Professional Documents
Culture Documents
Corporate Law MBL
Corporate Law MBL
Corporate Law MBL
: III
Corporate Law Module Nos. : I - IX
CORPORATE LAW
TOPICS
6. Monopolies and Restrictive Trade Practices (Module No. VII) ................................. 280
Corporate Law
FORMATION OF A COMPANY
Materials Checked By :
1. Ms. Archana Kaul
2. Ms. Sudha Peri
Materials Edited By :
1. Prof. T.Devidas
2. Dr.P.C.Bedwa
Published By :
Distance Education Department
National Law School Of India University
Post Bag No: 7201
Nagarbhavi, Bangalore - 560 072
India
Printed By :
National Printing Press, Koramangala, Bangalore -95
TOPICS
7. Case Law............................................................................................................................. 60
8. Problems............................................................................................................................ 64
Flow Chart 1
Business Organisation
Individual Collective
Ownership or Proprietorship Ownership
Partnership Joint
at will Venture
Each of these business organisations are briefly described on the next page:
7
Flow Chart - 2
Types of Companies
1 2 3 4 5 6 7 8 9
on the on the on the on the on the on the on the on the on the
basis of basis of basis of basis of basis of basis of basis of basis of basis of
liability nature of size & inter-Company listing in functions nationality capital aims
incorporation shareholding relation Stock Exchange
The chart thereof shows that there are different ways of known as holding Company. A holding Company thus, may
categorising the Companies though the very identity on the basis have chain of subsidiaries, some of which are a direct subsidiary
of categories make the distribution of Companies clear but still of the holding Company and others are subsidiary to the
the Companies Act has defined some of the above categories of subsidiaries of the holding Company. All these Companies
Companies. As for example Sec 4 of the Company Act has together are known as Group Companies which essentially show
defined ‘holding’ and ‘subsidiary’ relationship. A Company is the group interest or group holding. Some of the definitions of
deemed to be a ‘subsidiary’ of another if the other controls the other types of Companies are given earlier under flow chart (1).
composition of its board of directors or holds more than 50% of Others will be explained at appropriate places.
the voting power of the Company or it is subsidiary to another
subsidiary of the other Company, then such other Company is
10
13
14
17
18
19
20
21
22
24
26
27
29
30
31
Amalgamation is the process of fusion of two or more companies The power of the CLB under S.18(4) to extend the period for
into one. If such a power is not given by the object clause Section filing its order with Registrar, only when it is alive. The power
394 gives jurisdiction to the court to sanction an amalgamation under section 19 arises when the order has become null and
or arrangement. [Marybong and Kyel Tea Estate Ltd. Re void on grounds of failure to file with the Registrar within the
(1977) 47 Comp. cas. 802]. stipulated period.
The first step to be taken for the alteration of the object clause Before the Companies Amendment Act, 1974, the application
or registered office clause is the passing of a special resolution for confirmation of the alteration had to be made to the court.
at a general meeting. Within 30 days of the passing of the special The jurisdiction was transferred to CLB by the Amendment Act,
resolution a copy of the same has to be filed with the Registrar 1974, to give effect to the recommendation of the Administrative
(s.192). The next step is to file a petition before the Company Reform Commission.
Law Board for confirmation of the alteration. Atleast one month Differences between the English Law and Indian Law:
before the filing of the petition a general notice about the The English Law on the topic is entirely different. Though the
amendment shall be given by publication in two newspapers, grounds for the alteration of the object clause were the same as
one in English and the other in the principal language of the in our Law, the Companies Act, 1948, dispensed with
District where the registered office of the company is situate. requirement of confirmation by the court to give effect to the
Individual notice of the petition shall be given to all the debenture alteration. On the other hand the English statute conferred a
holders and other creditors of the company. right to the dissenting minority to apply to the court for
The petition before the Company Law Board shall be cancellation of the alteration. The Companies Act, 1985 retained
accompanied with copies of the memorandum, articles, notice the same provision. But the Companies Act, 1989 effected
calling the meeting, special resolution, etc. Wide power is given radical changes as regards the amendment of the object clause.
to the Company Law Board either to confirm the alteration or Under the new provision (sec.4) ‘a company may by special
to reject it. Alteration may be confirmed either wholly or in resolution alter its memorandum with respect to the statement
part and on such terms and conditions as it may think fit.
32
33
35
We, the several persons whose names are subscribed, are desirous 3. E.F. of ------------------------ ,, 1
of being formed into a company in pursuance of this 4. G.H. of ----------------------- ,, 2
memorandum of association, and we respectively agree to take 5. I.J. of ------------------------- ,, 2
the number of shares in the capital of the company set opposite
our respective names. 6. K.L. of ------------------------ ,, 1
7. M.N. of ----------------------- ,, 1
Total shares taken 12
Date of the .........................day of ....................19
Witness to the above signatures
X.Y. of ...........................
36
37
38
39
40
41
42
43
Signature of Witness
Attestation ______________________________
I, hereby attest the Signature of the Transferors(s) herein Name and Address of Witness
mentioned ______________________________
______________________________
Signature ______________________________
Name ______________________________
Address/Seal ______________________________
* Please see overleaf for instructions PIN
subs. vide Notfn. No. GSR 480 (E) dated 22-4-88, (See Chartered Secretary issue May 1988, p 427).
Attestation, where required (thumb impressions, marks, signature difference, etc,) should be done by a Magistrate, Notary
Public or Special Executive Magistrate or a similar authority holding a Public Office and authorised to use the Seal of his office
or a member of a recognised Stock Exchange through whom the shares are introduced or a manager of the transferor’s bank.
Note: Names must be rubber stamped preferably in a straight line. Chronological order should be maintained. Broker’s Clearing
Number should be stated when delivery is given by a Clearing Member Bank.
44
2. _______________________________ 2. ____________________________
3. _______________________________ 3. ____________________________
___________________________________________________________________________________
Occupation Address Father’s/Husband’s Name
___________________________________________________________________________________
1
___________________________________________________________________________________
2
___________________________________________________________________________________
3
___________________________________________________________________________________
Transferee(s) existing Folio, Value of
if any, in same Order of Names Stamps affixed Rs.
Dated this .................... day of ................. ‘One Thousand Nine Hundred .......... Place ...............................
Specimen
Continuation of front page (herein enter the Distinctive numbers when the space on the front page is found to
be insufficient)
___________________________________________________________________________________
Distinctive From
____________________________________________________________________
Number To
___________________________________________________________________________________
Corresponding
Certificate Nos.
___________________________________________________________________________________
45
___________________________________________________________________________________
* To be filled only if the documents are lodged by a person other than the transferee.
46
47
50
52
53
54
56
59
60
62
63
65
[NOTE: Specify your name, ID No, and address while sending answer papers]
66
67
Coporate Law
68
Materials Checked by :
Ms. Archana Kaul, B.Sc., LL.M.
Materials Edited by :
Dr. P. C. Bedwa
Published by :
Distance Education Department
National Law School of India University
Post Bag No. 7201
Nagarbhavi, Bangalore - 560 072
69
Corporate Personality is the most ingenious invention in the Anglo-American Jurisprudence in the
sixteenth century. The large scale production system and the individualism required a legal vehicle.
Corporate personality met that demand. It is not that the corporate personality was not known in
earlier legal systems but no body earlier thought that such a device would be necessary to be the
vehicle of progress in industrial civilization. The corporate personality is unique in several senses.
As for example, it has a distinct personality separate from its shareholders, on which law confers
rights and impose duties; it has a perpetual life unlike a person in fact and in the absence of its
members it does not automatically die. In the Second World War all the shareholders of several
companies were killed. It was held in one such a case that the company was still alive and could
lawfully function. In this module we have discussed various special characters of a corporate body
and its functions.
In the I module you have understood as to how different type of companies can be floated,
registered and commence business. You have also understood the various documents that could
be required to incorporate such companies. Once these companies are incorporated the company
gets a distinct, separate, perpetual life. It can sue and can be sued in its own name. One very
important character of almost entire corporate sector (barring unlimited companies) is that the
liability of the members is limited. That does not mean that the liability of the company is limited.
Of course if the company has more liability than assets the company cannot continue any longer
and has to go in for winding up. The limited liability concept was invented in the middle of the
nineteenth century in Joint Stock Companies to give a phillip to rapid industrialisation and capitalism
at the centres of imperialism. Therefore companies formed with capitalists in England but having
business in India would ensure the shareholders profits but assured them that they would not
suffer any loss exceeding the capital that they have contributed. As a result common people started
buying shares and stocks of these companies. In this new form of legal personality the capitalism
carried out with glorious success until it found stiff resistance from trade cycles specially in the
nineteenth and twentieth centuries. It is interesting to note here adaptability of the judicial
system to the need of the corporate structure and economic growth. Judiciary served as a faithful
servant to the growth of capitalism, but it is also true that judiciary formed the basis of public
interest from which the theoretical format of welfare economics ultimately came into being. It is
therefore necessary for every student of Corporate Law to carefully examine the extent and
limitation of characters of corporate being.
