BA., LL.B.

(H) VIth Semester Online Examination, 2020

Corporate Laws-I
Paper No. II
Time: Three Hours Max. Marks: 75
Name: Shafaq Zooni Roll no: 49
Course: B.A.LL.B.(Hons.) Examination Roll no.: 17BLWS155
Year: 3rd year (VIth Semester)

Unit-I
1. Arshad, Ajay and Hardeep want to start the business of purchasing and selling Electronic
goods. All of them wish to take part in the management of the business, but at the same time
they would like to avoid personal liability for its debts. They would also like to be able to
transfer their respective interests in the business without difficulty. Advise them whether it
would be better for them to form a company limited by shares or a partnership and discuss the
advantages and disadvantages of each of them.

Ans) Companies limited by shares refers to a company having the liability of its members
limited by the memorandum to the amount, if any, unpaid on the shares respectively held by
them according to the Section 2(22) of The Companies Act, 2013. Such a company is created
by registration. A company is an artificial legal entity, which has members, a common seal and
perpetual succession. Whereas a Partnership is created by an agreement between two or more
persons who come together to carry out a business to share profit and losses mutually. There is
a discord between ownership and management in a company but there is no such divide in
partnership and partners can participate actively, in day to day business activities together.

In the instant illustration, the advice to the concerned persons with regard to selecting a
company limited by shares or a partnership can be made after making a thorough comparative
analysis of the advantages and disadvantages of both forms of businesses.

Advantages of Partnership

• No legal formalities relating to registration during incorporation or for auditing are

compulsorily followed.
• It is easy to change the agreement and to specify/ edit the powers of the partners
 • The partnership agreement is based on utmost good faith.
• Decision making in a partnership is fairly easier and quicker because of less number of
people involved.
• The borrowing of money through debentures is authorized in a company.

Disadvantages of Partnership

• The partners have unlimited joint and several liability for all the debts incurred by the
firm. A partnership has no separate legal existence distinct from its members and the
partners are also held to be liable for the acts of the firm.
• There is no element of perpetual succession in a partnership as it is based on an
agreement and ends with the death/exit of any partner.
• Ordinarily, there is no right of transfer by a partner but if the partner wishes to do so,
the consent of all other partners must be acquired before doing so. The transferee only
gets limited rights in a partnership.
• A partnership firm cannot issue debentures.

A hybrid form of both a company and a partnership firm, called as Limited Liability
Partnership, also exists. In such a partnership. the liability of the partners is separate and
individual partners are shielded from the wrongful acts committed by the other partners. It has
the features of both, a company and a partnership firm. It has perpetual succession while an
ordinary partnership doesn't. It is also said to have more flexibility than a general partnership.
However, it is created on the basis of a contractual agreement and has no divide between
ownership and management. Thus, the persons concerned are not suggested to engage in a
business through LLP.

Advantages of a company limited by shares

• it is a separate legal entity and the directors (who are responsible for the management
and control of the affairs of the company) are not held personally liable for the
company's misfortunes or debts. The company’s shareholders also have limited liability
which depends upon the amount of investment made by them. The personal assets of
directors and shareholders remain protected.
• it has perpetual succession and shall not cease to exist on the exit/death of any members
of the company.
 • The shares can be transferred easily without requiring the consent of other shareholders.
The rules specified in the memorandum and articles must be followed while making
any such transfer. The transferee shall also get all the rights of the transferor.
• Public finance institutions lend their resources more willingly to companies than to
other forms of businesses.

Disadvantages of a company limited by shares

• The formation of a company involves a lot of legal formalities with regards to the
company's registration under The Companies Act, 2013 during incorporation,
conducting an audit, general meetings, accounts, etc
• The memorandum and articles of the company specifies the scope of the company and
it cannot be altered easily. It is essential for members to follow the prescribed
regulations and not to defer from it in any manner.
• The number of shareholders of a company is a lot and they may not know each other.
The element of good faith is less in a company as compared to a partnership.
• The Directors are generally not held to be personally liable but if they engage in
unlawful purposes, or if their conduct is fraudulent, then the Directors can be held
personally liable They may also have criminal (section 34) and civil liability (section
35) for making mis-statement in the prospectus.
• The Courts have observed that when the separate legal entity of a company is being
used for fraudulent purposes then, the actual perpetrator can be held liable as the
corporate veil is lifted. It is done so to
o ascertain the character and economic realities behind the legal personality of the
company as held in Jones v. Lipman, (1962) 1 WLR 832.
o where the company is merely an agency as in Central Inland Water Transport
Corporation Ltd. v. Brojo Nath Ganguly, AIR 1986 SC 1571
o when company is engaged in activities against the public policy as in Connor
Brothers v. Connors, (1940) 4 All ER 1971,
o for determining the real character and status of the company as in Jyoti Ltd. v. K.K.
Bhasin, (1988)1 Comp LJ 198L
o for evasion of taxes and duties as in Re Sir Dinshaw Manekjee Petit, AIR 1927
Bombay 371, etc.

