Kslu Unit 4 Q & A Company Law

UNIT 4 COMPANY LAW Q & A
UNIT 4 QUESTIONS
ALLOTMENT
1. What are the different classes of share capital? Explain the statutory
restrictions and general principles of allotment of shares. (Refer Page No.
295) (Dec2014) (June2015) (June2016) (Dec2017) (Dec2018) (March2021)
SHARES
Introduction:
A share is the basis and basic feature of the company. It is a new kind of business
phenomena of 19th century. Share is a part of capital and also it is a small function
of huge investment. A share is limited to its amount only. It does not override the
company. The shares in a company can easily transferable from one person to
other. By possessing a share a person can become a member of a company and
can enjoy various rights such as right to vote, right to claim dividends, right to stand
in election for BOD, shares in profit and loss. It is a new kind of property so it can
buy, sell, pledged or mortgaged etc.
Meaning and Definitions of Shares:
Share is the interest of shareholders in a definite portion of capital. It expresses a
proprietary relationship between the company and the shareholders. The expression
of ‘share’ in the literal sense means, ‘a part’ or ‘a division’ or ‘a portion’. In other
words, the capital of a company is divided into small units called as ‘shares.
According to Romer. L. J. “Share is a kind of property which gives various rights and
liabilities and it is an existing bundle of rights”.
According to Dixon, J. “A share in a company is a piece of property conferring rights
in relation to distribution of income and capital”.
A share has also been defined as “an interest having a money value and made up of
diverse rights specified under the AOA.
According to section 2 (84) “share” means a share in the share capital of a
company and includes stock.
Forms of Share Capital:

1. Authorised Capital: Authorised capital is the maximum amount of capital
with which the company is authorised to raise from the public by issue of
shares. The MOA of every company has to specify the amount of capital with
which it wants to be registered. The capital so stated is called as authorised,
registered or nominal capital.
2. Issued Capital: The Company usually does not need the whole of authorised
capital. So in the beginning it usually issues only a part of capital to public for
subscription it is called as the issued capital. The issued capital can never
exceed the authorised capital.
3. Unissued Capital: The balance of capital remaining to be issued is called as
unissued capital. In other words it is that part of authorised capital of a
company which is not issued to public for subscription.
4. Subscribed Capital: it is that part of issued capital for which applications are
received from the public. In other words it is that part of issued capital which is
taken – up by public is called as subscribed capital.
5. Unsubscribed Capital: It means which is not subscribed by public or not
taken by public is called as unsubscribed capital.
6. Called- Up Capital: Generally, a company does not need entire value of

shares subscribed by public immediately. So it calls and demands only part of
the shares subscribed. It is that part of capital which is called- up by the
company is called as called- up capital.
7. Uncalled Capital: The balance of subscribed capital which is not called up or
demanded by company is called uncalled capital.
8. Paid-Up Capital: It is a part of called up capital against the payment has
been received by members on their respective share in response to calls
made by the company.
9. Unpaid-Up Capital: the balance of called up capital which has been paid by
shareholders is called as unpaid capital.
10. Reserve Capital: It means that amount which is not callable by the company
except in event of winding up of the company. The company cannot demand
the payment of money on shares to that extent during its lifetime. When once
the reserve capital has been so created the company cannot alter its AOA
reserve capital cannot be charged as security for loans by directors it cannot
be turned into an ordinary capital.
ALLOTMENT OF SHARES (Section-39)

Whenever the company requires huge amount, it issues an advertisement along with
Prospectus and applications. The interested public fill up the application and send to
them to the company along of the company with certain fixed amount. It is up to the
BODs of the company to accept the offer or reject it. If the offer is accepted by the
company by making allotment of shares it results in a valid contract between the
company and the applicant.
The company may not allot the shares to all applications, for example; if a company
requires 1 Crore whereas the applications received by it may express their
willingness up to 3 Crores then it is the duty of the company to select the
applications worth of 1 Crore and return the balance to the applicants. The
applicants who are selected shall be issued letters of allotment and also requiring
them to pay the share amount in instalments or at a time. Now a day the companies
are imposing the conditions to pay money in advance along with the application. If
the application is allotted then the company will issue share certificate to the
shareholders. Allotment of shares is the act of allotting or distributing the shares of a
company to specific person in response to their application for shares
RESTRICTIONS ON ALLOTMENT OF SHARES

General Restrictions on Allotment of Shares: For a valid allotment of shares there
are certain general restrictions imposed on the companies:
1. There must be proper Offer and Acceptance:

As a contract requires an offer by one party to do something in the same way a valid
allotment of shares there must be an offer by one party and acceptance by the other.
The acceptance of the offer by the company means the allotment of shares to the
applicant by the company.
2. Allotment must be made by Proper Authority:

The allotment must be made by proper authority according to the provisions of the
AOA. Proper authority means the BOD’s. Usually an allotment is made by a
resolution of the BOD but in certain circumstances the articles and memorandum
may authorise any other person to allot the shares.
3. Allotment Must be Made Within Reasonable Time:

The allotment must be made within the time specified in the application not
exceeding 120 days of issuing the prospectus. If no time is specified then a
reasonable time may be considered. The Supreme Court said that the interval of 5-6
months between application and allotment is unreasonable. Therefore, the allotment
must be made within the reasonable time.
4. Allotment Must be Communicated:

Allotment must be communicated to the applicant in order to constitute contract. If
the application stipulates a particular way of communication, then the company
should communicate in a stipulated way of communication. Otherwise, the ordinary
mode of communication I.e., post should be followed.
5. Allotment Must be Unconditional:

Allotment should be made on the conditions stated in the application for shares if
there is a variation there is no contract between the company and the applicant.
Illegal conditions should not be imposed on the applicant.
Statutory Restrictions On Allotment Of Shares: There are some statutory

restrictions on allotment of shares:
1.Minimum Subscription
Section-39 of the Companies Act 2013, deals with the provisions relating to minimum
subscription. When a company invites the public to subscribe for shares it cannot
allot those shares until the minimum subscription stated in the prospectus is
received. The companies Act has taken precautionary steps for the protection of
investors. The restriction on minimum subscription is a watch dog upon the directors.
The minimum amount which in the opinion of the directors may raised by the issue of
shares to meet the expenditure on each of the following:
a) To pay the purchase price of any property.

b) To pay the preliminary expenses.
c) To pay commissions.
d) To pay for money borrowed by the company.
e) To make provisions for the working capital.
The prospectus must mention the amount of minimum subscription. The amount
payable on application on each share shall not be less than 5 % of the nominal value
of the shares. All money should be deposited in a scheduled bank. As soon as the
company issues prospectus within 120 days it should receive the minimum
subscription amount. If the company does not receive the minimum subscription,
then within 30 days the company must refund the money to the subscribers. If the
company keeps that amount it has to pay interest at 6% on each share.
2. Opening of Subscription List:

The companies Act provides that shares shall not be allowed immediately after the
issue of prospectus. No allotment shall be made on any shares in pursuance of
prospectus issued until the beginning of 5th day after on which the prospectus is
issued.
3.Obtaining Permission from Stock Exchange (Section 46)

Every company making public offer shall make an application to at least one stock
exchange before making the public offer. This is duty of company to obtain
permission of stock exchange or stock exchanges for the dealing of securities there.
Prospectus for the public offer shall also state the name or names of the stock
exchange in which application for dealing of the securities has been made. If a
default is made in complying with the provisions of this section, the company shall be
punishable with a fine which shall not be less than five lakh rupees but which may
extend to fifty lakh rupees and every officer of the company who is in default shall be
punishable with imprisonment for a term which may extend to one year or with fine
which shall not be less than fifty thousand rupees but which may extend to three lakh
rupees, or with both.
4.Over Subscription:
If the company receives more applications with money it shall have to return such
excess money within 8 days from the date of completion of the allotment.
5.Return of Allotment:
The company shall have the report within 30days of allotment of shares the entire
matters regarding the allotment to the register of companies. This report is called as
return as to allotment. This returns as to allotment shall state the numbers, nominal
value, the name, the address and occupation of the shareholders and the amount
paid on each share. Every officer who is in default shall be punishable with fine
which may extent to 1000 rupees per day during which the default continues.
2. What is allotment? And what are the statutory restrictions on allotment

of shares? (June2014) (April2021)
Refer Q 1
CHARGES
3. Explain the characteristics of floating charge and fixed charge. When
floating charge can be converted in to fixed charge? (June2014)
FIXED AND FLOATING CHARGES

