depends, to a very large extent, upon the competence and integrity of
its directors. It is, therefore, necessary that management of companies should be in proper
hands. The appointment of directors is accordingly strictly regulated by the act. There are now
special provisions for preventing management by undesirable persons.

Appointment of first directors

The first directors are usually appointed by name in the articles or in the manner provided therein.
Where the articles do not provide for the appointment of first directors, the subscribers to the
memorandum, who are individuals, shall be deemed to be the first directors of the company subject
to the regulations of the company’s articles. The first directors can hold office until the directors are

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duly appointed in accordance with the provisions of section 235) (Section 254). It may, however, be
noted that in case of a public company, a list of persons who are to be the first directors of a
company along with their consent in writing must be delivered to the Registrar of Companies.

Appointment of directors at general meeting

According to section 255, the director must be appointed by the company in general meeting. In the
case of a public company or of a private company which is a subsidiary of a public company, unless
the articles provide for the retirement of all directors at every annual general meeting, at least two-
third of total number of directors must be persons whose period of office is liable to determination
by rotation. In other words, only one third of the total number of directors can be non-rotational
directors.

Appointment of directors in case of a private company which is not a subsidiary of a public

company-In case of a private company, which is not a subsidiary of a public company, if the
articles are silent as to the appointment of directors, or do not specifically provide for appointment
of directors otherwise than in a general meeting, then the directors are to be appointed in general
meeting by the shareholders[Section 255(2)] as interpreted by the Calcutta High Court in the case
of Swapan Das Gupta v. Navin Chand Suchiantij

Appointment of a director other than a retiring director [Sec. 257]

Section 257 provides for the procedure of appointment of a person other than retiring director. If
any person other than the retiring director wishes to stand for directorship or any member proposes
a person for directorship, he must signify his intention to do so by giving 14 days’ notice to the
company before the general meeting and the company must inform the members not later than
seven days before the general meeting either by individual notices or by advertisement of this fact
in at least two newspapers circulating in the place where its registered office is located of which one
must be in English and the other in the regional language of that place. Also, the candidate or the
member who intends to propose him as director has to deposit a sum of Rs. 500 which shall be
refunded to such person or the member , as the case may be, if the candidate succeeds is being
elected . In case such person is not elected as director, he or the member, as the case may be , will
not be entitle to the refund of Rs. 500 and the amount deposited shall stand forfeited by the
company.

Appointment by Board of directors

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The Board of directors can exercise the power to appoint directors in the following three cases

1) Additional Directors (Section 260)

2) Filling up the Casual Vacancy (Section 262)
3) Alternate Directors (Section 313).

Appointment of Additional Directors – If the Articles authorise, the Board may appoint
additional directors. Such additional director together with the directors constituting the Board
should not exceed the maximum number fixed by the articles. Also, the additional directors are
entitled to hold office only up to the date of the next annual general meeting of the company
(Section 260).

Filling Up Casual Vacancy

Section 262 empowers the Board to fill casual vacancies in the case of a public company or a
private company which is a subsidiary of a public company. A casual vacancy is one that arises
otherwise than by retirement or the expiration of the time fixed for an appointment. Thus , if the
office of any director appointed by the company in general meeting is vacated before his term of
office expires in the normal course, the resulting casual vacancy may, subject to any regulation in
the articles of the company , be filled by the Board of Directors at a meeting of the Board

Alternate Director (Section 313) – The Board of directors of a company may, if so authorized by
its articles or by a reaction passed by the company in general meeting, appoint an alternate director
to act for a director during his absence for a period of not less than three months from the State in
which meetings of the Board are ordinarily held.

Appointment directors by proportional representation [Section 265]

Ordinarily, directors are appointed by simple majority vote on the resolutions moved for their
appointment. As a result majority shareholders controlling 51 per cent or more votes may elect all
directors and a substantial minority, as high as 49 per cent, may find no representation on the
Board. In order to enable the minority shareholders to have a proportionate representation on the
Board, section 265 of the Companies Act gives an option to companies to appoint directors through
a system of proportional representation. The section provides that a company may provide in its
Articles for the appointment of not less than 2/3rd of the total directors according to the principle of
proportional representation by single transferable vote or some system of cumulative voting or
otherwise. Such appointment shall be made once in every three years (Section 265).

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Appointment of directors by the Central Government (Section 408)

The Central Government has been empowered to appoint directors on an order passed by the
Company Law Board . CLB may so order either on a reference by the Central Government or on
the application of not less than 100 member of the company or of members holding not less than
1/10th of the total voting power. Such appointments shall be so ordered by the CLB where it finds
that the affairs of the Company have been conducted in a manner oppressive to any member of the
company or in a manner prejudicial to the interests of the company or to the public interest . Such a
director may be appoint for any term but not exceeding three year.In lieu of passing an order as
aforesaid , the CLB may directs the company to amend its article so as to provide for election of
directors by the system of proportional representation. It may also direct that until new directors are
appointed in pursuance of the order aforesaid, such number of persons as it may specify as being
necessary to effectively safeguard the interest of the company or its shareholders or the public
interest shall hold office as additional directors of the company( Section 408[2]).

Appointment of Directors by third parties (Nominee Directors)

There may be occasions when directors represent certain third parties in the Board. This usually
happens when the Government, foreign collaborators, holding companies, financial institutions or
other lenders, etc, nominate a director to represent their interest on the Board. The phenomenon of
nominee directors has become an important feature of the modem Indian corporate scenario. It is
primarily because of the role of the various lending institutions like banks, mutual funds, public
financial institutions, State financial corporations, etc

Managing director: - A director who, by virtue of an agreement with the company or of a

resolution passed by the company in general meeting or by its Board of directors, or by virtue of its
Memorandum or Articles of Association, is entrusted with substantial powers of management
which would not otherwise be exercisable by him.

Appointment of a managing director

a) by the virtue of an agreement with the company

b) by the virtue of a resolution passed by the company in general meeting,

c) by virtue of a resolution passed by the Board of directors,

d) by virtue of the Memorandum/ Articles of Association. ------------------

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Quest: - What is Company Meeting? Explain in brief the various kinds of meeting. Is it
compulsory to call upon the meeting of all the Companies.

Company Meetings

A meeting is said to be take place when two or more than two person’s meet.Acc. To P.K. Ghosh
“Any gathering, assembly or coming together of two or more persons for the transaction of some
lawful business of common concern is called meeting.”

Characteristics

1. It is a get – together of two or more persons who are members of the Company.
2. For discussing & taking a decision on some lawful business.
3. Before conducting a meeting, a notice about the meeting must be given.
4. A meeting is held at a specific place & time.
5. Company’s meeting is held according to the prop. Pf the Companies Act.

Requirement or Essentials of Valid Meetings:

1. Proper Authority: The proper authority to convene a general meeting of a Company is

board of Directors who should pass a resolution to call the meeting at a duly convened board
meeting.
2. Notice: 21 days prior notice of or meeting should be given to the members.
3. Quorum: It means the minimum no. of members who must be present in order to constitute a
meeting and transact business threat.
4. Chairman of Meeting: A chairman is necessary to conduct a meeting.
5. Minutes of Meeting: Every Co. must keep a record fall proceedings of every meeting.