.
Final Advise: In the present problem, a company limited by shares allows them to be part of
the management and control of the affairs of the business and also does not hold them
personally liable for the personal debts of the company. In a partnership, the partners are
engaged in day-to-day activities of the business but they are also held personally, liable for the
firm. Another important requirement for forming a business in the question was the easy
transfer of their individual interests in the business. Easy transfer of their interests without the
consent of other shareholders or members is available in a company. Whereas in a partnership,
they cannot transfer interests without the consent of other members.

A partnership is suitable where the size of the business is relatively small and the capital
requirements are not very high, and it is popular amongst lawyers, CAs, estate agents, etc. A
company has a vast supply of resources, while the personal resources of the partners in a
partnership are relatively limited. In the present case, the business to be started is of the
purchase and sale of electronic goods, which is not a relatively small capital business and
thereby, it can be concluded that a company limited by shares would be a netter option.
 Unit-II
2(a). What do you understand by ‘Memorandum of Association’ of a company? Explain its
clauses.

2(b). Describe the binding force of ‘Memorandum of Association’ and ‘Article of Association’
of a company.

Ans) a) Section 2(56) of the Companies Act,2013 states ‘memorandum’ means the
memorandum of association of a company as originally framed or as altered from time to time
in pursuance of any previous company law or of this Act. This document is of utmost
importance to any proposed company as it contains certain fundamental clauses which describe
the conditions for the company’s incorporation.

Name Clause – The company is a legal person and must have a name to establish its identity.
However, there are certain rules which must be kept in mind when naming a company:

• It is undesirable to keep such a name which is resembling of a previously registered

company or identical to an already registered trademark. In Society of Motor
Manufacturers and Traders Ltd. v. Motor Manufacturers and Traders Mutual
Insurance Co Ltd. (1925) 1 Ch 675, it was observed that the resemblance between two
names in dispute must be so calculated to deceive, such as indicative of dealing in same
line of products, location of business, types of customers and persons involved in the
business suggested an association between the two companies or that they were part of
same group.
• When a company wishes to change its name, the Court directs the company to do so
and not the Registrar. ‘
• If the liability of the members is limited, the last word of the name must be ‘Limited’,
and in case of private company, it must be ‘Private Limited’, to ensure that all persons
dealing with the company shall have clear notice that the liability of the members is
limited. In Nassau Steam Press v. Tyler, (1894) 70 LT 376, it was held that the name
of the company was not mentioned in accordance with the requirements of the Act and
that the company not having paid the bill, the defendants were personally liable
thereon. Any omission or addition amounting to misdescription would make the person
purporting to sign the bill personally liable.
 • The Central Government may however, by licence, allow a charitable company to drop
the word ‘Limited’ from its name u/s 8 of Companies Act, 2013.
• Also, a company may change its name by passing a special resolution and with Central
Government’s approval in writing u/s 4(2) and (3).

Registered Office Clause -The memorandum must specify the State in which the registered
office of the company has to be situated as u/s 12, and must be done so within 30 days of
incorporation or commencement of business as all communications that will be done on the
registered address.

• Shifting of registered office from one State to another and alteration of objects may
affect not only the company’s shareholders but also the creditors, dealers and
employees but it can shift its office within the same district, town or city. Thus, a
registered office can be shifted from one State to another by a special resolution only
with a sanction of the Central Government as u/s 13(4).
The Central Government must however consider the objections, if any, of persons
whose interests would get affected with the change. In Orient Paper Mills Ltd. v. State,
AIR 1957 Ori 232, such a proposed alteration was opposed by the State on grounds of
loss of revenue and employment opportunities. The Court declined the proposal
upholding the interests of the State to protect its revenue. But later in Mackinnon
Mackenzie & Co, re (1967), the Court refused to stay the contention of the State and
allowed the transfer.
• Before confirming the alteration, the sanctioning authority must satisfy itself that
sufficient notice has been given to every debenture holder and related persons.