Fixed and floating charges are used to secure borrowing by a company. Such
borrowing is often done under the terms of a debenture issued by the company.
Charges on a company's assets must be registered and may also need to be
registered in some other way, e.g. a charge on land and buildings must also be
registered at the Land Registry. A fixed charge is a charge or mortgage secured on
particular property, e.g. land and buildings, a ship, piece of machinery, shares,
intellectual property such as copyrights, patents, trademarks, etc.
A floating charge is a particular type of security, available only to companies. It is an
equitable charge on (usually) all the company's assets both present and future, on
terms that the company may deal with the assets in the ordinary course of business.
Very occasionally the charge is over just a class of the company's assets, such as its
stock.
The floating charge is useful for many companies, allowing them to borrow even
though they have no specific assets, such as freehold premises, which they can use
as security. A floating charge allows all the company's assets, such as stock in trade,
plant and machinery, vehicles, etc., to be charged.
The special nature of the floating charge is that the company can continue to use the
assets and can buy and sell them in the ordinary course of business. It can thus
trade with its stock and sell and replace plant and machinery, etc. without needing
fresh consent from the mortgagee. The charge is said to float over the assets
charged, rather than fixing on any of them specifically. This continues until the
charge 'crystallizes', which occurs when the debenture specifies. This will include
any failure to meet the terms of the loan (non-payment, etc.), or if the company goes
into liquidation, ceases to trade, etc.
Most borrowing comes from the High Street banks, whose standard practice is to
take an all-monies debenture, secured by fixed charges on any assets the company
may have which will carry a fixed charge, and a floating charge on all other assets.
This is the best security which can be created over the assets of any particular
company. The bank may require other security from the directors and may want their
personal guarantees.
What is a charge?
As per Section 2(16) of the Companies Act, 2013, 'Charge' means an interest or lien
created on the property or assets of a company or any of its undertakings or both as
security and includes a mortgage.
However, 'charge' is defined under Section 100 of the Transfer of Property Act, 1882
thus:
"Where immovable property of one person is by act parties or by operation of law
made security for the payment of money to another, and the transaction does not
amount to a mortgage, the latter person is said to have a charge on the property".
Charge is used in the sense of a lien, encumbrance or claim on property. It signifies
a debt or liability. The word 'charge' has, however, a wider meaning than the words,
'Mortgage' or 'Lien'. 'Charge' means generally an interest.
A charge which is to be satisfied out of a particular fund or the proceeds of a

particular thing, and so becomes a lien or incumbrance upon it. It is also used of a
claim against a person acting in a particular capacity, which is to be satisfied out of
money or property in his custody, or out of his own property.
2. Kinds of charges: — The charge may be fixed charge or floating charge.

Whether a charge is a fixed charge or a floating charge will depend upon the words
used in the document creating the charge.
(a) Fixed Charge or Specific Charge: — A fixed or Specific Charge is one which is
created on some ascertained and definite property of the company e.g. a charge
on building, land and heavy machinery. Thus, a fixed charge is equivalent to
mortgage. The legal title belongs to the holder of the charge. The company
cannot dispose of the property free from the debt. It cannot sell, lease etc. without
the consent of the mortgagee. The company is, however, entitled to retain the
possession of the property.
(b) Floating Charge: - A floating charge is an equitable charge which is created
on some class of property which is constantly changing e.g., a charge on stock in
trade, book debts both present and future. A floating charge is peculiar only to
companies as a type of security for the moneys borrowed by them. No other
person or association or body of persons can create a floating charge on its
assets. Floating charge does not attach to any specific property of the company.
Ii does not amount to mortgage. The company can deal with its property so
charged in any manner it likes without the consent of the holder of the charge
until the charge becomes fixed on the happening of an event. The main idea
behind a floating charge is to allow the company to carry on its business in the
ordinary course as if no charge had been created. Gower describes that "a
charge floating like a cloud over the whole assets from time to time falling within a
generic description".
Where the assets to be charged are liquid and are likely to be turned over in the
course of business, only a floating charge would be the most appropriate security.
The validity of such a charge was clearly recognised in re panama New Zealand
etc., Co. [(1870) 5 Ch 318] where a company's 'undertaking' was charged and the
Court held that the Charge was effective against the present and future assets of the
company.
Floating charges are an invention of English equity and their incidents remain the
subject of uncodified judge made law. No particular form of words is necessary to
create a floating charge. There is no prescribed formula by which a floating charge is
created. Any form of words which creates a charge which is ambulatory and shifting
in its nature is a floating charge. The important elements in the floating charge are (i)
freedom to deal with and (ii) element of fluctuation.
(i) Characteristics of floating charges: — The chief characteristics of a floating
charge were explained by Romer J in Re Yorkshire Woolcombers Association
Ltd., [1903) 2 Ch 284] as follows:
"A mortgage or charge by a company which contains the three following
characteristics is a floating charge:
a) It should be a charge upon a class of assets both present and future;
b) The class of assets charged must be one which in the ordinary course of
business would be changing from time to time;
c) It should be contemplated by the charge that until some step is taken by the
mortgagee, the company shall have the right to use the assets comprised in
the charge in the ordinary course of its business". Further, neither the
ownership nor the possession is passed to the lender under this type of
charge.
The buyer of the goods will take the goods free from the encumbrance.
If the company is not permitted to use the assets charged in the ordinary course of
its business, or to use them only with the permission or license of the lender, or
under his supervision, it is not a floating charge.
(ii) Consequences of a Floating Charge: — The company can-
(I) deal in the property on which a floating charge is created, till the
charge crystallises.
(II) notwithstanding the floating charge, create specific mortgages of its
property having priority over the floating charge; and
(III) sell the whole of its undertaking if that is one of its objects specified
in the Memorandum, in spite of the floating charge on the
undertaking.
(c) When floating charge becomes fixed charge or crystalisation of floating

charge:
A floating charge crystalised or becomes fixed charge on the happening of the
following contingencies or circumstances:
(a) If the company ceases to carry its business in the ordinary way or goes into
liquidation.
(b) If the debenture-holder (or any third party) takes control of the business by
appointing a receiver or obtaining an order of the Court for the appointment of
a receiver.
(c) If the creditor in whose favour the charge has been created files a suit against
the company for the recovery of the debt.
(d) If the event occurs upon which, by the terms of the debenture, the lender's
security is to attach specifically to the company's assets.
When the company makes a default in the payment of either the principal or interest,
the charge holders may enforce their security by seizing the assets over which the
charge was until then floating. When they do this the charge crystallises; it becomes
a fixed charge. But it is not the default by the company, but the intervention of the
charge holders that crystallises the charge this was laid down by the House of Lords
in Government Stock and other Securities Investment Co. v. Manila Railway Co.
[(1897) AC 81].
(d) Distinction between Fixed and Floating Charges: —
The following are the differences between fixed charges and floating charges.
(1) Fixed charge is a legal charge whereas floating charge is an equitable
charge.
(2) Fixed charge is made on definite, specific and ascertained and existing
assets while floating charge is made on present and future changing
assets.
(3) in case of fixed charge, company cannot deal with the assets except with
the consent of the charge holder, but, in case of floating charge, company
is free to use or deal with the assets the way it likes until the charge
crystallises i.e., become fixed charge.
(4) Registration of fixed charge on movable assets is not compu^ ^ whereas,
registration of all floating charges on all kinds compulsory by law.
(5) Fixed charge has always priority over floating charge.
In Illingworth v. Houldsworth [(1904) AC 355], Lord Macnaghten stated that, "A

specific (i.e. fixed) charge., is one that without more fastens on ascertained and
definite property or property capable of being ascertained and defined; a floating
charge, on the other hand, is ambulatory and shifting in its nature, hovering over
and, so to speak, floating with the property which it is intended to affect, until some
event occurs or some act is done which causes it to settle and fasten on the subject
of the charge within its reach and grasp".
3. Priority of Charge: —
(1) A fixed charge over the same assets has priority over the floating charge. In
Government Stock and other Securities Investment Co. v. Manila Railway Co.
[(1897) AC 81] , the debentures issued by a company created a floating charge
and three months' interest became due, but the debenture-holders took no steps.
The company then made a mortgage of a specific part of its property. The Court
held that the mortgage had priority. The creditor who takes a subsequent specific
mortgage will have priority over the floating charge even if he knows of the
floating charge. However, if the company is prohibited from creating subsequent
specific mortgages, the creditor who takes a subsequent specific mortgage with
notice of the prohibition shall have no priority over the floating charge.
(2) When a fixed charge is created on the same property, the fixed charge which is
first, in point of time, takes priority over the second.
(3) A company is allowed to create a second floating charge over its assets or
undertaking. But the first floating charge can have priority over the second
floating charge.
(4) A company cannot create mortgages ranking in priority to the floating charge
after it has crystallised. On crystalisation, the floating charge becomes a specific
mortgage of the property which the company then owns and thereafter acquires
and the normal rules of priority apply between it and the mortgages created later.
MEANING OF CHARGES – The Companies Act, 2013 defines a Charge as an

interest or lien created on the assets or property of a Company or any of its
undertaking as security and includes a mortgage U/s 2(16). In the earlier Act of
1956, the word “Mortgage” was not mentioned.
TYPES OF CHARGES: -
Fixed Charge: A charge which is identifiable with specific and clear asset/property
at the time of creation of charge. The Company cannot transfer such identified and
defined property unless the charge holder (creditor) is paid off his dues.
Floating Charge: It covers the floating and circulating nature of properties of a
company, like sundry debtors, stock in trade etc. The nature of the property charged
may change from time to time. The floating charge crystallizes into fixed
Crystallisation of Floating Charge This conversion of floating charge into a fixed

charge is usually called Crystallisation of floating charge. Such an event happens
under the following circumstances
 The debtor is unable to pay off the debts.
 The business couldn’t be carried out when the creditor/debenture Holder
takes action against the debtor for not repaying the debts and in all such
circumstances which are listed out under the relevant provisions of the
Companies Act, 2013.
 Company goes into liquidation Company cease to carry on its business

