The English Common Law is the source of origin of the Company legislations in India.

Various
Companies Acts passed in India from time to time were based on the English Companies Act. In
1850, the first law on ‘registration of joint stock companies’ was enacted in India which was based on
the English Companies Act of 1844 known as the Joint Stock Companies Act, 1844. This Act of 1850
recognized the company as a distinct legal entity but the privilege of limited liability was not granted
to the company under the Act. The principle of limited liability was recognized in India by virtue of
the Joint Stock Companies Act, 1857 which was passed following the English law, the Joint Stock
Companies Act, 1856. The next law relating to Company in India was the Companies Act of 1866
legislated (based on English Companies Act of 1862) ‘for consolidating and amending the law
relating to the incorporation, regulation and winding up of trading companies and other associations.’
This Act was amended and remodelled in 1882 and it remained effective till 1913. In 1913, the Indian
Companies Act of 1913 was legislated following the English Companies (Consolidation) Act, 1908.
This Act of 1913 was found to be highly inadequate in the course of its operation and thus it went
through numerous amendments till the enactment of the Companies Act, 1956. The Companies Act,
1956 was enacted in compliance of the recommendations of the Bhabha Committee. The major
amendments in this Act were brought in 2002 which provided for the constitution of the National
Company Law Tribunal in place of the Company Law Board.

Historical development of company law

1. 1. Historical Development of Company Law Prepared By Radhika

2. 2. Brief History of CompanyLaw  The history of Indian company law began with the
Companies act of 1850, modeled on British Companies act of 1844.  Between 1850 and
1882, the Companies act was amended many times and the act of 1882 repealed all the
previous laws and remained in force till 1912, though amended many times.  The Indian
Companies act of 1913 was based on the British Companies act of 1908.
3. 3. Cont.  Subsequent amendments were in 1914, 1915, 1920, 1926, 1930, 1932 and
1936.The amendment in 1936 was based on the lines of the British companies act of 1929 and
became operative from 15th January, 1937.  After independence it was found that the
company law should again be amended.  Therefore The Companies Act, 1956 was passed
and it came into force on 1st April 1956.  This Act was also amended subsequently.
4. 4. The CompanyLaw 1956  After the independence, it was found that the existing
companies act should be amended to suit the changed conditions in the country.  In line with
Cohen Committee of England, the central government appointed a 12-member company law
committee in October 1950 under the chairmanship of Mr. C. H. Bhabha (known as Bhabha
Committee) and submitted their report in April 1952.
5. 5. Cont.  The central government brought a bill in parliament on 2nd September, 1953. The
parliament appointed a joint parliamentary committee in May 1954 to go into the
recommendations of the Bhabha committee and to suggest any modifications or changes.
6. 6. Cont.  On the basis of the recommendations of the joint parliamentary committee, the
parliament passed the new act in November, 1955 which received the presidents assents on
18th January, 1956, this act came into force with effect from April, 1956.  It consists of 658
sections and 14 schedules.  It also helps the growth of companies on healthy business
principles.
7. 7. Main objectivesof the CompanyLaw 1956 To sustain trust & faith of Shareholders To
protect & preserve rights of Share holders To make the drastic control over all the activities of
company To make regulation of an effective Annual Meetings Investment of general public
should be used for the development of society or social welfare
 Companies Act 1956
Last updated: July 2018 | 4 min read
Introduction
The Companies Act 1956 is administered by the Government of India through the Ministry of
Corporate Affairs and the Offices of Registrar of Companies, Official Liquidators, Public
Trustee, Company Law Board, Director of Inspection, etc. The Act is 658 sections long. The
Act contains provisions about Companies, directors of the companies, memorandum and
articles of associations, etc. This act states and discusses every single provision requires or
may need to govern a company. It mentions what type on companies their differences,
constitution , management, members , capital, how should the shares should be issues,
debentures, registration of charge, at the end of the act it concludes the about winding up of a
company, discussing the situations a company needs to be winded up. The ways it should be
done by volunteer or through courts.
Provisions of the Act
Article 3 of the act describes the definition of a company, the types of companies that can be
formed e.g. public, private, holding, subsidiary, limited by shares, unlimited etc. Further on in
Article 10 E it explains about the constitution of board of company, it explains the
companies’ name, the jurisdictions, tribunals, memorandums and the changes that can be
made. Article 26 and further on explains about the article of association of the company
which a very important part when forming a company and various amendments that can be
made. Article 53 to 123,it explains about the shares, the share holders their rights, it explains
about debentures, share capital, their procedure and powers within the company. Article 146
to 251 it explains about the management and administration of the company and the
provisions registered office and name. Article 252 to 323 elaborates on the provisions of
duties, powers responsibility and liability of the directors in the company which is a very
integral part of the company when it is formed. Article 391 to 409 explains about the
arbitration, the prevention and obsession of the company Article 425 to 560 it explains the
procedure of winding up of a company, the preventions the rights of shareholders, creditors,
methods of liquidations, compensation provided and ways of winding up the company.
Article 591 and further on explains about setting up companies outside India and their fees
and registration procedure and all.
An overview of Companies Act 1956
Companies Act 1956 explains about the whole procedure of the how to form a company, its
fees procedure, name, constitution, its members, and the motive behind the company, its
share capital, about its general board meetings, management and administration of the
company including an important part which is the directors as they are the decision makers
and they take all the important decisions for the company their main responsibility and
liabilities about the company matter the most. The Act explains about the winding of the
business as well and what happens in detail during liquidation period.
Company objective and legal procedure based on the Act
The basic objectives underlying the law are:
 A minimum standard of good behaviour and business honesty in company promotion
and management.
 Due recognition of the legitimate interest of shareholders and creditors and of the duty
of managements not to prejudice to jeopardize those interests.
 Provision for greater and effective control over and voice in the management for
shareholders.
 A fair and true disclosure of the affairs of companies in their annual published balance
sheet and profit and loss accounts.
 Proper standard of accounting and auditing.
 Recognition of the rights of shareholders to receive reasonable information and
facilities for exercising an intelligent judgment with reference to the management.
 A ceiling on the share of profits payable to managements as remuneration for services
rendered.
 A check on their transactions where there was a possibility of conflict of duty and
interest.
 A provision for investigation into the affairs of any company managed in a manner
oppressive to minority of the shareholders or prejudicial to the interest of the company as a
whole.
 Enforcement of the performance of their duties by those engaged in the management
of public companies or of private companies which are subsidiaries of public companies by
providing sanctions in the case of breach and subjecting the latter also to the more restrictive
provisions of law applicable to public companies.
Companies Act empowerment and mechanism
In India, the Companies Act, 1956, is the most important piece of legislation that empowers
the Central Government to regulate the formation, financing, functioning and winding up of
companies. The Act contains the mechanism regarding organizational, financial, and
managerial, all the relevant aspects of a company. It empowers the Central Government to
inspect the books of accounts of a company, to direct special audit, to order investigation into
the affairs of a company and to launch prosecution for violation of the Act. These inspections
are designed to find out whether the companies conduct their affairs in accordance with the
provisions of the Act, whether any unfair practices prejudicial to the public interest are being
resorted to by any company or a group of companies and to examine whether there is any
mismanagement which may adversely affect any interest of the shareholders, creditors,
employees and others. If an inspection discloses a prima facie case of fraud or cheating,
action is initiated under provisions of the Companies Act or the same is referred to the
Central Bureau of Investigation. The Companies Act, 1956 has been amended from time to
time in response to the changing business environment.
5 Most Important Objectives of the Company Law in India
In the present business environment, the company law is the principal law affecting the
organisation, administration and management of corporate business. Initially this law was
applicable to joint stock companies only but now its scope has widened.
According to the traditional view, company law is concerned with the organisation and
functioning of joint stock companies, their constitution, and their management and eventually
with the manner of their dissolution.

Today it has become the principal law of organisation and management for corporate
business.

Objectives:
The basic objectives of the Companies Act, 1956 as stated by C.D. Deshmukh, the then
Finance Minister, are as follows:

1. Minimum standard of business integrity and conduct in promotion and management of

companies.

2. Full and fair disclosure of all reasonable information relating to the affairs of the company.

3. Effective participation and control by shareholders and the protection of their legitimate
interests.

4. Enforcement of proper performance of duties by company management.

5. Powers of intervention and investigation into the affairs of companies where they are
managed in manner prejudicial to the interests of the shareholders or to the public interest.

The primary objectives of the Act are to regulate all private investments for the common
good of the society and to protect the legitimate interests of genuine investors.

The Act also aims at democratising and professionalising company managements so as to

discipline the conduct and behaviour of the companies in public interest. The Act also aims at
preventing the misconduct and malpractices on the part of company managements.

The term “company” is used to describe an association of a number of persons formed for
some common purpose and registered according to the law relating to companies. Section
3(1) of the Companies Act 1956 states that a company means a company formed and
registered under this Act or an existing company.
Corporate Governance provisions in the Companies Act, 2013 The enactment of the
companies Act 2013 was major development in corporate governance in 2013. The new Act
replaces the Companies Act, 1956 and aims to improve corporate governance standards,
simplify regulations and enhance the interests of minority shareholders. The new Act is a
major milestone in the corporate governance sphere in India and is likely to have significant
impact on the governance of companies in the country. Following are the main provisions
related to corporate governance that have been incorporated in the Companies Act, 2013. i.
The Companies Act, 2013 introduces new definitions relating to accounting standards,
auditing standards, financial statement, independent director, interested director, key
managerial personnel, voting right etc. For example, the legislation introduces a new class of
companies called ‘one person company’ (OPC) to the existing classes of companies, namely
public and private. OPC is a new vehicle for individuals for carrying on a business with
limited liability. ii. Board of Directors (Clause 166): The new Act provides that the company
can have a maximum of 15 directors on the Board; appointing more than 15 directors,
however, will require shareholder approval. Further, the new Act prescribes both academic
and professional qualifications for directors. It states that the majority of members of Audit
Committee including its Chairperson should have the ability to read and understand the
financial statements. In addition, for the first time, duties of directors have been defined in the
Act. The Act considerably enhances the roles and responsibilities of the Board of Directors
and makes them more accountable. Infringement of these provisions has been made
punishable with fine. iii. Independent Director (Clause 149): The concept of independent
directors (IDs) has been introduced for the first time in the Company Law in India. It
prescribes that all listed companies must have at least onethird of the Board as IDs. IDs may
be appointed for a term of up to five consecutive years. While the introduction of the concept
of IDs in the new Act is a welcome move, it does not appear to sufficiently address the
enduring challenges related to the effectiveness of IDs in the context of concentrated
shareholding pattern in most of the listed companies in India. iv. Related Party Transactions
(RPT) (Clause 188): The new Act requires that no company should enter into RPT contracts
pertaining to — (a) sale, purchase or supply of any goods or materials; (b) sale or dispose of
or buying, property of any kind; (c) leasing of property of any kind; (d) availing or rendering
of any services; (e) appointment of any agent for purchase or sale of goods, materials,
services or property; (f) such related party's appointment to any office or place of profit in the
company, its subsidiary company or associate www.nseindia.com ISMR Corporate
Governance in India: Developments and Policies 150 company. In case such a contract or
arrangement is entered into with a related party, it must be referred to in the Board’s Report
along with the justification for entering into such contract or arrangement. Further, any RPT
between a company and its Directors shall require prior approval by a resolution in general
meeting. Violations of these provisions would be punishable with fine or imprisonment or
both. v. Corporate Social Responsibility (CSR) (Clause 135): The new Act has mandated the
profit making companies to spend on CSR related activities. Every company having net
worth of Rs 500 crore or more or turnover of Rs 1000 crore or more or net profit of Rs 5
crore or more during any financial year shall constitute a CSR Committee of the Board. In
pursuance of its CSR policy, the Board of every such company–through these committees--
shall ensure that the company spends (in every financial year) at least 2 percent of the
average net profits of the company made during the three immediately preceding financial
years. vi. Auditors (Clause 139): A listed company cannot appoint or reappoint (a) an
individual as auditor for more than one term of five consecutive years, or (b) an audit firm as
auditor for more than two terms of five consecutive years. To avoid any conflict of interest,
the Act has mentioned the services that an auditor cannot render, directly or indirectly, to the
company, which include: accounting and book-keeping services, internal audit, investment
banking services, investment advisory services, management services etc. vii. Disclosure and
Reporting (Clause 92): In the new Act, there is significant transformation in non-financial
annual disclosures and reporting by companies as compared to the earlier format in the
Companies Act, 1956. viii. Serious Fraud Investigation Office (SFIO) (Clause 211): The Act
has proposed statutory status to SFIO. Investigation report of SFIO filed with the Court for
framing of charges shall be treated as a report filed by a Police Officer. SFIO shall have
power to arrest in respect of certain offences of the Act which attract the punishment for
fraud. Further, the new Act has a provision for stringent penalty for fraud related offences. ix.
Class action suits (Clause 245): For the first time, a provision has been made for class action
under which it is provided that specified number of member(s), depositor(s) or any class of
them, may file an application before the Tribunal seeking any damage or compensation or
demand any other suitable action against an audit firm. The order passed by the Tribunal shall
be binding on all the stakeholders including the company and all its members, depositors and
auditors.
Nature of an LLP: The Cross-Breed Corporate Structure
In light of the fact, that this form of business enterprise combines the advantages of a
company and a partnership, the corporate nature of an LLP and its mode of functioning
makes it a unique structure.

LLP is a body corporate and a legal entity separate from its partners. It has perpetual
succession which implies that the LLP can continue its existence irrespective of a change in
partners. It is capable of entering into contracts and holding property in its own name.

Having a separate legal entity, it is liable to the full extent of its assets but liability of the
partners is limited to their agreed contribution in the LLP. LLPs can participate in
compromises, arrangements, mergers and amalgamations. Dissolution may be voluntary or
may be ordered by the NCLT.

The Partners are considered agents of the LLP and not of each other. Designated Partners are
responsible for managing the day to day business and other statutory compliances. Moreover,
no partner is liable on account of the independent or un-authorized actions of other partners,
thus individual partners are shielded from joint liability created by another partner’s wrongful
business decisions or misconduct. Further, mutual rights and duties of the partners within a
LLP are governed by an agreement between the partners or between the partners and the LLP
as may be required.

A partnership is an organisation in which the partners share equally in responsibility and

liability. The primary distinction between an LLP and a general partnership is that partnership
has no legal existence separate from the partners who constitute it, while an LLP exists as a
legal entity separate from its partners.

An LLP is treated as a company, inter alia, with respect to the extent of liability of the

partners. However, in the case of taxation, it is treated as a partnership. For other purposes,
the LLP has a partnership regulatory regime, which permits the partners the flexibility of
internal organization based on mutual agreement. An LLP also has a simpler and less
expensive process of formation as compared to a company.
 Advantages of an LLP

·        The organization and operation of an LLP is on the basis of the LLP agreement which
is made on mutually agreed terms and conditions

·        The cost of registration for an LLP is lower as compared to that of incorporating a

public or private limited company

·        As partners are liable only up to their agreed contribution, no joint liability is created by
the independent and unauthorized acts of another partner

·        The registration process is comparatively simpler as compared to that of a company.

·        Remuneration of partners, voting rights etc. is all clear and as per the LLP agreement.

·        Unlike in the case of a company, there is no restriction on the limit of remuneration to

be paid to a partner. The only requirement is that such remuneration must be authorized by
the LLP Agreement and must not exceed the limit prescribed under it.

·        Partners are not liable to be sued for the dues against the LLP as the LLP can sue and
be sued in its own name

·        There is greater flexibility and ease when it comes to becoming a partner, leaving the
LLP or transferring interest in the LLP as per the LLP Agreement.

·        Partners are free to enter into any contract (unlike in a company where there are
restrictions on the board regarding some specified contracts, in which directors are interested)

·        As an organization on account of stringent regulatory framework, an LLP will enjoy

comparatively higher credit-worthiness than that of a partnership but lesser than a company.

·        There is no mandatory requirement to get the accounts audited like in the case of
companies.

·        Unlike partnership firms and sole proprietorships, an LLP is a regulated body and can
raise funds from private equity investors, financial institutions etc.

·        Tax Benefits:

a.   For income tax purposes LLPs are treated at par with partnership firms. Only the LLP is
liable for payment of income tax and the share of its partners in LLP is not liable to tax.
Provison of “deemed income” under income tax act is inapplicable to LLPs.

b.   Tax rate is lower than that applicable to companies

c.   LLPs are not subject to Dividend Distribution Tax as compared to companies, hence no
tax liability arises when profits are distributed to its partners.

Disadvantages of an LLP
·        There is no provision relating to redressal in case of oppression and mismanagement
unlike the provisions provided for in the case of a company

·        An act of one partner without the consent of the other partners may bind the LLP

·        Under certain cases, the liability may extend to the personal assets of the partners

·        Winding up as provided under Limited Liability Partnership (Winding Up and

Dissolution) Rules, 2012 is a lengthy and expensive procedure and may come in the way of
winding up business in case of exigencies

·        As an organization, an LLP has lesser credit-worthiness than a company.

·        An LLP is required to file Annual Statement of accounts and Solvency & Annual
Return with Registrar of Companies every year. This requirement is absent in the case of a
partnership.

Conclusion
The primary reasons for introducing LLP included the risk factor and the enhanced global
competitive advantage to the Indian professionals. In the event of business failure, the
liability would be limited to the partner responsible. There would be no recourse to attach the
personal assets of the other members. This lowers the risk factor associated with unlimited
liability in a partnership and introduced the limited liability concept of company law to make
such bodies more adaptive to international competition. Functioning under this structure, it
has made possible for a large pool of Indian professionals to provide various useful services
to the International clientele.

The LLP structure has proven to be particularly advantageous for providing such professional
services in the era of satisfying the global customers with utmost productivity. Hence, it
would be a suitable vehicle for partnership among professionals who are already regulated
such as company Secretaries, Chartered Accountants, Cost Accountants, Lawyers, and
Architects, Engineers and Doctors etc., particularly accountants and auditors who are not
legally permitted to operate as company.

Further, as India is attracting FDI in entrepreneurial projects carried through the LLP format,
the same would encourage the small entrepreneurs in India to explore business ventures with
foreign investment. Also, foreign entities having project offices in India consider reducing
risk by employing the LLP structure. Any structure where different members want to control
different segments and further bear full responsibility for their acts could conveniently use
the LLP structure that includes infrastructure project SPVs where different partners bring in
different expertise into the project.

To sum up, while some more fine-tuning of the LLP structure is required to mitigate certain
conflicting situations, the regulation of the LLP corporate structure has genuinely been a
boon to Indian business interests.
Second Unit
Companies Act 2013

Registration and Incorporation of a Company

The Companies Act, 2013 details the regulations and company
registration papers essential for the incorporation of a company. In
this article, we will understand all such rules and documents listed in
the Act. To begin with, let’s define the promoters of a company.

Promoters
Section 2(69) of the Companies Act, 2013, defines promoters as an
individual who:-

 Is named as a promoter in the prospectus or in the annual

returns of the company.
 Controls the affairs of a company, directly or indirectly.
 Advises, directs, or instructs the Board of Directors.
Hence, we can say that promoters are people who originally come up
with the idea of the company, form it and register it. However,
solicitors, accountants, etc. who act in their professional capacity are
NOT promoters of the company.

Formation of a Company
Section 3 of the Companies Act, 2013, details the basic requirements
of forming a company as follows:

 Formation of a public company involves 7 or more people who

subscribe their names to the memorandum and register the
company for any lawful purpose.
 Similarly, 2 or more people can form a private company.
 One person can form a One-person company.
Registration or Incorporation of a Company
Section 7 of the Companies Act, 2013, details the procedure for
incorporation of a company. Here is the procedure:

Filing of company registration papers with the registrar

To incorporate a company, the subscriber has to file the following

company registration papers with the registrar within whose
jurisdiction the location of the registered office of the proposed
company falls.

1. The Memorandum and Articles of the company. All subscribers

have to sign on the memorandum.
2. The person who is engaged in the formation of the company
has to give a declaration regarding compliance of all the
requirements and rules of the Act. A person named in the Articles
also has to sign the declaration.
3. Each subscriber to the Memorandum and individuals named as
first directors in the Articles should submit an affidavit with the
following details:
i. Declaration regarding non-conviction of any offence with
respect to the formation, promotion, or management of any
company.
ii. He has not been found guilty of fraud or any breach of
duty to any company in the last five years.
iii. The documents filed with the registrar are complete and
true to the best of his knowledge.
4. Address for correspondence until the registered office is set-up.
5. If the subscriber to the Memorandum is an individual, then he
needs to provide his full name, residential address, and nationality
 along with a proof of identity. If the subscriber is a body
corporate, then prescribed documents need to be provided.
6. Individuals mentioned as subscribers to the Memorandum in
the Articles need to provide the details specified in the point
above along with the Director Identification Number.
7. The individuals mentioned as first directors of the company in
the Articles must provide particulars of interests in other firms or
bodies corporate along with their consent to act as directors of
the company as per the prescribed form and manner.

Issuing the Certificate of Incorporation

Once the Registrar receives the information and company registration

papers, he registers all information and documents and issues a
Certificate of Incorporation in the prescribed form.

Corporate Identity Number (CIN)

The Registrar also allocates a Corporate Identity Number (CIN) to

the company which is a distinct identity for the company. The
allotment of CIN is on and from the company’s incorporation date.
The certificate carries this date.

Maintaining copies of Company registration papers

The company must maintain copies of all information and documents

until dissolution.

Furnishing false information at the time of incorporation

During the formation of a company, an individual can:

 Furnish incorrect or false information

 Suppress any material information in the documents provided
to the Registrar for the incorporation, on purpose
In such cases, the individual is liable for action for fraud under
section 447.

The company is already incorporated based on false

information

If a company is already incorporated but it is found at a later date that

the information or documents submitted were false or incorrect, then
the promoters, first directors, and persons making a declaration is
liable for action for fraud under section 447.