Objects and Powers Clause – the memorandum must state the objects for which a proposed
company is being formed. The choice of objects lies with the subscribers to the memorandum
and their freedom is unrestricted in this sphere except for that they must not be illegal or against
the provisions laid out in the Companies Act. There are certain reasons why object clause is
deemed to be compulsory:

• Ensures funds raised for ne undertaking are not risked in another as held in Waman Lal
v. Scindia Steam Navigation Co., AIR 1944 Bom 131.
• Gives a certain protection to its creditors as they’re assured that corporate capital cannot
be spent on any project not directly within the meaning of the company’s objects.
 • Serves public interest by confining the corporate activities within a defined field, thus
preventing diversification of a company’s activities in areas not closely related business
for which the company was formed.
• Prevents concentration of Economic power.
• The doctrine of ultra vires was affirmed by the Supreme Court in A Lakshmanaswami
Mudaliar v. LIC, AIR 1963 SC 1185, saying that the directors could not spend the
company’s money on any charitable or general object which they might choose.

Alteration of objects can only be done when a company raised money from public through
its prospectus but couldn’t utilise the full amount by way of a special resolution which have
to be published in newspapers (one in English and other in the vernacular language of the
state), along with the justifications for the change. Also, the dissenting shareholders must
be given appropriate opportunity to leave the company if they desire.

Liability Clause – it states the nature of liability that the members incur, meaning if the
company has limited liability or not which can be ascertained by its name itself. It means
that no member cannot be compelled to pay for more than the nominal value of the shares
held by him or only the amount that remains unpaid, whichever is lower, thus expressing
that the company is having limited liability. In case of company with limited with
guarantee, the liability is limited to the amount of the guarantee set out in the
company’s memorandum or to such amount as the members may respectively undertake to
contribute to the assets of the company in the event of its being wound up.

Capital Clause – it states the amount of nominal capital of the company and the number
and value of the shares into which it is divided. Also, in case of one-person owned
company, in this clause it has to be stated the name of person who would become the
member of the company in event of the subscriber’s death.

b) Under section 10 of the Act, it is declared:

“Subject to the provisions of this Act, the Memorandum and Articles shall, when
registered, bind the company and the members thereof to the same extent as if they
respectively had been signed by the company and by each member, and contained
covenants on its and his part to observe all the provisions of the Memorandum and of
the Articles.”
Thus, the Articles bind the company to its members, the members to the company and the
members to each other. They constitute a contract between a company and its members in
respect of their rights and liabilities as members. A member may sue the company, just as the
company may sue the members to enforce and restrain any breach of the articles.

1. Binding the company to its members: The company is bound to the members to observe
and follow the articles. In case the company commits a breach of the articles, members
can restrain the company from doing so, by bringing an injunction against the company.
Members may sue to restrain a company from doing any ultra-vires or illegal acts or
from acting on a resolution obtained by fraud or which is inconsistent with the Articles.
Members may also sue the company for the enforcement of their personal right under
the Articles, e.g., right to receive divided which has been declared. However, only a
shareholder or a member of the company, in the capacity of a member, can enforce the
rules and regulations contained in the Articles.
In Wood v. Odessa Waterworks Co., (1889) 42 Ch D 636, in an action by a member to
restrain the directors from acting on a resolution, the Court held, the question is whether
that which is proposed to be done in the present case is in accordance with the articles
of association of the company. Those articles provide that the directors may, with the
sanction of a general meeting, declare a dividend to be paid to shareholders. Prima facie
that means to be paid in cash. The debenture bonds proposed to be issued are not a
payment in cash. Accordingly, the directors were restrained from acting on the
resolution.
2. Binding on members in their relations to the company: An article of association is a
‘contract of the most sacred character’ between the company and each member, binding
the members to the company under a statutory covenant. All money payable by any
member to the company under the Memorandum or Articles shall be a debt due from
him to the company. Articles are taken to be signed and agreed to be observed by each
member, thus, members are bound by the articles just as if every one of them had
contracted to conform to them. A company can sue its members for the enforcement of
its Articles as well as for restraining their breach.
In Borland’s Trustees v. Steel Bros. & Co. Ltd., (1901) 1 Ch 279 the Court held the
articles of association of the company provided that in the event of the bankruptcy of a
member his shares would be sold at a price to be fixed by the directors. Borland became
bankrupt. His trustee in bankruptcy wanted to sell these shares at their true value
 contended that he was not bound by the articles. It was held that he was bound to abide
by the provisions of the company’s articles.
3. Binding between members: The contractual force given to the articles is limited to the
matters arising out of company’s relationship of the members as members and does not
extend beyond the company relationship. The articles do not regulate their rights inter
se. Such rights can only be enforced by or against a member through the company.
However, this is not without exception. Courts have extended the articles to constitute
a contract between individual members qua members without joining the company as
a party to the action.
In the case of Rayfield v. Hands, (1960) Ch 1, Rayfield was a shareholder in a company.
He was required to inform the directors in the event of his intention to transfer the
shares. The directors were required to take the shares at a fair value. Rayfield informed
the directors in accordance with the articles. The directors contended that they were not
bound to take and pay for Rayfield’s shares and the articles could impose no such
obligation on them. The court set aside this argument by treating the directors as
members and compelled them to take Rayfield’s shares at a fair value. The court also
held that it was not necessary for Rayfield to join the company for bringing a suit against
the directors.
4. No binding in relation to the outsiders: The memorandum and articles do not constitute
a contract between the company and the third party neither the company nor the
members of the company is bound to the outsiders to give effect to the provisions of
the memorandum and the articles. For example: In Browne v. La Trinidad, (1887) 37
Ch D 1, the articles of the company contained a clause to the effect that Browne should
be a director and should not be removable. He was, however, removed and had brought
an action to restrain the company from excluding him. It was held that there was no
contract between Browne and the company. No outsider can enforce articles against the
company even if they purport to give him certain rights. Thus, an outsider cannot take
advantage of the Articles to found a claim thereon against the company. Even a member
enjoying certain rights in a capacity other than a member cannot enforce them against
the company.
 Unit-III
3. (a). Share is an interest of shareholder in a company measured a sum of money for the
purpose of liability, in the first place, and of interest in the second…….