N. L. MITRA
Course Coordinator
70
TOPICS
71
72
75
78
with the rapid development of market economy organisation persons, unless incorporated, leads to inevitable confusion and
structures are given an extra emphasis for the purpose of uncertainty concerning both the rights and liabilities of members
increasing operational efficiency. In order to facilitate transfer inter se, as also their relations with others. sec. 11(2) of the
of technology and technical know how different forms of Act, thus provides that no company, association or partnership
organisational structure of global operations, have been devised. consisting of more than twenty persons (10 in case of banking
Multinational and transnationals generally operate through business) shall be formed for the purpose of carrying on any
holding subsidiary relationships either in federal form or in a business that has for its objects the acquisition of gain for itself
confederal form. In MNC's self sufficient national units operate or for its members unless it is registered as a company under the
and constitute the central unit. In TNC's national units are not Companies Act, or is formed in pursuance of some other Indian
only self sufficient but operate independently on product lines, law. If it is not so registered it becomes an 'illegal association'.
but they have interdependence on global policy formulation. In This section does not apply to a Hindu unindividual family
the case of global and international companies the operation is [HUF] doing some business, and if a business is carried on by
principally done through either a country agent or a country two or more HUFs, in computing the number of members for
susbidiary which is entirely dependent on the policy dictates. the purposes of this section, minor members are excluded. Some
These mostly operate as clearing houses. of the consequences of forming an illegal association are:
(i) According to sec. 11(4), every member of such an
1.10 ILLEGAL ASSOCIATIONS association shall be personally liable for all liabilities
One of the basic objectives of the Companies Act is to eliminate incurred in the business, apart from imposition of fine which
the evils caused by large partnerships trading in unincorporated may extend to Rs.1000/-.
form. A business association consisting of a large number of
79
80
'Galbraith Circle' portrays the realities of a modern corporate unless there is a thorough study of the market and a proper
structure. The technocrats & the workers in various stages of planning by this techno-structure. Shareholder as a prominent
corporation are now permanent features of a company, much figure is now receding to the background. As he puts it
more so than the shareholders who have become mere suppliers graphically, capitalism remains and is galloping but the vanishing
of capital. In ascertaining whether in the matters of corporation figure is the capitalist himself.
the workers and management should have a say in addition to Peter Drucker made a brilliant study of the modern corporation
the say of the shareholders, the new structure of the modern in "The concept of the corporation". He says that, ‘the structure
corporation should always be borne in mind. An assessment of of the modern corporation has become "an essay in federalism"
the rights of the different ingredients constituting the corporation and on the whole an exceedingly successful one. It attempts to
would be defective unless this modern corporate structure is combine the greatest corporate unity with the greatest divisional
given due weightage. autonomy and responsibilities; and like every true federation it
The realities of modern corporation were reassessed by Adolf aims at realizing unity through local self-government and vice-
Berle in his book "The 20th Century Capitalist Revolution". versa. This is the result of the policy of decentralization which
He said that, the actualities of modern corporation demonstrate is the accepted pattern of modern large corporations. The
the gradual erosion of even directors' powers and the rise of the concept of decentralization of modern corporations has
power of what he termed as the techno-structure. In modern developed into a philosophy of industrial management and into
business, the board of directors are unable to take any decision a system of local self government. It is not a mere technique of
management but an outline of social order'.
81
82
83
84
85
By the Legislature (Cracking the corporate Shell) By the Judiciary (Lifting of the veil)
Determination of character For the benefit of revenue or Fraud or improper Agency or trust and Government
taxation purpose conduct companies
86
87
88
89
90
91
92
96
98
99
4.3 HISTORY OF THE ULTRA VIRES RULE The companies position was finally settled in 1875 in Ashbury
Railway Carriage & Iron Co. v. Riche [(1875) LR 7 HL 653]
In the words of Gower "The ultra vires rule has a long and and further reiterated and clarified in Attorney General v. Great
somewhat tangled history". Chartered corporations were Eastern Railway [(1874-80) All ER Rep Ext 1459]. In London
considered as possessing all the powers of a natural person to County Council v. Attorney General [(1902) AC 165] Lord
the extent an artificial entity was physically capable of exercising Hallsbury L. C. referring to the two above cases said: I think
them. If these powers were misused by exceeding the objects now it cannot be doubted that these two cases do constitute the
stated in the charter, a writ in the nature of 'Quo Warranto', could law upon the subject".
be taken, to restrain such action or proceeding, or in the nature
of 'Ciare Facias' could be taken to forfeit the charger, but the 4.4 EFFECT OF ULTRA VIRES TRANSACTIONS
actions were not null and void.
As can be easily foreseen, effects of ultra vires transactions are
By the English Companies Act of 1844, incorporation became usually grave, influencing the rights of both the company and
possible by registration under the Act and charters of also the third party to the contract. The flow chart given below
incorporation became infructuous. The constitution of such shows the various consequences of an ultra vires transaction at
companies still followed the existing practice of having a a glance.
document in the nature of a deed of settlement with no clear
exposition of the different objects of the company.
102
3] Repudiation of contract We have already discussed in detail the rights which a company
or shareholders have in case of ultra vires transactions, we have
So far this discussion has centred around the rights which the now to study the rights which the other party to the transaction
company & shareholders have against the responsible directors. has against those officers of the company responsible for entering
But the most fundamental right of the company in such cases, into the contract. These rights briefly are as follows:
from which the remaining rights flow is the right to 'repudiate
the contract'. The general rule is, that, an ultra vires contract is 1] Right to a tracing order
completely null and void and devoid of any legal effect. A very If the other party has advanced an ultra vires loan to a company,
interesting point to note in this regard is that, if the company then the party does not have a right to recover the money so
has executed its part of the ultra vires contract, courts by hook advanced because an ultra vires loan cannot create any liability
or by crook manage to ensure that the third party is bound by on the company. It would be unfair, on the other hand to deprive
the ultra vires contract. But, where the third party has executed the lender of the money so advanced. Therefore, the third party
his part of the contract, then alone does the rule of ultra vires has been given the right to follow his money and to recover it
transactions being completely void holds good in rem are made in specie from the possession of the company, provided the
available to the third party. For example, in Ahmad Sait v. money can be identified. This right is known as the 'right to a
Bank of Mysore [(1930) 59 M.L.J.R 28], though it was ultra tracing order'. This right was recognized & enforced under the
vires for the Bank of Mysore to advance money on mortgage, it common law, if the money could be identified as such or any
did do so. But still the Madras High Court held, that, the Bank asset of the company could be identified as having been
had the right to sue on the basis of the mortgage & thus to
103
104
105
107
109
110
111
112
116
118
[Note: Please specify your name, ID number and address while sending answer papers].
119
1. Avtar Singh, Company Law, 9th edn. 1986, Eastern Book Company, Lucknow.
2. Gower, L.B.C., Gower's Principles of Modern Company Law, 5th edn. 1992, Sweet & Maxwell Ltd., London.
3. Ivamy, E.R.H., Topham and Ivamy's Company Law, 1974, Eastern Law House Pvt. Ltd., Calcutta.
4. Ramaiya, A., Guide to the Companies Act, 8th edn. 1977, Wadhwa & Company, Nagpur.
5. Schimtthoff, C.M., & Thompson, J.H., Palmer's Company Law, 21st edn.1968, Stevens & Sons Ltd., London.
6. Sealy,L.S., Cases & Materials in Company Law, 1st edn.(rep): 1975, Cambridge University Press, Cambridge.
7. Sen, S.C., The New Frontiers of Company Law, 1971, Eastern Law House, Calcutta.
8. Sangal, P.S., National & Multinational Companies, some legal issues, 1st edn: 1981, N.M. Tripathi Pvt. Ltd., Bombay.
120
Corporate Law
Corporate Management
121
Published By:
Distance Education Department
National Law School of India University,
Post Bag No: 7201
Nagarbhavi, Bangalore, 560 072.
122
123
TOPICS
124
125
1.2 LEGAL DEVICES OF CONTROL With regard to the second, the position may be clearly understood
As seen in the above flow chart there are three forms of control in the light of Lord Greene M. R.’s observation in re Smith and
which rest on a legal base, and revolve about the right to vote a Fawcett Ltd [(1942) Ch 304]. Here, a clause in the Articles of
majority of the voting stock. We will now take up each one of a private company provided: “The directors may at any time in
these devices in detail. their absolute and uncontrolled direction refuse to register any
transfer of shares”. The issued capital of the company consisted
A] Control through almost complete ownership of 8,002 shares of which the two directors of the company S &
This type of control is found in what may properly be called the F held 4,001 shares each. F died and his son applied to have the
‘private corporation’ or ‘one man companies’ where a small shares registered in his name. But S, in the exercise of the above
group of persons or a single individual own all or practically all power, refused to consent to the registration. He however,
the outstanding stock. They are in a position of control, not offered to accept the applicant upto 2,001 shares, provided the
only because they have the legal powers of ownership, but also remaining were sold to him at a fixed price. The plaintiff brought
because they are in a position to make use of them and, in an action contending that S’s refusal to register was on a wrong
particular being in a position to elect and dominate the principle since it was not made for the benefit of the company
management. In such an enterprise ownership and management/ but was rather to preserve his own dominating position. It was
control is combined in the same hands. held that `Private companies are (no doubt)in law separate entires
Since the 19th century, such companies have been the centre of just as much as are public companies, but from the business and
large scale controversy, usually based on two aspects, viz., (1) personal point of view they are much more analogous to
whether the one man company had an existence apart from the partnerships than to public corporations ....... The directors must
individual controlling it, and (2) whether, in case of private exercise their discretion bonafide in what they consider - not
corporations unchecked power and control could be vested in what court may consider - is in the interest of the company. An
the hands of a few individuals. if they have done that the court cannot substitute its judgment
In response to the first, way back in 1936, in T R Pratt for theirs”.