 On the happening of any event as specified in deed of agreement.
DEBENTURE
4. What are the different kinds of debentures that can be issued under the
Companies Act, 2013? Explain. (June2017)
What is Debenture? Explain its characteristics. What are the various kinds of
debenture? (June2018) (Dec2020) (April2021)
DEBENTURES
Meaning and Definition of Debenture:
Debenture is most important instrument to raise capital for a company. It is a long
term security yielding a fixed rate of interest issued by a company and secured
against assets of the company. A company use debenture to raise debt capital.
Popularly, debenture issued by public sector companies with government approval is
called bonds.
Section 2 (30) of the Companies Act, 2013 define inclusively debenture as
“debenture” includes debenture stock, bonds or any other instrument of a company
evidencing a debt, whether constituting a charge on the assets of the company or
not.
In Levy v/s Abercorris Slate & Slab Co., (1887), it has been held that “debenture
means it is a document which either creates a debt or acknowledges it”
According to Topham, “Debenture is a document given by a company as an
evidence of a debt to the holder usually arising out of a loan and most commonly
secured by a charge”.
This is clear from definition that debenture may be Secured Debenture or Unsecured
Debenture. According to Section 44, the shares or debentures or other interest of
any member in a company shall be movable property transferable in the manner
provided by the articles of the company. The certificate of debenture shall be issued
within a period of six months from the date of allotment in the case of any allotment
of debenture.
Characteristics features of Debenture:
In the light of above definitions, the characteristics features of a debenture are as
follows:
1. It is issued by a company and is usually in the form of a certificate which is an
acknowledgement of indebtedness.
2. It is issued under the company’s seal.
3. It is one of the series issued to a number of lenders. But a single debenture is
also not uncommon. Thus, a mortgage of a company’s property to a single
individual as security for a loan is a debenture within the definition.
4. It usually specifies a particular period or date as the date of repayment. It also
provides for the payment of a specified principal and interest at the specified
date.
5. It generally creates a charge on the undertaking of the company or some
parts of its property; but there may be debentures without any such charge.
6. A debenture-holder does not have any right to vote in the company meetings,
but their claims rank prior to preferential and equity shareholders and their
exact rights depends upon the nature of debenture they hold
Kinds of Debentures:
Debentures may be the following kinds:
1. Bearer Debenture: These debentures, also known as ‘unregistered
debentures’ are payable to its bearer. Bearer Debentures are transferable by
mere delivery without any notice to the company. Company keeps no record
for such debenture holders. Debenture Coupons are attached with the
Debenture Certificate and interest can be claimed by the Coupon holder. The
holder of this debenture names will not appear in the Register of Debenture
Holders and also in the Debenture Certificate. These are regarded as
negotiable instruments and are transferable by delivery, and a bonafide
transferee for value is not affected by the defect in the title of the prior holder.
In Bechuanaland Exploration Co. v/s London Trading bank Ltd.,(1898): ‘B’ company
held debentures of an English Company, payable to bearer. It kept them in a safe of
which the secretary had the key. The secretary pledged the debentures with a bank
as securities for a loan taken by him. The bank took the debentures bonafide. The
Court held that the bank was entitled to the debentures as against the company.
2. Registered Debentures: These are debentures which
are payable to the registered holders. A holder is one
whose name appears both on the debenture certificate
and in the company’s register of debentures. The
registered holder of the debentures can transfer them like
shares, but the transfer to be complete has to be
registered with the company.
3. Secured Debentures: Debentures which create some
charge on the property of the company are known as
secured debentures. The charge may be a fixed charge
or a floating charge.
4. Unsecured Debentures: Debentures which do not
create any charge on the assets of the company are
known as unsecured debentures. The holders of these
debentures like ordinary unsecured creditors may sue
the company for recovery of the debt.
5. Redeemable Debentures: Debentures are usually
issued on the condition that they shall be redeemed after
a certain period. Such debentures are known as
redeemable debentures.
6. Irredeemable or Perpetual Debentures: When
debentures are irredeemable, they are called perpetual
debentures. A debenture will be treated as irredeemable
where either there is no period fixed for repayment of the
principal amount or repayment of it is made conditional
on the happening of an event which may not happen for
an identified period or may happen only in certain
specified and contingent events, e.g., the winding up of
the company. They are not invalid because of the
condition that they are made irredeemable or
redeemable only on the happening of some contingency,
or on the expiration of a period, however long, it may be
for 100 years after the issue of debentures.
7. Convertible Debentures: These debentures give an

option to the holders to convert them into preference or
equity shares at stated rates of exchange, after a certain
period. If the holders exercise the right of conversion,
they cease to be lenders to the company and become
members instead.
8. Non- Convertible Debentures: These debentures do
not give any option to their holders to convert them into
preference or equity shares. They are to be duly paid as
and when they mature.
SHARE CAPITAL
5. Explain the different types of Share Capital. (Dec2016) (June2018)
Refer Q.1 above

UNIT 4 PROBLEMS
'X' company lends to Y company a loan on a mortgage of its assets. The

procedure laid down in the Articles for such transaction is not complied with.
The directors of the 2 companies were the same. Is this mortgage binding
upon a company? (June2015)
ANS: Even A&Co. and B&Co. are under the same management, yet they are
separate and distinct legal entities. B&Co. can take the shelter of doctrine of indoor
management for enforcing its right of recovery of the debt for lending the money
against mortgage. As regards the validity of mortgage A&Co. or B&Co. has to
register the charge with concerned ROC within 30 days of their creation
Ultra-vires borrowings, can be divide into - ultra-vires the company; and - intra
(within) vires the company but ultra-vires the directors. The problem given is intra
vires the company but ultra vires the directors.
The legal position in such cases may noted as follows:
a) If the lender was aware of the lack of authority on the part of directors, he will
have no right of action against the company.
b) But where the directors, under the AOA, could exercise the borrowing powers
subject to certain approvals, the lender could rely on the doctrine of indoor
management that the necessary approvals would have been obtained [Royal
British Bank V. Turquand (1856)].
c) The Company shall be held liable if the company borrowed by directors
beyond their authority is used for the benefit of the company [Krishna Kumar
Rohtagi v State Bank of India (1980)]
The Auditors of a company made a confidential report to the directors stating

that the security for some loans are insufficient and difficulty of realization and
stated that no dividends should be paid for the year, but the auditor also in his
report to his shareholder stated that the value of the assets depends upon the
realization. A dividend of 15% was declared out of capital assets. State
whether the Auditor or Director are liable for the same. (June2015)
(https://www.google.co.in/books/edition/A_Manual_of_Mercantile_Law/rLVpH-
XVRhYC?
hl=en&gbpv=1&dq=The+Auditors+of+a+company+made+a+confidential+report
+to+the+directors+stating+that+the+security+for+some+loans+are+insufficient
+and+difficulty+of+realization+and+stated+that+no+dividends+should+be+pai
d+for+the+year,&pg=PA518&printsec=frontcover)
RE LONDON AND GENERAL BANK:

An auditor represented a confidential report to the directors calling their attention to
the insufficiency of the securities in which the capital of the company was invested, and the
difficulty of realizing them, but in his report to the shareholders merely stated that the value
of the assets was dependent on realization, and in the result the shareholders were
deceived as to the condition of the company, and a dividend was declared out of capital and
not out of income.
HELD:
The auditors had been guilty of misfeasance under S.10 of the Companies like
winding-up, Act, 1890 of, and was liable to make good the amount of dividend paid as
amounting here to $14,433.3s.
LINDLEY, LJ.: "....... it is the duty of the directors, and not of the auditors, to
recommend to the shareholders the amounts to be appropriated for dividends and it is the
duty of the directors to have proper accounts kept, so as to show the true state and condition
of the company........ it is for the shareholders, but only on the recommendation of the
directors, to declare a dividend. It is impossible to read the section of the Companies Act
without being struck with the importance of the enactment that the auditors are to be
appointed by the shareholders and not to or regards to the directors, are to report to them
directly. Therefore, the object of this enactment is obvious. It evidently is to secure to the
shareholders independent and reliable information respecting the true financial position of
the company at the time of the audit..... It is no part of an auditor's duty to give advice there,
either to shareholders or to directors, so as to what they ought to do. However, an auditor
has nothing to do with the prudence or imprudence of making loans including or without
security. It is nothing to him whereas the business of a company is being conducted
prudently or imprudently or unprofitably or profitably.
'A' transferred certain land to 'B' on a condition that 'B' would never sell the
land to coloured persons. 'B' sold the land to a company composed
exclusively of Negros. 'A' took action for the annulment of the transfer on the
ground that property had passed to coloured persons. Will he succeed?
(Dec2016) (Dec2018) (March2021)
A corporation is, in law, quite distinct and separate from the members who compose
it. Its rights and liabilities are different for those of the members. A Problems of
Corporate Personality
A corporation is, in law, quite distinct and separate from the members who compose
it. Its rights and liabilities are different for those of the members. A shareholder of a
company can legally enters into a contract with the company as such. Shares
holders might be entirely changed, or their number might greatly reduce, but it would
make, in no way, any change in the identity of the company. The company might go
bankrupt but the shareholders would retain their millions.
The real position of a company can be understood only if we make a comparison of it
with an unincorporated firm. In an unincorporated firm, there is not much difference
between the rights and obligations of the firm and its partners. Even the separate
property of the partners is liable for the debts of the firm. Change of any one partner
causes the reconstitution of the firm. There can be no firm of only one partner,
whereas a company may be of only one member. This special position of the
company is due to the fact that a company is a juristic person, therefore, it is distinct
and separate from its shareholders but the unincorporated firm is not a juristic
person, therefore, it does not have the above-mentioned advantages.
Salomon v. Salomon and Farrar v. Farrar: In short, the essential character of the
corporation is that it has a distinct personality from its members. In Salomon v.
Salomon and Co. Ltd, 1897 A.C 22) the House of Lords refused to identify the
company with its shareholder. It was held that â€˜he could Claim the preferential
rights of a bondholder against the company which was in reality he himself, to the
detriment of genuine creditors.
Again, in (Farrar v. Farrar Ltd. 14 (1889) 40 Ch. D. 395) it was held A sale by a
person to corporation of which he is member is not either in form, or in substance as
sale by a person to himself, the idea is that the corporate body is distinct from the
persons composing it. A sale by a member of a corporation to the corporation itself is
in every sense, valid in equality as well as in law.
People's Pleasure Park Co. v. Rohleder: An important American case in which the
same principle was laid down is (People's Pleasure Part Co. v. Rohleder, 61 S.E.R.
794). In this case the question was as to whether a restrictive covenant that title to
land should never pass to a coloured person operated to prevent transfer to
corporation of which all the members were Negroes. It was held that the transfer to
the corporation was valid, because a corporation is distinct from its members as
mentioned in In re Europe (1932 V.L.R. 443). of a company can legally enters into a
contract with the company as such. Shares holders might be entirely changed, or
their number might greatly reduce, but it would make, in no way, any change in the
identity of the company. The company might go bankrupt but the shareholders would
retain their millions.
The real position of a company can be understood only if we make a comparison of it
with an unincorporated firm. In an unincorporated firm, there is not much difference
between the rights and obligations of the firm and its partners. Even the separate
property of the partners is liable for the debts of the firm. Change of any one partner
causes the reconstitution of the firm. There can be no firm of only one partner,
whereas a company may be of only one member. This special position of the
company is due to the fact that a company is a juristic person, therefore, it is distinct
and separate from its shareholders but the unincorporated firm is not a juristic
person, therefore, it does not have the above-mentioned advantages.
Salomon v. Salomon and Farrar v. Farrar: In short, the essential character of the
corporation is that it has a distinct personality from its members. In Salomon v.
Salomon and Co. Ltd, 1897 A.C 22) the House of Lords refused to identify the
company with its shareholder. It was held that â€˜he could Claim the preferential
rights of a bondholder against the company which was in reality he himself, to the
detriment of genuine creditors.
Again, in (Farrar v. Farrar Ltd. 14 (1889) 40 Ch. D. 395) it was held A sale by a
person to corporation of which he is member is not either in form, or in substance as
sale by a person to himself, the idea is that the corporate body is distinct from the
persons composing it. A sale by a member of a corporation to the corporation itself is
in every sense, valid in equality as well as in law.
People's Pleasure Park Co. v. Rohleder: An important American case in which the
same principle was laid down is (People's Pleasure Part Co. v. Rohleder, 61 S.E.R.
794). In this case the question was as to whether a restrictive covenant that title to
land should never pass to a coloured person operated to prevent transfer to
corporation of which all the members were Negroes. It was held that the transfer to
the corporation was valid, because a corporation is distinct from its members as
mentioned in In re Europe (1932 V.L.R. 443).
(https://www.iilsindia.com/study-material/290431_1600526517.docx)
ommon law courts have for centuries regarded corporations as artificial persons-
colourless, invisible, intangible persons. In the first decade of the twentieth century,
one Major Johnson, a former slave acquired a piece of land. The seller of the land
had himself received the piece of land with one specific restriction- the land was not
to be sold to a black person. Such covenants were common at the time, almost
a half century before the U.S. Supreme Court would rule their enforcement
unconstitutional.
The sale was contested in the Court. There was one catch- Johnson had acquired
the land in the name of a corporation-"a corporation composed exclusively of
negroes," chartered to "develop a pleasure park for the amusement of coloured
people". The Court was asked to determine whether the corporation itself was a
“coloured person." In People's Pleasure Park Co. v. Rohleder, the court concluded
that the corporation was a person only in law, and "in law, there can be no
such thing as a coloured corporation."
And so Johnson was allowed to retain the property. The case was decided in 1908
A company inserted an advertisement in a newspaper stating that some

shares were still available for sale according to the terms of the prospectus of
the company which could be obtained on application. Can it be considered as
prospectus? (June2016) (June2018)
Advertisement in newspaper to invite application for purchase of remaining shares of