Explain the above statement while discussing the nature and concept of share.

(b). Classify the ‘share’ and ‘share capital’ of a company.

Ans) a) A man’s movable property is of two kinds, namely:

• chose-in-possession - property of which one has actual physical possession

• chose-in-action - property of which one does not have immediate possession, but has
a right to it, which can be enforced by a legal action. This right is generally evidenced
by a document, for example, a railway receipt.

A share in a company is a chose-in-action and a share certificate is the evidence of it. Section
2(84) of the Act defines a share as share in the share capital of the company, and includes stock
except where a distinction between stocks and shares is express or implied. The section 44 of
Companies Act, 2013, provides that shares or other interest of any member in a company shall
be movable property. But in India a share is also regarded as a good. The section 2 of Sale of
Goods Act defines goods as including every kind of moveable property. Hence shares in a
company in India are goods and not mere chose-in-action. The analysis of the share in terms
of goods has been carried further to some of its natural implications by the Supreme Court in
LIC v. Escorts Ltd., (1986) 1 SCC 264, If shares are goods, rules relating to passing of
ownership in goods would apply. The section 19 of Sale of Goods Act says that property in the
goods sold passes when it is intended to pass. Shares are specific goods and Section 20 of the
Act says that ownership in specific goods passes when the contract is made. Thus, a purchaser
of shares becomes the owner of the property in the shares when he contracts to buy them. The
inevitable implication of these provisions is that the company cannot deprive him of his
ownership by refusing to register him as a shareholder unless there is a genuine reason to do
so. But even so shares are not goods in the ordinary sense of the word. Shares remain a peculiar
kind of movable property which cannot pass from hand to hand like a ball or pen. The property
in these shares belonged to the registered shareholders and could not be transferred to another
except according to the articles of the company.
Thus, the exact nature of a share does not admit of easy explanation when the company is an
altogether distinct person from the members composing it. It is universal, though not
obligatory, for an incorporated company to have a capital stock. It is equally universal to divide
the capital into shares of nominal value. A person who holds such a share is known as the
shareholder. Each shareholder, therefore, holds a portion of the capital of the company. A share
means a share in the capital of the company and is a tangible property. But shareholders are
not, in the eyes of law, part owners of the undertaking. The undertaking is something different
from the totality of the shareholdings. All the assets of the company are vested in the corporate
body and not in the individuals composing it. Hence a share does not constitute the holder a
part owner of the company’s capital.