Order of the National Company Law Tribunal (NCLT)

If a company is incorporated by furnishing false or incorrect

information or representation or suppressing material facts or
information in the documents furnished, the Tribunal can pass the
following orders (if an application is made and the Tribunal is
satisfied with it):

 Pass an order to regulate the management of the company. It

can include changes in its Memorandum and Articles if required.
This order is either in public interest or in the interest of the
company and its members and creditors.
 Make the liability of its members unlimited
 Order removal of the name of the company from the Registrar
of Companies
 Order the company to wind-up
 Pass any other order as it deems fit
Before passing an order, the Tribunal has to give the company a
reasonable opportunity to state its case. Also, the Tribunal should
consider the transactions of the company including obligations
contracted or payment of any liability.
Effect of Registration of a Company
According to Section 9 of the Companies Act, 2013, these are the
effects of registration of a company:

 From the date of incorporation, the subscribers to the

Memorandum and all subsequent members of the company are a
body corporate.
 A registered company can exercise all functions of a company
incorporated under the Act. Also, the company has perpetual
succession with power to acquire, hold, and dispose of property
of all forms. Also, it can contract, sue and be sued by the said
name.
 Further, the company becomes a legal person separate from
the incorporators from the date of incorporation. Also, a binding
contract comes into existence between the company and its
members as mentioned in the Memorandum and Articles of
Association. Until the company dissolves or the Registrar removes
it from the register, it has perpetual existence.
Companies Types: 5 Types of
Companies – Discussed!
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(A) On the basis of incorporation:

On the basis of incorporation, companies can be classified
as:
(i) Chartered companies

(ii) Statutory companies

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(iii) Registered companies

(i) Chartered companies:

The crown in exercise of the royal prerogative has power to create a
corporation by the grant of a charter to persons assenting to be
incorporated. Such companies or corporations are known as
chartered companies. Examples of this type of companies are Bank
of England (1694), East India Company (1600). The powers and the
nature of business of a chartered company are defined by the
charter which incorporates it. After the country attained
independence, these types of companies do not exist in India.

(ii) Statutory companies:
A company may be incorporated by means of a special Act of the
Parliament or any state legislature. Such companies are called
statutory companies, Instances of statutory companies in India are
Reserve Bank of India, the Life Insurance Corporation of India, the
Food Corporation of India etc. The provisions of the Companies Act
1956 apply to statutory companies except where the said provisions
are inconsistent with the provisions of the Act creating them.
Statutory companies are mostly invested with compulsory powers.

(iii) Registered companies:
Companies registered under the Companies Act 1956, or earlier
Companies Acts are called registered companies. Such companies
come into existence when they are registered under the Companies
Act and a certificate of incorporation is granted to them by the
Registrar.

(B) On the basis of liability:

On the basis of liability the company can be classified into:
ADVERTISEMENTS:

(i) Companies limited by shares

(ii) Companies limited by guarantee

(iii) Unlimited companies.

(i) Companies limited by shares:

ADVERTISEMENTS:

When the liability of the members of a company is limited to the

amount if any unpaid on the shares, such a company is known as a
company limited by shares. In a company limited by shares the
liability of the members is limited to the amount if any unpaid on
the shares respectively held by them. The liability can be enforced
during existence of the company as well as during the winding up.
Where the shares are fully paid up, no further liability rests on
them.

(ii) Companies limited by guarantee:

It is a registered company in which the liability of members is
limited to such amounts as they may respectively undertake by the
memorandum to contribute to the assets of the company in the
event of its being wound up. In the case of such companies the
liability of its members is limited to the amount of guarantee
undertaken by them. Clubs, trade associations, research
associations and societies for promoting various objects are various
examples of guarantee companies.

(iii) Unlimited companies:

A company not having a limit on the liability of its members is
termed as unlimited company. In case of such a company every
member is liable for the debts of the company as in an ordinary
partnership in proportion to his interest in the company. Such
companies are not popular in India.

(C) On the basis of number of members:

(i) Private company:
A private company means a company which by its articles
of association:
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(i) Restricts the right to transfer its shares

(ii) Limits the number of its members to fifty (excluding members

who are or were in the employment of the company) and
(iii) Prohibits any invitation to the public to subscribe for any shares
or debentures of the company.

(iv) Where two or more persons hold one or more shares in a

company jointly, they are treated as a single member. There should
be at least two persons to form a private company and the
maximum number of members in a private company cannot exceed
50. A private limited company is required to add the words “Private
Ltd” at the end of its name.

(ii) Public company:

ADVERTISEMENTS:

A public company means a company which is not a private

company. There must be at least seven persons to form a public
company. It is of the essence of a public company that its articles do
not contain provisions restricting the number of its members or
excluding generally the transfer of its shares to the public or
prohibiting any invitation to the public to subscribe for its shares or
debentures. Only the shares of a public company are capable of
being dealt in on a stock exchange.

(D) According to Domicile:

(i) Foreign company:
It means a company incorporated outside India and having a place
of business in India.

According to Section 591 a foreign company is one

incorporated outside India:
(a) Which established a place of business within India after the
commencement of this Act or (b) Which had a place of business
within India before the commencement of this Act and continues to
have the same at the commencement of this Act.

(ii) Indian Companies:

A company formed and registered in India is known as an Indian
Company.

(E) Miscellaneous Category:

(i) Government Company:
It means any company in which not less than 51 percent of the paid
up share capital is held by the Central Govt, and/or by any State
Government or Governments or partly by the Central Government
and partly by one or more State Governments. The subsidiary of a
Government company is also a Government company.

(ii) Holding and subsidiary companies:

A company is known as the holding company of another company if
it has control over another company. A company is known as
subsidiary of another company when control is exercised by the
latter over the former called a subsidiary company. A company is to
be deemed to be subsidiary company of another

(a) If the other:

(a) Controls the composition of its Board of directors or

(b) Exercises or controls more than half of its total voting power
where it is an existing company in respect where of the holders of
preference shares issued before the commencement of the Act have
the same voting rights as the holders of equity shares or

(c) In the case of any other company holds more than half in
nominal value of its equity share capital or
(b) If it is a subsidiary of a third company which is subsidiary of the
controlling company.
(iii) One man Company:
This is a company in which one man holds practically the whole of
the share capital of the company and in order to meet the statutory
requirement of minimum number of members, some dummy
members hold one or two shares each. The dummy members are
usually nominees of principal shareholder. The principal
shareholder is in a position to enjoy the profits of the business with
limited liability. Such type of companies are perfectly valid and not
illegal.

Promoter of a Company: Functions,

Duties and Liabilities
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ADVERTISEMENTS:

After reading this article you will learn about:- 1. Meaning of a

Promoter 2. Functions of a Promoter 3. Legal Position 4. Rights 5.
Duties 6. Liabilities 7. Preliminary Contracts.

Meaning of a Promoter:
The idea of carrying on a business which can be profitably
undertaken is conceived either by a person or by a group of persons
who are called promoters. After the idea is conceived, the promoters
make detailed investigations to find out the weaknesses and strong
points of the idea, to determine the amount of capital required and
to estimate the operating expenses and probable income.
The term ‘promoter’ is a term of business and not of law. It has not
been defined anywhere in the Act, but a number of judicial
decisions have attempted to explain it.

ADVERTISEMENTS:

According to L.J. Brown. “The term promoter is a term not of law

but of business, usefully 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.”

According to Justice C. Cockburn. “Promoter is one who undertakes

to form a company with reference to a given object and to set it
going, and who takes the necessary steps to accomplish that
purpose.”

According to Palmer, “Company promoter is a person who

originates a scheme for the formation of the company, has the
memorandum and the articles prepared, executed and registered
and finds the first directors, settles the terms of preliminary
contracts and prospectus (if any) and makes arrangement for
advertising and circulating the prospectus and placing the capital.”

According to Guthmann and Dougall. “Promoter is the person who

assembles the men, the money and the materials into a going
concern.”

ADVERTISEMENTS:

From these definitions of promoter it is concluded that:

“Promoter is the person who originates the idea for formation of a
company and gives the practical shape to that idea with the help of
his own resources and with that of others.”

A person cannot be held as promoter merely because he has signed

at the foot of the Memorandum or that he has provided money for
the payment of formation expenses.

The promoters, in fact, render a very useful service in the formation

of the company. A promoter has been described as ”a creator of
wealth and an economic prophet.” The promoters carry a
considerable risk because if the idea sometimes goes wrong then the
time and money spent by them will be a waste.

ADVERTISEMENTS:

In the words of Henry E. Heagland, “A successful promoter is a

creator of wealth. He is an economic prophet. He is able to visualise
what does not yet exist and to organise business enterprise to make
the products available to the using public.”

A promoter may be an individual, a firm, an association of persons

or even a company.

Functions of a Promoter:
The Promoter Performs the following main functions:
1. To conceive an idea of forming a company and explore its
possibilities.

ADVERTISEMENTS:

2. To conduct the necessary negotiation for the purchase of business

in case it is intended to purchase as existing business. In this
context, the help of experts may be taken, if considered necessary.

3. To collect the requisite number of persons (i.e. seven in case of a

public company and two in case of a private company) who can sign
the ‘Memorandum of Association’ and ‘Articles of Association’ of the
company and also agree to act as the first directors of the company.

4. To decide about the following:

(i) The name of the Company,

ADVERTISEMENTS:

(ii) The location of its registered office,

(iii) The amount and form of its share capital,

(iv) The brokers or underwriters for capital issue, if necessary,

(v) The bankers,

ADVERTISEMENTS:

(vi) The auditors,

(vii) The legal advisers.

5. To get the Memorandum of Association (M/A) and Articles of

Association (A/A) drafted and printed.

6. To make preliminary contracts with vendors, underwriters, etc.

ADVERTISEMENTS:

7. To make arrangement for the preparation of prospectus, its filing,

advertisement and issue of capital.

8. To arrange for the registration of company and obtain the

certificate of incorporation.

9. To defray preliminary expenses.

10. To arrange the minimum subscription.

Legal Position of a Promoter:

The promoter is neither a trustee nor an agent of the company
because there is no company yet in existence. The correct way to
describe his legal position is that he stands in a fiduciary position
towards the company about to be formed.

Lord Cairns has correctly stated the position of promoter in

Erlanger V. New Semberero Phophate Co. “The promoters of a
company stand 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.”

From the fiduciary position of promoters, the two

important results follow:
(1) A promoter cannot be allowed to make any secret profits. If it is
found that in any particular transaction of the company, he has
obtained a secret profit for himself, he will be bound to refund the
same to the company.

(2) The promoter is not allowed to derive a profit from the sale of
his own property to the company unless all material facts are
disclosed. If he contracts to sell his own property to the company
without making a full disclosure, the company may either
repudiate/rescind the sale or affirm the contract and recover the
profit made out of it by the promoter.

A promoter who wishes to sell his own property to the company

must make a full disclosure of his interest.

The disclosure may be made:

(i) To an independent Board of Directors, or

(ii) In the articles of association of the company, or

(iii) In the prospectus, or

(iv) To the existing and intended shareholders directly.

If the promoter fails to discharge the obligation demanded of his

fiduciary position the company may rescind the contract or may in
the alternative choose to take advantage of the contract and sue the
promoter for damages for breach of his duty to the company.

Secret profits on the sale of property can be recovered from a

promoter only when the property was bought and sold to the
company while he was acting as a promoter.

Rights of Promoter:
The rights of promoters are enumerated as follows:
1. Right of indemnity:
Where more than one person act as the promoters of the company,
one promoter can claim against another promoter for the
compensation and damages paid by him. Promoters are severally
and jointly liable for any untrue statement given in the prospectus
and for the secret profits.

2. Right to receive the legitimate preliminary expenses:

A promoter is entitled to receive the legitimate preliminary
expenses which he has incurred in the process of formation of the
company such as cost of advertisement, fee of solicitor and
surveyors. The right to receive the preliminary expenses is not a
contractual right. It depends upon the discretion of the directors of
the company. The claim for expenses should be supported by
vouchers.

3. Right to receive the remuneration:

A promoter has no right against the company for his remuneration
unless there is a contract to that effect. In some cases, articles of the
company provide for the directors paying a specified amount to
promoters for their services but this does not give the promoters
any contractual right to sue the company. This is simply an
authority vested in the directors of the company.

However, the promoters are usually the directors, so that in practice

the promoters will receive their remuneration.

The remuneration may be paid in any of the following

ways:
(i) A commission may be paid to the promoter on the purchase price
of the business or property taken over by the company through him.

(ii) The promoters may be granted by the company a lumpsum

amount.

(iii) The promoters may be given fully or partly paid shares in

consideration of their services rendered.

(iv) The promoter may be given a commission at a fixed rate on the

shares sold.

(v) The promoter may purchase the business or other property and
sell the same to the company at an inflated price. He must disclose
this fact.
(vi) The promoters may take an option to subscribe within a fixed
period for a certain portion of the company’s unissued shares at par.

Whatever be the nature of remuneration, it must be disclosed in the

prospectus if paid within the preceding two years from the date of
prospectus.

Duties of Promoter:
The duties of promoters are as follows:
1. To disclose the secret profit:
The promoter should not make any secret profit. If he has made any
secret profit, it is his duty to disclose all the money secretly obtained
by way of profit. He is empowered to deduct the reasonable
expenses incurred by him.

2. To disclose all the material facts:

The promoter should disclose all the material facts. If a promoter
contracts to sell the company a property without making a full
disclosure, and the property was acquired by him at a time when he
stood in a fiduciary position towards the company, the company
may either repudiate the sale or affirm the contract and recover the
profit made out of it by the promoters.

3. The promoter must make good to the company what he

has obtained as a trustee:
A promoters stands in fiduciary position towards the company. It is
the duty of the promoter to make good to the company what he has
obtained as trustee and not what he may get at any time.

4. Duty to disclose private arrangements:

It is the duty of the promoter to disclose all the private arrangement
resulting him profit by the promotion of the company.

5. Duty of promoter against the future allottees:

When it is said the promoters stand in a fiduciary position towards
the company then it does not mean that they stand in such relation
only to the company or to the signatories of memorandums of
company and they will also stand in this relation to the future
allottees of the shares.
Liabilities of Promoter:
The liabilities of promoters are given below:
1. Liability to account in profit:
As we have already discussed that promoter stands in a fiduciary
position to the company. The promoter is liable to account to the
company for all secret profits made by him without full disclosure to
the company. The company may adopt any one of the following two
courses if the promoter fails to disclose the profit.

(i)The company can sue the promoter for an amount of profit and
recover the same with interest.

(ii) The company can rescind the contract and can recover the
money paid.

2. Liability for mis-statement in the prospectus:

Section 62(1) holds the promoter liable to pay compensation to
every person who subscribes for any share or debentures on the
faith of the prospectus for any loss or damage sustained by reason of
any untrue statement included in it. Sec. on 62 also provides certain
grounds on which a promoter can avoid his liability. Similarly Sec.
63 provides for criminal liability for mis-statement in the
prospectus and a promoter may also become liable under this
section.

The promoter may also be imprisoned for a term which may extend
to two years or may be punished with the fine upto Rs. 5,000 for
untrue statement in the prospectus. (Sec. 63).

3. Personal liability:
The promoter is personally liable for all contracts made by him on
behalf of the company until the contracts have been discharged or
the company takes over the liability of the promoter.

The death of promoter does not relieve him from liabilities.

4. Liability at the time of winding up of the company:

In the course of winding up of the company, on an application made
by the official liquidator, the court may make a promoter liable for
misfeasance or breach of trust. (Sec. 543).
Further where fraud has been alleged by the liquidator against a
promoter, the court may order for his public examination. (Sec.
478).

Preliminary Contracts/Pre-Incorporation Contracts Made by the

Promoters:
Preliminary contracts are those contracts which are made by the
promoters with different parties on behalf of the company yet to be
incorporated. Such contracts are generally entered into by
promoters to acquire some property or right for and on behalf of the
company to be formed.

The promoters enter into preliminary contracts, generally as agents

or trustees of the company. Such contracts are not legally binding
on the company because two consenting parties are necessary to a
contract whereas the company is nonentity before incorporation.

The company has no legal existence until it is

incorporated. It therefore follows:
1. That when, the company is registered, it is not bound by the
preliminary contract.

2. That the company when registered cannot ratify the agreement.

The company was not a principal with contractual capacity at the
time of contract. A contract can be ratified only when it is made by
an agent for a principal who is in existence and who is competent to
contract at the time when the contract is made.

3. That if the agent undertook any liability under the agreement, he

would be personally liable notwithstanding that he is described in
the agreement as an agent and that the company may have
attempted to ratify the agreement.

4. The company cannot enforce the preliminary agreement.

The preliminary contracts made by promoters generally provided

that if the company adopts the agreement the promoter’s liability
shall cease and if the company does not adopt the agreement within
a certain time either party may rescind the contract. In such a case
promoter’s liability would cease after the lapse of fixed time.
Corporate veil:

A legal concept that separates the personality of a corporation from the

personalities of its shareholders, and protects them from being personally liable for
the company’s debts and other obligations.

Lifting of Corporate veil:

At times it may happen that the corporate personality of the company is used to
commit frauds and improper or illegal acts. Since an artificial person is not capable
of doing anything illegal or fraudulent, the façade of corporate personality might
have to be removed to identify the persons who are really guilty. This is known as
‘lifting of corporate veil’.

It refers to the situation where a shareholder is held liable for its corporation’s debts
despite the rule of limited liability and/of separate personality. The veil doctrine is
invoked when shareholders blur the distinction between the corporation and the
shareholders. A company or corporation can only act through human agents that
compose it. As a result, there are two main ways through which a company becomes
liable in company or corporate law: firstly through direct liability (for direct
infringement) and secondly through secondary liability (for acts of its human agents
acting in the course of their employment).

There are two existing theories for the lifting of the corporate veil. The first is the
“alter-ego” or other self theory, and the other is the “instrumentality” theory.

The alter-ego theory considers if there is in distinctive nature of the boundaries

between the corporation and its shareholders.

The instrumentality theory on the other hand examines the use of a corporation by
its owners in ways that benefit the owner rather than the corporation. It is up to the
court to decide on which theory to apply or make a combination of the two doctrines.

Concept of limited liability:

One of the main motives for forming a corporation or company is the limited liability
that it offers to its shareholders. By this doctrine, a shareholder can only lose what
he or she has contributed as shares to the corporate entity and nothing more. This
concept is in serious conflict with the doctrine of lifting the veil as both these do not
co-exist which is discussed by us in the paper in detail.
DEVELOPMENT OF THE CONCEPT
OF “LIFTING THE CORPORATE VEIL”
One of the main characteristic features of a company is that the company is a
separate legal entity distinct from its members. The most illustrative case in this
regard is the case decided by House of Lords- Salomon v. A Salomon & Co. Ltd[i].

In this case, Mr. Solomon had the business of shoe and boots manufacture. ‘A
Salomon & Co. Ltd.’ was incorporated by Solomon with seven subscribers-Himself,
his wife, a daughter and four sons. All shareholders held shares of UK pound 1 each.
The company purchased the business of Salomon for 39000 pounds, the purchase
consideration was paid in terms of 10000 pounds debentures conferring charge on
the company’s assets, 20000 pounds in fully paid 1 pound share each and the
balance in cash.

The company in less than one year ran into difficulties and liquidation proceedings
commenced.  The assets of the company were not even sufficient to discharge the
debentures (held entirely by Salomon itself) and nothing was left to the insured
creditors. The House of Lords unanimously held that the company had been validly
constituted, since the Act only required seven members holding at least one share
each and that Salomon is separate from Salomon & Co. Ltd.

The entity of the corporation is entirely separate from that of its shareholders; it
bears its own name and has a seal of its own; its assets are distinct and separate
from those of its members; it can sue and be sued exclusively for its purpose; liability
of the members are limited to the capital invested by them.[ii]

Further in Lee v. Lee’s Air Farming Ltd.[iii], it was held that there was a valid contract
of service between Lee and the Company, and Lee was therefore a worker within the
meaning of the Act. It was a logical consequence of the decision in Salomon’s case
that one person may function in the dual capacity both as director and employee of
the same company.

In The King v Portus; ex parte Federated Clerks Union of Australia[iv], where Latham
CJ while deciding whether or not employees of a company owned by the Federal
Government were not employed by the Federal Government ruled that the company
is a distinct person from its shareholders. The shareholders are not liable to
creditors for the debts of the company. The shareholders do not own the property of
the company.
In course of time, the doctrine that a company has a separate and legal entity of its
own has been subjected to certain exceptions by the application of the fiction that
the veil of the corporation can be lifted and its face examined in substance.

Thus when “Tata Company” or “German Company” or “Government Company” is

referred to, we look behind the smoke-screen of the company and find the individual
who can be identified with the company. This phenomenon which is applied by the
courts and which is also provided now in many statutes is called “lifting of the
corporate veil”. As a consequence of the lifting of the corporate veil, the company as
a separate legal entity is disregarded and the people behind the act are identified
irrespective of the personality of the company. So, this principle is also
called “disregarding the corporate entity”.

LIFTING THE CORPORATE VEIL

Meaning of the doctrine:

Lifting the corporate refers to the possibility of looking behind the company’s
framework (or behind the company’s separate personality) to make the members
liable, as an exception to the rule that they are normally shielded by the corporate
shell (i.e. they are normally not liable to outsiders at all either as principles or as
agents or in any other guise, and are already normally liable to pay the company what
they agreed to pay by way of share purchase price or guarantee, nothing more).[v]

When the true legal position of a company and the circumstances under which its
entity as a corporate body will be ignored and the corporate veil is lifted, the
individual shareholder may be treated as liable for its acts.

The corporate veil may be lifted where the statute itself contemplates lifting the veil
or fraud or improper conduct is intended to be prevented.