Kind of Company Meetings

Several types of meetings take place in the business organizations. Especially the company meetings
can be shown by following:

1) Shareholders meeting/ statutory (legal) Meeting: When the meeting is held with the
shareholders of the company it is called shareholders meeting.
Definition:

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 Statutory meeting is the first meeting of the members of a public company. It is held once in the
life of a public company. Statutory means legal so this meeting is totally based on law. Law
enforced the company to call this meeting.
Occasion:
This meeting must be held after 3 months, but before 6 months of obtaining the certificate of
commencement of business.
Notice of Meeting:
The directors will send a notice of the meeting to all the members of the company at least 21
days before the meeting. And also send statutory report to the shareholders.

 Statutory meeting: According to Company laws, after getting the letter of commence, the
company arranges a meeting after one month of six months. This is the first general meeting of
the company and during the life of the company this type of meeting held once. The company
gives the circular before 21 days of the meeting. The decisions of the meeting are called
statutory decision.

 Annual general meeting: After registration of the company, the company is bound to invites
the first general meeting with in eighteen months. Then the general meeting will be held in
every year. The differences of the two general meeting cannot be more than fifteen months.
The decisions of the meeting are called general decision.

 Extra-ordinary general meeting: If necessary of the company this type of meeting can be
held on any time. The director or some shareholders can invite this meeting one tenth of the
shareholders may give the requisition to the Board of directors to arrange this type of meeting.
After getting the requisition of the board of Directors fail to arrange a meeting with in twenty
one days, the shareholder can invite the meeting within three months. The decision taken by
the meeting is called special decision.

2) Directors meeting: When the meeting is held among the directors of the company it is called
directors meeting. It is classified into two parts. They are:

 Board meeting: According to article of association. The board of directors meetings called
Board Meeting. If nothing about this type of meeting in the article of association, then by
Table- A rules of the company law this type of meeting can be held on. According to rules of
company law the company is bound to arrange the meeting once in one month and at least four
times within a year the Quorum: is filled up by 3/1 rd of the directors present or at least two

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 directors present. Each director is preserved one vote and if any case the directors vote can be
divided equally, then the president give the casting vote and take the decision.

 Committee meeting: According to article of association the Board of Directors sometimes

make special committee to complete in any special work among some directors of the
company. This committee member sometimes meets together for coordinating the work
properly. This type of seating is called committee meeting

3) Special meeting: For any special situation, when the meeting is arranged by the company, it is
called special meeting. The types of the special meetings are as follows:

 Class-meeting: The Company has different kinds of shares. When the meeting is arranged by
any one kind of shareholders it is called class meeting.

 Creditors meeting: The directors or their appointed lower can invite this type of meeting.
Moreover this type of meeting may be arranged by the order of the court. If necessary to
reconstruct or to dissolve or to any amalgamate the company to preserve the rights of the
creditor this type of meeting is invited by their proper authoritative person. The creditors who
will be present in the meeting or the presence of three-fourth credit holders of the total credit
can take the decision and the court will give the instruction on the basis of this decision and the
creditors are bounded to abide by the decision.-----------------------------------

Quest:-What is the provision in relation to Resolution?

Ans:- There are three kinds of resolutions:-

1. Ordinary resolution

2. Special resolution.

3. Resolution requiring special notice.

1. Ordinary Resolution [section 189(1)] When a motion is passed by simple majority of the
members voting at a general meeting, it is said to have been passed by an ordinary resolution. All
matters which are not required by the companies Act, 1956 or the company’s Articles to be done by
a special resolution can be done by means of an ordinary resolution. Some of the cases in which
only ordinary resolution is required are:

(i) Alteration of authorized capital

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 (ii) Declaration of dividend
(iii) Appointment of auditors (other than the appointment cover by Section 224A)
(iv) Fixation of their remuneration, election of directors.

2. Special resolution [section 189(2)] According to section 189(2), a resolution is a special

resolution when –

a. The intention to propose the resolution as a special resolution has been duly specified in the
notice calling the general meeting or other intimation given to the members
b. The notice required under the companies Act has been duly given of the general meeting;
c. The votes cast in favour of the resolution by members present in person or by proxy are not less
than 3 times the number of votes, if any, cast against the resolution. Abstentions, if any, are not
to be taken into account.

Some of the matters for which special resolution is required to be passed are:

a) To alter object clause of Memorandum;

b) To change the registered office of the company from one state to another
c) To reduce share capital of the company; and
d) To alter Articles of Association.

3. Resolution Requiring Special notice: According to section 190, a resolution requiring special
notice is not actually an independent class of resolution. Such a resolution may be an ordinary or
special resolution. It is a different kind of an ordinary resolution of which notice of the intention of
move a resolution has to be given to the company by proposer. The notice shall be given not less
than 14 days before the meeting at which resolution is to be moved exclusive of the day on which
the notice is served or deemed to be served and the day of the meeting. The object of special notice
is to be give the members sufficient time to consider proposed resolution and to give Board of
Directors an opportunity to indicate their views on resolution.

A special resolution is required for a resolution in following cases:-

a) Appointment of auditor other than retiring one

b) Provision that a retiring auditor shall not be re-appointed.
c) Removal of director in place of one who is removed
d) Appointment of a director in place of one who is removed The Articles of the company may
provide for additional matters in respect of which special resolution is to be passed…………..

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Quest:- What are the provisions relating to Annual General meeting?

Ans: - Annual general meeting of the company is an annual meeting of the body of the member
held every year. Companies to hold AGM: Every company can hold annual general meeting
whether having shares capital or not, whether limited or unlimited.

Time limit:

First Annual general meeting:

A company may hold its first annual general meeting within a period of 18 month from the date of
incorporation. However this should not be more than 9 months from close of financial years.

Subsequent meeting:-

1. There must be one meeting held in each year.

2. The gap between two annual general meetings must not be more than 15 years.

3. Meeting must be held not later than 6 months from close of financial year.

Extension of time: the registrar has the power to extend the time of 15 months by 3 more months
in special cases.

Day, hour and place of meeting: The meeting can be held at any working place, on any working
day and working hours.

If the day scheduled for meeting is declared by the Central Government to be a public holiday after
the issue of the notice, it shall not be deemed as a holiday.

Notice of the meeting: 21 clear days notice or any shorter notice if agreed by all shareholders must
be given.

Business to be transected

(1) Ordinary business:-

(a) To present the balance sheet, report of Board of Directors, etc.

(b) To declare dividends.

(c) To appoint directors.

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 (d) To appoint auditors and fixation of their remuneration

Special Business:-

Any other business which is not an ordinary business

Default in holding Annual general meeting

The Company Law Board on petition from member shall call or direct the calling of the general
meeting of the company.

Penalty:

If default is made in holding AGM, the company and every officer in default shall be punishable
with fine which may extend to RS. 50,000/- . In case the default continues, a further fine upto Rs.
2,500/- per day may be levied till such default continues. ----------------------------------

Quest: - What are the provisions of Statutory Meeting?

Ans:- Statutory meeting is the first meeting of the company and is conducted once during the life
time of the company.

Companies which can hold such meeting: A company limited by shares and a company limited
by guarantee & having share capital are the companies which can hold statutory meeting.

Companies which need not hold the meeting:-

1. Private company whether independent or subsidiary of a public company.

2. A public company not having share capital

3. An unlimited public company.

4. A public company limited by guarantee and not having share capital

5. A Government company.

Time limit for the meeting: - A statutory meeting may be held within a period of

1. Not less than one month.

2. Not more than 6 months.

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From the date of receiving the certificate of commencement of business.

Notice of the meeting: A minimum of 21 clear days notice is to be given.