But shareholders are the owners of certain rights and interests and are subject to some liabilities.
A shareholder acquires an interest not in a mere chattel, but in the company itself, which is of
a permanent nature. A share is the interest of a shareholder in the company measured by a sum
of money for the purpose of liability and dividends, in the first place, and of interest, in the
second, and also consisting of a series of contract as contained in the articles of association. A
share is not a sum of money but an interest measured by a sum of money and made up of
various rights and liabilities. A share is thus an existing bundle of rights. It is a well-established
fact that shares are simply bundles of intangible rights against the company which had issued
them. Share certificates are not valuable property in themselves but they are just evidence of
the true property, which are the proportionate interests of the shareholders in the ownership of
the company. One pari passu share is exactly the same as any other as recognised in Solloway
v. McLaughlin, 1938 AC 247 (PC).

A share entitles the holder:

• to receive a proportionate part of the profits of the company;

• to take part in the management of the company's business in accordance with the
articles,
• to receive a proportion of the assets in the event of winding up and all other benefits
of membership.

A share also carries the liability to pay the full value in winding up. All these rights and
liabilities are subject to the terms and conditions contained in the company’s articles. When,
therefore, the owner of some shares dies, what passes upon his death and what has to be valued
is nothing more than the totality of his rights and liabilities as they exist under the provisions
of the Companies Act and the constitution of the particular company. The act of becoming a
member of a corporation is something more than a contract as it is more akin to like entering
into a complex and abiding relation.

A share has become a symbol of passive property, meaning control of the corporate wealth.
The active property, meaning the interest of the shareholder in the corporate, is under the
control of the corporate managers. The legal concept of the shareholder is still that of the owner
of the enterprise. But in fact, his position has receded to that of a functionless rentier of the
capital. Having supplied capital to the enterprise, he does not wish to be bothered except by
dividends. His investment confers upon him a claim on income. What is bought and sold in the
market is not productive wealth itself, but income producing prospects. Right to income has
become commodity for exchange. In short, the shareholder has a piece of property with an open
market value.

b) Share Capital is defined as the amount of capital which a company may raise in future as
mentioned in capital clause of the Memorandum of Association. The capital is fixed after
making careful analysis of present and future requirements of the company. The company’s
capital may be divided into following categories:

1. Authorised or Nominal Capital - This is the maximum amount of capital which a

company can issue. The company, in no case, can issue more capital than authorised by
its Memorandum. It is called Authorised Capital because the company has an authority
to issue this much capital. While deciding about authorised capital, present and future
needs of the concern should be taken into consideration.
The company can fix any amount as authorised capital. In case a company wants to
issue more capital than authorised, it will have to alter capital clause in the
Memorandum. It is not necessary that the whole of authorised capital be issued for
subscription. The company can issue shares as per its requirements. The authorised
capital fixes only the maximum limits beyond which it cannot go.
2. Issued Capital - The company will issue shares according to its requirements. It may
not need the entire capital at one time. Rather, capital needs go along with its
 development stages. The capital which is offered to the public for subscription is known
as Issued Capital. The part of capital which is not issued is known as unissued capital.
3. Subscribed Capital – The shares issued by the company for public subscription may not
be applied for in full. Subscribed capital denotes the share capital taken up by the public.
The issued and subscribed capitals can be same also.
The subscription of share capital depends upon reputation of the company.
4. Called-up Capital - After the receipt of share applications, the Board of Directors makes
allotment of shares to the applicants. Certain amount is payable on application and the
balance is called at the time of allotment and calls. The capital is called up as per
requirements for funds. The amount of capital is called called-up capital. The part of
capital which has not been called-up is known as Un-called capital. The shareholders
are under obligation to pay the money whenever it is called-up.
5. Paid-up Capital - The amount of capital actually received is termed as Paid-up Capital.
The shareholders are asked to pay the calls within a certain period. In case whole of the
called-up money has been received from the shareholders, called-up and paid-up capital
will be the same.
6. Reserved Capital - A limited company may earmark a part of uncalled capital as
Reserved Capital. The reserved capital is called-up only in case of winding up of the
company. This is done in order to create confidence in the minds of the creditors.
Capital can be reserved by passing a special resolution by the shareholders.

Shares are defined as the capital of a company is divided into a number of equal parts.
According to Section 43 of the Companies Act, 2013, the share capital of a company is of two
types:

• Preferential Share Capital

• Equity Share Capital

Preferential Share Capital - The preferential share capital is that part of the Issued share capital
of the company carrying a preferential right for:

o Dividend Payment - A fixed amount or amount calculated at a fixed rate. This

might/might not be subject to income tax.
 o Repayment - In case of a winding up or repayment of the amount of paid-up share
capital, there is a preferential right to the payment of any fixed premium or premium on
any fixed scale. The Memorandum or Articles of the company specifies the same.