“It is neither necessary nor desirable to enumerate the classes of cases where lifting
the veil is permissible, since that must necessarily depend on the relevant statutory
or other provisions, the object sought to be achieved, the impugned conduct, the
involvement of the element of public interest, the effect on parties who may be
affected, etc.”. This was iterated by the Supreme Court in Life Insurance Corporation
of India v. Escorts Ltd.[vi]

The circumstances under which corporate veil may be lifted can be categorized
broadly into two following heads:

1. Statutory Provisions
2. Judicial interpretation
STATUTORY PROVISIONS

Section 5 of the Companies Act defines the individual person committing a wrong or
an illegal act to be held liable in respect of offenses as ‘officer who is in default’. This
section gives a list of officers who shall be liable to punishment or penalty under the
expression ‘officer who is in default’ which includes a managing director or a whole-
time director.

Section 45– Reduction of membership below statutory minimum: This section

provides that if the members of a company is reduced below seven in the case of a
public company and below two in the case of a private company (given in Section
12) and the company continues to carry on the business for more than six months,
while the number is so reduced, every person who knows this fact and is a member
of the company is severally liable for the debts of the company contracted during
that time.

In the case of Madan lal v. Himatlal & Co.[vii]  the respondent filed suit against a
private limited company and its directors for recovery of dues. The directors resisted
the suit on the ground that at no point of time the company did carry on business
with members below the legal minimum and therefore, the directors could not be
made severally liable for the debt in question. It was held that it was for the
respondent being dominus litus,  to choose persons of his choice to be sued. 

Section 147- Misdescription of name: Under sub-section (4) of this section, an

officer of a company who signs any bill of exchange, hundi, promissory note, cheque
wherein the name of the company is not mentioned is the prescribed manner, such
officer can be held personally liable to the holder of the bill of exchange, hundi etc.
unless it is duly paid by the company. Such instance was observed in the case of
Hendon v. Adelman.[viii]

Section 239– Power of inspector to investigate affairs of another company in same

group or management: It provides that if it is necessary for the satisfactory
completion of the task of an inspector appointed to investigate the affairs of the
company for the alleged mismanagement, or oppressive policy towards its
members, he may investigate into the affairs of another related company in the
same management or group.

Section 275- Subject to the provisions of Section 278, this section provides that no
person can be a director of more than 15 companies at a time. Section 279 provides
for a punishment with fine which may extend to Rs. 50,000 in respect of each of
those companies after the first twenty.

Section 299- This Section gives effect to the following recommendation of the

Company Law Committee: “It is necessary to provide that the general notice which a
director is entitled to give to the company of his interest in a particular company or
firm under the proviso to sub-section (1) of section 91-A should be given at a
meeting of the directors or take reasonable steps to secure that it is brought up and
read at the next meeting of the Board after it is given.[ix] The section applies to all
public as well as private companies. Failure to comply with the requirements of this
Section will cause vacation of the office of the Director and will also subject him to
penalty under sub-section (4).

 Sections 307 and 308- Section 307 applies to every director and every deemed
director. Not only the name, description and amount of shareholding of each of the
persons mentioned but also the nature and extent of interest or right in or over any
shares or debentures of such person must be shown in the register of shareholders.

Section 314- The object of this section is to prohibit a director and anyone

connected with him, holding any employment carrying remuneration of as such sum
as prescribed or more under the company unless the company approves of it by a
special resolution.

 Section 542- Fraudulent conduct: If in the course of the winding up of the company,

it appears that any business of the company has been carried on with intent to
defraud the creditors of the company or any other person or for any fraudulent
purpose, the persons who were knowingly parties to the carrying on of the business,
in the manner aforesaid, shall be personally responsible, without any limitation of
liability for all or any of the debts or other liabilities of the company, as the court may
direct. In Popular Bank Ltd., In re[x] it was held that section 542 appears to make the
directors liable in disregard of principles of limited liability. It leaves the Court with
discretion to make a declaration of liability, in relation to ‘all or any of the debts or
other liabilities of the company’. This [xi]section postulates a nexus between
fraudulent reading or purpose and liability of persons concerned.

JUDICIAL INTERPRETATIONS

By contrast with the limited and careful statutory directions to ‘lift the veil’ judicial
inroads into the principle of separate personality are more numerous. Besides
statutory provisions for lifting the corporate veil, courts also do lift the corporate veil
to see the real state of affairs. Some cases where the courts did lift the veil are as
follows:

1. United States v. Milwaukee Refrigerator Transit Company[xii]–  In this case, the U.S.
Supreme Court held that “where the notion of legal entity is used to defeat public
convenience, justify wrong, protect fraud or defend crime, the law will disregard the
corporate entity and treat it as an association of persons.”

Some of the earliest instances where the English and Indian Courts
disregarded the principle established in Salomon’s case are:
2. Daimler Co. Ltd. v. Continental Tyre and Rubber Co. (Great Britain) Ltd[xiii]– This is
an instance of determination of the enemy character of a company. In this case,
there was a German company.  It set up a subsidiary company in Britain and entered
into a contract with Continental Tyre and Rubber Co. (Great Britain) Ltd. for the
supply of tyres. During the time of war, the British company refused to pay as trading
with an alien company is prohibited during that time. To find out whether the
company was a German or a British company, the Court lifted the veil and found out
that since the decision making bodies, the board of directors and the general body of
share holders were controlled by Germans, the company was a German company
and not a British company and hence it was an enemy company. 

3. Gilford Motor Co. v. Horne[xiv]–  This is an instance for prevention of façade or sham.
In this case, an employee entered into an agreement that after his employment is
terminated he shall not enter into a competing business or he should not solicit their
customers by setting up his own business. After the defendant’s service was
terminated, he set up a company of the same business.

His wife and another employee were the main share holders and the directors
of the company. Although it was in their name, he was the main controller of
the business and the business solicited customers of the previous company.
The Court held that the formation of the new company was a mere cloak or
sham to enable him to breach the agreement with the plaintiff. 

4. Re, FG (Films) Ltd[xv]–  In this case the court refused to compel the board of film
censors to register a film as an English film, which was in fact produced by a
powerful American film company in the name of a company registered in England in
order to avoid certain technical difficulties. The English company was created with a
nominal capital of 100 pounds only, consisting of 100 shares of which 90 were held
by the American president of the company. The Court held that the real producer was
the American company and that it would be a sham to hold that the American
company and American president were merely agents of the English company for
producing the film. 

5. Jones v. Lipman[xvi]–  In this case, the seller of a piece of land sought to evade the
specific performance of a contract for the sale of the land by conveying the land to a
company which he formed for the purpose and thus he attempted to avoid
completing the sale of his house to the plaintiff. Russel J. describing the company as
a “devise and a sham, a mask which he holds before his face and attempt to avoid
recognition by the eye of equity” and ordered both the defendant and his company
specifically to perform the contract with the plaintiff. 

6. Tata Engineering and Locomotive Co. Ltd. State of Bihar[xvii] – In this case, it was

stated that a company is also not allowed to lay claim on fundamental rights on the
basis of its being an aggregation of citizens. Once a company is formed, its business
is the business of an incorporated body thus formed and not of the citizens and the
rights of such body must be judged on that footing and cannot be judged on the
 assumption that they are the rights attributable to the business of the individual
citizens. 

7. N.B. Finance Ltd. v. Shital Prasad Jain[xviii]–  In this case the Delhi High Court
granted to the plaintiff company an order of interim injunction restraining defendant
companies from alienating the properties of their ownership on the ground that the
defendant companies were merely nominees of the defendant who had fraudulently
used the money borrowed from the plaintiff company and bought properties in the
name of defendant companies. The court did not in this case grant protection under
the doctrine of the corporate veil. 

8. Shri Ambica Mills Ltd. v. State of Gujarat[xix]–  It was held that the petitioners were
as good as parties to the proceedings, though their names were not expressly
mentioned as persons filing the petitions on behalf of the company. The managing
directors in their individual capacities may not be parties to such proceedings but in
the official capacity as managing directors and as officers of the company, they
could certainly be said to represent the company in such proceedings. Also as they
were required to so act as seen from the various provisions of the Act and the Rules
they could not be said to be total strangers to the company petition.

Doctrine of Ultra Vires

A Memorandum of Association of a company is a basic charter of the
company. It is a binding document which describes the scope of the
company among other things. If a company departs from its MOA
such an act is ultra vires. Let us further understand the Doctrine of
Ultra Vires.

The Doctrine of Ultra Vires

The Doctrine of Ultra Vires is a fundamental rule of Company Law.
It states that the objects of a company, as specified in
its Memorandum of Association, can be departed from only to the
extent permitted by the Act. Hence, if the company does an act, or
enters into a contract beyond the powers of the directors and/or the
company itself, then the said act/contract is void and not legally
binding on the company.

The term Ultra Vires means ‘Beyond Powers’. In legal terms, it is

applicable only to the acts performed in excess of the legal powers of
the doer. This works on an assumption that the powers are limited in
nature. Since the Doctrine of Ultra Vires limits the company to the
objects specified in the memorandum, the company can be:

 Restrained from using its funds for purposes other than those
specified in the Memorandum
 Restrained from carrying on trade different from the one
authorized.
The company cannot sue on an ultra vires transaction. Further, it
cannot be sued too. If a company supplies goods or offers service or
lends money on an ultra vires contract, then it cannot obtain payment
or recover the loan.

However, if a lender loans money to a company which has not been

extended yet, then he can stop the company from parting with it via
an injunction. The lender has this right because the company does not
become the owner of the money as it is ultra vires to the company
and the lender remains the owner.

Further, if the company borrows money in an ultra vires transaction

to repay a legal loan, then the lender is entitled to recover his loan
from the company.

Sometimes an act which is ultra vires can be regularized by the

shareholders of the company. For example,

 If an act is ultra vires the power of directors, then the

shareholders can ratify it.
 If an act is ultra vires the Articles of the company, then the
company can alter the Articles.
Remember, you cannot bind a company through an ultra vires
contract. Estoppel, acquiescence, lapse of time, delay, or ratification
cannot make it ‘Intravires’.
Summing up the Doctrine of Ultra Vires

1. An act, legal in itself, but not authorized by the object clause of

the Memorandum of Association of a company or statute, is Ultra
Vires the company. Hence, it is null and void.
2. An act ultra vires the company cannot be ratified even by the
unanimous consent of all shareholders.
3. If an act is ultra vires the directors of a company, but intra vires
the company itself, then the members of the company can pass a
resolution to ratify it.
4. If an act is Ultra Vires the Articles of Association of a company,
then the same can be ratified by a special resolution at a general
meeting.

The Flip-side

While the main advantage of the Doctrine of Ultra Vires is the

protection of shareholders and creditors, it has disadvantages too.
This doctrine prevents the company from changing its activities in a
direction agreed by all members. Further, a special resolution can
alter the object clause of the Memorandum. This defeats the core
purpose of the doctrine.

Doctrine of Constructive Notice-

The memorandum and articles of association of every company are registered with the Registrar of
Companies. The office of the Registrar is a public office and consequently the memorandum and
articles become public documents. They are open and accessible to all. It is therefore, the duty of
every person dealing with a company to inspect its public documents and make sure that his
contract is in conformity with their provisions. But whether a person actually reads them or not, he
is to be in the same position as if he had read them. He will be presumed to know the contents of
those documents.

Another effect of this rule is that a person dealing with the company is taken not only to have read
those documents but to have understood them according to their proper meaning. He is presumed
to have understood not merely the company’s powers but also those of its officers. Further, there is
a constructive notice not merely of the memorandum and articles, but also of all the documents,
such as special resolutions [S. 117] and particulars of charges [S. 77] 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 accounts. According to Palmer, the principle applies only to the
documents which affect the powers of the company.

The common law doctrine of constructive notice should apply to the form. To reiterate the form is a
public document which contains particulars of directors who are the mind and will of a company, as
well as managers and secretaries who are responsible for the day to day running of the company. It
is a document which affects the powers of the company and its agents. Certainly, its purpose must
be more than just to provide information about the company’s directors, managers and secretary.
Therefore, persons dealing with company should check with the Registrar of Companies who its
directors, mangers and secretaries are at given time.

Oakbank Oil Co. v. Crum (1882 8 A.C.65)-

-It has been held that anyone dealing with the Company is presumed not only to have read the
memorandum and Articles, but understood them properly.
-Thus, Memorandum and Articles of a company are presumed to be notice to the public.
-Such a notice is called Constructive notice.

MOA and AOA become public documents after registration of a Company.

It is taken for granted that everyone who deals with the company knows of these documents.

Legal effect: If a person’s deals with a company in a manner which is inconsistent with the provisions
contained in MOA and AOA – own risk and cost and shall have to bear the consequences thereof.

Doctrine of Indoor Management-

The role of the doctrine of indoor management is opposed to that of the rule of constructive notice.
The latter seeks to protect the company against the outsider; the former operates to protect
outsiders against the company. The rule of constructive notice is confined to the external position of
the company and, therefore, it follows that there is no notice as to how the company’s internal
machinery is handled by its officers. If the contract is consistent with the public documents, the
person contracting will not be prejudiced by irregularities that may beset the indoor working of the
company.

Royal British Bank v. Turquand-

Turquand, a company, had a clause in its constitution that allowed the company to borrow money
once it had been approved and passed by resolution (decision) of the shareholders at a general
meeting. Turquand entered into a loan with the Royal British Bank and two of the co-directors
signed and attached the company seal to the loan agreement. Loan had not been approved by the
shareholders.
Company defaulted on their payments and the bank sought restitution. Company refused to repay
claiming that the directors had no right to enter into such an arrangement
It was held that – the Turquand was entitled to assume that the resolution was passed.

The Company was therefore bound by the rule.

Doctrine is also popularly known as the Turquand rule’.

Exceptions to the Doctrine of Indoor Management-

1.Knowledge of irregularity-
The first and the most obvious restriction is that the rule has no application where the party affected
by an irregularity had actual notice of it. Knowledge of irregularity may arise from the fact that the
person contracting was himself a party to the inside procedure.

Howard v Patent Ivory-

The directors could not defend the issue of debentures to themselves because they should have
known that the extent to which they were lending money to the company required the assent of the
general meeting which they had not obtained.

The principle is clear that a person who is himself a part of the internal machinery cannot take
advantage of irregularities.

2. Forgery-
Doctrine of indoor management does not apply to forgery because forgery is voidab- initio.

Ruben v. Great Fingall Consolidated-

The plaintiff was the transferee of a share certificate issued under the seal of the defendant
company. The certificate was issued by the company’s secretary, who had affixed the seal of the
company and forged the signatures of two directors.

The plaintiff contended that whether the signatures were genuine or forged was a part of internal
management and, therefore, the company should be estopped from denying genuineness of
document. But it was held that the rule has never been extended to cover such a complete forgery.

Lord Loreburn said: It is quite true that persons dealing with limited liability companies are not
bound to inquire into their indoor management and will not be affected by irregularities of which
they have no notice. But this doctrine, which is well established, applies to irregularities which
otherwise might affect a genuine transaction. It cannot apply to a forgery.

3. Negligence on the part of the outsider-

Anand Bihari Lal vs. Dinshaw and Co.-
In this case the plaintiff accepted transfer of Company’s property from its accountant, the transfer
was held void.

What is a Prospectus?

A prospectus is a document issued by the company inviting the public and

investors for the subscription of its securities. A prospectus also helps in
informing the investors about the risk of investing in the company. A
Prospectus is required to be issued only after the incorporation of the
company. These documents describe stocks, bonds and other types of
securities offered by the company. Mutual fund companies also provide a
prospectus to prospective clients, which includes a report of the money’s
strategies, the manager’s background, the fund’s fee structure and a fund’s
financial statements. A prospectus is always accompanied by performance
history and financial information of the company. The reason for
accompanying such an information along with the prospectus is to make sure
that, the investors are well aware of the company’s background and overall
performance and the investors do not fall into the prey of investing in a bad
company.

Definition of Prospectus under the Companies Act, 2013

Section 2(70) of the Act defines prospectus as, “A prospectus means any

document described or issued as a prospectus and includes a red herring
prospectus referred to in section 32 or shelf prospectus referred to in section
31 or any notice, circular, advertisement or other document inviting offers
from the public for the subscription or purchase of any securities of a body
corporate.”

Thus, it is clear from the above definition of the prospectus that, a

prospectus is a just an invitation to offer securities to the public and not an
offer in the contractual sense.

Companies that are required to issue a prospectus

 A public listed company who intends to offer shares or debentures can issue
prospectus.
 A private company is prohibited from inviting the public to subscribe to their
shares and thus cannot issue a prospectus. However, a private company
 which has converted itself into a public company may issue a prospectus to
offer shares to the public.

Types of Prospectus under the Companies Act,

2013
There are four types of a prospectus, which are as under:

 Abridged Prospectus

According to Section 2(1) of the Act, abridged prospectus means a

memorandum containing such salient features of a prospectus as may be
specified by the SEBI by making regulations in this behalf. It means that a
company cannot issue application form for purchase of securities unless such
form is accompanied by an abridged prospectus.

 Deemed Prospectus

According to Section 25(1) of the Act, where a company allots or agrees to

allot any securities of the company with a view to all or any of those
securities being offered for sale to the public. Any document by which such
offer for sale to the public is made is deemed to be a prospectus by
implication of law.

 Shelf Prospectus

According to Section 31 of the Act, Shelf prospectus is a prospectus in

respect of which the securities or class of securities included therein are
issued for subscription in one or more issues over a certain period without
the issue of a further prospectus. Only the companies which have been
prescribed by the SEBI can issue a Shelf prospectus with the Registrar.

 Red Herring Prospectus (RHP)

According to Section 32 of the Act, an RHP means a prospectus which does
not have complete particulars on the price of the securities offered and
quantum of securities to be issued. A company may issue an RHP prior to the
issue of a prospectus. The company shall file RHP with Registrar at least
three days prior to the opening of the subscription list and the offer. An RHP
carries the same obligations as are applicable to a prospectus and any
variation between the RHP and a prospectus shall be highlighted as
variations in the prospectus

Matters to be stated in a prospectus

Under the Companies Act, 2013

 According to Section 26 of the Act, every prospectus issued by or on behalf of

a company must be dated and that date shall unless the contrary is proved, be
regarded as the date of its publication.
 It shall state such information and set out such reports on financial
information as may be specified by the SEBI in consultation with the Central
Government.
 A copy of the prospectus shall be signed by every director or proposed
director or by his agent must be delivered to the registrar on or before the date
of publication.
 Every prospectus issued to the public should mention that a copy of the
prospectus along with the specified documents has been filed with the
registrar.
 If prospectus includes a statement made by an expert, the expert must not be
engaged or interested in the formation or promotion or in the management of
the company. A written consent of the expert should also be obtained before
the issue of prospectus with the statement.
 A prospectus must not be issued more than 90 days after the date on which a
copy thereof is delivered for registration. If a prospectus is issued it will be
deemed to be a prospectus a copy of which has not been delivered to the
registrar.
 A prospectus shall make a declaration about the compliance of the provisions
of the act and nothing contained in the prospectus is in contravention of the
 provisions of the Companies Act, Securities Contracts (Regulation) Act, 1956
and Securities Exchange Board of India Act, 1992.
 Section 27 of the Act states that a company can vary the terms of a contract
referred to in the prospectus or objects for which the prospectus was issued,
subject to the approval of an authority given by the company in general
meeting by way of special resolution. The details of the notice in respect of
such resolution to shareholders shall also be published in the newspapers in
the city where the registered office of the company is situated.

Under the Companies (Prospectus and Allotment of

Securities) Rules, 2014

 Rule 3 states that every prospectus issued shall contain the following
information—

1. the names and addresses of the registered office of the company, company secretary,
Chief Financial Officer, auditors, legal advisers, bankers, trustees, if any, underwriters and
such other persons as may be prescribed;
2. the dates of opening and closing of the issue;
3. a declaration made by the Board or the Committee authorized by the Board in the
prospectus that the allotment letters shall be issued or application money shall be
refunded within fifteen days from the closure of the issue or such lesser time as may be
specified by SEBI;
4. a statement by the Board of Directors of separate bank account;
5. the details of all the utilized and unutilized monies out of the monies collected in the
previous issue made by way of a public offer;
6. the details of the underwriters and the amount underwritten by them;
7. the consent of trustees, advocates, merchant bankers, registrar, lenders, and experts;
8. the authority for the issue and the details of the resolution passed, therefore;
9. the capital structure of the company in the prescribed manner;
10. procedure and time schedule for allotment and issue of securities;
11. main objects of the issue, the purpose for requirements of funds, funding plan, the
summary of the project appraisal report and such other particulars as may be prescribed;
12. minimum subscription, amount payable by way of premium, issue of shares otherwise
than on cash;
 13. the details of any litigation or legal action pending or taken by any Ministry or Department
of the Government or a statutory authority against any promoter of the issuer company
during the last five years immediately preceding the year of the issue of the prospectus;
14. the details of pending litigation;
15. the details of default and non-payment of statutory dues;
16. the details of directors including their appointment and remuneration, and particulars of
the nature and extent of their interest in the company;
17. the disclosure for sources of promoters’ contribution;

 The reports that the company needs to set out in the prospectus, are given
in Rule 4, which are as under

1. Reports by the auditors with respect to profits and losses and assets and liabilities of the
company.
2. Reports relating to profits and losses for each of the five financial years.
3. Reports about the business or transaction to which the proceeds of the securities are to
be applied.

 Other matters and reports which are to be stated in the prospectus, are given
in Rule 5. They are as under

1. Proceeds or any part of the proceeds, of the issue of the shares or debentures, are applied
directly or indirectly in the purchase of any business, profits or losses of the business,
assets, and liabilities of the business, in purchase or acquisition of any immovable
property.
2. Acquisition by the company of shares in any other body corporate.
3. Matters relating to terms and conditions of the term loans including re-scheduling,
prepayment, penalty, default.
4. The aggregate number of securities of the issuer company and its subsidiary companies
purchased or sold by the promoter group and by the directors of the company.
5. The Related Party Transactions(RPTs) entered during the last five financial years.
6. The details of acts of material frauds committed against the company.
Misstatements in the Prospectus

Contravention of Section 26 of the Companies Act, 2013

 If a prospectus is issued in contravention of the provisions of this section,

then the company shall be punishable with a fine, not less than fifty thousand
rupees which may extend to three lakh rupees, and
 Every person who is party to the issue of the prospectus shall be punishable
with imprisonment for a term which may to three years or with a fine, not less
than fifty thousand rupees which may extend to three lakh rupees, or with
both.