a company is prospectus (Pramatha Nath Sanyal v. Kali Kumar Dutt, A.I.R. 1925
Cal. 714). In this case directors were penalized for not complying with the
requirements of filing a copy thereof with Registrar of Companies
A prospectus is any document which traces a company’s monetary protections available to
be purchased to intrigued financial backers. A prospectus can be given by or for the benefit
of the public company. It can issue either concerning its development or after its
arrangement, or for the benefit of any individual who has drawn in or is keen on the
development of a public company. As characterized in sec 2(70) of the Companies Act 2013,
“prospectus” signifies any report portrayed or given as a prospectus and incorporates a
distraction prospectus alluded to in section 32 or rack prospectus alluded to in section 31 or
any notification, roundabout, ad or other record welcoming proposals from general society
for the membership or acquisition of any protections of a body corporate.” Thus, according to
the definition ‘prospectus under the act, may not be a promotion just, but rather it could be a
roundabout or even a notification. “It may not be an advertisement only, but also it may be a
circular or even a notice.” A document, therefore, can be called a prospectus if it satisfies the
following things:
The document should invite the subscription to public shares or debentures, or any such
securities.”
As per Companies Act 1913, it was needed by each business entity, prior to distributing a
prospectus, should document a duplicate of something very similar with the enlistment
center of business entities, whenever fulfilled then just the company can distribute a
prospectus. Failure to consent to something similar, the individual who purposely distributed
a prospectus, will be obligated to pay a fine. On account of Pramatha Nath Sanyal versus
Kali Kumar Dutt (AIR 1925 Cal.714) Bengal Miscellany, Ltd.,where a company recorded
under business entity, a notice was embedded in a paper expressing: “a few shares are as
yet ready to move as per the conditions of the prospectus of the company which can be
obtained on application”. It was contended by the applicants that it was anything but a
prospectus under the significance of prospectus under the Act. The promotion being referred
to is about a prospectus given before and was likewise recorded with the enlistment.
Facts of the case
The Bengal Miscellany Ltd., a Company registered under the Act, issued an advertisement
in a newspaper which read as “Some shares are still available for sale according to the
terms of the prospectus of the company which can be obtained on application.”
Issue
The ground upon which the convictions are challenged, is that the advertisement in question
is not a prospectus within the meaning of the Act. Basically, the offending matter in this case
is an advertisement offering to the public some shares of the Company for sale.
Contentions
The ground whereupon the convictions are tested, is that the advertisement being referred to
isn’t a prospectus under the Act however explicitly it alludes to a prospectus, duplicate
whereof had truly been as of now documented with the Registrar of Joint Stock Companies.
It is encouraged that if the prospectus of the Company has effectively been documented with
the Registrar as it has been made, and the advertisement as of now alludes to the
prospectus and states the facts that it has been so recorded, it isn’t required under the law to
document a duplicate of the advertisement with the Registrar; and it is additionally asked
that if a duplicate of this advertisement had lover endeavored to be documented it would not
have been acknowledged as it doesn’t contain the specifics vital under Section 93 of the Act.
The offending matter for this situation is an advertisement offering to the public a few shares
of the Company available to be purchased. It hence obviously comes extremely close to)
inside the meaning of “prospectus” as contained in Section 2, Clause (14) of the Act. The
definition runs in this manner: “Prospectus implies any prospectus, notice, round,
advertisement or other greeting offering to general society for membership or acquisition of
any shares or debentures of a Company.” Then under Section 92 the documenting of a
prospectus is compulsory and the specifics to be set out in that are given exhaustively in the
said section as likewise in Section 93. A reference to the various sections of the Act makes it
crystal clear that the arrangements identifying with a prospectus are generally severe and
the obligation of getting it ready and recording it as per law is amazingly difficult. Upon the
plain expressions of the rule I can see nothing which eases the Company from documenting
a duplicate of an advertisement of this nature with the Registrar prior to giving it.
From the outset, nonetheless, the candidate’s conflicts appear to be conceivable and it
appears pointless and superfluous that a duplicate of the advertisement ought to be
recorded when the actual prospectus has been documented. It strikes that as trivial that a
Company ought to be needed to document a duplicate of each advertisement that it issues
in the papers welcoming the acquisition of its shares when the advertisement explicitly
alludes to a prospectus, duplicate of which, it says, is accessible to a planning buyer of
shares on application, and duplicate of which, it says, has been properly recorded; and
moreover if the Company had recorded a duplicate of the advertisement in the shape in
which it was given it couldn’t have been acknowledged by the Registrar. The arrangement of
the law, notwithstanding, is totally extraordinary, and on a cautious investigation of it it is
neither absurd nor low.
Summary of the case and judgment

As in this case, an advertisement was inserted in a newspaper stating, “Some shares are
still available for sale according to the terms of the prospectus of the company which can be
obtained on application.” This was held to be a prospectus as it invited the public to
purchase the shares.
The obligation of people who cause a prospectus to be given was set somewhere account of
The New Brunswick and Canada Ry. Co. v. Muggeridye (1860) in these words: “The
individuals who issue a prospectus holding out to the public the incredible benefits which will
build to people who will take shares in a proposed undertaking, and welcoming them to take
shares, on the confidence of the portrayals in that contained, will undoubtedly state
everything with severe and conscientious precision and not exclusively to avoid expressing
as fact that which isn’t thus, however overlook nobody fact inside their insight, the presence
of which may in any degree influence the nature or degree or nature of the advantages and
benefits which the prospectus holds out as instigation to take shares.”
For the situation in Henderson v. Lacon (1867) Wood, V. C., noticed along these lines: “I
should say I think the aftereffect of the multitude of desert gardens which have happened
shows the incredible worth of that brilliant inheritance, in the event that I may so term it,
which has been left to us by Sir Richard Kindersley, who has dense in couple of words the
entire precept with regards to the standard of lead between shareholders and their chiefs, on
account of The New Brunswick and Canada Ry. Co. v. Muggeridye (1860) simplicity referred
to with support on account of The Central Ry. Co. of Venezuela v. Kisch (1867) L.R. 2 H.L.
113, in the House of Lords.”
Clearly, the planning of a prospectus requires the best consideration, while an attractive
assertion of the benefits offered is legitimately passable, each articulation made ought to be
a fair one; no equivocal diction out of line reservation or misleading statements ought to be
permitted to be utilized or to sneak in. On a reference to the sections referenced above,
along with a portion of different sections of the Act, e.g Sections 81 and 100, obviously one
of the central points of the governing body has been to get the fullest divulgence of all-
material and fundamental specifics regarding the situation of a Company and lay something
very similar in full perspective on all planning buyers of its shares or investment in its profits.
With that object. The governing body had given that any solicitation to the general population
for that reason ought to be dependent upon the examination of the specialists. It was thusly
enacted in Section 92 of the Act that an advertisement of the nature which frames the topic
of the current cases ought to be set before the Registrar by recording a duplicate of it before
it is given and it has additionally given that to be so documented it should contain
fundamental specifics, for example, are referenced in Section 93. additionally, this shows up
from Sub-section (2) of Section 93 which makes a few exceptions that if there would be an
occurrence of paper advertisements, and Sub-section (3) of that section which makes the
section irrelevant to a round or notice welcoming existing individuals or debenture-holders of
a Company to buy in either for shares or for debentures. Obviously an advertisement in the
shape where it has been distributed would not have been acknowledged by the Registrar as
fulfilling the prerequisites of Section 93: however that lone implies that it ought not have
been given.
Analysis
Advertisements given by companies which propose to give shares, which don’t contain the
legal necessities and express that the distribution is for data just and that candidates should
apply to the Company for the full prospectus; such advertisements ought to never contain an
application structure, however they don’t give off an impression of being in opposition to the
Act.
According to Companies Act 1913, it was required by every joint-stock company, before
publishing a prospectus, must file a copy of the same with the registrar of joint-stock
companies, if satisfied, then only the company can publish a prospectus. Failure to comply
with the same, the person who knowingly published a prospectus, shall be liable to pay a
fine. In the case of Bengal Miscellany, Ltd., a company listed under joint-stock company, an
advertisement was inserted in a newspaper stating: “some shares are still available for sale
according to the terms of the prospectus of the company which can be obtained on
application”.
It was argued by the petitioners that it was not a prospectus under the meaning of
prospectus under the act. The advertisement in question is about a prospectus issued earlier
and was also filed with the registrar of Joint-stock companies in the previous year, 1923. The
argument was rejected and thus it was held to be a prospectus as it invited the public to
purchase shares. The directors were, therefore, penalized, for not complying with the
requirements of filing a copy thereof with the Registrar of Companies.
On account of Rattan Singh versus Overseeing Director, Moga Transport Co. Ltd. [1959] 29
Comp. Cas. 165, it was claimed that shares were given to those share-holders just, who
were the Managing Director of the Company, respondent, and this was finished with an
expectation to get new share-holders picked by him. The object of doing so was to expand
the Managing chief’s own solidarity, as shares were looked to be offered to people having a
place with his own companions and allies. The candidates griped that the resolution imitated
for the acquisition of shares was never conveyed to all the share-holders and those share-
holders who didn’t have a place with the gathering of respondents were kept in obscurity.
It was seen that the notice and articles of association of the Company didn’t approve the
issue of shares to outsiders and the extra capital must be circulated among the current
shareholders. The court for this situation noticed the offering of shares to friends and
relatives of a chief wasn’t a solicitation to the general population to purchase shares.
Further, the learned adjudicator saw that in all cases the assurance of the subject of an offer
being made to the public would rely on the facts and language of the notification of any such
record and will likewise rely upon the conditions of each case.”
Also, the current prospectus doesn’t fall inside that classification, for it doesn’t express that
the distribution is for data just, nor does it say that the candidates should apply to the
Company for the full prospectus, however just that the prospectus might be gotten on
application. Therefore in this case the convictions are correct and the Rules should be
discharged.
Conclusion
A prospectus for being a valid one should contain fundamental essentials and it should be
registered. In the event that any prospectus isn’t registered, it is considered as an invalid one
and with negation to arrangements set down for the substantial prospectus. Such
contradiction is culpable under section 26(9).
At whatever point the advertisement if the prospectus is made, it should contain the reminder
of the company. At the point when a company is making a proposition for an offer of
protections, then, at that point preceding giving a prospectus, it might give a distraction
prospectus. A company can likewise give a rack prospectus when it needs to make an offer
at least one protection or class of protections and afterward it doesn’t need to give a
prospectus prior to giving an offer of every security. Therefore in this case it was held to be a
prospectus as it invited the public to purchase the shares.
(https://thecompany.ninja/pramatha-nath-sanyal-v-kali-kumar-dutt-a-i-r-1925-cal-714/)
A film company borrowed a sum of money on the security of all its assets
including machinery etc. now lying and that may be brought by it until the
repayment of loan. What kind of charge is created by the company?
(June2016)
'
X' applied for shares in Y company. His application was sent by post and a
letter of allotment was dispatched by the company soon after through post.
But the letter never reached 'X'. Is he liable as a shareholder? Decide.
(June2017)
Grant applied for certain shares in a company, the company dispatched letter of allotment to him
which never reached him. It was held that he was liable for the balance amount due on the shares.
[Household Fire And Carriage Accident Insurance Co. Ltd. v. Grant (1879) 4 E.D. 216]
Facts
Grant had negotiated to purchase shares in Household Fire. His application was
accepted, and his name was added to the list of registered shareholders, However,
the letter informing the appellant of this never reached him and thus Grant never
paid for the shares. His earnings from dividends were credited to his account.
Eventually Household Fire went into liquidation and the liquidator applied for money
from the appellant. He refused to pay on the grounds that he was not a shareholder
– he had never received the notification in the mail and was not aware.
The appeal judge Thesiger J found that the appellant implied that the respondent
was to send him the notification that he had been issued the shares in the mail by
requesting them by mail, and therefore they were not to be penalized for sending the
notification that way. The liquidator was thus successful at recovering the money,
which Grant appealed.
Issue
When do acceptances becoming binding when they are sent via mail?
Decision
There was a valid contract. Appeal dismissed.
Reasons
Thesiger and Baggallay agree with the trial judge's decision that the contract was
formed when the acceptance was mailed. They discuss the pros and cons of the
postal rule, and decide that the pros outweigh the cons. They state that the offeror
can always choose to make the acceptance binding only upon his through the mail
as long as that is a medium of communication that the parties contemplated as at the
time of mailing there is a meeting of the minds.
Bramwell, in the dissent, disagrees and gives several examples of situations where
he believes that the postal rule would hinder transactions. He says generally that the
notice of acceptance must reach the party who made the offer before it can be
considered binding. He says that if the rule proposed in the majority is accepted then
it must be adhered to in all instances of notices via mail. For example, if you mail
money to someone in an acceptance, then you have paid even if the money never
reaches the other party.
Ratio
A contract becomes binding the instant that the acceptance is put in the mail, so long
as the parties have contemplated the mail as a viable means of communication in
their dealings (the postal rule)
K was bearer debenture holder of 'S' company. He transferred the same to 'R'.
The company refused to pay the amount with interest to him. (Dec2018)
Mr. 'R' was the transferee of a share certificate issued under the seal of the G'
company. The certificate was issued by the company secretary, who had affixed the
seal of the company and forged their signature of two directors. Whether the share
certificate is valid? (June2018)
Share certificate is not binding on company as it contained forged signatures. Thus, no title could be
transferred to A even if he is a bona fide purchaser since as per the general rule forgery is nullity (It
means if any signatures are forged, it shall be taken as if no signatures are there, thus no tile can be
transfer to transferee). This view was also held in the case of Rubben v Great Fingal Consolidated.
Hence B would not succeed in having the shares in his name.
The doctrine of indoor management, also known as the Turquand rule is a 150-year old
concept, which protects outsiders against the actions done by the company.
Any person who enters into a contract with the company shall ensure that the transaction is
authorised by the articles and memorandum of the company. There is no requirement to look
into the internal irregularities, and even if there are any irregularities, the company shall be
held liable since the person has acted on the grounds of good faith.
To absorb the concept of this doctrine, it is important to understand the concept of the
doctrine of constructive notice. Both the concept of indoor management and constructive
notice is explained below.
Doctrine of Constructive Notice
Section 399 of the Companies Act, 2013 states that any person may, after payment of the
prescribed fees inspect by electronic means any documents kept with the Registrar of
Companies. Any person can also obtain a copy of any document including the certificate of
incorporation from the Registrar.
In line with this provision, the Memorandum of Association and the Articles of Association
are public documents once they are filed with the Registrar. Any person may inspect the
same after payment of the fees prescribed. The special resolutions are also required to be
registered with the Registrar under the Companies Act, 2013.
The doctrine presumes that every person has knowledge of the contents of the
Memorandum of Association, Articles of Association and every other document such as
special resolutions as it is filed with the Registrar and available for public view.
This principle has been upheld in the landmark case of Oakbank Oil Co. V. Crum (1882) 8
A.C.65. Thus, if any person enters into a contract, which is inconsistent with the company’s
Memorandum and Article, he shall not acquire any rights against the company and shall
bear the consequences himself.
Origin of Doctrine of Indoor Management