Equity Share Capital - All share capital which is not preferential share capital is Equity Share
Capital. Equity shares are of two types:

o With voting rights

o With differential rights to voting, dividends, etc., in accordance with the rules.

They rank after the preference shares for the purpose of dividend payment and repayment of
capital. The rate of dividend is also generally not fixed and may vary from year depending upon
the profit of the company. This rate of dividend is recommended by the directors of the
company. They are the real owners of the company. They have voting rights in the management
of the company.
 Unit-IV
4. Discuss the concept and usual features of debentures. Also elucidate the circumstances
where a floating charge becomes a fixed one.

Ans) The word ‘debenture’ has been derived from a Latin word ‘debere’ which means to
borrow. Debenture is a written instrument acknowledging a debt under the common seal of the
company.

In accordance with Section 2(30) of the Companies Act, 2013, debentures include debenture
stock issued by the company as an evidence of debt taken by such company, either by creation
or non-creation of the charge over the assets of the company.

Companies generally raise funds by issuing as share capital or through borrowing from lenders.
A debenture is one of ways of company borrowing where the company agrees to repay the debt
where may also be a charge over the company’s assets to ensure the repayment of this debt.
Debenture is an alternative form of investment in a company that is more secured than
investment in shares because company must pay interest and it will be paid before the dividend
payment. Debenture holders also get privilege, if the company which issued the debentures
becomes bankrupt. A disadvantage is that debenture holders have no share in the company and
therefore have no control over it. If a company borrows money from general, it will give its
creditor a document ensuring the terms and existence of the loan, which is called a debenture
and the amount written on the document is repayable at a future date.

The company must pay interest to the creditor during the period of the loan. In order to improve
the chances of recovering the debt from the company if it becomes bankrupt, a creditor may
take a charge over some or all of the assets of the company as collateral. So it means that the
creditor has a legal interest in that asset and the company cannot sell it without either paying
off the debt or getting the permission of the creditor which increases the creditor’s chance of
being repaid on the bankruptcy of the company as it has a privileged claim on money from the
bankruptcy.

Characteristics of Debentures

• Debenture is a movable property. It is in the form of a certificate of indebtedness of the

company and issued by the company itself. It generally creates a charge on the
 undertaking or undertakings of the company. There is usually a specific date of
redemption.
• The debenture holders are creditors to the company and they do not have any claim of
ownership of the company unlike shareholders. The company is only under debt of the
debenture holders.
• As the debenture holders are not the owner of the company so they are not entitled with
the administration and management of the company.
• The debenture holder need not be concerned with the profits or loss of the company,
they have a fixed rate of interest on the principal amount which they get every year
irrespective of the financial condition of the company.
• Debentures usually have a charge on the assets of the company, which means that if the
company on liquidation is not able to repay the amount the debenture holders can sell
of property of the company to recover money.
• There is an undertaking given by the company to repay debenture holders the principal
amount along with the interest at the state time.
• The debenture holders cannot claim the privilege to vote in any meeting of the
company.
• When the company is winding up, the first priority of the company is to repay to the
debenture holders of the company hence, there is no risk involved of loss of money of
the debenture holders.
• There is a series with pari passu clause which is usually a part of the debentures being
issued and it would be equal as security and if the security is being enforced, the amount
shall be discharged relate ably. If there is deficiency of assets, the division will be
proportionately.

Floating charge – A fixed charge is taken over specific property, e.g. land, buildings, fixed
plant and machinery. Upon the giving of a fixed charge, the company, though still is the legal
owner of the charged asset, cannot sell or deal with the asset without the permission of the
charge holder.

Unlike a fixed charge, a floating charge does not attach to a specific asset. It ‘floats’ over a
class of assets, while the component parts of that class of assets may be changing as the
company still has the power to deal with any of the assets within that class without the need to
consult the charge holder. A debenture can provide that the floating charge can ‘crystallize’ in
specific circumstances. For example, when the company ceases to carry on business or goes
into liquidation, or when the debenture holder appoints a receiver to enforce their security.

When a floating charge crystallizes, it no longer hovers over a class of assets which are subject
to the charge, but becomes equivalent to a fixed charge because from the time of crystallization,
the company cannot deal with any item within the class of assets without the consent of the
charge holder.

Usually, debentures containing a floating charge also impose a prohibition on the company
granting any fixed charges over the assets that are the subject of the floating charge. This is
because fixed charges that are created after the floating charge would rank before the floating
charge for payment in the event of insolvency of the company. In other words, despite the fact
a fixed charge is registered after a floating charge, it would be paid in preference to the floating
charge.