Object: The main purpose of the meeting is to enable the members of the company to know at an
early date the financial position and the prospects of the company and also to provide them an
opportunity to discuss on various matters arising out of promotion and formation of the company.

Importance: this meeting is held only once during the life time of the company and is the first
meeting of the company.

What is a statutory meeting and its content: A statutory meeting is a report which is sent to each
member along with the notice of the meeting.

Content of statutory report:-

1. It sets out the total number of shares allotted and the mode of allotment.

2. The total amount of the cash received by the company in respect of the shares allotted.

3. An abstract of receipt and payment of the company. This report has to be duly certified by at
least two directors. Out of which one shall be a managing director along with auditor of the
company.

4. Agenda of the meeting regarding the formation and prospects of the company.

5. Particulars of directors, auditors, etc.

6. Particulars of contract.

7. under writing contract.

8. Arrears of call.

9. Commission or brokerage.

Adjournment of Statutory meeting: The statutory meeting may be adjourned from time to time
according to the provision of the companies Act, 1956 and the power to adjourn vests in the hand of
the shareholders.

Penalties:

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1. If default is made complying the requirement of section 165, every person responsible shall be
punishable with a fine extended to Rs. 5,000/-.

2. If the company fails to call a statutory meeting then it becomes a sound ground for the winding
up of the company. -----------------------------------------

Quest:-What are the safeguards for the protection of a company from oppression and
mismanagement?

Introduction

Section 397 of the Companies Act, 1956 that any member of a company who complain that the
affairs of the company are being conducted in a manner prejudicial to public interest or in a manner
oppressive to any member or members (including any one or more of themselves) may apply to the
Company Law Board for an order under this Section provided such members have a right so to
apply in virtue of Section 399. On application, if the Company Law Board is of opinion that the
company affairs are being conducted in a manner prejudicial to public interest or in a manner
oppressive to any member or members and that to win up the company would unfairly prejudice
such member or members, but that otherwise the facts would justify the making of a winding up
order on the ground that it was just and equitable that the company should be wound up, the
Company Law Board may, with a view to bringing an end the matters complained of, make such
order as it thinks fit.

Meaning of oppression

The meaning of the term “oppression” as explained by Lord Cooper in the Scottish case of Elder v.
Elder & Watson Ltd. , was cited with approval by Wanchoo J. of the Supreme Court of India in
Shanti Prasad Jain v. Kalinga Tubes. He said that the conduct complained of should, at least,
involve a visible departure from the standards of their dealing, and violations of conditions of fair
play on which every shareholder who entrusts his money to Company is entitled to rely. The
complaining member must show that he is suffering from oppression in his capacity as a member
and not in any other capacity.

Oppression is the exercise of authority or power in a burdensome, cruel, or unjust manner. It can
also be defined as an act or instance of oppressing, the state of being oppressed, and the feeling of
being heavily burdened, mentally or physically, by troubles, adverse conditions, and anxiety.

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 Prevention of oppression

Section 397(1) of the Companies Act provides that any member of a company who complains that
the affair of the company are being conducted in a manner prejudicial to public interest or in a
manner oppressive to any member or members may apply to the Tribunal for an order thus to
protect his /her statutory rights.

Sub-section (2) of Section 397 lays down the circumstances under which the tribunal may grant
relief under Section 397, if it is of opinion that:-

(a) The company’s affairs are being conducted in a manner prejudicial to public interest or in a
manner oppressive to any member or members; and

(b) To wind up the company would be unfairly and prejudicial to such member or members, but
that otherwise the facts would justify the making of a winding up order on the ground that it was
just and equitable that the company should be wound.

The tribunal with the view to end the matters complained of, may make such order as it thinks fit.

The key terms in subsection (1)

 Prejudicial to public interest,

 Oppressive to any member/member
 Prejudicial to public interest

The words “in a manner prejudicial to public interest” were inserted in section 397 and also in
section 398 and section 408, by the Companies Amendment Act of 1963.The insertion of these
words provides for the court or the Central Government to have jurisdiction to interfere in cases
where even though there may be no prejudice to any shareholders but yet may be prejudicial to
public interest.

The meaning of ‘public interest’ is an elusive abstraction, meaning general social welfare
or ‘regard for social good’ and implying ‘interest of the general public in matters where regard
for the social good is of the first moment’

In N.R.Murty v. Industrial Development Corporation of Orissa, it was observed that the

concept of “public interest” takes the company outside the conventional sphere of being a concern

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in which the shareholders alone are interested. It emphasizes the idea of the company functioning
for the public good.

 Oppressive to any member/members

The term ‘oppression’ is not specifically defined in the Companies Act. Its interpretation may be
extracted from the judicial pronouncements of case-laws. In Scottish Corporation case, it was held
that Oppression may result from not acting as much as by acting. It means that oppression may arise
from doing a particular act and also from avoiding doing certain act which should have been done.

Who can apply?

Section 397 of the Companies Act states the members of a company shall have the right to apply
under Section 397 or 398 of the Companies Act. According to Section 399 where the company is
with the share capital, the application must be signed by at least 100 members of the company or by
one tenth of the total number of its members, whichever is less, or by any member, or members
holding one-tenth of the issued share capital of the company. Where the company is without share
capital, the application has to be signed by one-fifth of the total number of its members. A single
member cannot present a petition under section 397 of the Companies Act. The legal representative
of a deceased member whose name is again on the register of members is entitled to petition under
Section 397 and 398 of the Companies Act.

Under Section 399(4) of the Companies Act, the Central Government if the circumstances exist
authorizes any member or members of the company to apply to the tribunal and the requirement
cited above, may be waived. The consent of the requisite no. of members is required at the time of
filing the application and if some of the members withdraw their consent, it would in no way make
any effect in the application. The other members can very well continue with the proceedings.

Conditions for Granting Reliefs

To obtain relief under section 397 the following conditions should be satisfied:-
There must be “oppression”- The Punjab and Haryana High Court in Mohan Lal Chandmall v.
Punjab Co. Ltd has held that an attempt to deprive a member of his ordinary membership rights
amounts to “oppression”. Imposing of more new and risky objects upon unwilling minority
shareholders may in some circumstances amount to “oppression”. However, minor acts of
mismanagement cannot be regarded as “oppression”. The Court will not allow that the remedy under

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Section 397 becomes a vexatious source of litigation.[6] But an unreasonable refusal to accept a
transfer of shares held as sufficient ground to pass an order under Section 397 of the Companies Act,
1956.Thus to constitute oppression there must be unfair abuse of the powers and impairments of the
confidence on the part of the majority of shareholders.

Facts must justify winding up- It is well settled that the remedy of winding up is an extreme
remedy. No relief of winding up can be granted on the ground that the directors of the company have
misappropriated the company’s fund, as such act of the directors does not fall in the category of
oppression or mismanagement.[8]To obtain remedy under Section 397 of the Companies Act, the
petitioner must show the existence of facts which would justify the winding up order on just and
equitable ground.

The oppression must be continued in nature – It is settled position that a single act of oppression
or mismanagement is sufficient to invoke Section 397 or 398 of the Companies Act. No relief under
either of the section can be granted if the act complained of is a solitary action of the majority.
Hence, an isolated action of oppression is not sufficient to obtain relief under Section 397 or 398 of
the Act. Thus to prove oppression continuation of the past acts relating to the present acts is the
relevant factor , otherwise a single act of oppression is not capable to yield relief.