The doctrine originated from the landmark case Royal British Bank V Turquand (1856) 6
E&B 327. The facts of the case are as follows. The Articles of the company provide for the
borrowing of money on bonds, which requires a resolution to be passed in the General
Meeting. The directors did acquire the loan but failed to pass the resolution. The repayment
on loan defaulted, and the company was held liable. The shareholders refused to accept the
claim in the absence of the resolution. Held, the company shall be liable since the person
dealing with the company is entitled to assume that there has been necessary compliance
with regards to the internal management.
The rule was further endorsed by the House of Lords in Mahony V East Holyford Mining Co.
[1875] LR 7 HL 869. 6. In this case, the Articles of the company provided that the cheque
shall be signed by two directors and countersigned by the secretary. It later came to light
that neither the directors nor the secretary who signed the cheque was appointed properly.
Held, the person receiving such cheque shall be entitled to the amount since the
appointment of directors is a part of the internal management of the company and a person
dealing with the company is not required to enquire about it.
The above view held in the case of House of Lords in Mahony V East Holyford Mining Co. is
supported by Section 176 of the Companies Act, 2013, which states that the defects in the
appointment of the director shall not invalidate the acts done.
The doctrine provides the third parties who enter into a contract with the company is
protected against any irregularities in the internal procedure of the company. The third
parties cannot find out internal irregularities that take place in a company, hence the
company will be liable for any loss suffered by them due to these irregularities.
The doctrine of constructive notice protects the company against the claim of third parties
while the doctrine of indoor management protects the third parties against the company
procedures.
Exceptions to the Doctrine of Indoor Management
Forgery
Transactions involving forgery are void ab initio (null and void) since it is not the case of
absence of free consent; it is a situation of no consent at all. This has been established in
the Ruben V Great Fingall Consolidated case [1906] 1 AC 439. A person was issued a share
certificate with a common seal of the company. The signature of two directors and the
secretary was required for a valid certificate. The secretary signed the certificate in his name
and also forged the signatures of the two directors. The holder contented that he was not
aware of the forgery, and he is not required to look into it. The Court held that the company
is not liable for forgery done by its officers.
A company has been declared dividend and is not paid with in thirty days
from the date of declaration. Shareholders wants to file a suit. Advise them.
(April2021)
Section 127 of Companies Act 2013 provides that when a dividend has been declared by a company
but has not been paid or the warrant in respect thereof has not been posted within thirty days from
the date of declaration to any shareholder entitled to the payment of the dividend, every director of
the company shall, if he is knowingly a party to the default, be punishable with imprisonment which
may extend to two years and with fine which shall not be less than one thousand rupees for every
day during which such default continues and the company shall be liable to pay simple interest at
the rate of eighteen per cent per annum during the period for which such default continues.
Exceptions: Proviso to section 127 has provided a list where no offence under this section shall be
deemed to have been committed:
(a) where the dividend could not be paid by reason of the operation of any law;
(b) where a shareholder has given directions to the company regarding the payment of the
dividend and those directions cannot be complied with and the same has been
communicated to him;
(c) where there is a dispute regarding the right to receive the dividend;
(d) where the dividend has been lawfully adjusted by the company against any sum due to it
from the shareholder; or
(e) where, for any other reason, the failure to pay the dividend or to post the warrant within the
period under this section was not due to any default on the part of the company.
UNIT 4 SHORT NOTES

Write a note on Buy-back of shares. (April2021)
(Also Refer KLE notes)
PROHIBITION OF BUY BACK