(Bombay) Ltd v. E D Sasson & Co Ltd [AIR 1936 Bom 62],
B] Majority control
Kania, J., observed that “under the law, an incorporated company
is a distinct entity, and although all the shares may be practically The first step in the separation of ownership and control is that
controlled by one person, in law a company is a distinct entity of ‘majority control’, and it involves ownership of a majority of
and it is not permissible or relevant to enquire whether the the outstanding stock by a single/small group of individual(s),
directors belonged to the same family or whether it is, as gives virtually all the legal powers of control which would be
compendiously described as a ‘one-man company’”. A similar held by a sole owner of the enterprise and in particular the power
observation was made much erlier, by the House of Lords in to select the board of directors. But, in medium - large
Salomon v. Salomon & Co Ltd [(1897) AC 22]. Thus such corporations where there is a larger dispersion of stock, the
companies exist with the encouragement of both the legislature control of the corporation vests in the hands of the person(s)
and the judiciary and “the great majority of them are as bonafide holding the majority stock. This concentration of control in the
and genuine as in a business sense they are convenient and hands of the majority, in effect means that the minority have
suitable media for provision and application of capital to lost most of their powers of control of the enterprise of which
industry” [Avtar Singh, p.6].
126
127
128
129
131
COMMUNICATION SYSTEM
from the above figures one can understand the input and output corporations` which came to be known as giants of modern days.
analysis of the management system which comprises a According to him these giant corporations are composed of
transformation process through various stages. The concerned ‘series of concentric circles`. Galbraith’s description of these
inputs necessary for a determined output of product services, giants in a series of concentric circles is a unique reading.
profits and others are: 1. Human Resources, 2. Capital, 3. According to him:
Management, and 4. Technology. The transformation process “It is more useful to think of the mature corporation as a series
involves planning, organising, staffing, leading and controlling. of concentric circles. The band within each pair of circles
Each of these stages have multiple functions. Management, as represents a group of participants with a different motivational
has been already indicated, is a total concept of organic system. In the more spacious bands at the outer reaches are the
functioning by a team to achieve a determined goal. most numerous groups. Such in general is their motivational
system that they are the most loosely attached. At the centre is
2.2 STRUCTURE OF CORPORATE MANAGEMENT what is now called the top management. There is the finest
Prof. Galbraith divided corporations into two groups for the attachment. Between are the others. With this image in mind
purpose of study of corporate structures, Firstly, ‘entrepreneurial the motivational system of the various participants in the
corporations` which maintained the same classical structure and corporation can be much more intelligently considered.
did not change over the years, and secondly, ‘mature In the outermost circle in the mature corporation are the ordinary
132
SHAREHOLDERS
MANAGING DIRECTOR
133
SHAREHOLDERS
PRESIDENT
line-charge as the top executive in each division. In a number consisting several people. As a result the Standard Oil
of companies Vice-President belongs to the Board as full Company has the chief executive consisting of a fourteen-
member from the professional management. But Vice-Presidents men Board of Directors composed entirely of full-time
may be invitees to the Board as well. officials of the Company. General Electric has a Chief
Executive team composed of President, and a number of
2.3 EVOLUTION OF CORPORATE MANAGEMENT Deputies and Vice-Presidents engaged in policy formulation
and execution. Many other U.S. Companies like Dupont,
Corporate Management has undergone a sea change in so far as
New Haven Railroad, Union Carbide etc., have such type
structures, functions and responsibilities are concerned in the
of management structure. The chief feature of this pattern
last hundred years. Management has become an important area
of management is that full time members of the Board
of study and research. Managers started analysing issues related
dominate the policy making.
to their management functions from a multi-disciplinary point
of view. Management systems started adapting several ways of ii) Professionalization has gone down to the basics of
analysis, specially from various behavioural perspectives. management. No Board can take a decision on anything,
Emergence of industrial psychology, sociology and economics far more in the complex area of marketing, finance and
led management as a leading behavioural science. Let us see policy execution unless there are thorough research reports
some of the noticeable changes in the corporate management in placed before them by some professionals. Professionalism
the recent times. is both inside and outside. Professionals dominate in the
Board and Board takes decisions only on professional
i) It is now established that the “chief executive job in every
reports.
business (except perhaps the very smallest) cannot properly
be organized as the job of one man. It must be the job of a iii) Committee functioning has become another structure
team of several men acting together” (Drucker, p.168). As adjustment in the present day management. According to
a result most successful companies have chief executives Drucker “members of the chief executive team who are
charged with responsibility for company objectives must
134
SHAREHOLDERS
BOARD OF DIRECTORS
PRESIDENT
WORKS MANAGER
MANUFACTURING
ADV. COMMITTEE
Each Committee is under the charge of an executive Vice- on investment; (d) incapacity of the shareholders to manage
Chairman/Director. Though the modern tendency is for a affairs; (e) difficulty in organising the dispersed shareholders;
functional and professional Board, Drucker suggested that “The (f) minimum alternative, and many other reasons. Corporate
Board must be detached from operations. It must view the democracy is not only impossible to achieve, it is not desirable
Company as a whole. This means that working executives of too as per the running philosophy of corporations. That is why,
the Company should not dominate in the Board” (Drucker, merger and take-overs are put as an enemy of the company and
p.180). not simply of the existing management. No chief executive will
In several senses corporate democracy has been proved to be a like an active brand of shareholders.
myth. In corporate management the proof has been beyond
doubt. Though directors were elected by the shareholders from 2.4 POSITION OF DIRECTORS
amongst themselves initially before five decades, at present a
Gower has very rightly observed that a company “remains an
director need not be a member of the Company. According to
artificial person; its policy can be formulated and decided upon
Drucker “the Board will be stronger and more effective if it is
genuinely an ‘outside` Board...” (Drucker, 180). The only by individual human beings, and can be put into effect
constitution of the Board has now become the task of the Chief and carried out only by human agencies.” Since the Board of
Executives. Drucker has rightly pointed out the responsibility Directors formulates the policy and gives effect to the same
of constituting a really detached and independent Board to and since all the assets or properties are put in the hands of the
evaluate the functions of the Chief Executive, as the task of the Board of Directors, there is often a confusion about the legal
function of the Chief Executive. He said “it is one of the most status of the Board of Directors of a company. Directors are
important things the chief executive team can do, and one of the described by judges as managing partners, agents or trustees.
major conditions for its own success is discharging its job.” As for example, Selborne L.C. held in G.E.RLy Co. v. Turner
Unfortunately at present, the Chief Executive in any Company, [(1872) L.R. 8 Ch. app 149] that “The Directors are the mere
is indulging in appointing only psychophant directors (a critique trustees or agents of the Company - trustees of the Company’s
termed them as ‘Ji Hoojoor` directors). money and property; agents in the transactions which they enter
Corporate democracy is impossible to function due to (a) wide into on behalf of the Company.” Master of the Rolls Jessel
disposal of shareholders and sharedholdings; (b) shareholders’ observed in Re. Forest of Dean Coal Co. [(1878) 10 Ch.D.
disinterest to perform ownership functions, (c) blind faith on 450] that “...they are commercial men managing a trading
some industrial management houses and satisfaction on ‘return` concern for the benefit of themselves and of all the shareholders
135
136
137
138
139
140
142
143
144
145
146
148
149
It has already had explained that the company being a sui juris The powers of the board have been grouped under three heads
requires a person in fact to represent it in dishcarging all its in Ramaiya as follows:
powers and functions. The persons composing the board of 1) Powers exercisable at the meetings of the board
directors are those who exercise various powers both general Besides the five powers mentioned above in (a) to (e) the
and specific for and on behalf of the company. Therefore it is following are other such powers:
necessary to understand general powers and specific powers of
the board and the limitations to such powers. All powers of the a) filing the casual vacancies in the board [Sec. 262];
company are devided into two groups. Some statutory powers b) appointing as Managing Director or the Manager a person
forming a group are reposed in AGM. All other functional who is holding such position in another company [Sec. 316
powers are vested in board of director. These powers are & 386];
generally known as general powers of the board. Some times c) consenting to a contract of the company with any director
on account of specific statutory provision or due to certain or his relative or parties [Sec. 297]; and
stipulations in the memorandum and Articles of association some d) investing in shares or debentures of a company under the
special power is required to be discharged by the board. same management.
General Powers of the board 2) Powers exercisable only with the consent of the company
According to Sec. 291 all powers of a company which the in general meeting
company is authorised and can do are vested in the board of a) power to sell, lease or otherwise dispose off the whole or
directors excepting : part of the undertaking of the company [Sec. 293(1)(a)];
(a) powers specifically provided by the Act for the AGM, (b) b) power to remit debt due by a director [Sec. 293(1)(b)];
power particularly conferred by memorandum and Articles
c) power to borrow in excess of capital and reserves [Sec.
of association on the company in general meeting; (c)
293(1)(d);
powers specifically determined by regulation passed by the
150
151
152
153
155
156
157
158
159
Investigations
160
161
162
163
166
[Note: Please specify your name, address and ID No. while sending in your answers]
167
168
Corporate Law
169
Materials Checked by :
Dr. P. C. Bedwa
Ms. Archana Kaul
Materials Edited by :
Mr. V. S. Mallar
Mr. T. Devidas
Published by :
Distance Education Department
National Law School of India University
Post Bag No. 7201
Nagarbhavi, Bangalore - 560 072
170
N. L. MITRA
Course Co-ordinator
171
TOPICS
172
General
Meeting
BOARD Governmental
Capital Market
Regulation
Regulation
Marketing Company
Management Auditor
Middle
Management
Therefore it is quite evident that policies are laid down in company and see only between the company and outsider
meetings in the form of resolutions. The chief executive prepares including the governmental agencies. This module therefore
instructions for the execution of the policies and the secretariat incorporates various types of meetings of different organism of
ensures that the company adheres to the governmental rules, the company, different types of resolutions and the business
regulations, guidelines and orders. Therefore the secretariat transacted in various systems of resolutions and various types
has two types of functioning, namely, co-ordinates the internal of reports that are considered in the meetings of various organis
information system between various functionaries of the and submitted to various authorities.