The petitioners must show fairness in their conduct-It is settled legal principle that the person
who seeks remedy must come with clean hands. The members complaining must show fairness in
their conduct. For ex-Mere declaration of low dividend which does not affect the value of the shares
of the petitioner, was neither oppression nor mismanagement in the eyes of law.

Mismanagement

The present Company Act does provide the definition of the expression ‘mismanagement’. When
the affairs of the company are being conducted in a manner prejudicial to the interest of the
company or its members or against the public interest, it amounts to mismanagement.

Prevention of Mismanagement

The present Company Act does provide the definition of the expression ‘mismanagement’. When
the affairs of the company are being conducted in a manner prejudicial to the interest of the
company or its members or against the public interest, it amounts to mismanagement.

Section 398(1) of the Companies act provides that any members of a company who complain:-

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that the affairs of the company are being conducted in a manner prejudicial to public interest or in a
manner prejudicial to the interests of the company; or a material change has taken place in the
management or control of the company, whether by an alteration in its Board of directors, or
manager or in the ownership of the company's shares, or if it has no share capital, in its
membership, or in any other manner whatsoever, and that by reason of such change, it is likely that
the affairs of the company will be conducted in a manner prejudicial to public interest or in a
manner prejudicial to the interests of the company; may apply to the Company Law Board for an
order of relief provided such members have a right so to apply as given below.

If, on any such application, the Company Law Board is of opinion that the affairs of the company
are being conducted as aforesaid or that by reason of any material change as aforesaid in the
management or control of the company, it is likely that the affairs of the company will be conducted
as aforesaid, the court may, with a view to bringing to an end or preventing the matters complained
of or apprehended, make such order as it thinks fit.

Conclusion

Oppression and mismanagement are part and parcel of business. During the course of business,
oppression of small/minority shareholders takes place by the majority shareholders who are in
control of the company. Similarly, mismanagement of business is not uncommon. When we talk of
mismanagement we mean mismanagement of resources. Mismanagement could mean siphoning of
funds, causing losses due to rash decision, not maintaining proper records, not calling requisite
meetings. Finer version of mismanagement could arise where the management does not act/react to
a business situation leading to downfall of business.

The concept of oppression and mismanagement is more relevant or common to family owned
concerns. The reasons are very obvious. Family owned concerns are owned by family members
who over time develop vested interest in business vested interest in their own heirs being the most
common - thereby leading to oppression of other family members. Here typically, the controlling
member of the family appropriates the family holdings by means of either a fresh issue or
fraudulent transfers in his favor or reconstitutes the board in such a manner as to alienate the other
family members. The result is the other family members get oppressed.

Secondly, the family owned concerns are not professional managed and their system of functioning
is usually personal. They lack probity and fair play. They generally do business in a manner where

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they begin to benefit personally to the exclusion of other members. This leads to oppression of
other family members/mismanagement of companies.

In order to check all these discrepancies the need was felt to have any measure to prevent the
Oppression and mismanagement and thus under Chapter 6th of Part 6th of Companies Act , 1956
provides for the judicial as well as administrative remedies to check Oppression and
mismanagement. It is a powerful tool which provides such power that even a singer member can
approach Company Law Board if any of his right has been infringed or in order to prevent the
Oppression and mismanagement in the company.---------------------------------------------------------

National Company Law Tribunal

Introduction

There was a growing need for empowering the Company Law Board and reducing the burden of
High Courts by constituting a high-power Tribunal, which could take up all matters relating to
Company Law and other Corporate Laws at one Forum. Keeping this in view, the 2002
Amendment inserted new Parts IB & IC in the Principal Act for formation of National Company
Law Tribunal (NCLT or Tribunal) and National Company Law Appellate Tribunal (Appellate
Tribunal) respectively. Necessary Section - Section 10FA was also inserted to provide for
dissolution of the present Company Law Board.

Accordingly, on and from the commencement of the Companies (Second Amendment) Act, 2002
the Board of Company Law Administration constituted under sub-section (1) of Section 10E shall
stand dissolved and all matters or proceedings or cases pending before the Company Law Board on
or before the constitution of the Tribunal u/s. 10FB, shall, on such constitution, stand transferred to
the National Company Law Tribunal and the said Tribunal shall dispose of such cases in
accordance with the provisions of this Act.

By a Notification No. 344(E) dated 31.03.2003, the Central Government had brought into force
Sections 2 and 6 of the Companies (Second Amendment) Act, 2002 with effect from 1.04.2003.
Section 2 of the Second Amendment Act relates to definitions, while Section 6 relates to insertion
of new Parts IB & IC relating to National Company Law Tribunal and the Appellate Tribunal.
Immediately thereafter the Central Government came out with a Press Note on 4.04.2003, clarifying
that the above Notification of 31st March, 2003 was issued only to enable the Government to
initiate necessary steps to establish the NCLT and make it operational. It was further clarified that

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the subject Notification bringing into effect Section 6 of the Second Amendment Act will only set
in.

Constitution

Section 10 FC of the legislation gives the constitution of the NCLT. It shall consist of the total 63
members. One will be the President and 31 members each as judicial and technical members. The
NCLT will be constituted of 2 member bench and there will be 31 benches located throughout
India. The rationale behind having 31 benches is to have benches in places which have a High
Court jurisdiction because this tribunal covers the functions of High Courts in matters of Company
Law. However, some scholars are of the view that this type of equal distribution might not serve the
purpose in a best possible way. This is because, metropolitan like Kolkata, Mumbai will have more
matters than Ranchi or Patna, and so, they suggest that distribution of benches should be based
depending upon the volume of cases and not equally distributed across geographical location

Functioning

For the disposal of any case relating to rehabilitation, restructuring or winding up of the companies,
the President will constitute one or more Special Benches consisting of 3 or more Members each of
whom shall necessarily be a Judicial Member, a Technical Member and a Member appointed under
Clause (g) or clause (h) of Section 10FD(3).

After the Special Bench passes an order in respect of a company to be wound up, the winding up
proceedings of such company may be conducted by a Bench consisting of a single Member.

If the Members of a Bench differ in opinion on any point or points, it shall be decided according to
the majority, if there is a majority, but if the Members are equally divided, they shall state the point
or points on which they differ, and the case shall be referred by the President of the Tribunal for
hearing on such point or points by one or more of the other Members of the Tribunal and such point
or points shall be decided according to the opinion of the majority of Members of the Tribunal who
have heard the case, including those who first heard it.

The Central Government will decide upon the number of Benches to be constituted but in addition
to this there shall be a Principal Bench at New Delhi presided over by the President of the Tribunal,
which will inter-alia have powers of transfer of proceedings from one Bench to the other after
recording the reasons for doing so in writing. The Tribunal shall have power to review its own
ordes (Section 10FN).

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Qualifications of members

The constitution of the NCLT will be having technical members and judicial members. But, the
eligibility criterion for choosing a technical member leaves much to be desired. A technical member
can be chosen from various fields of experience including administrative services. It must be
understood by the drafters that the post of a technical member does not really require experience in
bureaucracy. What is neede is the technical know-how which can come by taking members from
public policy think tanks, researchers, professors but the experience in administration or the IAS
officials are not endowed with qualities required of a technical member. So, the researcher feels that
the provision relating to inclusion of administrative members as technical members should be
deleted. The other kinds of persons who constitute the NCLT are the judicial members. The persons
working in the Labour Court, National Tribunal as magistrates should be considered for eligibility
to function as judicial members. The researcher again reiterates that posts of judicial members
should only be occupied by practicing advocates or members from judiciary like magistrates and
members from administration should not be made eligible for the post. This is because, what is
required of a judicial member is the working knowledge of law which can come only to lawyers or
members of judiciary. The legislation states that the date of retirement of the President will be 67
years and the members age of retirement will be 65 years. It is given under section 10FE of the
legislation. Both President and Members will have tenure for a period of 3 years and they would be
eligible for re-appointment. What is the troubling factor in all of this is that – the power to re-
appoint the President as well as the members lies with the Executive and this can hamper the
independence of the members of the NCLT. So, the researcher feels that the appointment and re-
appointment should be done by a bi-partisan body and this work should not be left with the
executive.