There are instances where a floating charge may become a fixed charge. This conversion of
floating charge into a fixed charge is usually called Crystallisation of floating charge. When
such conversion takes place, the floating charge is no more floating, even on the assets that are
not static. It becomes a fixed charge so that the whole control over particular assets belong to
the creditor in the event of default in repayment of debts. Such an event happens under the
following circumstances:

• The debtor is unable to pay off the debts.

• The company is about to wind up.
• The business couldn’t be carried out when the creditor takes action against the debtor
for not repaying the debts and in all such circumstances which are listed out under the
relevant provisions of the Companies Act, 2013.

In re Indus Film Corporation Ltd., AIR 1939 Sind 100, a film company borrowed a sum of
money and declared a lien ‘on all our assets, including machinery, etc, now lying or that may
be bought hereafter until repayment’. This was held to be a floating charge as it covered assets,
present and future, of extremely fluctuating nature and imposed no restriction on the use of
them.

As against it, in FD Jones & Co Ltd v. Ranjit Roy, AIR 1927 Cal 782, by a deed a company
had charged all its machinery, stock in trade and moveable effects, present and future. The deed
provided that the ‘properties shall be in the lender's possession’ which was actually given to
him. This was held to be no floating charge as it took away the company's right to use the assets
charged in the ordinary course of its business.

If the assets are withdrawn from the business and transferred to the lender’s possession, there
is, indeed, nothing over which the charge is to float. It immediately gets fixed on those assets.
A charge on book debts was held to be floating charge where the company had the right to
collect the debts and use the proceeds in the ordinary course of its business. The charged book
debts were not under the control of the chargee to make it a fixed charge as held in re Burmark
Investments Ltd., (2000) 1 BCLC 353 (NZCA), one distinguishing feature of a fixed charge
from a floating charge is the degree of control over the property which the charge-holder
exercises.
 Unit-V
5(a) What are the different positions in which a director stands in relation to a company?

(b) What are the statutory provisions relating to the appointment of directors in a company?

Ans) a) A director is not a servant of any master as held in Moriarty v. Regent’s Garage Co,
[1921] 1 KB 423. He is the controller of the company’s affairs. A director of a company is
neither an employee nor a servant to the company. They are professional people who were
hired by the company to direct its affairs.

However, there is no restriction under the Act, that a director cannot be an employee to the
company. In Lee v. Lee’s Air Farming Ltd, 1961 AC 12, it was held that, a director may,
however, work as an employee in different capacities. Director includes any person who is
occupying the position of a director, whatever name called.

In Judhah v. Rampada Gupta, AIR 1959 Cal 715, it was held that, director of a company
registered under the Companies Act, 1956 are persons duly appointed by the company to direct
and manage the business of the company. A director is sometimes described as agent, trustee,
managing partner etc. But each of these expressions is used not as exhaustive of their powers
and responsibilities, but as indicating useful points of view from which they may for the
moment and for the particular purpose be considered.

Director As Agents

In Ferguson v. Wilson, (1866) 2 Ch App 77, the court clearly recognised that directors are in
the eyes of law, agents of the company. It was held that, the company has no person; it can act
only through directors and the case is, as regards those directors, merely the ordinary case of a
principal and agent. When the directors contract in the name, and on behalf of the company, it
is the company which is liable on it and not the directors.

In Elkington & Co. v. Hurter, (1892) 2 Ch 452 8, where the plaintiff supplied certain goods to
a company through its chairman, promised to issue him a debenture for the price, but never did
so and company went into liquidation, he was held not liable to the plaintiff. Similarly, a
director was held to be personally not liable in a suit against a private chit fund company.
Attachment of the property of the director was held to be not permissible in Kuriakos v. PVK
Group Industries, (2002) 111 Comp Cas 826 Ker 9.
Like agents, directors have to disclose their personal interest, if any, in any transaction of the
company. In Ray Cylinders & Containers v. Hindustan General Industries Ltd, (2001) 103
Comp Case 161 Del, it was held that, the directors are the agents of the institution and not of
its individual members, except when that relationship arises due to the special facts of the case.
Also granted permission to file a suit against a company was not allowed to be treated as
permission against directors as well.

In Sarathi Leasing Finance Ltd v. B Narayana Shetty, (2006) 131 Comp Cas 798 Kant, the
articles of association empowered the managing director to represent the company in legal
proceedings. It was held that a further authorization was not necessary to enable him to file a
complaint for dishonour of cheque under Sec. 138 of Negotiable Instrument Act.