Criminal Liability for Misstatement in the prospectus

Where a prospectus is issued which includes any statement which is untrue

or misleading in form or context or any matter is likely to mislead the
investor, then every person who authorizes the issue of prospectus shall be
punishable with imprisonment for a term which may not be less than six
months, but which may extend to ten years; or a fine not less than the
amount involved in fraud but it may extend to three times the amount of
fraud; or with both.

Civil Liability for Misstatement in the prospectus

If there is any inclusion or omission of any matter in the prospectus issued,

which is misleading and the person who has subscribed the securities has
sustained any loss or damage, then the company and every person who is a
director, promoter and expert at the time of issue of prospectus, shall be
responsible and be liable for punishment under section 36 of the act, and
shall be liable to pay compensation to every person who has sustained such
loss or damage.
Conclusion
As seen above, a prospectus is a mandatory document for limited companies
to commence their business, but its complicated procedure delays the
operation of any business, therefore a number of organizations hesitate to
issue prospectus to the general public for subscription of share capital &
debentures.

Categories for Classification of

Corporate Securities (With Diagram)
Article shared by :  <="" div="">

ADVERTISEMENTS:

This article throws light upon the top two categories for
classification of corporate securities. The categories are: 1.
Ownership Securities 2. Creditor-ship Securities.

Category # 1. Ownership Securities:

The term ‘ownership securities,’ also known as ‘capital stock’

represents shares. Shares are the most universal form of raising
long-term funds from the market. Every company, except a
company limited by guarantee, has a statutory right to issue shares.
The capital of a company is divided into a number of equal parts
known as shares.
ADVERTISEMENTS:

According to Farewel, J., a share is, “the interest of a shareholder in

the company, measured by a sum of money, for the purpose of
liability in the first place, and of interest in the second, but also
consisting a series of mutual covenants entered into by all the
shareholders interest.”

Section 2(46) of the companies Act, 1956 defines it as “a share in the

share capital of a company, and includes stock except where a
distinction between stock and shares is expressed or implied”.

Kinds of Ownership Securities or Shares:

Companies issue different types of shares to mop up funds from

various investors. Before Companies Act, 1956 public companies
used to issue three types of shares, i.e. Preference Shares, Ordinary
Shares and Deferred Shares. The Companies Act, 1956 has limited
the type of shares to only two-Preference shares and Equity Shares.

ADVERTISEMENTS:

In some countries like U.S.A. and Canada certain companies issue

another type of shares called ‘no par stock’. But these shares, having
no face value, cannot be issued in India.

Different types of shares are issued to suit the requirements of

investors. Some investors prefer regular income though it may be
low, others may prefer higher returns and they will be prepared to
take risk. So, different types of shares suit different types of
investors. If only one type of shares is issued, the company may not
be able to mop up sufficient funds.

The various kinds of shares are discussed as follows:

i. Equity Shares:

ADVERTISEMENTS:

Equity shares, also known as ordinary shares or common shares

represent the owners’ capital in a company. The holders of these
shares are the real owners of the company. They have a control over
the working of the company. Equity shareholders are paid dividend
after paying it to the preference shareholders. The rate of dividend
on these shares depends upon the profits of the company.

They may be paid a higher rate of dividend or they may not get
anything. These shareholders take more risk as compared to
preference shareholders. Equity capital is paid after meeting all
other claims including that of preference shareholders. They take
risk both regarding dividend and return of capital. Equity share
capital cannot be redeemed during the time of the company.

ii. Preference Shares:

As the name suggests, these shares have certain preferences as

compared to other types of shares. These shares are given two
preferences. There is a preference for payment of dividend.
Whenever the company has distributable profits, the dividend is
first paid on preference share capital.

Other shareholders are paid dividend only out of the remaining

profits, if any. The second preference for these shares is the
repayment of capital at the time of liquidation of company. After
paying outside creditors, preference share capital is returned.
Equity shareholders will be paid only when preference share capital
is returned in full.

A fixed rate of dividend is paid on preference share capital.

Preference shareholders do not have voting rights; so they have no
say in the management of the company. However, they can vote if
their own interests are affected. Those persons who want their
money to fetch a constant rate of return even if the earning is less
will prefer to purchase preference shares.

iii. Deferred Shares:

These shares were earlier issued to promoters or founders for

services rendered to the company. These shares were known as
Founders Shares because they were normally issued to founders.
These shares rank last so far as payment of dividend and return of
capital is concerned. Preference shares and equity shares have
priority as to payment of dividend.

These shares were generally of a small denomination and the

management of the company remained in their hands by virtue of
their voting rights. These shareholders tried to manage the
company with efficiency and economy because they got dividend
only at last.

Now, of course, these cannot be issued and these are only of

historical importance. According to Companies Act, 1956 no public
limited company or which is a subsidiary of a public company can
issue deferred shares.

iv. No Par Stock/Shares:

No par stock means shares having no face value. The capital of a

company issuing such shares is divided into a number of specified
shares without any specific denomination. The share certificate of
the company simply states the number of shares held by its owner
without mentioning any face value.

The value of a share can be determined by dividing the real net

worth of the company with the total number of shares of the
company. Dividend on such shares is paid per share and not as a
percentage of fixed nominal value of shares.

The issue of no par stock offers a number of advantages

such as:

(i) It enable a company to present the balance sheet depicting its

true and correct position,

(ii) There is no need to reconstruct the balance sheet by way of

capital reduction;

(iii) There is no need to manipulate or window dress the accounts;

(iv) Marketing of shares becomes easier, and

(v) It induces investors to study the financial position of the
company to know the value of their holdings, etc.

However, no par stock suffers from many limitations also. No par

shares provide no standards for valuation of holdings. In many
cases dividends have been paid out of capital. The balance sheet of
the company becomes difficult to understand and there is more
scope of tax evasion.

Such shares are issued in certain countries like U.K., U.S.A. and
Canada and are gaining popularity there. But in India, no such
shares can be issued as the companies Act, 1956 provides for the
issue of only two types of shares (i) equity and (ii) preference.

v. Shares with Differential Rights:

‘Shares with differential rights’ means shares issued with

differential rights in accordance with section 86 of the Companies
Act.

Section 86 of the Act, as amended by the Companies

(Amendment) Act, 2000, provides that the new issue of
share capital of a company limited by shares shall be of
two kinds namely:

(a) Equity Share Capital:

(i) With voting rights; or

(ii) With differential rights as to dividend, voting or otherwise in

accordance with such rules and subject to such conditions as may be
prescribed.

(b) Preference Share Capital:

Sub-clauses (i) and (ii) in clause (a) above were inserted by the
Companies (Amendment) Act, 2000 which came into effect on 13th
December, 2000. Consequently, section 88 of the Companies Act
was omitted which prohibited issue of equity shares with
disproportionate rights.
However, it must be noted that the issue of shares with differential
rights as permitted by Companies (Amendment) Act, 2000 is
connected with equity shares only and not the preference shares.

As per Companies (Issue of Share Capital with Differential

Voting Rights) Rules, 2001, any company limited by
shares can issue equity shares with differential rights as to
voting, dividend or otherwise subject to the fulfillment of
following conditions at the time of issue of such equity
shares:

(i) The company should have distributed profits in terms of Section

205 of the Companies Act for preceding three financial years
preceding the year in which it is decided to issue such shares.

(ii) The company has not defaulted in filing annual accounts and
annual returns for three financial years immediately preceding the
year in which it is decided to issue such shares.

(iii) The company has not failed to repay its deposits or interest
thereon on due date or redeem its debentures on due date or pay
dividend.

(iv) The Articles of Association of the company authorise such issue;

otherwise, a special resolution shall be passed in the general
meeting to suitably alter the Articles.

(v) The company has not been convicted of any offence arising
under Securities Exchange Board of India Act, 1992; Securities
Contracts (Regulation) Act, 1956 or Foreign Exchange Management
Act, 1999.

(vi) The company has not defaulted in meeting investors’

grievances.

(vii) The shares with differential voting rights shall not exceed 25%
of the total share capital issued.

(viii) The company shall not convert its equity capital with voting
rights into equity share capital with differential voting rights and
the shares with differential voting rights into equity share capital
with voting rights.

(ix) A member of the company holding any equity share with

differential right shall be entitled to bonus shares, right shares of
the same class.

(x) The holders of the equity shares with differential right shall
enjoy all other rights to which the holder is entitled to excepting the
differential right.

(xi) The company has to obtain the approval of shareholders in

general meeting by passing resolution as required under section 94
(1) (a) and 94 (2) for increase in share capital by issuing new shares.

(xii) The listed public company has to obtain the approval of

shareholders through postal ballot.

(xiii) The notice of the meeting at which resolution is proposed to be

passed should be accompanied by an explanatory statement stating
(a) the rate of voting right which the equity share capital with
differential voting right shall carry, and (b) the scale or proportion
to which the rights of such class or type of shares will vary.

The concept of differential rights is new to the Indian corporates

and it will require experience to ascertain its effectiveness.
However, the issue of shares with differential rights may protect
companies from hostile takeovers and may also benefit the
shareholders by way of higher dividend than those having voting
rights.

But, at the same time, the disadvantage of non-voting shares in case

of a takeover bid may be that the price of voting shares may rise and
the price of non-voting shares shall not increase. Otherwise also, the
price of voting shares may be higher in the market as compared to
non-voting shares.

vi. Sweat Equity:

The term ‘sweat equity’ means equity shares issued by a company to
its employees or directors at a discount or for consideration other
than cash for providing know-how or making available rights in the
nature of intellectual property rights (say, patents or copyright) or
value additions, by whatever name called.

The idea behind the issue of sweat equity is that an employee or

director works best when he has ‘sense of belongingness’ and is
amply rewarded.

One of the ways of rewarding him is by offering him shares of the

company at low prices, where he is working. It is termed as ‘sweat
equity’ as it is earned by hard work (sweat) of employees and it is
also referred to as ‘sweet equity’ as employees become happy on the
issue of such shares. The purpose of sweat equity is to ensure more
loyalty and participation of employees.

Section 79A of the Companies Act, 1956 (inserted w.e.f.

31st October, 1998) allows companies to issue sweat equity
shares subject to the following conditions:

(a) ‘Sweat equity shares’ must be of a class of shares already issued

by the company.

(b) The issue of sweat equity shares must be authorised by a special

resolution passed by the company in general meeting. The
resolution must specify the number of shares, current market price,
consideration, if any and class or classes of directors or employees
to whom the sweat equity shares are to be issued.

(c) The sweat shares can be issued only one year after the company
is entitled to commence business.

(d) The sweat equity shares of a company, whose equity shares are
listed on a recognised stock exchange, shall be issued in accordance
with the regulations made by the Securities and Exchange Board of
India. However, in the case of a company whose equity shares are
not listed on stock exchange, sweat equity shares will be issued in
accordance with guidelines as may be prescribed by the Central
Government.
(e) A subsidiary of an Indian company can issue sweat equity to
Indian employees even if the subsidiary is incorporated out of India.

(f) All the limitations, restrictions and provisions relating to equity

shares shall be applicable to the sweat equity shares.

Category # 2. Creditor-ship Securities:

The term ‘creditor-ship securities’, also known as ‘debt capital’,

represents debentures and bonds. They occupy a very significant
place in the financial plan of the company. A debentures or a bond
is an acknowledgement of a debt. It is a certificate issued by a
company under its seal acknowledging a debt due by it to its
holders.

In the U.S.A., bonds are secured by tangible physical assets of the

company and debentures are secured only by the general
creditworthiness of the company. But, in India and U.K., no such
distinction is made between debentures and bonds.

According to the Companies Act, 1956, the term debentures

includes, “debentures stock, bonds and many other securities of a
company whether contributing a charge on the assets of the
company or not”.

Hence, in our study, we have not made any distinction between the
two terms, debentures and bonds and the two have been used
interchangeably. The use of such creditor-ship securities in
financing of a company generally tends to reduce the cost of capital
and consequently helps it to improve the earnings for its
shareholders.

Debentures or Bonds:

A company may raise long-term finance through public borrowings.

These loans are raised by the issue of debentures. A debenture is an
acknowledgement of a debt. According to Thomas Evelyn.

“A debenture is a document under the company’s seal which

provides for the payment of a principal sum and interest thereon at
regular intervals, which is usually secured by a fixed or floating
charge on the company’s property or undertaking and which
acknowledges a loan to the company’s property or undertaking and
which acknowledges a loan to the company”.

A debenture-holder is a creditor of the company. A fixed rate of

interest is paid on debentures. The interest on debentures is a
charge on the profit and loss account of the company. The
debentures are generally given a floating charge over the assets of
the company. When the debentures are secured, they are paid on
priority in comparison to all other creditors.

GENERAL PRINCIPLES REGARDING ALLOTMENT

With regard to the allotment of shares, the following general principles should be
observed in addition to the statutory provisions, discussed hereafter:
The allotment should be made by proper authority, i.e. the Board Directors
of the company, or a committee authorised to allot shares on behalf of the Board.
Allotment made without proper authority will be invalid. Allotment of shares made
by an irregularly constituted Board of directors shall be invalid [Changa
Mal v. Provisional Bank (1914) ILR 36 All 412]. It is necessary that the Board
should be duly constituted and should pass a valid resolution of allotment at a
valid meeting [Homes District Consolidated Gold Mines Re (1888) 39 Ch D 546
(CA)]. But Section 290 and the Rule in Royal British Bank v. Turquand (1856) 6 E
& B 327 : (1843-60) All ER Rep 435 may make an allotment valid even if some
defect was there in the appointment of directors but which was subsequently
discovered. An allotment by a Board irregularly constituted may be subsequently
ratified by a regular Board [Portugese Consolidated Copper Mines, (1889) 42 Ch.
D 160 (CA)]. A director who has joined in an allotment to himself will be estopped
from alleging the invalidity of the allotment [Yark Tramways Co. v. Willows,
(1882) 8 QBD 685 (CA)].
Allotment of shares must be made within a reasonable time (As per
Section 6 of the Indian Contract Act, 1872, an offer must be accepted within a
reasonable time). What is reasonable time is a question of fact in each case. An
applicant may refuse to take shares if the allotment is made after a long time. The
interval of about 6 months between application and allotment was held
unreasonable [Ramsgate Victoria Hotel Company v. Montefione (1866) LR 1 EX
109].
The allotment should be absolute and unconditional. Shares must be
alloted on same terms on which they were applied for and as they are stated in
 the application for shares. Allotment of shares subject to certain conditions is also
not be valid one. For example where an applicant applied for shares on the
condition that he will be appointed as branch manager of company but later on
the condition was breached, it was held that he is not bound by the allotment of
shares [Ramanbhai v. Ghasi Ram (1918) BOM. LR 595]. Similarly, if the number
of shares alloted are less than those applied for, it cannot be termed as absolute
allotment.
The allotment must be communicated. As mentioned earlier posting of
letter of allotment or allotment advice will be taken as a valid communication even
if the letter is lost in transit. In Household Fire And Carriage Accident Insurance
Co. Ltd. Grant (1879) 4 E.D. 216, Grant applied for certain shares in a company,
the company despatched letter of allotment to him which never reached him. It
was held that he was liable for the balance amount due on the shares. The mere
entry of a shareholder’s name in the company’s register is insufficient to establish
that an allotment was in fact made [Official Liquidator, Bellary Electric Supply Co.
v. Kanni Ram Ramwoothmal (1933) 3 Com Cases 45; AIR 1933 Med 320]. There
can be no proper allotment of shares unless the applicant has been informed of
the allotment [British and American Steam Navigation Co. Re. (1870) LR 10 Eq
659]. A formal allotment is not necessary. It is enough if the applicant is made
aware of the allotment. [Universal Banking Corpn. Re. Gunn’s Case (1867) 3 Ch
App 40].
Allotment against application only — No valid allotment can be made on
an oral request. Section 41 requires that a person should agree in writing to
become a member.
Allotment should not be in contravention of any other law — If shares are
allotted on an application of a minor, the allotment will be void. 
ABOUT SHARES:
“Shares” As per Section 2(84) of Companies Act, 2013, Share means Share in the
share capital of a Company and Include stocks.Share or Debentures are movable
property transferable in Manner provided in the AOA of Company. (Sec-44)
TYPES OF SHARE CAPITAL
i. Authorized Share Capital
ii. Issued Shared Capital
iii. Subscribed Share Capital
iv. Paid up share capital
KINDS OF SHARE CAPITAL
i. Equity Share Capital
a) With voting right
b) With differential right
ii. Preference Share Capital
 Share Certificate:
A share Certificate is a document issued by company evidencing that the person
named in the certificate is owner of number shares of Company as specified in the
Certificate.
TIME PERIOD FOR ISSUE OF SHARE CERTIFICATES:
 In case of Incorporation: With in a period of 2 (Two) Month from the date of
Incorporation to the subscriber of Memorandum.
 In case of Allotment: With in a period of 2 (Two) Month from the date of
allotment of shares.
 In case of Transfer: With in a period of 1 (One) Month from the date of receipt
of instrument of Transfer by the Company
Case:
Cardiff Chemicals V. Fortune Bio-Tech Ltd. (2004) 55
SCL 645 + 126 Comp Cas 275 (CLB),
It was held that burden to prove the share certificates have been delivered to
shareholder is on the company.
FAQ’s

S. No. QUESTION & ANSWERS.

A. Whether share certificate should be issued for partly paid up shares?

A Share certificate has to be issued whether the shares are partly paid up or fully paid
up.

B. In case of shares issued in Demat form, whether issue of physical share certificate
required or not?

If security is issued in Demat form, issue of share certificate is not required.

C. Who will intimate the Depository in case of issue of shares in Demat?

Company shall intimate details of allotment of securities to depository immediately on

allotment of such securities. {Provision of Section 56(4)}

D. Who is member?

• Every person holding shares of the Company.• Every person whose name is
entered as a beneficial owner in the record of a depository.

E. In case of dispute, who will be precedence as proof of evidence (Members’ Register

of Share Certificates)?

In case of dispute prima facie evidence through share certificate get precedence,
over the evidence of register of members, as the register of members, being under
control of Company is susceptible to manipulation.

F. What will be the fine and penalty on Company, if Company issue duplicate certificate
 with intent to defraud.

If a company renews a certificate or issues duplicate certificate with intent to defraud,

the company is punishable with fine which shall not be less then Five times of the
face value involved in the issue of duplicate certificate but it may extend upto ten
times the face value of such shares  ORTen Crore, whichever is higher.
NOMINAL VALUE OF SHARES:
 Shares not listed on any stock exchange: A share can be of any nominal
value e.g. Rs. 1, Rs. 10, Rs. 100, Rs. 1000.
 Shares listed on any stock exchange: Share listed in any stock exchange but
not in dematerialized form should be only of Rs. 10/- face value.
 Debenture listed on any stock exchange: Debenture listed in any stock
exchange but not in dematerialized form should be only of Rs. 100/- face value
REQUIREMENT FOR ISSUE OF SHARE CERTIFICATE:
 A Company shall provide one certificate to a member for all his shares without
payment of any charges.
 If a Shareholder want more than one Certificate: If a shareholder want more
than one certificate for one or more of shares than company may issue several
certificates, upon payment of Rs. 20/- each certificate after the first.
 If Shares hold Jointly by several person: The Company shall not be bound to
issue more than one certificate, and delivery of a certificate for a share to one of
several join holders shall be sufficient delivery to all such holders.
SHARE CERTIFICATE SHALL SPECIFY FOLLOWINGS MATTER:
 Share Certificate shall issue in form SH-I or near as possible.
 Certificate should specifying Name of Member.
 Every Certificate shall be under the Common Seal of the Company.
 It shall specify the Number of Shares it relates.
 It shall specify the amount paid on those Shares.
 It shall specify the Distinctive No. of Shares.
 It shall specify the Number of Share Certificate.
 It shall specify the Folio No. of Member.
 Name of Company, CIN of Company and Registered Office Address of the
Company.
REQUIREMENT FOR ISSUE OF SHARE CERTIFICATE:
 There should be an allotment or Subscription at the time of Incorporation.
 A Board resolution should be passed in the Board Meeting for issue of
Certificate.
(Share Certificate can be issued only under authority of Board of Directors by a
Board Resolution.)
 Share Certificate shall specify the matter mention in above.
 Share Certificate should be issue under the signature of Two Director and
(One of the Directors should be person other than Managing or Whole Time Director,
if such person is available on the Board of Directors.
 Company Secretary, if any or any other person authorized by Board of
Directors.
 (Company Secretary of the Company shall be deemed to be authorized to sign the
Share Certificates)
Note:
 Share Certificate Must be ‘Issued’ from registered office only.
 After issue of Share Certificate, Company should pay stamp duty on issue of
share certificate as per Stamp Act of the State.
REGISTER OF MEMBERS
Details of share certificates issued will be maintained in Register of members
maintained under Section 88 of the Companies Act, 2013. Along with Name to whom
issued and date of issue. Rule 5(4) of Companies Rules, 2014.

S. No. QUESTION & ANSWERS.

A. In case of BULK ISSUE of Share Certificate, how to get it Signed from the
DIRECTORS?

It is, therefore, provided that signatures of directors can be put by means of any
machine, equipment or other mechanical means (e.g. engraving in metal or
lithography, or digitally signed, but not by rubber stamp).

B. In case of Signature on Share Certificates by means of any machine, equipment or

other mechanical means then who will be responsible for affixation of signature.

The director shall be personally responsible for permitting affixation of his signature,
and safe custody of any machine, equipment or other material used.

C. In case of BULK ISSUE of Share Certificate, how to get it Signed from the THIRD
PERSON?

The third signature should be by actual signing.