Power of NCLT

The constitution of Benches of the Tribunal is given under section 10FL and the principal bench
will be in New Delhi. The principal bench will be presided over by the President of the NCLT. The
power of giving orders and rectifying the orders are derived from section 10FM (1) and section
10FM (2) of the Act. Under section 10 FM (1), the tribunal will hear the parties concerned and then
pass order and under section 10 FM (2), the tribunal can re-hear the matter under 2 years and can
rectify the order if there is a mistake of law. Section 10FP gives power to the tribunal to ask for
assistance from the Chief Metropolitan Magistrate and DM to enforce its decree against the
company or persons connected with the order.

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However, the decision of the Tribunal or the Appellate Tribunal is not binding and there is a
provision for filing an appeal to Supreme Court under section 10GF . However, proviso to section
10GF syas that that appeal has to be filed within 60 days from the date of communication of order
of tribunal. However, the Supreme Court may allow belated filing of application if the cause for
delay is genuine. If there is delay in filing the application, then the law can be circumvented by
filing an appeal under Article 136 of the Constitution under Special leave Petition. Then, it is upon
the Supreme Court to allow or not allow the appeal under Article 136. the researcher is of the view
that a time period of 60 days to file an appeal is less and the time must be extended to 90 days, so
that aggrieved people are not deprived of the right to appeal because of short limitation period
.------------------------------------------------------

Quest:-Define Reconstruction and Amalgamation. How can such a scheme be sanctioned by

the court?

Reconstruction and Amalgamation

Introduction

The terms merger and amalgamation have not been defined in the Companies Act, 1956 (hereinafter
referred to as the Act) though this voluminous piece of legislation contains 69 definitions in Section
2. The concept paper recently issued by the Ministry of Company Affairs, the fate of which is still
unknown, contained 100 such definitions but still stopped short of defining merger or
amalgamation. The terms merger and amalgamation are synonyms and the term ‘amalgamation’, as
per Concise Oxford Dictionary, Tenth Edition, means, ‘to combine or unite to form one
organization or structure’.

The provisions relating to merger and amalgamation are contained in sections 391 to 396A in
Chapter V of Part VI of the Act. Any proposal of amalgamation or merger begins with the process
of due diligence, as the proposal for merger without due diligence is like entering a tunnel with
darkness growing with each step. The due diligence process makes the journey see the light at the
end of the tunnel – the light of wisdom to amalgamate or not.

The Act and the relevant rules pertaining to amalgamation are to be followed scrupulously. The
provisions of the Act also deal with compromise or arrangement within or without amalgamation or
merger. Presently, the High Court enjoys powers of sanctioning amalgamation matters under
section 394 of the Act though it is a matter of time when this power will be exercised by National
Company Law Tribunal, a forum where Chartered Accountants shall be authorized to appear. Not

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losing sight of this opportunity coming way of the Chartered Accountants, the seminar on this very
topic, assumes greater significance and it is imperative that professionals like Chartered
Accountants should keep themselves informed of the provisions relating to merger and
amalgamations. The role of Chartered Accountants, in any amalgamation case, cannot be
undermined as without their uncanny insight within the financial maze, no due diligence, valuation,
share exchange ratio etc. can be accomplished.

Meaning of Amalgamation

Amalgamation is form of business combination. It is used as some other meaning like merger,
absorption, consolidation, and acquisition etc.It occurs when a company wants to expand their
business in terms of long term profitability under a mutual setting by two parties.

According to the Halsbury’s Law of England:

“Amalgamation is a blending of two or more existing undertaking into one undertaking, the
shareholders of each blending company becoming substantially the shareholders in the company
which is to carry on the blended undertaking. There may be amalgamation either by the transfer of
two or more undertakings to a new company, or by the transfer of one or more undertakings to an
existing company. strictly ‘amalgamation does, not, it seem, cover in the mere acquisition by a
company of the share capital of other companies which remain in existence and continue their
undertakings, but the context to which the term is used may show that it is intended to include such
an acquisition.”

Amalgamation can also be defined as “Amalgamation takes place when two or more companies
combine into one company, the shareholders in the amalgamating companies becoming
substantially the shareholders in the amalgamated company.

Sec 394 - Provisions for facilitating reconstruction and amalgamation of companies.

(1) Where an application is made to the Court under section 391 for the sanctioning of a
compromise or arrangement proposed between a company and any such persons as are mentioned
in that section, and it is shown to the Court

(a) that the compromise or arrangement has been proposed for the purposes of, or in connection
with, a scheme for the reconstruction of any company or companies, or the amalgamation of any
two or more companies ; and

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(b) that under the scheme the whole or any part of the undertaking, property or liabilities of any
company concerned in the scheme (in this section referred to as a " transferor company ") is to be
transferred to another company (in this section referred to as the " transferee company ") ;

the Court may, either by the order sanctioning the compromise or arrangement or by a
subsequent order, make provision for all or any of the following matters :

(i) the transfer to the transferee company of the whole or any part of the undertaking, property or
liabilities of any transferor company ;

(ii) the allotment or appropriation by the transferee company of any shares, debentures, policies,
or other like interests in that company which, under the compromise or arrangement, are to be
allotted or appropriated by that company to or for any person ;

(iii) the continuation by or against the transferee company of any legal proceedings pending by
or against any transferor company ;

(iv) the dissolution, without winding up, of any transferor company ;

(v) the provision to be made for any person who, within such time and in such manner as the
Court directs, dissent from the compromise or arrangement ; and

(vi) such incidental, consequential and supplemental matters as are necessary to secure that the
reconstruction or amalgamation shall be fully and effectively carried out :

Provided that no compromise or arrangement proposed for the purposes of, or in connection with, a
scheme for the amalgamation of a company, which is being wound up, with any other company or
companies, shall be sanctioned by the Court unless the Court has received a report from the
Company Law Board or the Registrar that the affairs of the company have not been conducted in a
manner prejudicial to the interests of its members or to public interest :

Provided further that no order for the dissolution of any transferor company under clause (iv) shall
be made by the Court unless the Official Liquidator has, on scrutiny of the books and papers of the
company, made a report to the Court that the affairs of the company have not been conducted in a
manner prejudicial to the interests of its members or to public interest.

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(2) 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 and vest in, and those liabilities shall be
transferred to and become the liabilities of, the transferee company ; and in the case of any property,
if the order so directs, freed from any charge which is, by virtue of the compromise or arrangement,
to cease to have effect.

(3) Within thirty days after the making of an order under this section, every company in relation to
which the order is made shall cause a certified copy thereof to be filed with the Registrar for
registration. If default is made in complying with this sub-section, the company, and every officer
of the company who is in default, shall be punishable with fine which may extend to five hundred
rupees.