Directors are the agents of a company. They are acting on behalf of the company. So, the
directors cannot be held personally liable for any default of the company. It was held that, for
a loan taken by a company, the directors, who had not given any personal guarantee to the
creditor, could not be made liable merely because they were directors.

Director As Trustees

Directors are the trusties of the company’s money, property and their powers and such must
account for all the moneys over which they exercise control and shall refund any moneys
improperly paid away, and shall exercise their powers honestly in the interest of the company
and all the shareholders, and not their own sectional interest.

The directors of a company are trustees for the company, and for reference to their power of
applying funds of the company and for misuse of the power they could be rendered liable as
trustees and on their death, cause of action survives against their legal representatives as held
in Ramaswamy Iyer v. Brahmayya & Co, [1966] 1 Comp LJ 107 1.

Directors are those persons selected to manage the affairs of the company for the benefit of
shareholders. It is an office of trust, which if they undertake, it is their duty to perform fully
and entirely. This peculiar nature of their office is one of the reasons why the directors have
been described as trusties.

In the real sense the directors are not trustees. A trustee is the legal owner of the trust property
and contracts in his own name. On the other hand, director is a paid agent or officer of the
company and contracts for the company. In fact, the directors are commercial men managing
a trading concern for the benefit of themselves and of all the shareholders in it.
To whom the directors are trustee, whether to the company or to the individual shareholders,
this principle was laid down in Percival v. Wright, [1902] 2 Ch 421, and still holds ground as
a basic proposition. In this case the court held that, directors have no duty towards individual
shareholders. From this it is very clear that, the directors are trustees to the company and not
of individual shareholders. This principle was reiterated in Peskin v. Anderson, [2000] 2 BCLC
1 1. Ordinarily the directors are not agents or trustees of members or shareholders and owe no
fiduciary duties to them.

However, in the decision of Allen v. Hyatt, (1914) 30 TLR 44, it was held that, the directors
are trustees of the profit for the benefit of the shareholders. They cannot always act under the
impression that they owe no duty to the individual shareholders. But it is of no doubt that the
primary duty of the director is to the company.

But in such circumstances where the directors act as agents for the shareholders, the latter
would be liable to the purchasers of their shares for any fraudulent misrepresentation made by
the directors in the course of negotiations.

Director As Organs Of Corporate Body

The organic theory of corporate life treats certain officials as organs of the company, for whose
action the company is held liable just as a natural person is for the action of his limbs as held
in Gopal Khaitan v. State, AIR 1969 Cal 132, 138. Thus, the modern directors are more than
mere agents or trustees. The Board is also correctly recognised to be a primary organ of the
company. Directors and managers represent the directing mind or will of the company and
control what it does.

The state of mind of these managers is the state of mind of the company and is treated by law
as such. The practical effects of these rules are that the directors’ personal fault in the business
of the company becomes the “fault of the company”; their reason to believe is attributed to the
company and the intention to occupy a premise as expressed by their conduct is the intention
of the company.

b) Section 152 of the New Act governs the appointment of directors. Certain specific
requirements for appointment of director as laid down in the Companies Act, 2013 are-

• If there is no provision for appointment of Director in the Articles of Association, the

subscribers to the memorandum, i.e. the shareholders, who are individuals shall be
deemed to be the first directors of the company until the directors are duly appointed;
 • Director to be appointed in a general meeting. If it is so done, an explanatory statement
for such appointment, annexed to the notice for the general meeting, shall include a
statement that in the opinion of the Board, he fulfils the conditions specified in this Act
for such an appointment;
• The proposed Director has to furnish his DIN (Director Identification Number)
mandatorily. DIN is allotted by the Central Government on application by a person
intending to be the Director of a company. DIN can be obtained in pursuance of section
153 and 154;
• The proposed Director has to also furnish a declaration stating that he is not disqualified
to be a director.
• Furthermore, such appointment should be with his consent. Earlier such consent was
not mandatory for private companies. Consent implies that being appointed a director
and taking the charge of the office are two different things;
• Consent has to be filed with the Registrar of Companies within 30 days of appointment

The provisions for optional proportionate representation which was earlier mandated only for
public companies and the private companies which are subsidies of a public company, has now
been extended to all private companies also through section 163 of the Companies Act, 2013.
Also, the disqualifications for appointment and reappointment of directors have been made
applicable to the private companies. Therefore, prior to appointing a director, a company must
check the various disqualifications for appointment as director under Section 164 of the New
Act beforehand.