173
175
179
180
Statutory
Meeting
Convened Requisition
S. 165
by CLB Meeting
S. 186 S. 169
Share
holders'
Other Meeting
Preference
Class
Shareholders'
Meetings
Meeting
Debenture
Creditors'
Holders'
Company Meeting
Meeting
Secretary
Employer- Committee
Workers' Meetings
Meeting Board of
Director's
Meetings
NOTE: An important point to be remembered is that though all these various kinds of meetings are called under the statute [i.e.,
Companies Act] it is only one meeting which is called as 'statutory meeting' as such. The remaining kinds of meetings are called
by different names. We will now discuss each of these meetings in detail.
Shareholders Meetings directors should send to every member a detailed report known
1) Statutory Meeting as statutory report” atleast 21 days before the day of the meeting.
This report must be certified by atleast two directors one of
Section 165(1) states that, every company limited by shares, them being the managing director and the auditors, for purpose
and every company limited by guarantee and having a share of verifying that the contents of the report are true to their best
capital, shall, within a period of not less than one month and not knowledge.
more than six months from the date at which the company is
entitled to commence business, hold a general meeting of the A copy of this report is also to be sent to the Registrar, and a
meeting of the members of the company, which shall be called default in filing of the report or holding of the meeting makes
"the statutory meeting". the company and the responsible person(s) liable to a fine which
may extend to Rs.500/- (sections 165(9)]. A delay in sending
For this meeting to be fruitful, the shareholders or members the report to the shareholders can however be condoned by the
should have all the relevant information relating to the company unanimous vote of all members present and voting.
on hand. For this purpose, section 165(2) provides that, the
181
There are two provisions to this sub-section, the first saying Need for an Annual General Meeting
that, if the first annual general meeting (or AGM) is held within An AGM is an important institution provided by the Act for the
18 months of incorporation it shall not be necessary for the protection of the shareholders rights. The present day companies
company to hold any other AGM in the year of incorporation or as seen in an earlier module, represent a sharp division between
the next year. Thus, for example, a company is incorporated in ownership and control. The shareholders being the capital
May 1994. If its first AGM is held within 18 months i.e., say in investors have an interest in knowing that the persons in whom
September 1995 then no other general meeting will be necessary they have vested the management and control of the company
either for 1994 or 1995. The second proviso, says that in special are not misusing their authority or mismanaging the funds. An
circumstances the Registrar may extend the time for an AGM AGM gives the shareholders a place and opportunity to review
to be held by 3 months provided it is not the first AGM. the working of the 'management' and the 'company'. It is also
Two consequences follow the failure of not holding an AGM. the place where some directors retire and others are elected in
Firstly, the CLB can order the holding of an AGM on an their place. Theoretically atleast this is one means by which a
application made to it by any member under Section 167 of the shareholder can exercise effective control i.e., by refusing to
Act. While making such an order the CLB can pass any other re-elect a unsatisfactory director. So also the company auditors
consequential or ancillary order or directions, in relation to the retire at this meeting and the question of their reappointment or
calling/conduct of the meeting. A meeting called in accordance replacement decided upon. The company declares its dividends
with the CLB directives will be deemed to be an AGM [section in the AGM. The Chairman of the company delivers a speech
167(2)]. This power to call an AGM vests exclusively in the on the occassion listing the achievements made and setbacks
CLB and the Court cannot exercise it even under its inherent suffered by the company in that year. The accounts of the
powers. company are put before the shareholders for their information
and scrutiny and the shareholders can ask any question in relation
Secondly, failure to call this meeting either in the regular course to such accounts. All in all, an annual general meeting is an
or in pursuance to the CBL directives, would make the company occassion where the investors of capital (i.e., the shareholders,
and every officer responsible for the default liable to a penalty and the managers of the capital (i.e., the directors and other
under section 168, which may extend to Rs.5000/- and in case officers) meet on neutral ground to review the working of the
the default continues then Rs.250/- per day for every day of company during the year and to form broad plans for the working
default. The facts of Sree Meenakshi Mills Co. Ltd. v. Asst. of the company in the next year. Since it provides a means by
Registrar of Joint Stock Companies [AIR 1938 Mad 640] which the arbitrary working of the management can be effectively
provide a good illustration on this point. Here, the company kept in check, the compulsion to hold the AGM once a year
called one general meeting in December 1934, which was cannot be done away with.
adjourned to March 1935 and then held. The next AGM was
182
185
The notice should be clear in its language, so that the reader is 3. To elect as Director:
left in no doubts as to its meaning. The language should be (i) Mr.A.R.Rao, one of the Directors, who retires by rotation under Article
simple, to the point, and unambiguous leading to a clear 44 of the Articles of Association of the Company and is eligible for re-
election, will be 68 years at his next birthday on October 1994, and a
understanding.
resolution that the age limit prescribed in Article 69 of the Company
g) Agenda shall not apply to him is necessary.
Special notice of the following resolution for exempting him from the
A notice which does not give the purpose of the meeting is not age-limit is hereby given:
very valid. Every meeting is held for a definite agenda and a
"RESOLVED that Mr.A.R.Rao who has completed 67 years of age be
notice convening the meeting should also give the receiver a and is hereby re-elected a Director and that the age-limit prescribed under
186
187
189
191
192
193
194
195
196
199
200
STATUTORY REPORT
(Pursuant to Section 165)
Called up per
of each share
Particulars
of Shares
19-12-60
Number
share
201
Rs. Rs.
202
Shares:
4,50,000 Equity Shares of Rs. 100 each of
which Rs. 75 per share called up 3,37,50,000
Less: Allotment monies in arrears Rs. 93,000
Unpaid Call (1st Call of
Rs. 25 per share is
made and is payable
on or before 31-12-60) Rs.78,30,500 79,23,500 2,58,26,500.00
Application Money Refundable 24,15,59,725.00
Other Receipts:
Interest on Short Term Deposits 12,99,501.96
Miscellaneous receipts 1,638.48 13,01,140.44
Amount Received and payable to Messrs.
Kilachand Devchand and Company
Private Ltd. 73,481.28
203
204
Particulars of
changes, if any, in
entries in columns
Sr. Names Address Occupation (1), (2) & (3) since Date of the
No. the date of change
in corporation
1 2 3 4 5
B. AUDITORS
Sl. Name Address Description Particulars of Date of the
No. changes, if any change
D. MANAGER
Nil Nil Nil Nil Nil
E. SECRETARY
205
7. The arrears if any due on calls from Directors, Managing Agents, Secretaries &
Treasurers and Manager Nil
}
RAMDAS KILACHAND
B. K. DAPHTARY Directors
K. M. PREMCHAND
Bombay, Dated this 23rd day of December 1960.
We hereby certify as correct so much of the Report as relates to the Shares allotted by the Company and to the cash received in respect of such
shares and to the receipts and payments.
DALAL & SHAH
NANUBAI & CO.
Chartered Accountants
Auditors
b) Annual Report
5) Shareholder to move, and second -
This is the report which is presented at every annual general That Mr.Y.L.Reddy, having expressed his willingness to
meeting held in pursuance of section 166 of the Act, wherein, continue as director for another term, be reelected as director
the board lay before the company, a balance sheet, and profit for a period of 3 years, on the same terms and conditions of
and loss account for a period beginning the day following the service as before".
previous AGM and ending not more than 6 months prior to the
6) Shareholders to move, and second -
present meeting; boards' report; auditors' report; Chairman's
speech etc. Given below is a specimen of the Agenda of an "That Kichha and Co. Ltd. having expressed their
AGM of a company. willingness to continue as auditors, be reappointed as
auditors for the company for the year 1994-95, on the same
AGENDA
terms and conditions as before."
1) Secretary to read the notice convening the meeting.
7) Vote of thanks -
2) Secretary to read auditor's report.
To have a better understanding of the proceedings let us
3) Ask the meeting whether the director's report, and accounts have a look at how the 'minutes' of this particular meeting
as printed and submitted shall be taken as read. would appear.
4) Chairman's speech, after which he will -
Minutes of the Above Agenda
i) move that the report and accounts as audited and
certified by the company's auditors, and placed before The Annual General Meeting of the Synthetics and Chemicals
the meeting, showing the position of the affairs of the (India) Ltd., was held on 30th May, 1994 at 3.00p.m. at Resham
company as on 30th March, 1994 be approved, Bhavan Hall, 78, Veer Nariman Road, Bombay-400 001
adopted, and (Registered Office).
ii) Call on Ms.Padma Bhushan to second the motion. Present
iii) Invite discussions. Shri. A.S.Menon in the Chair
v) Reply to questions, put the motion to vote and declare Ms.Padma Bhushan
the results.