(4) In this section

(a) " property” includes property, rights and powers of every description ; and " liabilities " includes
duties of every description ; and

(b) " Transferee company” does not include any company other than a company within the meaning
of this Act ; but " transferor company " includes anybody corporate, whether a company within the
meaning of this Act or not. ---------------------------------------------

Quest:-Explain the Doctrine of Ultra-vires.

Introduction

The object clause of the Memorandum of the company contains the object for which the company
is formed. An act of the company must not be beyond the objects clause, otherwise it will
be ultra viresand, therefore, void and cannot be ratified even if all the members wish to ratify it.
This is called the doctrine of ultra vires.

The word ‘ultra’ means beyond and ‘vires’ means powers. Thus the expression ultra vires means
an act beyond the powers. Here the expression ultra vires is used to indicate an act of the company
which is beyond the powers conferred on the company by the objects clause of its memorandum.

The application of the doctrine of ultra-vires was first demonstrated by the House of Lords
in Ashbury Railway Carriage & Railway Co. v. Riche, where the mem of a co defined its objects:
1) to manufacture and sell railway carriages etc; 2) to carry on the business of mechanical engineers

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and general contractors. The company contracted with Richie to finance the construction of a
railway line inBelgium and subsequently repudiated it as one beyond its powers. Richie brought an
action for breach of contract. The House of Lords held that the contract was ultra vires and void.
They were of the opinion that general terms like general contractors must be taken in reference to
the main objects of the company which otherwise would authorize every kind of activity making
the memorandum meaningless.

In the next leading case of Attorney General v. Great Eastern Railway Co, this doctrine was made
clearer. The House of Lords held that the doctrine of UV as explained in Ashbury case should be
maintained but reasonably understood and applied. Thus, an act which is incidental to the objects
authorized ought not to be held as UV, unless it is expressly prohibited. Thus in Evans v.
Brunner, Mond & Co, a chemicals manufacturing company was allowed to donate 1,00,000
pounds to universities and scientific institutions for research as this would be conducive for the
progress of the company.

In India the Supreme Court has affirmed the doctrine in A Lakshmanaswami Mudaliar v. LIC,
where the donation made as charity was held ultra vires and the directors were held personally
liable to compensate the money.

Thus an act of the company is ultra vires if it is not

a) Essential for the fulfillment of the objects stated in the memorandum;

b) Incidental or consequential to that attainment of its objects

c) Which the company is authorized to do by the Company’s Act, in course of its business.

Present position

In England the doctrine of ultra vires has been restricted by the European Communities Act, 1972.
Thus, as against a third person acting in good faith, the company can no longer plead that the
contract was ultra-vires

In India, the principles laid down in Ashbury case are still applied without restrictions and
modifications. Thus, in India the ultra vires act is still regarded, as void and it cannot be validated
by ratification.

Consequences

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1) Injunction- whenever an ultra vires act has been or is about to be done, any member of the
company can get an injunction to restrain the co from proceeding further.

2) Personal liability of the directors- it is the duty of the directors to see that the funds of the
company are used only for legitimate business of the company. If the funds of the company are
used for a purpose foreign to its memorandum, the directors will be personally liable to restore it.

3) Breach of warranty of authority- an agent who acts beyond the scope of his authority will
be held personally liable. The directors of a company are its agents. If they induce an outsider to
contract in a matter the company does not have power to act, they will be personally liable to him.

4) Ultra vires acquired property- if a company’s money has been spent ultra vires in
purchasing some property, the company’s right over that property must be held secure. For that
asset, though wrongfully acquired, represents corporate capital.

5) Ultra vires contracts- an ultra vires contract being void ab initio, cannot become
intra vires by reason of estoppel, lapse of time, ratification, acquiescence or delay. No performance
of either side can give an unlawful contract any validity or right of action upon it.

6) Ultra vires torts- a company can be made liable for an ultra vires tort committed, provided, it
is shown that

a) The activity in the course of which it has been committed falls within the scope of the mem.

b) That the servant committed the tort.

Conclusion

It can be concluded that an UV act is void and cannot be ratified. It prevents the wrongful
application of the company’s assets likely to result in the insolvency of the company and
thereby protects creditors. It also prevents directors from departing the object for which the
company has been formed and, thus, puts a check over the activities of the directions. However, it
has sometimes led to injustice of third parties acting in good faith-----------------------------------------

Quest: - Explain the Doctrine of Constructive Notice.

Introduction

Every person who enters into any contract with a company will be presumed to know the contents
of the memo of ass and the articles of ass. This is known as the doctrine of constructive notice.

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The memorandum and the articles of association of every company are registered with the Registrar
of Companies. The office of the Registrar is a public office. Hence, the memo and the articles of ass
become public documents. It is therefore the duty of person dealing with a company to inspect its
public documents and make sure that his contract is in conformity with their provisions.

As observed by Lord Hatherley, “…whether a person actually reads them or not, he is to be in the
same position as if he had read them”. Every person will be presumed to know the contents of the
documents.

The practical effects of this rule can be observed in Kotla Venkataswamy v. Ramamurthy- The
articles of a company provided that its deeds etc should be signed by the managing director, the
secretary and a working director on behalf of the co. the plaintiff accepted a deed of mortgage
executed by the secretary and a working director only. The plaintiff could not claim his deed. It was
held that, “notwithstanding, therefore, she may have acted in good faith and the money may have
been applied for the purposes of the company, the bond is nevertheless invalid.”

Another effect of this rule is that a person dealing with the company is taken not only to have read
the documents but also to have understood them according to their proper meaning. Further, there is
a constructive notice not merely of the memo and art, but also of all the documents, such as special
resolutions and particulars of charges which are required by the Act to be registered with the
Registrar. But there is no notice of documents which are filed only for the sake of record, such as
returns and account.

Statutory reform of constructive notice

The ‘doctrine of constructive notice’ is more or less an unreal doctrine. It does not take notice of
the realities of business life. People know a company through its officers and not through its
documents. Section 9 of the European Communities Act, 1972 has abrogated this doctrine. These
provisions are now incorporated in sec 35 of the (English) Companies Act, 1985.

Position in India

The courts in India do not seem to have taken the doctrine seriously. For example, the Calcutta
High Court in Charnock Collieries Co Ltd. v. Bholanath, enforced a security which was not signed
in accordance with the company’s articles.

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Also, in Dehra Dun Mussorie Electric Tramway Co. v. Jagmandardas, the Allahabad High Court
allowed an overdraft incurred by the managing agent of a company when under the articles the
directors had no power to delegate their borrowing power.

Conclusion

Thus, the doctrine of constructive notice seeks too protect the company against the outsider by
deeming that such an outsider had the notice of the public documents of the company. However,
in India the courts with a view to protect the innocent third parties acting in good faith have not
relied upon the doctrine seriously .---------------------------------------------
Quest:- Explain the Doctrine of Indoor Management OR

Explain the Rule laid down in Royal British Bank v. Turquand.

Introduction

The doctrine of indoor management is an exception to the rule of constructive notice. It imposes
an important limitation on the doctrine of constructive notice. According to this doctrine, a person
dealing with a company is bound to read only the public documents. He will not be affected by any
irregularity in the internal management of the company.

The rule of indoor management had its genesis in Royal British Bank v. Turquand- The directors
of the 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 authorized by a
resolution passed at a general meeting of a company. The shareholders claimed that there was no
such resolution authorizing the loan and, therefore, it was taken without their authority.

The company was however held bound for the loan. Once it was found that the directors could
borrow subject to a resolution, the plaintiff had the right to assume that the necessary resolution
must have been passed.