MAINTENANCE OF BLANK SHARE CERTIFICATE:
 All blank form to be used for issue of share certificates shall be printed and
the printing shall be done only on the authority of a resolution of the Board. (Board of
Directors in their Meeting will pass a resolution for printing of Blank Share
Certificates).
 The blank form shall be consecutively machine- numbered and the forms and
the blocks, engravings, facsimiles and hues relating to the printing
 The Company Secretary or authorized person shall be responsible for
rendering an account of these forms to the Board.
 All books relating to share certificates shall be preserved in good order not
less than thirty years.
 DESTROY of Surrendered Certificates: All certificates surrendered to a
company shall immediately be defaced by stamping or printing the word “cancelled”
in bold letters and
o May be destroyed after the expiry of three years from the date on
which they are surrendered.
o Board will pass resolution for giving authority for destroys of such
Certificates.
o Destroy should be done in the presence of a person duly appointed by
the Board in this behalf.
S. No. QUESTION & ANSWERS.

A. Whether company will maintain Blank Share Certificate in its Record?

Yes, Companies Maintain blank share certificate in its records.

B. Who will be authorized for issue of Share Certificates?

Board of Directors in their Meeting will pass a resolution for printing of Blank Share
Certificates.

C. Who will be the custodian for the Blank Share Certificates?

Such Blank Share Certificates shall be kept in the custody of the Secretary or such
other person as the Board may authorize for the purpose.

D. Time period for preservance of book relating to share certificate.

All books relating to share certificates shall be preserved in good order not less than
thirty years.
ISSUE OF RENEWED SHARE CERTIFICATE:
 Company can issue fresh certificate by splitting, consolidating or replacing old
certificate.
FRESH Certificate can be issued: Fresh Certificate can be issued in following cases:
i. If the Share Certificate are sub-divided consolidated or
ii. In replacement of those which are defaced, mutilated, torn or old, decrepit, worn
out or
iii. Where the pages on the reverse for recording transfer have been duly utilized.
CONDITION for issue of Fresh Certificate:
 Fresh Certificate will be issue after surrender of old Certificate.
 Company can charge upto Rs. 50/- pre certificate as decided by the Board.
CHARGES for issue of Fresh Certificate (in lieu of Consolidation, sub-division):
 Company can charge for Sub-divided or consolidated or old share Certificate.
 But Company Can’t charge where pages on reverse for recording transfer
have been utilized.
 If fresh certificates issued pursuant to scheme of arrangement sanctioned by
the High Court or Central Government No fee shall be payable.
“Where a fresh certificate is issued as above, It shall be stated on the face of it and
be recorded in the Register maintained for the purpose, that it is. #Issued in lieu of
share certificate No…… sub-divided/replaced/on consolidation#.   {Rule 6(1)(b)
of Companies, (Share Capital and Debentures) Rules, 2014.
CHARGES for issue of Fresh Certificate (in lieu of Old and worn out Certificates):
A member can apply to company for replacement of old, torn, defaced or worn out
certificates.
 If the company is LISTED, it can’t charge any amount.
 If the Company is not listed, it can charge upto Rs. 20/- per share for issuing
new share certificates.
 Original Share Certificate must be surrendered to the Company.
RECORD TO BE MAINTAINED
 Record of renewed and Duplicate Share Certificates shall be maintained
in Form SH-2.
 The register shall be kept at registered office or where register of member is
kept in proper custody.
 All entries made in register shall be authenticated by Company Secretary or
authorized person.
DUPLICATE SHARE CERTIFICATE:
 Situations When duplicate Share Certificates can be issued, if original
certificate is lost or destroyed.
PROCESS FOR ISSUE OF DUPLICATE SHARE CERTIFICATES:
i. Shareholder will inform the Company about lost of Share Certificate.
ii. Company can ask for followings :
 Payment of fees of Rs. 50/- per share
 Supporting Evidence
 Indemnity Bond
 Payment of out of pocket expenses incurred by the company in investigation
the evidence produced.
iii. Share Certificate shall state prominently on the face of it and be recorded in the
Register maintained for the purpose that it is “DUPLICATE ISSUED IN LIEU OF
SHARE CERTIFICATE NO……:”
iv. The word “DUPLICATE” shall be stamped or printed prominently on the face of
the Share Certificate.
TIME PERIOD FOR ISSUE OF DUPLICATE SHARE CERTIFICATES:
In case of Unlisted Companies: The duplicate share certificates shall be issued
within a period of 3 (Three) month.
In case of Listed Companies: The duplicate share Certificate shall be issued 15
(fifteen) days, from the date of submission of complete documents with the
Company.
RECORD TO BE MAINTAINED
 Record of renewed and duplicate shares certificates shall be maintained
in form SH-2.
 The register shall be kept at registered office or where register of member is
kept in proper custody.
 All entries made in register shall be authenticated by Company Secretary or
authorized person.
Case:
Raj Bahadur Gujarmal Modi & Bros V. Godfrey Philips India (2008) 85
 SCL 290 (Bom HC)
 Duplicate share can be issued only if original was issued, which was lost or
destroyed.
 If there is no evidence of issue of original shares, duplicate cant’ be issued.
Pushpaben Kalyanbhai Vasa V. Philips India (2002) 40 SCL 766 (CLB)
It was held that CLB has no power to give directions for issue of duplicate certificate.

S. No. QUESTION & ANSWERS.

A. Whether company can charge from the shareholder for issue of Duplicate Share
Certificate?

Company can charge upto Rs. 50/- pre certificate as decided by the Board.

B. Whether Company Can charge where pages on reverse for recording transfer have
been utilized

No, Company Can Not.

C. In case of Issue of Duplicate/Renew Certificate, what should SPECIAL mention on

the Share Certificate.

In case of Subdivision/Consolidation/replaced:It shall be stated on the face of it and

be recorded in the Register maintained for the purpose, that it is. #Issued in lieu of
share certificate No…… sub-divided/replaced/on consolidation#.
In case of issue of Duplicate Share Certificate:It shall be stated on the face of it and
be recorded in the Register maintained for the purpose, that it is. it is “duplicate
issued in lieu of share certificate no……:”

D. In which form record of renewed and Duplicate Share Certificates shall be maintained

Form SH-2

The Reduction of Share Capital means reduction of issued, subscribed and paid up
share capital of the company. Previously, reduction of share capital was governed by
section 100 to 104 of the Companies Act, 1956, now it is governed by section 66 of
the Companies Act, 2013. As per old act, it was subjected to the confirmation of high
court, but under new Act, the said powers of high court has been transferred to
National Company Law Tribunal (NCLT).

Buy back of shares and redemption of Preference Shares are also reduction of

share capital but governed by specific provisions prescribed under Act. Such
reductions in the form of buy back and redemption do not require sanction/approval
from Tribunal (NCLT).
A. Need of Reduction of Share Capital
 Returning of surplus to shareholders;
 Eliminating losses, which may be preventing the payment of dividends;
 As a part of scheme of compromise or arrangements;
 simplify capital structure;
 When the company is making losses, the financial position does not present a
true and fair view of the company. The assets are overvalued and the balance sheet
consists of fictitious assets with debit balance in profit and loss account. In order to
reduction of capital will write-off that portion of capital which is already lost and will
make the balance sheet look healthy.
B. Modes of Reduction of share capital

1. Extinguish or reduce the liability

Company may reduce share capital by reducing or extinguishing the liability on any
of its partly paid up shares. For e.g:  if the shares are of face value of Rs. 100 each
of which Rs. 50 has been paid, the company may reduce them to Rs. 50 fully paid-
up shares and thus relieve the shareholders from liability on the uncalled capital of
Rs. 50 per share.

2. Cancel any paid-up share capital

Company may reduce share capital by cancelling any shares which are lost or is
unrepresented by available assets. For e.g: if the shares of face value of INR 100
each fully paid-up is represented by Rs. 75 worth of assets. In such a case,
reduction of share capital may be effected by cancelling Rs. 25 per share and writing
off similar amount of assets.

3. Pay off any paid-up share capital

Company may reduce share capital by paying off fully paid up shares which is in
excess of the wants of the company. For e.g: shares of face value of Rs. 100 each
fully paid-up can be reduced to face value of Rs. 75 each by paying back Rs. 25 per
share.
C. Prohibition on Reduction
No reduction of share capital shall be made if the company is in arrears in the
repayment of any deposits accepted by it either before or after the commencement
of this Act or the interest payable thereon.
D. Special Resolution and Approval of NCLT
A company limited by shares or limited by guarantee and having a share capital may
reduce the share capital by passing a special resolution, subject to the confirmation
by the Tribunal (NCLT).  
E. Notice to Regulators & Creditors
NCLT shall give notice of application for reduction of capital to the following:
 Central Government
 Registrar of Companies
 Securities and Exchange Board, in the case of listed companies, and
 Creditors of the company
and shall take into consideration the representations, if any, made to it by that C.G,
ROC, SEBI and the creditors within a period of 3 months from the date of receipt of
 the notice. If no representation has been received within the said period, it shall be
presumed that they have no objection to the reduction.
F. Accounting Standard to be followed
No application for reduction of share capital shall be sanctioned by the Tribunal
unless the accounting treatment proposed by the company is in conformity with the
accounting standards specified in section 133 or any other provision of this Act and a
certificate to that effect by the company’s auditor has been filed with the Tribunal.
G. Order of Tribunal
The Tribunal may, if it is satisfied that the debt or claim of every creditor of the
company has been discharged or determined or has been secured or his consent is
obtained, make an order confirming the reduction of share capital on such terms and
conditions as it deems fit.
H. Order of Tribunal to be filled with ROC
The company shall deliver a certified copy of the order of the Tribunal and of a
minute approved by the Tribunal showing—
 amount of share capital;
 number of shares into which it is to be divided;
 amount of each share; and
 amount deemed to be paid-up on each share at the date of registration.
to the Registrar within 30 days of the receipt of the copy of the order, who shall
register the same and issue a certificate to that effect.
I. Action under Section 447 i.e Punishment for Fraud
If any officer of the company
 knowingly conceals the name of any creditor entitled to object to the reduction;
 knowingly misrepresents the nature or amount of the debt or claim of any creditor; or
 abets or is privy to any such concealment or misrepresentation as aforesaid,
He shall be liable under section 447.
J. Penalty
If a company fails to comply with the provisions, it shall be punishable with fine which
shall not be less than Rs. 5 lakh but which may extend to Rs. 25 lakh.
K. Procedure for Reduction of Share Capital
> Convene a Board Meeting
 To approve the reduction of share capital;
 To fix the date of general meeting of the company to get approval of members.
> Dispatch notice of general meeting to all the shareholders at least before 21 days.
> Hold the general meeting and pass Special Resolutionapproving reduction of
share capital.
> If you have secured creditors, take NOC from them in writing.
 > File Special Resolution alongwith e-form MGT-14with ROC within 30 days of
passing.
> Apply to NCLT by filing an application in Form RSC-1to confirm reduction. The
application shall be accompanied with the following attachments:
 List of creditors
 Certificate of auditor to the effect that list of creditors is correct
 Certificate of auditor that Company is not having any arrears of repayment of deposit
and interest thereon;
 Certificate of auditor that Accounting Treatment proposed by the company for
reduction of share capital is in conformity with the Accounting standards.
 Any other relevant documents.
> The NCLT shall within 15 days of submission of the application give a notice to
ROC, SEBI in Form RSC-2and to every creditors of the company in Form RSC-3.
> The NCLT shall also give direction for the notice to be published in Form RSC-
4within 7 days of such direction in a leading English and vernacular language
newspaper and for uploading on the website of the company.
> The company shall file an affidavit in Form RSC-5confirming the dispatch and
publication of the notice within 7 days from the date of issue of such notice.
> The NCLT may dispense with the requirement of giving notice to the creditors or
publication of notice, if every creditor has been discharged or secured or given his
consent in writing.
> Representation by ROC, SEBI and creditors shall be sent to NCLT within 3 months
of receipt of notice and copy of which shall also be sent to the company. If no such
representation has been received by NCLT within the said period, it shall be
presumed that they have no objection.
> Company shall send the representation or objections so received alongwith
responses of the company thereto within 7 days of expiry of period upto which
objections were sought.
> NCLT may hold any enquiry on adjudication of claim and/or give direction for
securing the debts of the creditors.
> The order confirming the reduction of share capital shall be in Form RSC-6.
> The company shall deliver a certified copy of the order of the NCLT under sub-
section (3) and of minute approved by the Tribunal to the ROC and file  E-form INC-
28within 30 days of the receipt of order.
> The ROC shall issue a certificate to that effect in Form RSC-7.
L. Implications Under Income Tax Act
When any company reduces the share capital by way of reducing the face value of
shares or by way of paying off part of the share capital, it amounts to extinguishment
of the rights of the share holder to the extent of reduction of share capital. Therefore
it is regarded as transfer under section 2(47) of the IT Act and would be chargeable
to tax.
The income received on capital reduction would be taxable as under:
 Amounts distributed by the company on capital reduction to the extent of its
accumulated profits will be considered as deemed dividend under section 2(22)(d) and the
company will have to pay dividend distribution tax on the same,
 Distribution over and above the accumulated profits in excess of original cost of
acquisition of shares would be chargeable to capital gains tax in the hands of the share
holders.
Interpretation on Acceptance of Deposit by Companies
  csyogesh12
 | Company Law - Articles
  23 Nov 2018
  31,137 Views
  5 comments

Deposits have been defined under the Companies Act, 2013 (2013 Act) to include

any receipt of money by way of deposit or loan or in any other form by a company.
However deposits do not include such categories of amounts as may be prescribed
in consultation with the Reserve Bank of India (“RBI“). Chapter V of the 2013 Act and
the Companies (Acceptance of Deposits) Rules, 2014as amended from time to
time (“Deposits Rules“) primarily cover regulations relating to deposits. The
Deposits Rules provide an exhaustive definition of deposits which is exclusionary in
nature and exclude certain amounts received by a company, from the ambit of
deposits. It may also be noted that the Companies Act, 1956 (“1956 Act“) and the
Companies (Acceptance of Deposits) Rules, 1975 also defined deposits in a similar
manner and excluded certain amounts which were not to be considered deposits.
The dilemma is that some of the exclusions introduced under the Deposits Rules
lack clarity. At times these exclusions are contradictory to related provisions under
the Deposits Rules.
Deposits has been an important source of funding for the corporates in India. Under
the Companies Act, 1956 regime, provisions related to deposits was less stringent
as compared to under its successor.
Companies Act, 2013, initially laid down a kind of prohibition for acceptance of
deposit which was later relaxed through various amendments and providing crucial
exemptions to private companies. Private Companies can now accept deposits from
its member with minimum regulatory compliances.
Before moving towards the regulatory requirements for accepting deposits by the
Company, it must be clear what is Deposit and what are excluded from the ambit of
deposit or not termed as deposit. 
Definition of Deposit:
Deposit has been defined under Section 2(31) of the Companies Act, 2013 further
expanded under the Deposit Rules, 2014.
As per Section 2(31),  “deposit” includes any receipt of money by way of deposit or
loan or in any other form by a company, but does not include such categories of
amount as may be prescribed in consultation with the Reserve Bank of India.
Accordingly, Rule 2(1)(c) of Companies (Acceptance of Deposit) Rules,
2014, excludes the following amount received by a Company from the ambit of
Deposit and shall not be considered as deposits –
i. any amount received from the Central Government or a State Government or local
authority or statutory authority, or any amount Whose repayment is guaranteed by
the Central Government or a State Government;
ii. any amount received from foreign Governments, foreign or international banks,
foreign bodies corporate and foreign citizens, foreign authorities or persons resident
outside India;
iii.Loans or facility from banks;
iv. Loans from Public Financial Institutions/ Insurance Companies;
v. any amount received against issue of commercial paper or any other instruments;
vi. any amount received by a company from any other company;
vii. Any amount received through Public offer. However, if securities not allotted
within 60 days and refund not made within 15 days then such amount will be treated
as Deposit;
viii. Any amount received from the director of the company and in case of private
company also from the relative of the director of the company subject to the
condition that the amount has been given from own’s fund and not from borrowings.
ix. Any amount raised by the issue of bonds or debentures secured by a first charge
or a charge ranking pari passu with the first charge, compulsorily convertible within
10 years;
x. Any amount raised by issue of Unsecured Non-convertible debentures;
xi. Non-interest-bearing security deposit from employee of the company under the
contract of employment to the extent not exceeding his annual salary;
xii. Any non-interest bearing amount received and held in trust;
xiii. Any amount received in the course of business –
(a) As advance for supply of good or services provided that such goods or services
are supplied within 365 days of the receipt of advance;
(b) As advance in connection with consideration for an immovable property provided
such advance is adjusted against such property in accordance with the terms of the
agreement;
(c) As security deposit for the performance of the contract;
(d) As advance under long term projects for supply of capital goods;
Provided that if the amount received under (a), (b) & (d) becomes refundable due to
lack of necessary permission or approval to deal in the concerned goods or services,
then the amount received shall be deemed as deposit on the expiry of 15 days from
the date they become due for refund.
(e) As advance towards consideration for future warranty or maintenance contract;
 (f) As advance received which is allowed by any sectoral regulator;
(g) As advance for subscription towards publication;
xiv. Any amount of unsecured loan brought in by the promoters subject to the
fulfilment of the following conditions:
(a) the loan is brought in pursuance of the stipulation imposed by the lending
institutions on the promoters to contribute such finance;
(b) the loan is provided by the promoters themselves or by their relatives or by both;
and
(c) the exemption under this sub-clause shall be available only till the loans of
financial institution or bank are repaid and not thereafter;
xv. Any amount accepted by a Nidhi Company;
xvi. Any amount received by way of subscription in respect of a chit under the Chit
Fund Act, 1982;
xvii. Any amount received by the company under any collective investment scheme;
xviii. An amount of 25 lakh rupees or more received by a start-up company, by way
of a convertible note (convertible into equity shares or repayable within a period not
exceeding five years from the date of issue) in a single tranche, from a person;
xix. Any amount received by a company from registered Alternate Investment Funds,
Domestic Venture Capital Funds, Infrastructure Investment Trusts and Mutual
Funds. 
Interpretation on  Deposits  from Member, Director & Relative of Directors of
Private Company 
As per Rule 2 (1) (c) (viii) of Companies (Acceptance of Deposits) Rules, 2014 –
“Deposit” does not include any amount received from a person who, at the time of
the receipt of the amount, was a director of the company or a relative of the director
of the Private Company:
Provided that the director of the company or relative of the director of the private
company, as the case may be, from whom money is received, furnishes to the
company at the time of giving the money, a declaration in writing to the effect that the
amount is not being given out of funds acquired by him by borrowing or accepting
loans or deposits from others and the company shall disclose the details of money
so accepted in the Board’s report;
Simplified Interpretation: –
 Amount received (i.e. Loan) from director of the company (whether public or
private) is NOT “Deposit”.
 Amount received (i.e. Loan) from RELATIVE of director of the PRIVATE
COMPANY is NOT “Deposit”.
Therefore, in case of public company, amount received from relative of
director of the public company is considered as “Deposit”.
Ceiling Limit of Deposit – in case of PRIVATE COMPANIES
 Situation 1: –
According to First Proviso to Rule 3 (3) of Companies (Acceptance of
Deposits) Rules, 2014: –
Not exceeding 100% of aggregate of paid up capital, free reserves and securities
premium;
Such company shall file the details of monies so accepted to the ROC in e-Form
DPT-3.
Situation 2: –
According to Second Proviso to Rule 3 (3) of Companies (Acceptance of
Deposits) Rules, 2014: –
Following class of PRIVATE COMPANIES can accept deposit exceeding 100% of
aggregate of paid up capital, free reserves and securities premium (i.e. no maximum
limit of acceptance of deposit) –
1. A Private Company which is a start-up, for five years from the date of its
incorporation;
2. A Private Company which fulfils all of the following conditions, namely:-
a) Which is not associate or a subsidiary company of any other company;
b) The borrowings of such a company from banks or financial institutions or any body
corporate is less than twice of its paid up capital or Rs. 50 Crore, whichever is less.
c) Such a company has not defaulted in the repayment of such borrowings
subsisting at the time of accepting deposits under section
Such company shall file the details of monies so accepted to the ROC in e-Form
DPT-3.
Return of Deposits to be filed annually with ROC: – Rule 16
Every company to which Companies (Acceptance of Deposits) Rules, 2014 apply,
shall on or before the 30th June, of every year, file with the ROC, a return in e-Form
DPT-3 and furnish the information contained therein as on the 31st March of that
year duly audited by the auditor of the company.

Investors’ protection
Protection of investors means safeguard and enforcement of the rights and claims
of a person in his role as an investor. The capital of a company may be divided into
Equity capital and Debt capital. The persons who contribute to the equity capital of a
company are called investors. Investors have the voting rights in every matter of the
company and are entitled to get dividend. It is different from the creditors who
contribute to the debt capital of the company, who in turn get fixed rate of interest on
the money so lent. Moreover, creditors have limited voting rights only with respect to
those matters which directly affect their interest such as reduction of capital,
winding up of company etc.

Various provisions incorporated for the protection of investors under Companies Act,
1956 and the Companies Act, 2013 are-

(1) Civil Liability for Misstatement in Prospectus.

Section 62 of the Companies Act, 1956 lays down civil liability for misstatement in

prospectus. Where a prospectus invites persons to subscribe for shares in or
debentures of a company, the director, promoter (i.e. party to the preparation of
prospectus) and person who has authorised the issue of the prospectus, shall be
liable to pay compensation to every person who subscribes for any shares or
debentures on the faith of the prospectus for any loss or damage he may have
sustained by reason of any untrue statement included therein.

Any person who has subscribed for shares against public issue and sustained loss
or damage due to such misstatement is entitled to relief under this section.