Mr.Y.L.Reddy Directors
206
207
208
We hereby agree and declare that the information supplied in We now have the pleasure to offer the shares of this Company
the application, including the attachment sheets, is complete and to you out of the preferential offer by private placement on the
true. terms set out in the enclosed application form. If you are
interested in availing of this offer, please return the enclosed
And we further agree that we will notify Securities and Exchange application from duly filled and signed alongwith the remittance
Board of India and Reserve Bank of India immediately any in the manner indicated in the form to the registered office of
change in the information provided in the application. the Company. Allotment of shares however, will be at the
We further agree that we shall comply with, and be bound by discretion of the Board of Directors of the Company.
the Guidelines relating to Foreign Institutional Investors, as Unsubscribed portion out of this private preferential offer, if
announced by the Government of India, and such other any, will be subscribed by..........kindly note that the shares so
guidelines/instructions which may be announced by the allotted shall be subject to the guidelines and clarifications
Government/Securities and Exchange Board of India/Reserve issued thereof from time to time by the Securities and Exchange
Bank of India from time to time. Board of India (SEBI), including, in particular, as to the lock-
We further agree that as a condition of registration, we shall in period. Please also note that this offer is meant for your
abide by such operational instructions/directives as may be acceptance only and it cannot be renounced by you in favour of
issued by Securities and Exchange Board of India/Reserve Bank
of India from time to time.
209
210
213
214
217
219
Corporate Law
Corporate Investment
&
Investors' Protection
220
Published By:
Distance Education Department
National Law School of India University,
Post Bag No: 7201
Nagarbhavi, Bangalore, 560 072.
221
If you open your Companies Act, you will find that Chapter III and Chapter IV of the Act provide the substantive and procedural
laws relating to the subject under study. You have to appropriately take note of various Company Rules and other related regula-
tions in order to understand the subject in its entire operation. The Capital Issue Controller used to oversee the whole operation
before 1992. Presently the Security Exchange Board of India is incharge of regulating the whole capital market. You know that
a company has to raise its share and loan capital from the primary market i.e. the public at large. But public limited companies
require avenue for facilitating quick and easy transfer of shares and other securities. For this purpose the secondary share markets
known as Stock Exchanges came into operation. You have to understand how this share market operates. In order to appreciate
the regulatory system of the country you have to understand organisation and functions of the Security Exchange Board of India
(SEBI) which oversees the functioning of the Stock Exchanges.
Once you have the above goals of learning the subject you may ask yourself the questions raised there at the end of each sub-
topics and can make a self evaluation.
Since this is a vast area, the reading material exceeds 100 pages. I hope. you will find the study material very informative. You
have to supplement with the recent developments in the corporate sector which you will find in journals and new papers every
day.
N.L. Mitra
Course Co-ordinator
222
TOPICS
223
224
225
227
230
231
232
Clause ‘M’ — This clause has nothing to do with the rights Shares could be issued either at its nominal value, or at a
issue. premium or at a discount. While shares are commonly issued
at its nominal value, companies with a good performance and
Clause ‘N’ — This clause does not apply to the rights issue of
equity shares.
235
236
237
238
239
243
244
245
246
248
249
251
253
254
255
256
257
258
259
260
263
266
267
268
269
271
274
275
276
277
279
Corporate Law
280
Published by:
Distance Education Department
National Law School of India University,
Post Bag No: 7201
Nagarbhavi, Bangalore, 560 072.
281
MRTP Act has given new dimension to the economic legislation of the post-Independent era.
This enactment imbibes social and economic philosophy enshrined in the Directive Principles
of State Policy contained in the Indian Constitution, which lays down that the state shall
strive to promote the welfare of the people by securing and protecting as effectively as it may,
a social order in which justice - social, economic and political, shall inform are the institutions
of the national life, and the state shall, in particular, direct the policy towards ensuring that
the ownership and control of the material resources of the community are so distributed as
best to subserve the common good and that the operation of the economic system does not
result in the concentration of wealth and means of production to the common detriment. The
state policy has to ensure economic and industrial growth consistently with reduction in
concentration of wealth and economic power. While the growth factor has to be taken care of
by the state, the MRTP Act is designed to take care of the second important aspects of economic
growth, namely, the benefits of growth should belong to the public at large and not merely to
a handful of industrial houses. The three declared objectives of the MRTP Act. 1969 as
envisaged are - (1) that the operation of the economic system does not result in the concentration
of economic power to the common detriment. (2) for the control of monopolies, and (3) for
the prohibition of monopolies and respective trade practices and for the matters connected
therewith or incidental thereto. The Act has been amended number of times keeping in view
the need of the society and after the amendment of 1991 the following objects are intended to
be achieved:
In this module you are required to study the law as it works and how the MRTP Commission
and the judiciary reacts towards achieving the goals set by the Constitution in the light of the
above objectives. It would be helpful if you could read a good commentary on the Act so that
you can have a good analytical basis of the Act as it originally was and as it is now and the
effect cause and of the repealed provisions of the Act, as also the importance of the MRTP
Act in the light of liberalization and globalization.
N. L. MITRA
Course Coordinator
282
TOPICS
283
284
285
287
288
Sec. 66 of the Act empowers the Commission to make Orders may be conditional, particular or general
regulations for the efficient conduct of its functions under the Sec. 13(1) empowers the Commission to provide in the order
Act. Regulation making power may relate to matters relating - made by it under the provisions of the Act that it may stipulate
a) the conditions of service, as approved by the Central such condition, which are not inconsistent with the provisions
Government, of persons appointed by the Commission; of the Act, as it may deem necessary, for the proper execution
b) the issue of the process to the Government and to other of the order. The Commission should however, make such
persons and the manner in which they may be served; stipulation or provision consistent with observance of natural
justice. The failure to comply with the obligations or stipulations
c) the manner in which the special Sec. of the register kept by
imposed on any person by the Commission shall be deemed to
the Director General under Sec. 36 shall be maintained and
be guilty of an offence under the Act punishable with
the particulars to be entered or filled therein;
imprisonment for a term which may extend to three years, or
d) deleted by the Amendment Act of 1984; with fine which may extend to 50,000/- rupees, or with both,
e) the payment of costs of any proceedings before the and where the offence is continuing one, with a further fine which
Commission by the parties concerned and the general may extend to 5,000/- rupees for every day, after the first day,
procedure and conduct of the business of the Commission; during which such contravention continues [S 50 (1)].
and The Commission’s orders may be general in its application or
f) any other matters for which regulations are required to be may be limited to any particular class of traders or a particular
or may be, made under the Act. class of trade practice or a particular trade practice or a particular
Under Sec. 66(3) the Central Government shall cause every locality. Thus under this provision an order of the Commission
regulation made under this Sec. to be laid, as soon as may be may prima facie appear to be discriminatory but is within its
after it is made, before each house of Parliament, while it is in statutory powers and such orders would not be discriminatory
session, for a total period of thirty days which may be comprised of the order be in personam [Mitra p 152; S 13 (3)].
in one session or in two or more successive sessions, and if Amendment or Revocation of Orders
before the expiry of session immediately following the session
or the successive sessions aforesaid, both houses agree in making The Commission is empowered u/s.13 (2) to amend or vary any
any modification in the regulation, or both houses agree that the order made by it in the same manner in which it was made. This
regulation should not be made, the regulation shall thereafter includes the scope for the Commission to make suo motu
have effect only in such modified form or be of no effect, as the amendment or variation or revocation of such an order already
case may be; so however, that any such modification or passed by it. Such amendment or revocation etc. may also be
annulment shall be without prejudice to the validity of anything ordered by the Commission on an application made u/s. 13 (2)
previously done under that regulation. of the Act read with Regulation 78 and the provisions of Sec.
290
291
293
294
296
297
298
300
301
302
304
305
306
307
311
313
314
[Note: Please specify your name, ID number and address while sending answer papers].
315
316
Corporate Law
317
Materials Checked By :
1. Prof. V. Vijayakumar
2. Prof. T. Devidas
3. Mr. S. Dasgupta
Published By
Distance Education Department
National Law School of India University,
Post Bag No: 7201
Nagarbhavi, Bangalore, 560 072.
318
TOPICS
320
321
1.8 PREPARATION OF ANNUAL ACCOUNTS For the purpose of presenting the Annual Accounts to the
shareholders, the Board of Directors shall place before them
The Annual Accounts are to be prepared to indicate the profit every year at the Annual General Meeting the Balance Sheet
and loss of the company in the form specified in Annexure- I and Profit and Loss Account. In the case of a company not
(which relates to Part II of Sch. VI of the Companies Act, 1956). carrying on business for profit, an Income and Expenditure
This Profit and Loss Account is prepared in two parts. The Account shall instead be laid before the company.
first part is known as the Trading Account and the latter, the
Profit and Loss Account. Of course a Manufacturing Account It is the task of the Directors to get the Balance Sheet and Profit
is also prepared. In the Trading Account all direct expenses and and Loss Account prepared and presented to the shareholders
direct receipts are posted to show gross profit. All other revenue along with the report of the Auditors. But these accounts have
expenses stand reflected in the Profit and Loss Account and a to be considered by the shareholders and approved by them
transfer posting is made of the gross profit as well. That shows before they can be deemed final. A dividend recommended by
the net profit. The Profit and Loss Account shall give a true the Board becomes final, and a debt thereon due, only after the
and fair view of the profit or loss of the company for the period approval by the shareholders.
in view. The Profit and Loss Account should be annexed to the Balance
The balance of all assets and liabilities of the company are then Sheet and the Auditor's Report attached thereto. The difference
placed in the Balance Sheet which shall give a true and fair lies in the fact that the Auditor needs to examine and report on
view of the state of affairs of the company at the end of the every document annexed to the Balance Sheet.
period of report. (refer to sec. 211 of the Companies Act, 1956). The Balance Sheet can be prepared either in the Horizontal form
The Balance Sheet is to be prepared in the form given in or the Vertical form. The Balance Sheet and Profit and Loss
Annexure- II (which relates to Part I of Sch. VI of the Companies Account should give comparative figures for each head of
Act, 1956) account for the previous year also. The Balance Sheet is always
Every Balance Sheet and every Profit and Loss Account of the prepared as on a particular day whereas the Profit and Loss
company shall be signed for the Board of Directors of the Account is prepared for a period or year ending on that date.
company by its Manager or Secretary, if any, and by not less All the disclosure requirements of Schedule VI should be strictly
than two Directors of the company, one of whom shall be the followed as this information is mandatorily to be given.