The rule is based on public convenience and justice and the following obvious reasons:

 The internal procedure is not a matter of public knowledge. An outsider is presumed to know
the constitution of a company, but not what may or may not have taken place within the doors
that are closed to him.

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  The lot of creditors of a limited company is not a particularly happy one; it would be unhappier
still if the company could escape liability by denying the authority of officials to act on its
behalf.

The rule/doctrine is applied to protect persons contracting with companies from all kinds of internal
irregularities. It has been applied to cover the acts of de facto directors, who have not been
appointed but have only assumed office at the acquiescence of the shareholders or whose
appointment is defective, or have exercised authority which could have been delegated to them
under the Act but actually not delegated, or who has acted without quorum.

Exceptions to the rule

1) Knowledge of irregularity A person who has actual knowledge of the internal irregularity
cannot claim the protection of this rule, because he could have taken steps for self-protection. A
person who himself is a party to the inside procedure, such as a director is deemed to know the
irregularities, if any. T.R Pratt (Bombay) Ltd. V. E.D. Sassoon & Co. Ltd. - Company A lent
money to Company B on a mortgage of its assets. The procedure laid down in the articles for such
transactions was not complied with. The directors of the two companies were the same. Held, the
lender had notice of the irregularity and hence the mortgage was not binding.

2) Negligence and suspicion of irregularity: where a person dealing with a company could
discover the irregularity if he had made proper inquiries, he cannot claim the benefit of the rule of
indoor management. The protection of the rule is also not available where the circumstances
surrounding the contract are so suspicious as to invite inquiry, and the outsider dealing with the
company does not make proper inquiry.

3) Forgery: The rule in Turquand’s case does not apply where a person relies upon a document
that turns out to be forged since nothing can validate forgery. In Ruben v. Great Fingall Ltd, a co
was not held bound by a certificate issued by tit secretary by forging the signature of two directions.
However, in Official Liquidator v. Commr of Police, the Madras High Court held the company
liable where the Managing Director had forged the signature of two other directors.

4) Representation through articles: A person who does not have actual knowledge of the
company’s articles cannot claim as against the company that he was entitled to assume that a power
which could have been delegated to the directors was in fact so delegated. In Rama Corporation v.
Proved Tin and General Investment Co, the plaintiffs contracted with the defendant co and gave a
cheque under the contract. The director could have been authorized but in fact, was not. The

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plaintiffs had not read the articles. The director misappropriated the cheques and plaintiff sued.
Held, director not liable as it was outside his authority. -----------------------------------------------------

Quest: - Explain the various modes of winding up of a company.

Ans: - Introduction

The Liquidation or winding up a company is a process through which life of company and it’s all
affairs is wound up and its property administered for benefits of its creditors and members. An
administrator, who is called liquidator, is appoint to take control of company, collect its assents, pay
its debts and finally if any surplus assents are left, they are divided among the members of the
company in proportion to their rights under the articles. This being done the company is dissolved
on compliance within the requisite formalities prescribed by the companies’ ordinance.

The object of winding – up of a Company is to dispose of the assets of the Company, Pay-off the
debts out of the assets, and then to distribute the surplus if any among the members in proportions
to their holdings in the Co

Acc. to Prof. Gower: “winding –up of a Co. is the process whereby its life is ended and its
property administered for the benefit of its creditor and members”. An administrator, called a
Liquidator, is appointed & he takes control of the Company.

Who may apply for winding – up?

1. Petition by Company: The Co. is entitled to petition when it has passed a special resolution
requesting that it be wound up by the Court.

2. Petition by Contributory’s: On the winding up of a Company its members are called

contributories. Where the ground is reduction in membership, any contributory can apply.

3. Creditor’s Petition: (S-439 (8): A creditor, secured or otherwise, debenture holder and a
trustee for debenture holders can apply for winding-up where the Petition is brought by a
contingent or prospective creditor, the Court may admit it if there is a prima face case and the
Security for cost is given.

4. Registrar’s Petition: [S-439 (5)]The Registrar is entitled to apply unless sit appears to him
either from the financial condition of the Company as disclosed in its balance-sheet or from the
report of a special auditor that the Company is unable to pay its debts.

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 5. Central Goat’s Petition: (S-243) the govt. may apply when an investigation shows that the
conditions of the company are not sound or not earning profits from last three financial years.

1. Winding up by the Court or compulsory winding up (Sec. 433)

1) Special Resolution It is passed by the members in a general meeting.

2) Default in filing statutory Report If a default is made in delivery the statutory report of a
public Company to the Registrar or in holding the statutory meeting of a Company, the Court
make an order for winding-up.

3) Failure to Commence Business Within Time A Company is wound-up on this ground if it

does not commence its business within a year from its incorporation or suspends its business
for a whole year unless there are reasonable prospects or good reasons for the delay.

4) Reduction of Membership Reduction of Membership below the legal minimum limit i.e.
below 7 in public Co. & below 2 in private Co.

5) Inability to Pay Debts A Company may be wound up by the court if it is unable to pay its
debts. (S-434) Lays down some specific cases when Company is deemed to be unable to pay
its debts.

a. Demand for Payment Neglected:- If a creditor to whom the company is indebted for a
sum exceeding Rs. 500 has served in the Co. at its registered office, a demand for payment
and the company has for 3 week there after neglected to pay, then the Co. is unable to pay
its debts.

b. Decreed Debt Unsatisfied:- If execution or other process issued on a decree or order of

any court in favour or order of any court in favor of a creditor of the company is returned
unsatisfied in whole or in part the company is deemed to be unable to pay its debts.

c. Commercial Insolvency:- If it is proved to the satisfaction of the Court that the

Company is pay its debts, the Court shall take into account the Contingent & prospective
liabilities of the Co. also.

6) Just and equitable:-If the court is of Opinion that it is just and equitable that the Company
should be wound-up. THE CASES ARE

(a) Loss of Objective

(b) Deadlock in Management

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 (c) Oppression in minority

(d) Fraudulent purpose, and

(e) Where Company is a dummy

2. Voluntary winding up a Company (S-484-521)

The object of a voluntary winding is that the company and its creditors shall be left to settle their
affairs without going to Court, but they may apply to the court for any directions and order if and
when necessary. Voluntary winding-up means winding-up by the members or creditors of the Co.
themselves without the intervention of the court. (S-484) provides that a Co. can be wound up
voluntarily under the following circumstances:

Explanation voluntary winding up a company

1) Ordinary Resolution: The members passed in a general meeting in the following cases:

 Where the duration of the Co. was fixed by AOA and the period has expired, and

 Where the AOA provided for winding up on the occurrence of any event and that event has
occurred.

2) Special Resolution: Passed by the members in all other cases, within 14 days of passing the
resolution for voluntary winding-up, it must be notified to the public by an advertisement in
the ‘official Gazette’ and in local newspapers.

Types of Voluntary Winding-Up:

(1) Members voluntary winding-up, and

(2) Creditor’s voluntary winding-up.

(1) member’s voluntary winding-up (489-498) a winding-up in the case of which a

declaration has been made by the board and filled with the registrar is referred to as ‘members’
voluntary winding up

Procedure of Member’s Voluntary Winding-Up

(1) Appointment of Liquidators: The Co. in general meeting shall appoint one or more
liquidators for purpose of winding up the affairs and distributing the assets of the Company.