Section 35 of the Companies Act, 2013 provides for the civil liability for
misstatement in prospectus. Where a person has subscribed for securities of a
company acting on any statement included, or the inclusion or omission of any
matter, in the prospectus which is misleading and has sustained any loss or damage
as a consequence thereof, the company and the following persons given below shall
be liable to pay compensation to every person who has sustained such loss or
damage. The persons liable, along with the Company are-

(a) Director of the company at the time of the issue of the prospectus;

(b) Has authorized himself to be named and is named in the prospectus as a director
of the company, or has agreed to become such director, either immediately or after
an interval of time;

(c) Promoter of the company;

(d) Has authorised the issue of the prospectus; and

(e) An expert who is not, and has not been, engaged or interested in the formation or
promotion or management, of the company and has given his written consent to the
issue of the prospectus and has not withdrawn such consent before the delivery of a
copy of the prospectus to the Registrar for registration and a statement to that effect
shall be included in the prospectus.

The measure of damages for the loss suffered by reason of the untrue statement,
omission etc. is the difference between the value which the shares would have had
but for such statement or omission and the true value of the shares at the time of
allotment.[iii] In applying the correct measure of damages to be awarded to
compensate a person who has been fraudulently induced to purchase shares, the
crucial criterion is the difference between the purchase price and their actual value. It
may be appropriate to use the subsequent market price of the shares after the fraud
has come to light and the market has settled.[iv]The period prescribed for a suit for
damage by shareholder is 3 years as per Article 113 of the Limitation Act, 1963.

In R. v. Lord Kylsant[v], a table was set out in the prospectus showing that the
company had paid dividends varying from 8 to 10 percent in the preceding years,
except for two years where no dividend was paid. The statement showed that the
company was in a sound financial position but the truth was that the company had
substantial trading loss during the seven years preceding the date of prospectus and
the dividends had been paid, not out of the current earnings, but out of the funds
which had been earned during the abnormal period of war. The prospectus was held
to be untrue due to the omission of the fact which was necessary to appreciate the
statements made in the prospectus.

(2) Criminal Liability for Misrepresentation in Prospectus

Section 63 of the Companies Act, 1956 lays down criminal liability for

misrepresentation in prospectus. Every person who has authorised the issue of the
prospectus containing any untrue statement shall be punishable with the
imprisonment which may extend to two years, or with fine which may extend to Rs.
50,000 or both.

Section 34 of the Companies Act, 2013 provides that where a prospectus contains

any statement which is untrue or misleading in form or context in which it is included
or where any inclusion or omission of any matter is likely to mislead, then every
person who authorizes the issue of such prospectus shall be punishable with
imprisonment for a term which shall not be less than 6 months but which may
extend to 10 years and shall also be liable to fine which shall not be less than the
amount involved in the fraud, but which may extend to three times the amount
involved in the fraud.[vi]

Thus, the imposition of liability on the persons involved in the preparation of a

prospectus is a measure to regulate the Initial Public Offering. This regulation is
necessary to ensure accuracy, adequacy and timeliness of the material information
in relation to both the prospectus and the concerned issuing company.

(3) Advertisement of prospectus.

Section 58A of the companies Act, 1956, as inserted by Companies Amendment

Act, 1974, states that deposits should not be invited without issuing an
advertisement. There should be an advertisement, including therein a statement
showing the financial position of the company and that the company is not in default
in the repayment of any deposit or the interest charged with respect to such deposit.

Section 30 of the Companies Act, 2013 lays down the provision for advertisement of
prospectus. Where an advertisement of any prospectus of a company is published in
any manner, it shall be necessary to specify therein the contents of its memorandum
as regards the objects, the liability of members and the amount of share capital of
the company, and the names of the signatories to the memorandum and the number
of shares subscribed for by them, and its capital structure.

(4) Investor Education and Protection Fund

Section 205C of the companies Act, 1956 provides for the establishment of Investor
Education and Protection Fund by the Central Government. It is a mandatory duty on
the Government.[vii] The amounts that shall be credited to the Fund are –

(a) Amounts in the unpaid dividend accounts of companies;

(b) The application moneys received by companies for allotment of any securities
and due for refund;

(c) Matured deposits with companies;

(d) Matured debentures with companies;

(e) The interest accrued on the amounts referred to in clauses (a) to (d);

(f) Grants and donations given to the Fund by the Central Government, State
Governments, companies or any other institutions for the purposes of the Fund ; and

(g) The interest or other income received out of the investments made from the
Fund.

Provided that no such amounts referred to in clauses (a) to (d) shall form part of the
Fund unless such amounts have remained unclaimed and unpaid for a period of 7
years from the date they became due for payment.

Section 205C(3) of the Companies Act, 1956 provides that the Fund shall be utilised
for promotion of investors’ awareness and protection of the interests of investors in
accordance with such rules as may be prescribed.

Section 125 of the Companies Act, 2013 provides that Investor Education and
Protection Fund (“Fund”) shall be established by the Central Government. The
following amounts shall be credited to the Fund-
(a) The amount given by the Central Government by way of grants after due
appropriation made by Parliament by law in this behalf for being utilised for the
purposes of the Fund.

(b) Donations given to the Fund by the Central Government, State Governments,
companies or any other institution for the purposes of the Fund.

(c) The amount in the Unpaid Dividend Account of companies transferred to the
Fund under sub-section (5) of section 124. Section 124 provides for the Unpaid
Dividend Account. Section 124(1) states that where a dividend has been declared by
a company but has not been paid or claimed within 30 days from the date of the
declaration to any shareholder entitled to the payment of the dividend, the company
shall, within 7 days from the date of expiry of the said period of thirty days, transfer
the total amount of dividend which remains unpaid or unclaimed to a special
account to be opened by the company in that behalf in any scheduled bank to be
called the Unpaid Dividend Account.

Section 124(5) provides that where any money so transferred to the Unpaid Dividend
Account of a company which remains unpaid or unclaimed for a period of 7 years
from the date of such transfer shall be transferred by the company along with
interest accrued, if any, to the Investor Education and Protection Fund established
under section 125 (1).

(d) The amount in the general revenue account of the Central Government which had
been transferred to that account under sub-section (5) of section 205A of the
Companies Act, 1956, as it stood immediately before the commencement of the
Companies (Amendment) Act, 1999, and remaining unpaid or unclaimed on the
commencement of this Act.

Section 205A (5) of the Companies Act, 1956 prior to the abovementioned
Amendment provided that- Any money transferred to the unpaid dividend account of
a company which remained unpaid or unclaimed for a period of 3 years from the
date of such transfer, shall be transferred by the company to the general revenue
account of the Central Government.

(e) The amount lying in the Investor Education and Protection Fund under section
205C of the Companies Act, 1956.

(f) The interest or other income received out of investments made from the Fund.

(g) The amount received under sub-section (4) of section 38. Section 38 of the
Companies Act, 2013 provides that any person who makes or abets- (a) making of
an application in a fictitious name to a company for acquiring or subscribing for its
securities, or (b) makes or abets making of multiple applications to a company in
different names or in different combinations of his name or surname for acquiring or
subscribing for its securities or (c) otherwise induces directly or indirectly a company
to allot, or register any transfer of, securities to him, or to any other person in a
fictitious name shall be liable under Section 447 i.e. shall be punishable with
imprisonment for a term which shall not be less than 6 months but which may
extend to 10 years and shall also be liable to fine which shall not be less than the
amount involved in the fraud, but which may extend to three times the amount
involved in the fraud.

Where a person has been convicted under this section, the Court may also order
disgorgement of gain, if any, made by, and seizure and disposal of the securities in
possession of, such person.[viii] The amount so received through disgorgement or
disposal of securities shall be credited to the Investor Education and Protection
Fund.[ix]

(h) The application money received by companies for allotment of any securities and
due for refund

(i) Matured deposits with companies other than banking companies

(j) Matured debentures with companies

(k) Interest accrued on the amounts referred to in clauses (h) to (j)

(l) Sale proceeds of fractional shares arising out of issuance of bonus shares,
merger and amalgamation for seven or more years

(m) Redemption amount of preference shares remaining unpaid or unclaimed for

seven or more years; and

(n) Such other amount as may be prescribed

The proviso to this section provides that the amount referred to in clauses (h) to (j)
shall not form part of the Fund unless such amount has remained unclaimed and
unpaid for a period of 7 years from the date it became due for payment.

Individual Shareholder Right

There are two kinds of rights for a member of the Company, namely Individual
membership rights and corporate membership rights. An individual membership
right is a right to maintain himself in full membership with all the rights and
privileges appertaining to that status.[x]

The individual membership right insists on strict observance of legal rules, statutory
provisions and provisions under MOA and AOA. Where corporate membership rights
are concerned, a shareholder can assert those rights only in conformity with the
decision of the majority of the shareholders.[xi]

The Supreme Court in landmark case, Life Insurance Cooperation of India V. Escorts

Ltd. & others[xii]observe certain fundamental rights of shareholders which are as
follows:

 To elect directors and to participate in the management through them.

 To enjoy the profit of the company in shape of dividends.
 To apply to the court for relief in case of oppression and mismanagement.
 To apply to the court for winding up of company.
 To share the surplus on winding up of the company.

As Hohfeld[xiii]analyzed that right is always corresponded by duty so it is important

to understand right in relation to duty. In general sense Rights are legal, social, or
ethical principles of freedom or entitlement; that is, rights are the fundamental
normative rules about what is allowed of people or owed to people, according to
some legal system, social convention, or ethical theory. Similarly shareholders’ right
includes certain powers of control over the corporation. The corporation must
protect shareholder interests, and perform certain legal duties in order to preserve
shareholders’ prerogatives and options. If the rights of the shareholders are
protected then only concept of shareholder democracy seems to exist. A
shareholder of a company enjoys two kinds of rights they are individual rights and
corporate rights. As an individual a shareholder can enforce his individual rights, here
as corporate rights can be enforced only by a majority of shareholders. The various
rights of members of a company can be grouped under the following heads.

 (i) Contractual Rights: These are those rights to which a member is entitled by virtue
of Memorandum of Association (MOA) and Articles of Association (AOA). Since the
AOA articles constitute a contract between the company and its member, the
provision mentioned in the AOA is mandatory. Such rights includes- right to have his
name on the Register of members, to vote at the meeting of members, to receive
dividends when declared, to exercise the right of pre-emption, return of capital on
winding-up or on reduction of share capital of the company etc.[xiv]

Since MOA provides the Object Clause of the Company, the member has a right to
bring action to restrain the company from doing an ultra-vires act.[xv]

(ii) Statutory Right: Rights entrusted under the Companies Act, 2013 are known as
Statutory Right. There are various rights provided to a member under the Act are-
(a) Right to have his name entered in the Company’s register of members

Section 88(1)(a) of the Companies Act, 2013 provides that every company shall
keep and maintain a register of members indicating separately for each class of
equity and preference shares held by each member residing in or outside India.

Section 88 (5) provides punishment for default in maintaining such Register. If a

company does not maintain a register of members, the company and every officer of
the company who is in default shall be punishable with fine which shall not be less
than Rs. 50,000 but which may extend to Rs. 3 lakh and where the failure is a
continuing one, with a further fine which may extend to Rs. 1,000 for every day, after
the first during which the failure continues.

The corresponding section of the Companies Act, 1956 is Section 150. In case of

default in maintaining the register of its members, the company and every officer of
the company who is in default shall be punishable with fine which may extend to Rs.
500 for every day during which the default continues.

Thus the liability for such default is increased under the Companies Act, 2013.

Register of members is the prima facie evidence of its contents including

membership.[xvi] It is, however, not the conclusive proof of membership of a
member.

(b) Delivery of share certificate

Section 56(4) of the Companies Act, 2013 provides that every company shall deliver
the certificates of all securities within a period of 2 months from the date of
incorporation in the case of subscribers to the memorandum; within a period of 2
months from the date of allotment, in the case of any allotment of any of its shares;
and within a period of 1 month from the date of receipt by the company of the
instrument of transfer or intimation of transmission, in the case of a transfer or
transmission of securities.

Section 56(6) provides that in case of default, the company shall be punishable with
fine which shall not be less than Rs. 25,000 but which may extend to Rs. 5 lakh and
every officer of the company who is in default shall be punishable with fine which
shall not be less than Rs. 10,000 but which may extend to Rs. 1 lakh.

The corresponding section of the Companies Act, 1956 is Section 113. Within 3

months after the allotment of shares and within 2 months after the application for
the registration of the transfer of any such share, the allottee or the transferor is
entitled for delivery of such shares certificate. In case of default, the company, and
every officer of the company who is in default shall be punishable with fine which
may extend to Rs. 5000 for every day during which the default continues.[xvii]
In H.V. Jayaram v. Industrial Credit and Investment Corporation of India Ltd. (ICICI)
[xviii], where the share certificates were sent to the purchaser of shares by post as
requested by him, the Supreme Court has ruled that where an offence punishable
under Section 113 (2) of the Companies Act, 1956 has been committed, the cause of
action arises where the head office of the company is situated and not where the
purchaser resides. Therefore, a complaint can be filed only where the registered
office of company is situated.

The Court held that since the company had dispatched the share certificates to the
purchaser by post, there was no default on its part as regards compliance of the
provisions of Section 113(1) and therefore, there was no merit in appeal and as such
the same was dismissed.

(c) Right to receive dividend

Section 127 of the Companies Act, 2013 provides punishment for failure to

distribute dividends. Where a dividend has been declared by a company but has not
been paid within 30 days from the date of declaration to any shareholder entitled to
the payment of the dividend, every director of the company shall, if he is knowingly a
party to the default,[xix] be punishable with imprisonment which may extend to 2
years and with fine which shall not be less than Rs. 1000 for every day during which
such default continues and the company shall be liable to pay simple interest at the
rate of 18% per annum during the period for which such default continues.

If a company declares dividend then only it becomes liable to pay.[xx]

A company may, if so authorised by its articles, pay dividends in proportion to the

amount paid-up on each share.[xxi] No dividend shall be declared or paid by a
company for any financial year except- (i) out of the profits of the company for that
year arrived at after providing for depreciation, or out of the profits of the company
for any previous financial year or years arrived at after providing for depreciation; or
(ii) out of money provided by the Central Government or a State Government for the
payment of dividend by the company in pursuance of a guarantee given by that
Government.[xxii]

The corresponding section of Companies Act, 1956 is Section 207 which provides
penalty for failure to distribute dividends within 30 days from the date of declaration
to any shareholder entitled to such payment. Every director of the company shall, if
he is knowingly a party to the default, be punishable with simple imprisonment for a
term which may extend to 3 years and shall also be liable to a fine of Rs. 1000 for
every day during which such default continues and the company shall be liable to
pay simple interest at the rate of 18% per annum during the period for which such
default continues.
Thus the Companies Act, 2013 has reduced the limit of the punishment of
imprisonment from 3 years to 2 years only and has increased the fine by fixing a
minimum amount of Rs. 1000, as the 1956 Act provided the maximum amount of
fine as Rs. 1000.

(d) Rights issue (on further issue of shares)

Section 62(1) (a) of the companies Act, 2013 provides that where at any time, a
company having a share capital proposes to increase its subscribed capital by the
issue of further shares, such shares shall be offered to persons who, at the date of
the offer, are holders of equity shares of the company in proportion to the paid-up
share capital on those shares.

Section 81 is the corresponding section of the Companies Act, 1956 which provides

that the existing members has a pre-emptive right on further issue of shares in
proportion to the shares already held by them.

(e) Voting rights

Section 47(1) of the Companies Act, 2013 provides that every member of a

company limited by shares and holding equity share capital therein, shall have a right
to vote on every resolution placed before the company; and his voting right on a poll
shall be in proportion to his share in the paid-up equity share capital of the company.

A condition is imposed on this right under section 50 which provides that a member
of the company limited by shares shall not be entitled to any voting rights in respect
of the amount paid by him on shares held by him, until that amount has been called
up.[xxiii]

Section 87 is the corresponding section under the Companies Act, 1956 which
provides that member holding equity share capital has a right to vote on every
resolution placed before the Company. Such voting rights shall be in proportion to
the member’s share in the paid-up equity capital of the Company.

(f) Right to transfer shares

Section 44 of the Companies Act, 2013 provides the nature of shares. It states that
the shares or debentures or other interest of any member in a company shall be
movable property transferable in the manner provided by the articles of the
company.

Section 82 of the Companies Act, 1956 provides that shareholders are owner of their
share and can transfer it subject to the restrictions imposed by AOA.
(g) Right to inspect register of members or debenture holders, annual returns

Section 94(2) of the Companies Act, 2013 provides that the registers and their
indices, except when they are closed under the provisions of this Act, and the copies
of all the returns shall be open for inspection by any member, debenture-holder,
other security holder or beneficial owner, during business hours without payment of
any fees and by any other person on payment of such fees as may be prescribed.

The corresponding section under Companies Act, 1956 is Section 163.

(h) Right to petition for compulsory winding up of the Company

Section 272(1) (c) of the Companies Act, 2013 provides that contributory can apply
for winding up on any grounds given under section 271(1). A “contributory” is a
person liable to contribute to the assets of a company in the event of its being
wound up. The concept of contributory arises only at the time of winding up of a
company. A member does not become a contributory until the winding up.

The corresponding section of Companies Act, 1956 is Section 439.

(i) Right to attend and vote at a meeting of the company and to appoint proxy

Section 105(1) of the Companies Act, 2013 provides that any member of a company
entitled to attend and vote at a meeting of the company shall be entitled to appoint
another person as a proxy to attend and vote at the meeting on his behalf.

The corresponding section of Companies Act, 1956 is Section 176.

(j) Right to receive notice

Section 111(1) (a) of the Companies Act, 2013 provides that a company shall give
notice to members of any resolution which may properly be moved and is intended
to be moved at a meeting, if it is required by the member in writing.

The corresponding section of the Companies Act, 1956 is Section 188 which

provides that the Company shall give notice to the members of the next annual
general meeting, notice of any resolution which may properly be moved and is
intended to be moved at that meeting, if required by the member and at his expense.

(k) Right to apply to the Tribunal for calling Annual General Meeting

Section 97 of the Companies Act, 2013 states that if any default is made in holding
the annual general meeting of a company, any member of the company may apply to
the Tribunal to call, or direct the calling of, an annual general meeting of the
company.
The corresponding section of the Companies act, 1956 is S. 167 which gives right to
the member to apply to the Central Government for calling an Annual General
Meeting in case of default by the Company.

Thus the Companies Act, 2013 gives the power to call annual general meeting to the
Tribunal, unlike the Central Government under the Companies Act, 1956.

(l) Right to receive a share in the surplus assets of the Co. at the time of winding up

Section 297 of the Companies Act, 2013 provides that the Tribunal shall adjust the
rights of the contributories among themselves and distribute any surplus among the
persons entitled thereto.

Section 475 of the Companies Act is the corresponding section related to this right.

Rights of the Minority shareholders

Democratic decisions are made in accordance with the majority decision and are
deemed to be fair and justified while overshadowing the minority concerns. The
corporate world has adopted this majority rule in decision making process and
management of the companies. Statutory provisions in this regard have been
provided under the Companies Act, 1956 (“CA 1956”), which is being replaced by the
Companies Act, 2013 (“CA 2013”).[xxiv]

Despite the fact provisions have been in place under the CA 1956 to protect the
interest of the minority shareholders, the minority has been incapable or unwilling
due to lack of time, recourse or capability- financial or otherwise. This has resulted in
the minority to either let the majority dominate and suppress them or squeeze them
out of the decision making process of the company and eventually the company. CA
2013 has sought to invariably provide for protection of minority shareholders rights
and can be regarded as a game changer in the tussle between the majority and
minority shareholders. Various provisions have been introduced in CA 2013 to
essentially bridge the gap towards protection and welfare of the minority
shareholders under CA 1956.

This provision came after the incident in 2011 when Mahindra Satyam agreed to pay
$125 million (Rs 580 crore) in an out-of-court settlement to end a bunch of class
action suits -a combined petition by a large group of investors – filed in the US. The
suits were filed after Satyam Computer investors lost substantial money. This
followed former chairman Ramalinga Raju admitting to “cooking” the company’s
books. Eventually, the company was acquired by Tech Mahindra. [xxv]

The new Companies Act has been implemented to rectify this. Now, the individual or
minority shareholders will find it easier to effect a change in decisions taken by a
company’s management, but only if they can organise themselves into groups.
Presently, ‘minority shareholders’ are not defined under any law, however, by virtue of
Section 395 (Power to acquire shares of dissenting shareholders) and Section 399
(Right to apply for Oppression and Mismanagement) of CA 1956, minority
shareholders have been set out as ten percent (10%) of shares or minimum hundred
(100) shareholders, whichever is less, in companies with share capital; and one-fifth
(1/5) of the total number of its members, in case of companies without share
capital. In general terms, minority shareholding can be understood to mean holding
such amount of shares which does not confer control over the company or render
the shareholder with having a non-controlling interest in a company. CA 1956
provides for various provisions dealing with situations wherein rights of minority
shareholders are affected and the same can be divided into two major heads, i.e., (a)
oppression and mismanagement of the company; and (b) reconstruction and
amalgamation of companies.

Oppression and Mismanagement

CA 1956 provides for protection of the minority shareholders from oppression and
mismanagement by the majority under Section 397 (Application to Company Law
Board for relief in cases of oppression) and 398 (Application to Company Law Board
for relief in cases of mismanagement). Oppression as per Section 397(1) of CA 1956
has been defined as ‘when affairs of the company are being conducted in a manner
prejudicial to public interest or in a manner oppressive to any member or members’
while the term mismanagement has been defined under Section 398 (1) as
‘conducting the affairs of the company in a manner prejudicial to public interest or in
a manner prejudicial to the interests of the company or there has been a material
change in the management and control of the company, and by reason of such
change it is likely that affairs of the company will be conducted in a manner
prejudicial to public interest or interest of the company’. Right to apply to the
Company Law Board in case of oppression and/or mismanagement is provided
under Section 399 to the minority shareholders meeting the ten percent shareholding
or hundred members or one-fifth members limit, as the case may be. However, the
Central Government is also provided with the discretionary power to allow any
number of shareholders and/or members to apply for relief under Section 397 and
398 in case the limit provided under Section 399 is not met.