Companies Act of 2013 permits a company to buy back its own shares. It means
company can purchase its own shares. It is possible only after fulfilling certain legal
restrictions.
Restriction on purchase by company or giving loan for purchase of its shares
(Section 67):
A company limited buy shares or a company limited by guarantee and having share
capital shall have no power to by its own shares unless the consequent reduction of
share capital is effected under the provision of this Act. No public company shall give
any financial assistance for the purpose of or in connection with a purchase or
subscription made or to be made by any person of or for any shares in the company
or in its holding company. This financial assistance includes a loan, guarantee, the
provision for security or otherwise.
However, this restriction on financial assistance shall not apply to –
(a) The lending of money by a banking company in the ordinary course of its
business;
(b) If the purchase of or subscription for the shares held by trustees for the benefit of
the employees or such shares held by the employees of the company; For this
purpose, a scheme should have been approved by company through special
resolution and in accordance with the prescribed requirements
(c) The giving of a loan by a company to its employees other than directors or key
managerial personnel for an amount not exceeding their salary or wages for a period
of six months with a view to enabling them to purchase or subscribe for fully paid –
up shares in the company or its holding company to be held by them by way of
beneficial ownership.
.
If a company contravenes the provisions of this section, it shall be punishable with
fine which shall not be less than one lakh rupees but which may extend to twenty-
five lakh rupees and every officer of the company who is in default shall be
punishable with imprisonment for a term which may extend to three years and with
fine which shall not be less than one lakh rupees but which may extend to twenty-
five lakh rupees.
POWER OF COMPANY TO PURCHASE ITS OWN SECURITIES (SECTION 68):
This power is called buy – back.
A Company may purchase its own shares or other specified securities out of –
(a) Its free reserve;
(b) The securities premium account; or
(c) The proceeds of the issue of any shares or other specified securities.
No buy – back of any kind of shares or other securities shall be made out of the
proceeds of an earlier issue of the same kind of share or other specified securities.
No company shall buy – back unless –
(a) The buy – back is authorised by its articles;
(b) a special resolution has been passed at a general meeting of the company
authorising the buy – back.
(c) The buy – back is twenty – five percent or less of the aggregate of paid – up
capital and free reserve of the company;
(d) The ratio of the aggregate of secured and unsecured debts owned by the
company after buy – back is not more than twice the paid up capital and its free
reserve; this may be such higher ratio as central government may by order notify;
(e) All the shares or other specified securities for buy – back are fully paid – up;
(f) The buy – back of shares or other specified securities listed on any recognised
stock exchange is in accordance with the regulation made by the Securities and
Exchange Board of India (SEBI);
(g) The buy – back in respect of shares or other specified securities not listed on any
recognised exchange is in accordance with rules as prescribed.
Every buy – back shall be completed within a period of one year from the date of
passing of the special resolution or the resolution, as the case may be.
The buy – back may be –
(a) From the existing shareholders or security – holders on a proportionate basis;
(b) From the open market; or
(c) By purchasing the securities issued to employees of the company pursuant to a
scheme of stock option or sweat equity.
A company proposing to buy – back, before making such buy – back, shall file with
the Registrar a declaration of solvency signed by at least two directors of the
company. They shall also verify by an affidavit that the Board of Directors has made
a full inquiry into the affairs of the company as a result of which they have formed an
opinion that it is capable of meeting its liability and will not be rendered insolvent
within a period of one year from the date of declaration adopted by the board. Where
company has a managing director, one of the signatory shall be managing director.
In case of listed company, this declaration shall also be filed with Securities and
Exchange Board of India. Where a company buys back its own shares or other
specified securities, it shall extinguish and physically destroy the shares or securities
so bought back within seven days of the last date of completion of buy-back.
Where a company completes a buy-back of its shares or other specified securities, it
shall not make a further issue of the same kind of shares or other securities including
allotment of new shares or other specified securities within a period of six months
except by way of a bonus issue or in the discharge of subsisting obligations such as
conversion of warrants, stock option schemes, sweat equity or conversion of
preference shares or debentures into equity shares.
Where a company buys back its shares or other specified securities, it shall maintain
a register of the shares or securities so bought, the consideration paid for the shares
or securities bought back, the date of cancellation of shares or securities, the date of
extinguishing and physically destroying the shares or securities and other particulars.
A company shall, after the completion of the buy-back, file with the Registrar a return
containing such particulars relating to the buy-back within thirty days of such
completion. In case of a listed company, this return shall also be filed with the
Securities and Exchange Board of India.
If a company makes any default in complying with the provisions of this section or
any regulation made by the Securities and Exchange Board, the company shall be
punishable with fine which shall not be less than one lakh rupees but which may
extend to three lakh rupees and every officer of the company who is in default shall
be punishable with imprisonment for a term which may extend to three years or with
fine which shall not be less than one lakh rupees but which may extend to three lakh
rupees, or with both.
TRANSFER OF CERTAIN SUM TO CAPITAL REDEMPTION RESERVE
ACCOUNT (SECTION 69):
Where a company purchases its own shares out of free reserves or securities
premium account, a sum equal to the nominal value of the shares so purchased shall
be transferred to the capital redemption reserve account and details of such transfer
shall be disclosed in the balance sheet. The capital redemption reserve account may
be applied by the company, in paying up unissued shares of the company to be
issued to members of the company as fully paid bonus shares.
PROHIBITION FOR BUY – BACK IN CERTAIN CIRCUMSTANCES (SECTION 70):
No company shall directly or indirectly purchase its own shares or other specified
securities—
(a) Through any subsidiary company including its own subsidiary companies;
(b) Through any investment company or group of investment companies; or
(c) If a default, is made by the company, in the repayment of deposits and interest
payment thereon, redemption of debentures or preference shares or payment of
dividend to any shareholder, or repayment of any term loan or interest payable
thereon to any financial institution or banking company.
Call on Shares. (June2016)

Calls on shares
Articles 13 to 18 of Para II of Table F of Schedule - I of Companies A< 2013
interprets the calls on shares thus:
13. (i) The Board may, from time to time, make calls upon the members respect
of any monies unpaid on their shares (whether on account of the nominal
value of the shares or by way of premium) and not by the conditions of
allotment thereof made payable at fixed times:
Provided that no call shall exceed one-fourth of the nominal value of
the share or be payable at less-than one month from the date fixed for
the payment of the last preceding call.
(ii) Each member shall, subject to receiving at least fourteen days' notice
specifying the time or times and place of payment, pay to the company,
at the time or times and place so specified, the amount called on his
shares.
(iii) A call may be revoked or postponed at the discretion of the Board.
14. A call shall be deemed to have been made at the time when the resolution of
the Board authorising the call was passed and may be required to be paid by
instalments.
15. The joint holders of a share shall be jointly and severally liable to pay all calls
in respect thereof.
16. (i) If a sum called in respect of a share is not paid before or on the day
appointed for payment thereof, the person from whom the sum is due shall
pay interest thereon from die day appointed for payment thereof to the time of
actual payment at ten per cent, per annum or at such lower rate, if any, as the
Board may determine.
(ii) The Board shall be at liberty to waive payment of any such interest wholly
or in part.
17. (i) Any sum which by the terms of issue of a share becomes payable on
allotment or at any fixed date, whether on account of the nominal value of the
share or by way of premium, shall, for the purposes of these regulations, be
deemed to be a call duly made and payable on the date on which by the
terms of issue such sum becomes payable.
(ii) In case of non-payment of such sum, all the relevant provisions of these
regulations as to payment of interest and expenses, forfeiture or otherwise
shall apply as if such sum had become payable by virtue of a call duly made
and notified.
18. The Board—
(a) may, if it thinks fit, receive from any member willing to advance the same,
all or any part of the monies uncalled and unpaid upon any shares held by
him; and
(b) upon all or any of the monies so advanced, may (until the same would, but
for such advance, become presently payable) pay interest at such rate not
exceeding, unless the company in general meeting shall otherwise direct,
twelve per cent per annum, as may be agreed upon between the Board
and the member paying the sum in advance.
Calls on shares of same class to be made on uniform basis (Sec. 49)
Where any calls for further share capital are made on the shares of a class,
such calls shall be made on a uniform basis on all shares falling under that
class.
Explanation. — For the purposes of this section, shares of the same nominal
value on which different amounts have been paid-up shall not be deemed to
fall under the same class.
Charges. (June2015)
Refer main Question
Debenture (June2019)
Refer Main Question
Dividends. (June2014) (June2016) (Dec2017) (June2017) (June2019) (March2021)
DIVIDENDS
Introduction:
The word “dividend” has origin from the Latin word “dividendum’. It means a thing to
be divided. Every investor is aware that dividend is nothing but profits earned by the
company and dividend amongst the shareholders in proportion to the amount paid
up shares held by them. Simply stated it is a return on investment made by the
shareholders. Dividend is paid by a company to its shareholders on a particular date
either out of profits or out of reserves. Declaration of dividend is usually one of the
items of the agenda of every AGM when directors recommend dividend
Meaning and Definition of Dividend:
One of the main objects of companies is to earn profits which are distributed among
shareholders by way of ‘dividend’. In general sense ‘dividend’ is the share of the
Company profits distributed among the members. According to section 2(35)
“dividend” includes any interim dividend. In Commissioner of Income-Tax v/s
Girdhadas & Co. (pvt) Ltd., 1967, it was observed that the term ‘dividend’ has two
meanings:
(1) “As applied to a company which is a going concern, it ordinarily means the
portion of the profits of the company which is allocated to the holders of shares in the
company.
(2) In case of a winding up of a company it means a division of the realised assets
among the creditors and contributories according to their respective rights”.
RULES REGARDING DIVIDEND