Managing Director, if any. The Balance Sheet and Profit and In case the information required to be given in the Balance Sheet
Loss Account shall be approved by the Board of Directors before cannot be conveniently included in the Balance Sheet it can be
they are signed. (refer to sec. 215 of the Companies Act, 1956) furnished in a separate schedule to be annexed to and forming
part of the Balance Sheet.
1.9 RIGHT OF MEMBERS TO THE ANNUAL The Profit and Loss Account should be clearly made out to
ACCOUNTS disclose the result of the working of the company during that
Every Member is entitled to be given a copy of Balance Sheet, period. It should disclose every material feature and also
Profit and Loss Account and all documents required to be exceptional items. The various items of revenue and expenditure
annexed or attached to the Balance Sheet and the same should should be arranged under the most convenient heads. Unlike
be sent to him at least 21 days before the Annual General the Balance Sheet the format of the Profit and Loss Account
Meeting. (refer to sec. 219 of the Companies Act, 1956) has not been stated in Part II of Schedule VI which only states
the information to be disclosed. Information required to be
In the case of a listed company, an abridged version of the
disclosed can also be given by way of a note attached thereto.
account in Form 23B which contains the salient features may
be sent to the members. Even though such an exemption is The Act also provides that in case companies do not disclose
granted, a member can ask for and should be provided with a information as required by Schedule VI due to any exemption
full set of accounts in case he so demands. granted by the government or are exempted from
disclosure of certain information due to any special Act they
Since the documents of a public company are open to inspection
come under, the Balance Sheet shall nevertheless be deemed to
by the members of the public, a copy of the Balance Sheet and
be true and fair. What is true and fair has not been fully defined
Profit and Loss Account, the Auditors’ Report, and the Directors’
in the Act except negatively. The Auditor is also called upon to
Report need to be filed in the office of the Registrar
report on the true and fair views of the accounts. So we could
323
324
326
327
Liabilities Assets
328
Liabilities Assets
*Additions and deduc- (1) Capital Reserves — Showing nature of investments and mode *Aggregate amount of
tions since last (2) Capital Redemption Reserve. of valuation, for example, cost or market company’s quoted
balance-sheet to be (3) Share Premium Account (cc). value and distinguishing between — investments and also
shown, under each of (4) Other Reserves specifying the the market value
the specified heads. nature of each reserve and the thereof shall be shown.
amount in respect thereof.
Aggregate amount of
company’s unquoted
investments shall
also be shown.
The word “fund” in Less : Debit balance in Profit & *(1) Investments in Government or Trust
relation to any “Reserve” Loss Account (if any) (h). Securities.
should be used only where (5) Surplus, i.e., balance in *(2) Investments in shares, debentures
such Reserve is specifi- Profit & Loss Account after or bonds showing separately shares,
cally represented by providing for proposed alloca- fully paid-up and partly paid up and
earmarked investments. tions, namely : also distinguishing the different
classes of shares and showing also in
Dividend, Bonus or Reserves. similar details investments in shares,
(6) Proposed additions to debentures or bonds of subsidiary
Reserves. companies.
(7) Sinking Funds. *(3) Immovable proparties.
Loans from Directors, the
Managing Agents, Secretaries
and Treasurers. Manager should
be shown separately.
330
The nature of the security to SECURED LOANS : CURRENT ASSETS, LOANS AND ADVANCES :
be specified in each case.
*(1) Debentures (A) Current Assets. Mode of valuation of
Where loans have been guaran- *(2) Loans and Advances from (1) Interest accrued on Investments stock shall be stated
teed by Managing Agents, Banks and the amount in
Secretaries and Treasurers, *(3) Loans and Advances from (2) Stores and Spare Parts respect of raw
Managers and/or Directors, a subsidiaries (3) Loose Tools materials shall also
mention thereof shall also be *(4) Other Loans and Advances (4) Stock-in-trade be stated separately
made and also the aggregate (5) Works in Progress where practicable.
amount of such laons under (6) Sundry Debtors
each head. Terms of redemption (a) Debts outstanding for a period ** Mode of valuation
or conversion (if any) of exceeding six months. of works-in-progress
debentures issued to be stated (b) Other debts shall be stated.
together with earliest date
redemption or of conversion Less : Provision In regard to Sundry
(7-A) Cash balance on hand Debtor particulars to
(7-B) Bank balnces — be given separately of
(a) with Scheduled Banks and (a) debts considered
(b) with others good and in respect of
which the company is
(G.S.R. No.78, dated 4-1-1963) fully secured ; and (b)
331
Out
Loans from Directors, the In regard to bank balances,
Managing Agents, Secretaries particulars to be given
and Treasurers. Manager should separately on
be shown separately. (a) the balance lying with
Scheduled Banks on
Interest accrued and due on current accounts, call
unsecured Loans should be accounts and deposit
included under the appropriate accounts ;
sub-heads under the head (b) the names of the
“Unsecured Loans” bankers other than
Scheduled Banks
and the balances
lying with each such banker on current accounts, call accounts and deposit accounts and the maximum amount outstanding at any time during
the year from each such banker ; and
(c) the nature of the
interest, if any, of any director or his relative or the Managing Agent, or Secretaries and Treasurers any associate of the latter in each of the
bankers (other than scheduled Banks) referred to in (b) above”.
(G.S.R. No.78 dated 4th Jan 1963).
UNSECURED LOANS
Where loans have been (1) Fixed Deposits
guaranteed by managing (2) Loans and Advances
agents, Secretaries and from subsidiaries.
Treasurers, Managers, (3) Short Term Loans and
and/or Directors, a Advances :
mention thereof shall (a) From Banks,
also be made and also (b) From others.
the aggregate amount of (4) Other Loans and Advances :
such loans under each (a) From Banks
head (b) From others
332
B. Provisions :
(8) Provisions for Taxation.
(9) Proposed dividends
(10) For contingencies
(11) For Provident Fund Scheme.
(12) For insurance, pension and similar
staff benefits schemes.
333
334
FUNDS EMPLOYED
A. Fixed assets 1. Under each head the original cost, and additions thereto and deductions therefrom
I. Tangible assets during the year, and the total depreciation written off or provided up to the
1. Land end of the year shall be stated
2. Buildings
3. Plant and machinery 2. (a) The cost of a fixed asset shall be determined by adding to the purchase price
4. Furniture and Fittings any attributable costs of bringing it to its working condition for its intended
5. Vehicles use.
6. Livestock
7. Others (specify nature) (b) The cost of construction of a fixed asset shall be determined by adding to
II. Intangible Assets the purchase price of the materials and consumables used, the costs incurred
1. Goodwill by the company which are directly attributable to the construction of that asset.
2. Patents, Trade marks, In addition, there may be included in the cost of construction of a fixed asset a
Designs and similar rights reasonable proportion of the costs incurred by the company which are indirectly
3. Others (specify nature) attributable to the construction of that asset, but only to the extent that they
relate to the period of construction.
III. Capital work-in-progress
(c) Financing costs relating to deffered credits or borrowed funds attributable to
construction or acquisition of fixed assets up to the period such assets are ready
to be put to use should also be included in the cost of the asset to which they are
related. The fact of inclusion of interest in determining the cost of the asset to
which they relate and the amount of the interest shall be disclosed in a note to
the Balance Sheet in the year in which it is so included.
3. Where the original cost and the additions thereto and deductions therefrom
relate to any fixed asset which has been acquired from a country outside India,
and in consequence of a change in the rate of exchange at any time after the
acquisition of such asset there has been an increase or reduction in the liability
of the company, as expressed in Indian currency, for making payment towards
the whole or a part of the cost of the asset or for repayment of the whole or a
part of moneys borrowed by the company from any person, directly or indirectly.
In any foreign currency specifically for the purpose of acquiring the asset, the
amount by which the liability is so increased or reduced during the year, shall
be added to, or, as the case may be, deducted from, the cost, and the amount
arrived at after such addition or deduction shall be taken to be the cost of fixed
asset.
Explanations :
(a) ‘Foreign currency’, for the purpose of this Schedule, means any currency other
than the Indian currency.
(b) ‘Rate of exchange’, for the purposes of this Schedule, means the rate quoted by
a bank or other authorised dealer in foreign exchange at which the rupee may
be exchanged for a unit of a foreign currency or a foreign currency may be
exchanged for a unit of the rupee.
4. In every case where the original cost cannot be ascertained without unreasonable
expense or delay, the valuation shown by the books shall be given. For the
purpose of this paragraph, such valuation shall be the net amount at which an
asset stood in the Company’s books at the commencement of this Act after
deduction of the amounts previously provided or written off for depreciation
or diminution in value, and where any such asset is sold, the amount of sale
proceeds shall be shown as deduction.