On the other hand, CA 2013 provides for provisions relating to oppression and
mismanagement under Sections 241-246. Section 241 provides that an application
for relief can be made to the Tribunal in case of oppression and mismanagement.
Section 244(1) provides for the right to apply to Tribunal under Section 241, wherein
the minority limit is same as that mentioned in CA 1956. Under CA 2013, the Tribunal
may also waive any or all of the requirements of Section 244(1) and allow any
number of shareholders and/or members to apply for relief. This is a huge departure
from the provisions of CA 1956 as the discretion which was provided to the Central
Government to allow any number of shareholders to be considered as minority is,
under the new CA 2013 been given to the Tribunal and therefore is more likely to be
exercised.[xxvi]

To further briefly examine a few provisions of CA 1956 vis-à-vis the provisions of CA

2013:

 Provision of Section 397 and 398 of CA 1956 are combined in Section 241 of CA
2013 and accordingly applications for relief in cases of oppression, mismanagement
etc. will have to be directed to the Tribunal.
 While the powers of the Tribunal under CA 1956 on application under Section 397 or
398 and Section 404 were limited, CA 2013 granted additional powers to the Tribunal
including to:

(a)        restrictions on the transfer or allotment of the shares of the company;

(b)        removal of the managing director, manager or any of the directors of the
company;

(c)        recovery of undue gains made by any managing director, manager or director
during the period of his appointment as such and the manner of utilisation of the
recovery including transfer to Investor Education and Protection Fund or repayment
to identifiable victims;

(d)       the manner in which the managing director or manager of the company may
be appointed subsequent to an order removing the existing managing director or
manager of the company;

(e)        appointment of such number of persons as directors, who may be required by

the Tribunal to report to the Tribunal on such matters as the Tribunal may direct; and

(f)        imposition of costs as may be deemed fit by the Tribunal.

 The requirement of establishing existence of ‘just and equitable’ circumstances to

waive any and all requirements of the section pertaining to the meeting the minimum
minority limits and providing ‘security’ while allowing such an application are
excluded from the Companies Act, 2013.

Further, by way of Section 245, CA 2013 has introduced the concept of class action
which was non-existent in CA 1956.

Class Action

Section 245 of CA 2013 provides for class action to be instituted against the
company as well as the auditors of the company. The Draft Companies Rules allow
for this class action to be filed by the minority shareholders under Clause 16.1 of
Chapter-XVI (Number of members who can file an application for class action). On
close reading of Section 245 of the Companies Act, 2013, it can be seen that the
intent of the section is not only to empower the minority shareholder and/or
members of the company but also the depositors. Unlike Section 399 of CA 1956
which provides for protection to only shareholder/members of the company, Section
245 of CA 2013 also extends this protection to the class of depositors as well.
However, in the current scenario, the provision of representation of a class of
members or depositors by a particular member or depositor lacks clarity.

Sub-section (1) of Section 245 provides, “such number of member or members,

depositor or depositors or any class of them, as the case may be, as are indicated in
sub-section (2) may, if they are of the opinion that the management or conduct of the
affairs of the company are being conducted in a manner prejudicial to the interests
of the company or its members or depositors, file an application before the Tribunal
on behalf of the members or depositors for seeking all or any of the following orders
…”. Besides, there being a typographical error in this sub- section (1) with respect to
indicating sub-section (2) instead of sub-section (3) which provides for the minimum
number of members who can apply for class action there is also some confusion as
to the class on whose behalf such class action can be instituted. While ‘member has
been defined in the CA 2013 as including the subscriber to the memorandum of the
company, shareholders and person whose name is entered in the register of
members; definition for depositor is not provided under CA 2013.

Further, section 245 does not empower the Tribunal with discretionary power to
admit/allow any class suit wherein class of members or depositors are unable to
comply with the minimum number of members/depositors requirement to be laid
down in the Companies Rules. Also, on a close reading of Section 241 and Section
245 of the Companies Act, 2013, we can find duplication in protection provided to
the members in case affairs of the company are conducted in a manner prejudicial
to the interest of the company/members.

Reconstruction and Amalgamation

With respect to minority shareholder rights at the time of reconstruction and

amalgamation of companies, CA 1956 under Section 395 states that transfer of
shares or any class of shares of a company (transferor company) to another
company (transferee company), has to be approved by holders of atleast nine-tenths
(9/10) in value of the shares whose transfer is involved within four months after the
offer has been made by the transferee company. Herein it is important to note that
consent of 90% (ninety percent) shareholders is required, which is referred to as
majority. The section further provides that within two months after the lapse of the
aforementioned four months, the transferee company shall give a notice to any
dissenting shareholders expressing its desire to acquire their shares. Herein, the
term ‘dissenting shareholder’ is defined under Section 395(5)(a) as including
shareholder who has not assented to the scheme or contract and any shareholder
who has failed or refused to transfer his shares to the transferee company in
accordance with the scheme or contract. As the ninety percent (90%) shareholders in
this section are referred to as majority, the remaining ten percent (10%) dissenting
shareholders can be referred to as minority. The section further goes on to provide
that once the notice is provided to the dissenting shareholders, unless the dissenting
shareholders make an application to the Tribunal within a month of such notice,
transferee company shall be entitled to the shares of the dissenting shareholders
and such shares shall be transferred to the transferee company. If the transferee
already owns ten percent (10%) or more of such shares then the scheme needs to be
approved by shareholders holding ninth- tenth (9/10) in value and being three-fourth
(3/4) in number of the shareholders holding such shares. In such a case, the
dissenting shareholder ought to be offered the same price as the other shareholders.
However, this section has seldom been used and instead recourse has been to
Section 100 of CA 1956 to eliminate the minority. Section 100 provides that the
capital of the company may be reduced in any manner whatsoever by way of a
special resolution i.e. assent of seventy-five (75%) shareholders present and voting
subject to approval of the courts. This section ignores minority shareholding to the
extent that special resolution does not reflect the intention of the minority
shareholders.

To counter these shortcomings, CA 2013 has provided for Section 235 (Power to
acquire shares of shareholders dissenting from scheme or contract approved by
majority) and 236 (Purchase of Minority Shareholding). Section 235 is corresponding
to Section 395 of CA 1956 and provides that transfer of shares or any class of
shares in the transferor company to transferee company requires approval by the
holders of not less than nine-tenths (9/10) in value of the shares whose transfer is
involved and further the transferee company may, give notice to any dissenting
shareholder that it desires to acquire his shares. Section 235 makes it mandatory for
the majority shareholders to notify the company of their intention to buy the
remaining equity shares the moment acquirer, or a person acting in concert with
such acquirer, or group of persons becomes the registered holder of ninety per cent
(90%) or more of the issued equity share capital of a company. It further provides
that such shares are to be acquired at a price determined on the basis of valuation
by a registered valuer in accordance with such rules as may be prescribed.

CA 2013, in addition to minor improvements to certain provisions of CA 1956 has

also introduced new provisions affecting the reconstruction and amalgamation
procedures. These, inter alia, include:

 CA 2013 vide Section 235(4) in respect of ‘Dissenting Shareholders’ provides that the
sum received by the transferor company must be paid into separate bank account
within the specified period of time as against the provision mentioned in Section
395(4)of CA 1956 which lacked clarity on this aspect;
  As per CA 2013, Section 236 (1) and (2), the Acquirer on becoming registered holder
of niney percent (90%) or more of issued equity share capital shall offer minority
shareholder for buying equity shares at the determined value;
 Section 236 (3) of CA 2013 has provided the minority with an option to make an offer
to the majority shareholders to buy its shares; and
 Section 236 (5) of CA 2013 requires the transferor company to act as a transfer
agent for making payments to minority shareholders.

Minority Upgraded

Besides the above, CA 2013 has sought to empower the minority shareholders in
corporate decision making also. Section 151 of the CA 2013 requires listed
companies to appoint directors elected by small shareholders, i.e. shareholders
holding shares of nominal value of not more than twenty thousand rupees (INR
20,000/-). The Draft Companies Rules elaborates the provision in this regard under
Clause 11.5 of Chapter XI and provides that a listed company may either suo-moto
or upon the notice of not less than five hundred (500) or one-tenth (1/10) of the total
number of small shareholders, whichever is less, elect a small shareholders’ director
from amongst the small shareholders. Here, it is important to note that small
shareholders are different from the minority shareholders as small shareholders are
ascertained according to their individual shareholding which should be less than
twenty thousand rupees (INR 20,000/-); whereas minority shareholders/shareholding
is collectively ascertained and regarded as having non-controlling stake in the
company. However, small shareholders can be included in and/or regarded as
minority shareholders by virtue of their small shareholding amounting to non-
controlling stake in the company.

The Draft Companies Rules further provides for the procedure for nomination of a
small shareholder director and the information and declaration to be provided in this
regard. To safeguard the interest of the small shareholder and to maintain the
independent decision making by such directors, the Draft Companies Rules provides
that such director shall not be liable to retire by rotation and shall have tenure of
three years. However, the small shareholder director will not be eligible for
reappointment.

Sub-Clause (4) of Clause 11.5 of the Draft Companies Rules provides that “such
director shall be considered as an independent director subject to his giving a
declaration of his independence in accordance with sub-section (7) of Section 149 of
the Act.” Meaning thereby, that small shareholder director may or may not be an
independent director. However, the Draft Companies Rules provides under Sub-
Clause (5) of Clause 11.5 that such office shall be vacated if the director inter
alia ceases to be an independent director. Now, while Sub-Clause (4) of Clause 11.5
makes it optional for the small shareholder director to be an independent director;
Sub-Clause (5) of Clause 11.5 makes it mandatory for the small shareholder director
to be an independent director and to maintain its independence throughout its term
thereby creating confusion. It is expected that this inconsistency may be addressed
while finalizing the Draft Company Rules.

While empowering the minority/small shareholders in the decision making process,

the CA 2013 endeavours to further its present provisions to safeguard the interest of
minority shareholders through appointment of independent directors. The ‘Code of
Independent Directors’ provided pursuant to Section 149(8) in Schedule IV of the CA
2013, provides that independent directors shall inter alia work towards promoting the
confidence of minority shareholders.

Upon careful examination of the provisions of the CA 2013 it can be ascertained that
legislative intent in CA 2013 is to safeguard the minority interest in a more
comprehensive manner. However, the provisions of CA 2013 not only requires proper
implementation upon addressing the present lacunas but also requires instilling
confidence in the minority shareholders with respect to the institutional and
regulatory mechanism which ensures that interest of minority shareholders shall be
given due consideration. This dual approach towards enforcement of minority rights
shall only guarantee proper administration of the corporate activities. Nevertheless,
Ministry of Corporate Affairs’ effort in preparation of a framework, which endeavors
to empower minority shareholders, is commendable.

Rights of majority shareholder (Corporate membership rights)

Certain rights can be exercised only by the majority and not by single shareholder.
Such rights are known as corporate membership right. Some of the instances of
such rights under the Companies Act, 2013 are-

(i) Section 149(10) provides that an independent director shall be eligible for
reappointment only on passing of a special resolution by the company and
disclosure of such appointment in the Board’s report.

(ii) Section 139 provides that company shall place the matter relating to the
appointment of auditors for ratification by members at every annual general meeting.

(iii) Section 169 (1) may, by ordinary resolution, remove a director, not being a
director appointed by the Tribunal under section 242 in order to prevent
mismanagement or oppression, before the expiry of the period of his office after
giving him a reasonable opportunity of being heard.

(iv) Section 180 provides for restriction on the power of Board. The Board of
Directors of a company shall exercise the certain powers only with the consent of the
company by a special resolution. They are- (a) sell, lease or otherwise dispose of the
whole, or substantially the whole, of the undertaking of the company; (b) invest,
otherwise than in trust securities, the amount of compensation received by the
company as a result of any merger or amalgamation; (c) borrow money which
exceeds the aggregate of the paid-up capital of the company and its free reserves;
(d) to remit, or give time for the repayment of, any debt due from a director.

Principle of Majority Rule

Unlike individual right, under corporate membership rights a shareholder is not

entitled to bring an action in his own name. Majority shareholders in a general
meeting control the management of the company. If the directors are supported by
majority in what they do, the minority can do nothing.

The principle of majority rule was first established in the case Foss v.

Harbottle[xxvii]. In this case, the directors of the company Victoria Park Company
were alleged of fraudulent acts such as the property of the company being
misapplied and certain mortgages over the property being given. Majority
shareholders at the general meeting resolved that no action should be taken against
the directors. Two of the minority shareholders brought an action against the
directors to compel them to make good the losses to the Company. The Court
dismissed the action on the ground that the wrong done to the Company was
capable of being ratified or confirmed by the majority of the shareholders and
therefore the Court should not interfere. It was left to the majority to decide what
was for the benefit of the company and whether the proceedings against the
directors should be commenced or not. Thus, minority shareholders were not
entitled to sue the directors for the wrongs done to the company.

Exceptions to the Majority Rule

In certain conditions this principle is not applicable. These conditions may be treated
as the restrictions on the power of the majority. These conditions are-

(i) Ultra vires acts- Ultra vires means beyond power. The doctrine of ultra vires has
been developed to protect the investors and creditors of the Company. It prevents a
Company to employ the money of the investors for the purpose other than those
stated in the object clause of the memorandum.

If an act is ultra vires the company, no majority can sanction or confirm such an act
and every shareholder is entitled to bring an action against the company and its
officers in respect of it.[xxviii]

In Bharat Insurance Co. v. Kanhaiya Lal[xxix], one of the objects of the company was
to “advance money at interest on security of land, houses, machinery and other
property situated in India”. One shareholder brought an action on the ground that
several investments had been made by the company without adequate security and
contrary to the provisions of the memorandum. The Court held that he could sue
because as regards the ultra vires act, the majority rule does not come into
operation.

(ii) Fraud on the Minority

If the conduct of the majority shareholders constitutes fraud on the minority

shareholders, any shareholder in exercise of his individual right may apply to the
Tribunal to interfere and restrain the company from going ahead with that
transaction.[xxx]

In Brown v. British Abrasive Wheel Co.,[xxxi] the articles were altered so as to enable

the nine-tenths of the shareholders to compel any shareholder to sell his shares to
them at a fair value. The resolution of altering the articles was not upheld because it
was only in the interest of majority and not in the interest of the company as a whole.
The object of such resolution was merely to enable the majority to acquire the
shares of minority.

(iii) Company is in control of the wrongdoers

When the persons against whom the relief is sought themselves hold and control the
majority of shares in the company and will not permit an action to be brought in the
name of the company, then shareholders may sue in their own name.

In Glass v. Atkin,[xxxii] a company was controlled equally by two defendants and two
plaintiffs. The two plaintiffs brought an action against the two defendants alleging
that they had fraudulently converted the assets of the company for their own benefit.
The court allowed the action and observed that normally it is for the company itself
to bring an action where its interest is adversely affected, but in the instant case the
two plaintiffs were justified in bringing an action on behalf of the company since the
two defendants being in equal control would easily prevent the company from suing.

(iv) Acts requiring a special resolution

Sometimes the Act or the articles of the company require certain acts to be done
only by passing a special resolution at the general meeting of the company. If the
majority shareholders purport to do any such act by passing an ordinary resolution,
then anyone can bring an action to prevent the majority to do so.

What are the top trends in corporate social responsibility?

As pressure is added by consumers seeking to make more responsible
choices and by the constraints of ever-dwindling natural resources, more
companies are incorporating sustainable strategies and adopting more
socially responsible practices. The top trends in the area of corporate social
responsibility include increased transparency, investment in green
technologies, local community and employee engagement, and recognition of
economic inequality.

Demands for Disclosure

Partly in response to heightened regulatory oversight, partly as a result of
ever-increasing availability of almost instantaneous information and partly due
to consumer and shareholder demands, companies are becoming more
transparent in their operations. As part of a business model that embraces
corporate social responsibility, companies are sharing more environmental,
social and governance disclosures.

Creation of New Resources

Gone are the days of rampant resource usage without any accountability or
thought toward replenishment. As available natural resources are rapidly
depleted, rather than simply moving on to the next source of materials, fossil
fuels and cheaply available labor, socially responsible companies
are investing in green technologies and developing alternative resources.

Global Companies Acting Locally

Even companies that operate on a global level are recognizing the value of
local markets and supply chains. Also, corporate social responsibility
initiatives actively attempt to engage in activities that benefit local communities
as well as produce profits for the corporation. Related to these efforts are
attempts at engaging employees. Micro-volunteerism is an emerging trend
that allows employees to volunteer their efforts and make positive
contributions with minimal time commitments.

Investing in Employees
As the issue of economic inequality rises to the forefront of many political
debates, so does the issue increasingly press upon corporations. Recognition
of inequalities in pay and economic burdens of employees is a trend in more
progressive companies. Raising the pay rates of the lowest earning
employees is one of the top trends in corporate social responsibility.

Winding up of a Company

The winding up of a company is the last stage of a companies’ existence. There may be several
reasons for winding up of the company including mutual agreement among stakeholders, loss,
bankruptcy, death of promoters etc. Winding up is the process by which the company is put to an
end that is the process through which its corporate existence is ended and it is thereafter finally
dissolved. As per section 270 of the Companies Act, 2013 a company can be wound up either by a
tribunal or by way of voluntary winding up. The provisions of the act lay down proper procedures for
the winding up of a company.

Winding Up By A Tribunal

Winding up of a company takes place by a tribunal by appointing a liquidator if the company is

unable to pay its debts or the company has passed a special resolution to that effect or the company
is acting against the interest or morality of India, security of state, or has spoiled any kind of friendly
relations with foreign or neighboring countries or the company has not filed the financial statements
or annual returns for preceding five consecutive years or it is deemed just and equitable to the
tribunal to wind up the company or the company has undertaken fraudulent activities or any other
unlawful business or any person or management connected with the formation of company is found
guilty of fraud or any kind of misconduct.

Under section 272 of the companies act, the petition for winding up of a company in any of the
circumstances stated above can be filed by any of the following parties-

Such winding up petition shall be filed in form no. 1, 2 or 3, as required along with the statement of
affairs in form no. 4. The statement of affairs shall contain facts up to specific date which shall not be
more than 15 days prior of the date on which the statement of affairs is filed. Also, it shall be
certified by a certified chartered accountant.

Company

Creditors

Contributory or contributories

Central or state government

Registrar of Companies

Any other person authorized by the central government for that purpose

Voluntary Winding Up Voluntary winding up of a company takes place by mutual agreement of the
members of the company. Voluntary winding up may take place either by passing of a special
resolution or by passing an ordinary resolution by the members as a result of expiry of its time
period as fixed by the Articles of Association or the completion of the project or event for which it
was constituted. The companies have to comply with the following procedure for winding up as
provided by the Companies act, 2013-

The company shall conduct a meeting with at least two directors with the agenda to initiate winding
up of the company. The directors shall ensure that the company does not have any third party debts
or it will be able to repay its debts in case it’s wound up.

The company shall issue a written notice in this regard to conduct a general meeting of all the
shareholders for passing a resolution for the same.

The company in the general meeting shall pass an ordinary resolution to wind up the company by
simple majority or special majority of 3/4th members.

After passing the resolution, the company shall conduct a meeting of all the creditors. If majority of
creditors are of the opinion that winding up would be beneficial for the company, the company may
proceed with the same.

Within 10 days of the passing of the resolution, the company shall file a notice of winding up with
the registrar of companies for appointment of an official liquidator.

Within 14 days of the passing of the resolution, the company shall give a notice regarding winding up
of the company in the official gazette as well as advertise it in the newspaper.
Within 30 days of the passing of the resolution, the company shall file the certified copies of ordinary
or the special resolution passed in the general meeting as the case may be.

The company shall wind up the affairs of the company and prepare the liquidators account and get
the same audited.

The company shall again conduct a general meeting in furtherance of the winding up objective.

In the general meeting, the company shall pass a special resolution for the disposal of books and all
necessary documents.

With 15 days of the passing of the resolution, the company shall submit the copy of accounts and file
an application for winding up in the tribunal for passing the order for dissolution of the company.

The tribunal shall, if satisfied with the documents submitted by the company, pass an order within
60 days to effect of dissolution of the company.

After the order to this effect has been passed by the tribunal, the official liquidator shall file a copy of
the order with the registrar of companies.

After receiving the order passed by tribunal, the registrar shall then publish a notice in the official
Gazette declaring that the company is dissolved.

Winding up subject to Supervision of the Court Winding up under the supervision of the court if
often confused with winding up by a tribunal. In such a situation, the court only supervises the
winding up proceedings subject to certain terms and conditions imposed by the court. The court
gives the liberty to the stakeholders to file a winding up petition even when the company is being
wound up voluntarily. However, the Petitioner must prove that voluntary winding up cannot
continue with fairness to all concerned parties. The liquidator then appointed by the court must
submit a report with the registrar of companies in every three months showing the progress of
liquation.

 Liability as contributories of present and past members.

(1) In the event of a company being wound up, every present and past member shall be liable
to contribute to the assets of the company to an amount sufficient for payment of its debts and
liabilities and the costs, charges and expenses of the winding up, and for the adjustment of
the rights of the contributories among themselves, subject to the provisions of section 427
and subject also to the following qualifications, namely :-

(a) a past member shall not be liable to contribute if he has ceased to be a member
for one year or upwards before the commencement of the winding up ;
 (b) a past member shall not be liable to contribute in respect of any debt or liability of
the company contracted after he ceased to be a member ;

(c) no past member shall be liable to contribute unless it appears to the Court that the
present members are unable to satisfy the contributions required to be made by them
in pursuance of this Act ;

(d) in the case of a company limited by shares, no contribution shall be required from
any past or present member exceeding the amount, if any, unpaid on the shares in
respect of which he is liable as such member ;

(e) in the case of a company limited by guarantee, no contribution shall, subject to the
provisions of sub-section (2), be required from any past or present member
exceeding the amount undertaken to be contributed by him to the assets of the
company in the event of its being wound up ;

(f) nothing in this Act shall invalidate any provision contained in any policy of
insurance or other contract whereby the liability of individual members on the policy
or contract is restricted, or whereby the funds of the company are alone made liable
in respect of the policy or contract ;

(g) a sum due to any past or present member of the company in his character as
such, by way of dividends, profits or otherwise, shall not be deemed to be a debt of
the company payable to that member, in a case of competition between himself and
any creditor claiming otherwise than in the character of a past or present member of
the company ; but any such sum shall be taken into account for the purpose of the
final adjustment of the rights of the contributories among themselves.