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 (2) Board’s Power to cease on Appointment of Liquidator: On the appointment of a
liquidator, all the powers of the Board of Directors, and manager, if there be any of these,
shall cease, except when the Co. in general meeting or the liquidator sanctions them to
continue (S-491)

(3) Power to fill vacancy in office of Liquidator: If a vacancy occur by the deaths, resignation
or otherwise in the office of any liquidator appointed by the Co., the Co. in general meeting
may fill the vacancy.

(4) Notice of Appointed of Liquidator to be given to Registrar: The Co. shall give the notice
to the registrar of the appointment of a liquidator within 10days of the appointment (S-493).

(5) Duty of liquidator to call Creditor’s : If the liquidator is at any time of opinion that the Co.
will not be able to pay its debts in full within period stated a declaration that he shall summer
a meeting of the Creditors & lay before it’s a statement of the assets & liabilities of the Co.
(S-495(1)).

(2) Creditors’ Voluntary Winding Up (S-499-509)

If the declaration of solvency has not been made by directors the winding up referred to as
‘Creditor’s’ Voluntary winding up.

(1) Meeting of Creditors (S-500) : The BOD will convene two separate meetings one of
members & others of creditors either on the same day or one after the other and will be sent
simultaneously sent and advertised duly in the official Gazette and also in two regional
newspapers.

(2) Notice of Resolution to be Given: Within 10 days of the Passing of the resolution for
voluntary winding up at the Creditor’s meeting a copy of the same must be filed with the
Registrar. (S-501)

(3) Appointment of Liquidator (S-502) In the Co. meeting and the Creditors meeting, resolution
for voluntary winding up will be appoint a liquidators for winding up the affairs and
distributing the assets of the Co.

(4) Committee of Inspection (S-503) The Creditors at their meeting may appoint a committee of
inspection. On such Committee the share holder’s (not more than 5 persons) as their
representatives may be present and if the creditors object, the court can be approached for the
final decision.

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 (5) Liquidator’s Remuneration: The remuneration of the liquidators will b the fixed by the
Committee of inspection or by the Creditors. All the powers of the Boards will be transferred
to the liquidators. The committee of inspection or the Creditors meeting shall of course
control the activities of the liquidators. (S-504)

(6) Board’s Powers to Cease an Appointment of Liquidators (U/S- 505): On the appointment
of a liquidators, all the powers of BOD shall be cease but the committee of inspection or if
there is no such committee the creditors in general meeting may sanction the continuance of
the Board.

(7) Duty of liquidators to call meeting of Company & of Creditors at the End of Each year:
The liquidators will call the meetings of members &creditors at the end of first year & lay
before the meeting his report and accounts.

(8) Final meeting and Dissolution (U/s -509): As soon at the affairs of the Co. are fully wound
up he shall call the final meetings & submit his final report within one week of such meetings,
a copy of the account will be the filled with Registrar within 3 months of the registration the
company shall be deems to be dissolved.---------------------------------------------------------

Quest:- Who appoint Liquidator what are the powers of liquidator.

Ans:-

The Companies Act, 1956, provides that in each High Court there must be attached an officer known
as the Official Liquidator appointed by the Central Government. There may also be Deputy or
Assistant Official Liquidator. Upon the presentation of a petition for winding-up, the Court may
appoint the official liquidator as the provisional liquidator. When the winding-up order is passed, the
official liquidator becomes the liquidator of the company (Sec. 449).

Powers of the Liquidators (Sec. 457):

(1) The liquidator, in a winding-up by the Court, has power to do the following with the
sanction of the Court:

(a) To institute or defend any suit, prosecution or other legal proceedings, civil or criminal, in the
name and on behalf of company;

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(b) To carry on the business of the company so far as may be necessary for the beneficial winding-
up of the company;

(c) To sell the immovable property and actionable claims of the company by public auction or
private contract, with power to transfer the whole thereof to any person or body corporate or to sell
to the same in parcels;

(d) To raise on the security of the assets of the company any money requisites;

(e) To do all such other things as may be necessary for winding-up the affairs of the company and
distributing its assets.

According to Sec. 546, the liquidator can pay any class of creditors in full, make any compromise
or arrangement with creditors; and compromise any call or liability, with the sanction of the Court.

The liquidator can disclaim any onerous property or unprofitable contract.

(2) The liquidator in a winding-up by the court has power to do the following things, without
taking special permission from the court:

(a) To do all acts and to execute, in the name and on behalf of the company, all deeds, receipts and
other documents, and for that purpose to use, when necessary, the company’s seal;

(b) To inspect the records and returns of the company on the files of the Registrar without payment
of any fee;

(c) To prove, rank and claim in the insolvency of any contributory for any balance against his
estate, and to receive dividends in the insolvency;

(d) To draw, accept make and endorse any bill of exchange, hundi or promissory note in the name
and on behalf of the company;

(e) To take out, in his official name, letters of administration to any deceased contributory and to do
in his official name any other act necessary for obtaining payment of any money due from a
contributory or his estate which cannot be conveniently done in the name of the company;

(f) To appoint an agent to do any business which the liquidator is unable to do himself.

The Court can limit or modify the exercise of any of the powers of the liquidator enumerated under
(2) above.

Duties of Liquidator:

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The duties of a liquidator are enumerated:

(i) Proceeding in Winding-up:

Sec. 451(1) states that the liquidator shall conduct the proceedings in winding-up the company and
perform such duties as the Court may impose.

(ii) Report:

After receipt of the Statement of Affairs of the company the liquidator must submit a preliminary
report to the Court not later than 6 months from the date of the order of winding-up.

(iii) Additional Reports:

Sec. 455(2) also provides that the official liquidator may make, if he thinks fit, further report stating
the manner in which the company was promoted or formed. He may also state if any fraud has been
committed by any person relating to formation or any other matters which it is desirable to bring to
the notice of the Court.

(iv) Custody of Company’s Property:

Sec. 456 (1) states that where a winding-up order has been made or where a provisional liquidator
has been appointed, the liquidator, or the provisional liquidator, as the case may be, shall take into
his custody all the property, affects and actionable claims to which the company is entitled.

(v) Control of Powers:

Sec. 460(1) provides that the liquidator shall, in the administration of the asset of the company and
the distribution thereof among creditors, have regard to any directions which may be given by the
committee of inspection.

(vi) Meeting of Creditors and Contributories:

According to Sec. 460(3), the liquidator may summon general meeting of the
creditors/contributories as soon as he thinks fit in order to ascertain their wishes. He shall summon
such meeting at such times as the creditors/contributories may, by direct resolution or whenever
requested in writing, to do so by not less than 1/10th in value of creditors/contributories, as the case
may be.

(vii) Directions from the Court:

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Sec. 460(4) (4) provides that the liquidator may apply to the Court for directions in relation to any
particular matter arising in a winding-up.

(viii) Proper Books:

Sec. 461(1) states that the liquidator shall keep proper books for making entries or recording
minutes of the proceeding at meetings and such other matters as may be prescribed.

(ix) Audit of Accounts:

Sec. 462(1) also provides that the liquidator shall, at such times as may be prescribed but at least
twice each year during his tenure of office, present to the court an account of his receipts and
payments as liquidators. The account must be in the prescribed form, shall be made in duplicate and
duly verified [Sec. 462(2)].

(x) Appointment of Committee of Inspection:

Sec. 464(1)(b) provides that the liquidator shall, within two months from the date of duration by the
Court, convene a meeting of the company’s creditors to determine the members of the committee of
inspection.

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