335
1. Investments in Government or 1. Long term investment for the purpose of this Schedule, means an investment other
Trust Securities than a current investment.
2. Investments in shares,
debentures or bonds ‘Current investment’, for the purposes of this Schedule means an investment that
3. Immovable properties is by its nature readily realisable and is intended to be held for not more than
4. Investment in the capital of one year.
associations of persons 2. Long term investments shall be shown at cost or revalued amounts. The book value
5. Loans to subsidiaries of long term investments shall be reduced to recognise a decline, other than temporary,
6. Others (specify nature) in their value. Such reduction shall be determined and made for each investment
individually.
3. Aggregate amount of Company’s quoted investments and also the market value thereof
shall be shown. Aggregate amount of Company’s unquoted investments shall also
be shown.
‘Quoted investment’, for the purposes of this Schedule, means an investment in respect
of which a quotation or permission to deal on a recognised stock exchange has been
granted, and the expression ‘unquoted investment’ shall be construed accordingly.
4. In the case of subsidiary companies, the number of shares held by the holding company
as well as by the ultimate holding company and its subsidiaries shall be separately
stated. In the latter case, the Auditor shall not be required to certify the correctness
of such shareholdings as certified by the management.
5. A statement of long-term investments shall be annexed to the balance-sheet showing
the names of the bodies corporate (indicating separately the names of the bodies
corporate under the same management) in whose shares or debentures investments
have been made (including all investments, whether existing on the date of the balance-
sheet or not, made subsequent to the date as at which the previous Balance Sheet
was made out) and the nature and extent of the investment so made in each
336
Current assets 1. If the net realisable value of any current asset is lower than
its cost, the amount to be included in respect of that asset
shall be the net realisable value.
I. Investories
1. Raw materials and components
2. Stores, spares loose tools &
other consumables
3. Work-in-process
4. Finished goods
II. Debtors 1. Debts shall not include amounts which are in the nature
of loans or advances.
1. Trade debtors
2. Other debtors
2.‘Trade debtor’, for the purposes of this Schedule, means a person
from whom amounts are due for goods sold or services rendered.
3. Instructions Nos. 6,7,8,9 and 10 regarding ‘Long-term investments’
apply to ‘Debtors’ also.
4. Debts outstanding for more than one year shall be shown separately
under the respective heads.
III. Short term loans and advances 1. ‘Short term loans and advances, for the purposes of this Schedule,
1. To subsidiaries mean deposits and other advances which fall due for payment, in a
2. To such other entities in relatively short period, normally not more than 12 months from the
which the company or any of date on which such loans, deposits or other advances are made.
its subsidiaries is a member 2. Instructions Nos. 6,7,8,9 and 10 regarding ‘Long-term investments’
3. Advances recoverable in cash apply to ‘Short-term Loans and Advances’ also.
or in kind or for value to be
received 3. Current accounts with Directors and Manager shall be shown
4. Others (specify nature) separately.
337
VII. Other current assets (specify nature) Dividends declared by subsidiary companies after the date of the
balance-sheet shall not be included unless they are in respect of a period
which closed on or before the date of the balance-sheet.
338
1. Preliminary expenses
340
341
RATES OF DEPRECIATION
Nature of Assets Single Shift Double Shift Triple Shift
W.D.V. S.L.M. W.D.V. S.L.M. W.D.V. S.L.M.
1 2 3 4 5 6 7
344
346
347
3.7 Annexure It has been already pointed out earlier that the profit of a company
belongs to the company and not to the shareholders. As soon as
dividends are declared at the AGM, a shareholder gets the right
3.1 INTRODUCTORY NOTE
on the profit. Thus profit and dividend are two very inter-linked
The Profit earned by a company belongs to the company and concepts.
not to the shareholders. A member, being a shareholder, has a
The expression dividend has two meanings which the Supreme
right to his share only and has no right on the assets of the
Court pointed out in CIT v. Girdhari dass & Co Pvt Ltd (AIR
company. Dividend is the payment made to him as return, for
1967 SC 795). To a runing concern it means portion of the
his investment in the share capital. Dividend can only be paid
profit of a company which is allocated to the holders. In the
out of profits and not out of capital.
company and in case of a winding up proceeding it means the
It is the prerogative of the Board to appropriate the profits of a division of the realised assets among the creditors and
company for any year. The appropriation of profits to reserves contributors according to their respective rights. Dividend for
and dividends shall be stated in the Directors’ report. Only the our purpose, in the section means the former, i.e., allocated profit
Board has the right to recommend the payment of profits as on a share.
dividends to the shareholders. The shareholders cannot enhance
the dividend recommended but can reduce or reject it at the 3.3 DECLARATION AND PAYMENT OF DIVIDEND
Annual General Meeting. Hence payment of dividend is subject
to recommendation by the Board and approval of the same by According to sec. 205 of a Companies Act, a company cannot
the shareholders for payment. The dividends once declared to declare dividend or pay it for any financial year unless it has
the shareholders become a debt due. earned profit. The following are the clear provisions regarding
declaration of dividends to the shareholders :
3.2 LEGAL POSITION OF CORPORATE PROFIT (i) In order to declare dividend the profit must be found after
AND DIVIDEND providing for depreciation as stipulated in Schedule XIV
of the Companies Act. (See Annexure IV) While providing
Futcher Moulton, L.J., explained Profit In Re Spanish for the depreciation, unabsorbed depreciation of the
Prospecting Company Ltd [(1911)1 Ch.D 92] thus : "profits previous years or loss whichever is lower is also required
implies a comparison between state of business at two specific to be provided for (sec. 205 and sec. 350)
dates usually separated by an interval of a year. The fundamental
meaning is the amount of gain made by the business during the (ii) No dividend shall be payable except in cash. Of course
year. This can only be ascertained by a comparison of assets at capitalised profits may be used to issue bonus shares. (sec.
two dates .....” According to the principle of accounting this 205)
method of finding out profit by comparison of assets in two (iii) The dividend when declared becomes a debt due. In order
dates is not scientific. Profit according to the principle of to ensure that disbursement of the dividend amount is not
accounting over a particular period of time is the surplus of delayed by the company, the law provides that in case the
income over expenditure. In this sense it is nearer to the dividend is not paid or claimed within 42 days of the
dictionary meaning. According to Chambers Dictionary - Profit declaration thereof then within 7 days after the end of the
is the excess of selling price over the fixed cost. According to 42 days, the total amount of dividend should be transfered
taxing statutes, profit is the excess of revenue income over to a bank account with a scheduled bank.
revenue expenditure. The double entry system of book keeping This bank account cannot be operated except for the
on accrual basis takes into account the accruals and outstandings payment of dividend. In case the dividend is not claimed
while calculating the profit. Accountants are - generally or paid within 3 years after the transfer, the amount should
prudence driven. They provide for doubtfuls while considering be transfered to the general revenue account of the
the revenue income or revenue expenditure and recognise income government. This can be later claimed by the shareholder
de Cannon of Certainty. by making a claim on the government. (secs. 205A and
205B)
348
349
350
353
5.6 Branch Audit The Companies Act can be read in the context of this observation
in the following circumstances:
5.1 INTRODUCTORY NOTE Under sec.227(1A), the auditor is under an obligation to make
an inquiry and report only if the provisions of the Act are not
The role of a company Auditor cannot be exaggerated in the
complied with and, under sec. 227(2) and (3), the auditor shall
context of his rights, duties and responsibilities undertaken. Care
make a report stating whether, in his opinion and to the best of
in his Professional Ethics of Public Accounting emphasised the
his information and according to the explanations given to him,
independence of the professional practioners on account of their
the said accounts give the information required by the Act in
responsibilites, moral or legal to the corporation and to the public
the manner so required and give a true and fair view with regard
in the context to which their relationship may tend to influence
to : (a) in the case of the balance sheet, of the state of affairs of
others judgement. The following text explains Auditor's rights
the company ; and (b) the case of the Profit and Loss account
and duties.
for the financial year. Here again, the auditor only expresses an
opinion on the truth and fairness of the financial statements and
5.2 INDEPENDENCE OF AN AUDITOR does not vouch for the correctness of the statements concerned.
A note issued by the Research Committee of the Institute of These clauses have been provided in the Act basically because
Chartered Accountants of India has stated that independence it would be impracticable for an auditor to vouch for the veracity
actually implies that the judgement of a person is not subordinate of each and every transaction and activity of the company and
to the wishes or directions of another person who might have also because quite a number of the transactions could not be
engaged him or to his own self-interest. material enough to be considered for an indepth verification.