(2) In the winding up of a company limited by guarantee which has a share capital, every
member of the company shall be liable, in addition to the amount undertaken to be
contributed by him to the assets of the company in the event of its being wound up, to
contribute to the extent of any sums unpaid on any shares held by him as if the company
were a company limited by shares

Reconstruction and Amalgamation

The company wished to avoid being wound up and negotiated a scheme in which the existing
shareholdings in the company would be transferred to a new company which would take over the
company’s undertaking and assets as well as its debts. This was to be effected by a scheme for
reconstruction which would result in the old company’s shareholders holding four per cent of the
shares in the new company.

Notwithstanding the heritage of schemes of arrangement which can be traced back to the United
Kingdom in the 1860s, and the common origins of schemes in Australia and Singapore and an
established body of legal principles, there is a notable degree of inconsistency in the line of judicial
authorities on the nature of schemes of arrangements.

In particular, there is some controversy as to whether a scheme of arrangement derives its efficacy
from an order of court or from the statute. Australian courts favour the former view. English courts,
in contrast, take the position that a scheme of arrangement which has been approved by the
requisite majority of the company’s creditors derives its efficacy from statute and therefore operates
as a statutory contract.

An arrangement embraces such diverse schemes as conversion of debt into equity, subordination of
secured or unsecured debt, conversion of secured claims into unsecured claims and vice versa,
increase or reduction of share capital and other forms of reconstruction and amalgamation.

According to Halsbury’s Laws of England: 

“Neither ‘reconstruction nor amalgamation’ has a precise legal meaning. Where an undertaking is
being carried on by a company and is in substance transferred, not to an outsider, but to another
company consisting substantially of the same shareholders with a view to its being continued by the
transferee company, there is a reconstruction. It is none the less a reconstruction because all the
assets do not pass to the new company, or all the shareholders of the transferor company are not
shareholders in the transferee company, or the liabilities of the transferor company are not taken
over by the transferee company. ‘Amalgamation’ is a blending of two or more existing undertakings
into one undertaking, the shareholders of each blending company becoming substantially the
shareholders in the company which is to carry on the blended undertakings. 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 existing companies.”

Mergers, Amalgamation and Demergers of Companies under the Companies Act 1956 are governed
by sections 391 to 396 Companies Act 1956.

It requires companies to make application to the court under section 391, which empowers the
court to sanction the compromise or arrangement proposed by the companies. Section 392 further
empowers the High Court to enforce a compromise or arrangement ordered by the court under
section 391 of the Companies Act. Section 393 provides supporting provisions for compliance with
the provisions or directions given by the court. Sections 395, 396 and 396A are supplementary
provisions relating to amalgamation. Section 395 deals with the power to amalgamate without going
through the procedure of the court.

Amendment in the Companies Act, 1956 in year 2002 gave powers to National Company Law
Tribunal to review and to allow any compromise or arrangement, which is proposed between a
company and its creditors or any class of them or between a company and its members or any class
of them. However, because of non formation of National Company Law Tribunal, these powers still
lie with High Courts and the parties concerned can make applications to high courts.

Reconstruction and amalgamation by Voluntary Winding Up

A compromise involves a settlement of a dispute. An arrangement, in contrast, is broader and has
been held to be of wide import. It can cover any lawful arrangement that touches or concerns the
rights and obligations of the company and its shareholders or creditors, Section 494 of the
Companies Act 1956, which similar to section 287 of the Companies Act 1948 givers power a
company to reconstruct or amalgamate by means of voluntary liquidation wherein the liquidator
transfers the assets of the company in exchange for shares or other shares of the transferee
company.

· Effect on Shareholders
The effect on share holders is that the resolution is valid and the arrangement is binding upon them.
Nevertheless, any shareholder may, in specific circumstances, dissent from the sale or arrangement.

The dissenting shareholder is required under sub section (3) of this section to give notice of his
dissent to the liquidator in writing within seven days after passing of the special resolution. A legal
representative of deceased shareholder is also entitled to dissent. However, it is open for the
liquidator to waive such notice.

The share holder who neither agrees to the scheme nor challenges it but refuses to accept shares in
transferee company (especially if they are not fully paid) to avoid further liability , on these shares ,
shall be deemed to have permitted the liquidator to sell the new shares and pay him the net
proceeds. The liquidator shall recover the expenses incurred on such sale from the proceeds of that
sale. If there is more than one such shareholder, net proceeds shall be distributed proportionately.

· Effect on creditors.
The scheme does not expressly state that any arrangement under this section is binding on the
creditors yet it can be deducted from subsection (5) that the arrangement is binding on creditors as
well unless they move the court / Tribunal within one year after passing of resolution of winding up
and challenge the arrangement.

Nevertheless, an arrangement sanctioned by the special resolution does not relieve the liquidator of
the old company is dissolved. To leave every thing to the new company is a “gross dereliction” of
duty by the liquidator.[11]

Consent of the shareholders

The Companies Act, 1956, prescribes varying requirements for decisions to attain binding force on
the company and with sound and profound reasons. As is evident from a reading of sections 189
and190 of the Act, some decisions are efficacious on receiving the assent of a simple majority whilst
others require that there must be not less than three times the number of votes cast in favour of a
Resolution than those opposed to it. Section 391 of the Act, which deals with compromises and
arrangements, contemplates the consent of three-fourths in value of the affected persons for the
decision to be binding on the remainder. Chapter VI, comprising sections 397 to 409of the Act,
protects the rights of persons constituting a minority, holding not less than ten per cent of the
members. Section 395 of the Act is logically at the end of this spectrum, and envisages and permits,
within a defined arena, the drastic dilution of the rights of a class consisting of members constituting
less than ten per cent. Although this dilution has been seen and termed even as an ‘expropriation’,
jural interference was nonetheless found to be unnecessary only on this ground. The question that
arises is whether there is any rationale in the prescribed percentages, dependent upon the gravity of
theme assures to be effected. In my opinion, it is not legally odious to expect a minuscule group to
fall in line with the dictates of an overwhelming majority comprising ninety per cent of the group.
Usually, there is wisdom in the strength of members. There is every possibility that where nine
persons are willing to accept a particular offer, the remaining single person may be standing a part
from the others for motives which are not mercantile or commercial. While considering provisions
analogous to section 395 of the Act, Maugham, J. had expressed the following opinion which has
stood the test of time, thus

“I think, however, the view of the Legislature is that where not less than nine-tenths of the
shareholders in the transfer or company approve the scheme or accept the offer prima facie, at any
rate, the offer must be taken to be a proper one, and in default of an application by the dissenting
shareholders, which includes those who do not assent, the shares of the dissentients may be
acquired on the original terms by the transferee company. Accordingly, Ithink it is manifest that the
reasons for inducing the court to ‘order otherwise’ are reasons which must be supplied by the
dissentients who take the step of making an application to the court, and that the onus is on them of
giving a reason why their shares should not be acquired by the transferee company.

One conclusion which I draw from that fact is that the mere circumstance that the sale or exchange
is compulsory is one which ought not to influence the court. It has been called an expropriation, but I
do not regard that phrase as being very apt in the circumstances of thecase. The other conclusion I
draw is this, that again prima facie the court ought to regard the scheme as a fair one in as much as
it seems to me impossible to suppose that the court, in the absence of very strong grounds, is to be
entitled to set up its own view of the fairness of the scheme in opposition to so very large a majority
of the shareholders who are concerned. Accordingly, without expressing a final opinion on the
matter, because there maybe special circumstances in special cases, I am unable to see that I have
any right to order otherwise insuch a case as I have before me, it is affirmatively established that,
notwithstanding the viewsof a very large majority of shareholders the scheme is unfair.”

Tek Chand, J. has in Benarsi Das Sara/ v. Dalmia Dadri Cement Ltd. opined that the" principle
underlying section 395 is that where a company obtains 90 per cent of the shares or class of shares
under a scheme of arrangement, it can compel the dissentient minority to partwith its shares.
Conversely the dissenting shareholders are also entitled to compel the company to acquire their
shares as well as and on the same terms. Section 395 of the Companies Act, 1956, corresponds to
section 209 of the English Companies Act,1948, which reproduces with amendments section 155 of
the English Act of 1929.”final on account of pending appeals. 

Conclusion
Though no protection is available to any dissenting minority shareholders on this issue, the Courts,
while approving the scheme, follow a judicious approach of publishing a notice in the newspapers,
inviting objections, if any, against the scheme from the stakeholders. Any interested person,
including a minority shareholder may appear before the Court.

NCLT – Understanding National Company

Law Tribunal and its power
Updated on May 30, 2019 - 12:03:17 PM
National Company Law Tribunal is the outcome of the Eradi Committee. NCLT was
intended to be introduced in the Indian legal system in 2002 under the framework of
Companies Act, 1956 however, due to the litigation with respect to the constitutional
validity of NCLT which went for over 10 years, therefore, it was notified under the
Companies Act, 2013. It is a quasi-judicial authority incorporated for dealing with
corporate disputes that are of civil nature arising under the Companies Act.
However, a difference could be witnessed in the powers and functions of NCLT
under the previous Companies Act and the 2013 Act. The constitutional validity of
the NCLT and specified allied provisions contained in the Act were re-challenged.
Supreme Court had preserved the constitutional validity of the NCLT, however,
specific provisions were rendered as a violation of the constitutional principles.
NCLT works on the lines of a normal Court of law in the country and is obliged to
fairly and without any biases determine the facts of each case and decide with
matters in accordance with principles of natural justice and in the continuance of
such decisions, offer conclusions from decisions in the form of orders. The orders so
formed by NCLT could assist in resolving a situation, rectifying a wrong done by any
corporate or levying penalties and costs and might alter the rights, obligations, duties
or privileges of the concerned parties. The Tribunal isn’t required to adhere to the
severe rules with respect to appreciation of any evidence or procedural law.

Major Functions of NCLT

Registration of Companies
The new Companies Act, 2013 has enabled questioning the legitimacy of companies
because of specific procedural errors during incorporation and registration. NCLT
has been empowered in taking several steps, from cancelling the registration of a
company to dissolving any company. The Tribunal could even render the liability or
charge of members to unlimited. With this approach, NCLT can de-register any
company in specific situations when the registration certificate has been obtained by
wrongful manner or illegal means under section 7(7) of the Companies Act, 2013.

Transfer of shares
NCLT is also empowered to hear grievances of rejection of companies in transferring
shares and securities and under section 58- 59 of the Act which were at the outset
were under the purview of the Company Law Board. Going back to Companies Act,
1956 the solution available for rejection of transmission or transfer were limited only
to the shares and debentures of a company but as of now the prospect has been
raised under the Companies Act, 2013 and the now covers all the securities which
are issued by any company. 

Deposits
The Chapter V of the Act deals with deposits and was notified several times in 2014
and Company Law Board was the prime authority for taking up the cases under said
chapter. Now, such powers under the chapter V of the Act have been vested with
NCLT. The provisions with respect to the deposits under the Companies Act, 2013
were notified prior to the inception of the NCLT. Unhappy depositors now have a
remedy of class actions suits for seeking remedy for the omissions and acts on part
of the company that impacts their rights as depositors.
Power to investigate
As per the provision of the Companies Act, 2013 investigation about the affairs of the
company could be ordered with the help of an application of 100 members whereas
previously the application of 200 members was needed for the same. Moreover, if a
person who isn’t related to a company and is able to persuade NCLT about the
presence of conditions for ordering an investigation then NCLT has the power for
ordering an investigation. An investigation which is ordered by the NCLT could be
conducted within India or anywhere in the world. The provisions are drafted for
offering and seeking help from the courts and investigation agencies and of foreign
countries.

Freezing assets of a company

The NCLT isn’t just empowered to freezing the assets of a company for using them at a later
stage when such company comes under investigation or scrutiny, such investigation could
also be ordered on the request of others in specific conditions.

Converting a public limited company into a private

limited company
Sections 13-18 of the Companies Act, 2013 read with rules control the conversion of a Public
limited company into the Private limited company, such conversion needs an erstwhile
confirmation from the NCLT. NCLT has the power under section 459 of the Act, for
imposing specific conditions or restrictions and might subject granting approvals to such
conditions.

The National Company Law Tribunal and the National

Company Law Appellate Tribunal Constituted

The constitution of the National Company Law Tribunal and the National Company Law
Appellate Tribunal is a paradigm shift with the intention of establishing a specialized forum to
adjudicate all disputes/issues pertaining to companies in India. The primary objective of
constituting these tribunals is to provide a simpler, speedier and more accessible dispute
resolution mechanism.
The Government of India has, after fourteen years since their introduction, constituted the
National Company Law Tribunal (NCLT) and the National Company Law Appellate Tribunal
(NCLAT) under the Companies Act, 2013 (Companies Act) to provide for a single judicial
forum to adjudicate all disputes concerning the affairs of Indian companies. The tribunals
have been made effective from 1 June 2016.

The NCLT will have eleven benches initially, two at New Delhi and one each at Ahmedabad,
Allahabad, Bengaluru, Chandigarh, Chennai, Guwahati, Hyderabad, Kolkata and Mumbai.
The NCLT will comprise a president and judicial and technical members, as necessary.
Justice M.M. Kumar, former Chief Justice of the High Court of Jammu and Kashmir has
been appointed the president of the NCLT. The NCLAT, the appellate body, will consist of a
chairperson and a maximum of eleven judicial and technical members. Justice S.J.
Mukhopadhaya, a retired judge of the Supreme Court of India, has been appointed the
chairperson of the NCLAT.

While the tribunals have been set up to deal with all company related disputes (except any
criminal prosecution for offences under the Companies Act), the powers currently provided
to the NCLT and the NCLAT under the recent notifications are limited. It is expected that
further notifications will soon be issued to allow the NCLT and the NCLAT to exercise
complete gamut of powers prescribed under the Companies Act.

The NCLT has been given wide powers under the Companies Act to adjudicate:

1. cases initiated before the Company Law Board (CLB) under the Companies Act, 1956
(Old Act) (which, pursuant to NCLT's constitution, stand transferred to the NCLT);

2. all proceedings pending before any district court or High Court under the Old Act including
proceedings relating to arbitration, compromise, arrangements and reconstruction and
winding up of companies (which, upon the relevant notification being issued, shall stand
transferred to the NCLT);

3. references/inquiries/proceedings pending before the Board for Industrial and Financial

Reconstruction (BIFR), including those pending under the Sick Industrial Companies
(Special Provisions) Act, 1985 (SIC Act), which would be abated, upon relevant notification
being issued, and referred to the NCLT within 180 days from the date of abatement;

4. appeals or any other proceedings pending before the Appellate Authority for Industrial and
Financial Reconstruction (AAIFR), including those pending under the SIC Act, which would
be abated, upon relevant notification being issued, and referred to the NCLT within 180 days
from the date of abatement; and

5. fresh proceedings pertaining to claims of oppression and mismanagement of a company,

winding up of companies and all other powers prescribed under the Companies Act.

In addition, the recently enacted Insolvency and Bankruptcy Code, 2016 (Bankruptcy Code),
also provides wide powers to the NCLT to adjudicate upon the 'insolvency resolution
process' and liquidation of corporate debtors. However, the Bankruptcy Code is yet to be
notified and made effective.

In light of the limited provisions under the Companies Act which have been made effective,
presently, the NCLT has jurisdiction to:
1. entertain any claims of oppression and mismanagement of a company and to pass any
order that the NCLT may deem fit in this regard;

2. adjudicate proceedings and cases initiated before the CLB under the Old Act, which now
stand transferred to the NCLT; and

3. exercise powers under various sections of the Companies Act which have been notified
and made effective by the Government of India, including (a) power to pass any order
against a company incorporated by providing false information or by fraud, (b) power to grant
approval for alteration of articles of a company, if such alteration changes its nature from
public to private, and (c) power to provide approval for issuance of redeemable preference
shares by a company under certain circumstances.

All appeals against any order of the NCLT may be filed by the aggrieved parties with the
NCLAT. Any appeal against the orders of the CLB before the constitution of the NCLT would
continue to lie before the relevant High Court and not the NCLAT. Currently, for matters
pertaining to the winding up of companies and sick companies, parties would have to
continue to approach either the concerned High Courts, the BIFR or the AAIFR.

The formation of the NCLT and the NCLAT is a significant step towards attaining fast and
efficient resolution of disputes relating to affairs of the Indian corporates. It is expected that
once all relevant provisions under the Companies Act and the Bankruptcy Code are made
effective, these tribunals would provide holistic solutions to issues being faced by
companies, including those of winding up, oppression/mismanagement and insolvency.
Being the sole forum dealing with company related disputes, these tribunals would also
eliminate any scope for overlapping or conflicting rulings and minimise delays in resolution of
disputes, thus, proving to be a boon for litigants.
Insolvency and Bankruptcy Code, 2016
Formation of Insolvency and Bankruptcy
Code, 2016
After the introduction of the Insolvency and Bankruptcy Code, 2015 in the Lok Sabha
on 21st December 2015, it was referred to the Joint Committee. On such a referral
the Committee had presented its recommendations and a modified Bill based on its
suggestions.
In May 2016 both the Houses of Parliament passed the Insolvency and Bankruptcy
Code, 2016. The major objective of this economic reforms is to focus on creditor
drove insolvency resolution.

Shifting existing regime ‘Debtor in

possession’ to a ‘ Creditor in control’
In India, the Insolvency and Bankruptcy Code, 2016 is one matured step towards
settling the legal position with respect to financial failures and insolvency. To provide
easy exit with a painless mechanism in cases of insolvency of individuals as well as
companies, the code has significant value for all stakeholders including various
Government Regulators. Introduction of this Code has done away with overlapping
provisions contained in various laws –

 Sick Industrial Companies (Special Provisions) Act, 1985

 The Recovery of Debts Due to Banks and Financial Institutions Act, 1993
 The Securitization and Reconstruction of Financial Assets and Enforcement of
Security Interest Act, 2002
 The Companies Act, 2013.

Before the enactment of this Code, there were multiple agencies dealing with the
matters relating to debt, defaults, and insolvency which generally leads to delays,
complexities and higher costs in the process of Insolvency resolution.
The ‘Board for Industrial and Financial Reconstruction (BIFR)’, one of the Insolvency
Regulators, has been a phantasm for sick industrial companies. It is expected that
the Insolvency and Bankruptcy Code, 2016 will expedite the cases pending for a
long time and resolve them within 180 days with a further period of 90 days.

Applicability of the Code

The provisions of the Code shall apply for insolvency, liquidation, voluntary
liquidation or bankruptcy of the following entities:-

1. Any company incorporated under the Companies Act, 2013 or under any previous
law.
 2. Any other company governed by any special act for the time being in force, except in
so far as the said provision is inconsistent with the provisions of such Special Act.
3. Any Limited Liability Partnership under the LLP Act 2008.
4. Any other body being incorporated under any other law for the time being in force, as
specified by the Central Government in this regard
5. Partnership firms and individuals

Moreover, this code shall apply only if minimum amount of the default is Rs. 1
lakh. However, by placing the notification in Official Gazette, Central
Government may specify the minimum amount of default of higher value which shall
not be more than Rs. 1 crore.

Exceptions: There is an exception to the applicability of the Code that it shall not

apply to corporate persons who are regulated financial service providers like-

 Banks;
 Financial Institutions; and
 Insurance companies.

Objectives of the Code

A sound legal framework of bankruptcy law is required for achieving the following
objectives:-

 Improved handling of conflicts between creditors and

the debtor
It can provide procedural certainty about the process of negotiation, in such a way as
to reduce problems of common property and reduce information asymmetry for all
economic participants.
  Set a limit between malfeasance and business failure
It can also provide flexibility for parties to arrive at the most efficient solution to
maximize value during negotiations. The bankruptcy law will create a platform for
negotiation between creditors and external financiers which can create the possibility
of such rearrangements.

 Macroeconomic downturns losses to be allocated

An infirm insolvency regime leads to the stereotype of “rich promoters of defaulting
entities” generating theories such as:

1. misconduct is the reason for all the defaults made

2. ultimately it is the promoters who should personally and financially be held
responsible for defaults of the firms which are under their control.

 Macroeconomic downturns losses to be allocated

Clear allocation of these losses is a result of a well-defined bankruptcy framework.
Taxes, inflation, currency depreciation, expropriation, or wage or consumption
suppression are the common practices of loss allocation. These could affect foreign
creditors, small business owners, savers, workers, owners of financial and non-
financial assets, importers, exporters.

Key Objectives of the Code

The sole intention of the Insolvency and Bankruptcy Code, 2016 is to provide a
justified balance between-

 an interest of all the stakeholders of the company, so that they enjoy the availability
of credit
 the loss that a creditor might have to bear on account of default

The objective behind Insolvency and Bankruptcy Code, 2016 are listed below-

1. To consolidate and amend the laws relating to re-organization and insolvency

resolution of corporate persons, partnership firms, and individuals.
2. To fix time periods for execution of the law in a time-bound settlement of
insolvency (i.e. 180 days).
3. To maximize the value of assets of interested persons.
4. To promote entrepreneurship
5. To increase the availability of credit.
6. To balance all stakeholder’s interest (including alteration). Balance to be done
in the order of priority of payment of Government dues.
7. To establish an Insolvency and Bankruptcy Board of India as a regulatory
body for insolvency and bankruptcy law.
8. To establish higher levels of debt financing across a wide variety of debt
instruments.
9. To provide painless revival mechanism for entities.
10. To deal with cross-border insolvency.
11. To resolve India’s bad debt problem by creating a database of defaulters.