Independence is a well accepted standard of auditing. The need An auditor can only approach his work with an inquiring mind
for independence has been recognised in the Chartered and not with any preconceived notion that there is something
Accountants Act wherein provisions have been made to cover wrong or that there is fraud in the accounts although the tests
areas or situations where there would be a conflict between that he performs shall runover any fraud.
interest and duty and the independence of the auditor could be
affected. In the statement on Auditing Practices published by the ICAI, it
was pointed out that it is the directors of the company who are
The Companies Act also recognises the independence of primarily responsible for the preparation of the annual accounts
auditors. One specific area where the Act has made itself clear and for the information contained therein. The duty of
is with regard to the appointment of internal auditor as the safeguarding the assets of a company is primarily that of the
statutory auditor of the company. The Act specifically states management and the auditor is entitled to rely upon the
that an internal auditor cannot be appointed as the statutory safeguards and internal controls instituted by the management
auditor because the internal auditor is appointed by the although he will, and of course, take into account any
management and is in the position of an employee and if he is defficiencies he may note therein while drafting his audit
appointed as the company’s statutory auditor, it will not be programme.
possible for him to give an independent and objective report as
required under the Act. Based on the above, it can be stated that the auditor cannot be a
bloodhound but only a watch dog. However, this does not
Independence does not mean that the auditor should assume an absolve the auditor of his primary duty of reporting to the
attitude of hostility and proceed like a prosecutor. It only points members on the accounts examined by him and he should be
to the need for his functioning in a fair and impartial manner careful 'not to certify what he does not believe to be true and
with a sense of obligation not only to the management and those must take reasonable care before he believes that what he certifies
immediately concerned or interested in the company’s business is true’(Lindley L.J.)
but also to those who would be interested to become
shareholders or creditors. It would be apt in this context to
5.3 POWERS OF THE AUDITOR
quote Justice Lopes in the Kingston Cotton Mill Co, case
citation wherein he observed that “The auditor is a watchdog The auditor of a company is empowered to have a free and
but not a blood hound. He is justified in believing tried servants complete access at all times to the books, accounts and vouchers
354
355
359
360
362
363
364
365
366
[Note: Please specify your name, ID number and address while sending answer papers].
367
Corporate Law
368
Published by:
Distance Education Department
National Law School of India University,
Post Bag No: 7201
Nagarbhavi, Bangalore, 560 072.
369
N. L. Mitra
Course Co-ordinator
370
TOPICS
371
372
By Winding up By Dissolution
(S 425)
In the following pages we will deal with each of these modes in comes to an end. In liquidation procedure all assets, tangible
detail. and intangible are sold for cash (liquidated) and the liabilities
At this stage it is perhaps necessary to understand the concept and claims are also settled in cash. Thus liquidation is included
of 'winding up'. Though in corporate law 'winding up' has a very in a winding up procedure. But winding up is a bigger concept
significant place, the term is not defined in the law. An author than liquidation. In winding up the Company may continue to
has defined winding up as "a means by which the dissolution of function in the sense that (1) the Company may enter into fresh
a Company is brought about and its assets are realised and contracts in order to perform old contracts; (2) it may fulfill the
applied in payment of its debts, and after satisfaction of the obligations arising from old contracts; (3) gradually set out assets
debts, the balance, if any, is paid back to the members in and inventories (4) gradually pay off the debts on the basis of
proportion to the contribution made by them to the capital of priorities and (5) settle the accounts of the shareholders if some
the Company" (Ramaiya, p. 2338). Winding up is therefore a surplus is available. Once all these functions are done, the
procedure through which the Company can be brought to an Company comes to an end. So winding up, liquidation and
end. Liquidation is also a procedure through which the Company dissolution are all related concepts.
373
375
377
378
380
2.4 PROCEDURE OF WINDING UP Verification: The petition should be signed by a proper person,
but in case it is not properly signed it is a mere irregularity and
After hearing a petition for winding up the Court may dismiss can be cured at any time. It should also be certified by an affidavit
it, adjourn it, pass an interim order or make an order for winding of the petitioner, and if there are more than one petitioner, by an
up. This order may take effect either immediately or after a lapse affidavit of atleast one of the petitioners The affidavit should be
of certain period, say six months. Commencement of winding in the proforma given in Form No.3 (Rule 21), and should be
up is not from the date of the order, but is deemed to be from the filed along with the petition. The rule relating to certification is
time of presentation of the petition itself. But, where the winding to be strictly complied with, and if it is not done, then the Courts
up order is in response to a Special Resolution of the Company, will not give leave to re-verify the petition.
the commencement of winding up is deemed to be from the
date of passing of resolution. Advertisement: Once the petition is filed, it is posted before
the judge in chambers for admission and fixing of date, and also
Application: As mentioned earlier, an application for winding for directions as to the advertisement to be published and the
up shall be in the form of petition u/sec. 439, in Form 45, 46 or persons, if any, on whom the petition copy is to be served. But,
47 as the case maybe, with required variations and shall be the judge may, if he thinks fit, direct that notice be given to the
submitted in duplicate. The Registrar of he Court shall note on Company before advertising the petition (Rule 96) Under
the petition the date of its presentation (r. 95). Where the petition
381
382
384
3.1 INTRODUCTION ‘Victory in battle may depend as much upon thoughtful planning
as upon skill and bravery in the field’. So also the Liquidator’s
It is not necessary that a creditor or member or the Registrar capacity to produce the base outcome for creditors, shareholders,
should go in for the winding up. As seen in Sec. 433, the employees and others may be substantially determined by the
Company itself may voluntarily go in for winding up. When conduct of the pre-winding up procedure. In extreme cases the
the Company wants to wind itself up it can to do only after the future of an industry or the well-being of a whole community
passing of a resolution as shown below. may be at stake. Important decisions may have to be made well
before the appointment of a Liquidator and prior to consultation
with creditors at a time when the Company is still under the
Company’s Voluntary Winding Up control of its Directors who may, at this stage, be under such
pressures that they are emotionally unable to make objective
decisions [Grier, p.5]. It is advisable, therefore, that Directors
Ordinary Resolution Special Resolution faced with the possibility of liquidation, should not only consult
an expert for professional advice, but should also take certain
preliminary steps to facilitate the eventual take over by the
For any other reason
Liquidator. Some of these steps may be as follows:
385
388
389
4.2 Effect Of course the Court may give order for winding up under its
supervision and appoint additional Liquidator in addition to those
appointed by the members and creditors or may remove the
4.1 POWER TO ORDER WINDING UP
liquidator appointed by the members/creditors and appoint
According to Sec. 522 after a company passed a resolution for another Liquidator or may appoint Official Liquidator as the
voluntary winding up, the Court may make an order for voluntary Liquidator of the Company. Where an order has been made for
winding up to proceed but under the supervision of the Court. winding up under the supervision of the Court which was later
In making such an order the Court will have regard to the on replaced by another order for compulsory winding up by the
opinions and prayers of the creditors and contributors as proved Court, the Court may direct the Liquidators already appointed
to it with sufficient evidence. One has to distinguish 'compulsory to act as provisional or permanent Liquidator in addition to and
winding up by the Courts' and 'winding up under the supervision subjects to the Control of the Official Liquidator [S. 527]
of the Court.' In compulsory winding up by the Court, the Court
gives an order to the Company to go for compulsory winding 4.2 EFFECT OF THE ORDER
up in stipulated situations and on fulfillment of certain
One of the advantages of winding up under the supervision of
conditions. Under Sec. 433 a power is given to the Court to
the Court is that the Liquidator is allowed to continue to have
pass an order of winding up in appropriate cases. The effect of
same powers and functions, as a voluntary Liquidator has, subject
the order of winding up is to put the Company in the hand of the
to restrictions imposed by the Court if any. Courts can also
Official Liquidator for completing the process of winding up.
exercise same powers as its can do in case of compulsory winding
But an order of winding up under the supervision of the Court is up. Thus the order is quite flexible based upon the needs of the
essentially a voluntary winding up. The Court is only competent Company. Sec. 526 provides the following as the effects of the
to direct the winding up proceedings to be done under the order:
supervision of the Court in order to protect any special interest
(a) voluntary Liquidator may continue having same powers and
in question. As for example, in Re Baranards Banking Co
functions, unless altered directly by the order of the Court,
[(1866) 14 WR 722] the Court was of opinion that a proper
investigation into the affairs of the Company was necessary and (b) the Court will have full authority to make calls or to enforce
the assets happened to be large. So the Court gave an order for calls made by the Liquidator;
winding up under the supervision of the Court. In such a case (c) the Court is empowered to exercise all powers as its may
the Liquidators appointed by the members or creditors or both, do in a compulsory winding up;
continue to take winding up proceedings and open to the (d) the Court can direct any act or thing to be done to and in
direction and supervision of the Court. According to S 440 when favour of the Liquidator; and
a Company is already in a voluntary winding up under the (e) the petition is to be deemed to be a petition for winding up
supervision of the Court, the official Liquidator or anyone who by the Court [Sec. 523].
can apply for compulsory winding up may apply to the Court
for an order of the Court for compulsory winding up., If such an
order is given the Official Liquidator takes over the winding up
390
392
393
394
395
396
Apart from the Liquidator applying to the Court for permission against the Company [Sec. 545]. When the matter is referred to
to prosecute, the Court may itself direct the Liquidator to the Registrar he may further refer it to the Central Government
prosecute personally or refer the matter to the Registrar, if during for investigation if necessary; but where he does not see the
the course of compulsory winding up or winding up under case as one where he ought to prosecute then he could inform
supervision of Court, the Court becomes aware that any past or the Liquidator accordingly, who would then with sanction of
present officer of the Court has been guilty of some offence the Court undertake the proceedings himself.
398
399
401
402
403
Winding up may be
the only feasible
solution
The BIFR cannot help an industry which has become sick due situations where the sickness is induced/manmade i.e., either
to natural causes; for example, those arising due to acute because of mismanagement or due to governmental policies or
competition, market recession or product having absolutely no neglect. We would now briefly study the Constitution and
market etc., which may be common to an industry as a whole in working of BIFR.
a market economy. The BIFR can play an effective role only in
404
407
408
409
410
[Note: Please specify your name, ID number and address while sending answer papers].
411
412