1. Declaration of Dividend (SECTION 123):
A company shall declare dividend and pay it, only out of profit of the company for the
financial year or out of undistributed profit of any previous financial year or out of
both. In case, any guarantee given by any Government (Central or State), the
company may dividend out of money provided by that government for payment of
dividend. Before declaration of dividend, a company may transfer a portion from the
profit to the reserves of the company. The company is free to decide the percentage
for such transfer to the reserve. Where a company has no adequate profit or any
profit in a financial year or any accumulated profit to distribute as dividend, it may
declare dividend out of reserves in accordance with the rules made by the
government. The company may pay dividend only from free reserves, not from any
other reserves.
2. Interim Dividend:
The Board of Directors may declare interim dividend during financial year out of
surplus in profit and loss account. In case, a company is incurring loss as per
financials of latest quarter, interim dividend shall not be higher than average dividend
declared by the company during last three financial years.
3. Dividend Account in Bank:
The amount of dividend and interim dividend shall be deposited in a separate

account in a scheduled Bank within five days from the date of declaration of such
dividend. The dividend shall be paid to shareholder or to his banker in cash not
otherwise. However issue of bonus shares out of distributable profit or free reserve is
permitted and not be deemed to be a violation of this rule. Making a partly paid
share, fully paid through payment from distributable profit and free reserve is
permitted. Any dividend payable in cash may be paid by cheque or warrant or in any
electronic mode to the shareholder.
4. Right of members pending Registration of (SECTION 126):
Where any instrument of transfer of shares has been delivered to any company for
registration and the transfer of such shares has not been registered by the company,
it shall,—
(a) transfer the dividend in relation to such shares to the Unpaid Dividend Account
unless the company is authorised by the registered holder of such shares in writing
to pay such dividend to the transferee specified in such instrument of transfer; and
(b) keep in abeyance in relation to such shares, any offer of rights shares and any
issue of fully paid-up bonus shares.
5. Punishment for failure to distribute Dividend (SECTION 127):
Where a dividend has been declared by a company but has not been paid or the
warrant in respect thereof has not been posted within thirty days from the date of
declaration to any shareholder entitled to the payment of the dividend, every director
of the company shall, if he is knowingly a party to the default, be punishable with
imprisonment which may extend to two years and with fine which shall not be less
than one thousand rupees for every day during which such default continues and the
company shall be liable to pay simple interest at the rate of eighteen percent per
annum during the period for which such default continues.
No offence under this section shall be deemed to have been committed:—

(a) Where the dividend could not be paid by reason of the operation of any law;
(b) Where a shareholder has given directions to the company regarding the payment
of the dividend and those directions cannot be complied with and the same has been
communicated to him;
(c) Where there is a dispute regarding the right to receive the dividend;
(d) Where the dividend has been lawfully adjusted by the company against any sum
due to it from the shareholder; or
(e) Where, for any other reason, the failure to pay the dividend or to post the warrant
within the period under this section was not due to any default on the part of the
company.
6. Unpaid Dividend Account (Section 124):
Where a dividend has been declared by a company but has not been paid or claimed
within thirty days from the date of the declaration to any shareholder entitled to the
payment of the dividend, the company shall, within seven days from the date of
expiry of the said period of thirty days, transfer the total amount of dividend which
remains unpaid or unclaimed to a special account to be opened by the company in
that behalf in any scheduled bank to be called the Unpaid Dividend Account.
Thus, number of days to transfer unpaid or unclaimed amount of dividend to unpaid
dividend account comes to 30 + 7 = 37 days. The company shall, within a period of
ninety days of making any transfer of an amount to the Unpaid Dividend Account,
prepare a statement containing the names, their last known addresses and the
unpaid dividend to be paid to each person and place it on the website of the
company, if any, and also on any other website approved by the Central Government
for this purpose. This period of ninety days start form date of transfer to unpaid
dividend accounts, not from declaration of dividend or transfer of the meant for
dividend to dividend account. If any default is made in transferring the total amount
referred to the Unpaid Dividend Account of the company, it shall pay, from the date
of such default, interest on so much of the amount as has not been transferred to the
said account, at the rate of twelve per cent per annum and the interest accruing on
such amount shall ensure to the benefit of the members of the company in
proportion to the amount remaining unpaid to them. The Term ensures convey to
take, or have effect or serve to the use, benefit, or advantage of members. Any
person claiming to be entitled to any money transferred to the Unpaid Dividend
Account of the company may apply to the company for payment of the money
claimed.
If a company fails to comply with any of the requirements of this section, the
company shall be punishable with fine which shall not be less than five lakh rupees
but which may extend to twenty-five lakh rupees and every officer of the company
who is in default shall be punishable with fine which shall not be less than one lakh
rupees but which may extend to five lakh rupees.
Forfeiture of shares. (Dec2016)
FORFEITURE OF SHARES
If a shareholder having been called upon to pay any call on his shares fails to pay
the call, the company has two remedies against the shareholders, viz.,
1. It may sue him for the amount due.
2. It may forfeit his shares.
Forfeiture means depriving a person of his property as a penalty for some act or
omission. The company may forfeit the shares of a shareholder for non- payment of
some calls if the following conditions are satisfied:
In accordance with Articles: Forfeiture must be authorised by the Articles of the
company. Forfeiture is in the nature of penal proceedings. It is valid only if the
provisions of AOA are strictly complied with.
Prior Notice to Forfeiture: Before shares can be forfeited, the company must serve
a notice on the defaulting shareholder requiring payment of the unpaid call together
with any interest which may have accrued. The notice must –
Give not less than 14 days time from the date of service of notice for the payment of
the amount due; and
State in the event of non- payment of the amount within the period mentioned in the
notice, the shares in respect of which the call was made will be liable to be forfeited
Resolution of the Board: If the defaulting shareholder does not pay the amount
within the specified time as required by the notice, the directors must pass a
resolution forfeiting the share. If this resolution is not passed, the forfeiture is invalid.
If, however, the notice threatening the forfeiture incorporates as well.
Good faith: The power to forfeit shares must be exercised by the directors in good
faith and for the benefit of the company.
Lien on shares. (June2017)
Meaning of 4Lien*
A lien may be defined to be a charge on property for the payment of a debt or duty,
and for which it may be sold in discharge of the lien.
A lien is a right by which a person in possession of the property holds and retains it
against the other in signification of a demand due to the party retaining it.
A Lien, in a limited and technical sense, signifies the right by which a person in
possession of personal property holds and retains it against the owner in satisfaction
of a demand due to the party retaining it; but in its more extensive meaning and
common acceptation it is understood and used to denote a legal claim or charge on
property, either real or personal, as security for the payment of some debt or
obligation; it is not strictly a right in or right to the thing itself but more properly
constitutes a charge or security thereon.
A lien signifies an obligation, tie, or claim annexed to, or attaching upon, any
property without satisfying which such property cannot be demanded by its owner.
Kinds of lien: Lien of two kinds: general and particular.
General Lien: A general lien is the right to retain the property for a general balance
of account. A general lien, however, is not favoured, and can only be established
either by contract, express or necessarily implied, or by custom or usage of trade or
of the parties.
Particular Lien: A particular lien or special lien is a right to retain property of another
for some particular claim or charge upon the identical property detained.
Lien on shares
Articles 9 to 12 of Para II of Table F of Schedule I of Companies Act, 2013 provides

that:
9. (i) The company shall have a first and paramount lien—
(a) on every share (not being a fully paid share), for all monies (whether presently
payable or not) called, or payable at a fixed time, in respect of that share; and
(b) on all shares (not being fully paid shares) standing registered in the name of a
single person, for all monies presently payable by him or his estate to the
company:
Provided that the Board of Directors may at any time declare any share to be
wholly or in part exempt from the provisions of this clause.
(ii) The company's lien, if any, on a share shall extend to all dividends payable and
bonuses declared from time to time in respect of such shares.
10. The company may sell, in such manner as the Board thinks fit, any shares on
which the company has a lien:
Provided that no sale shall be made—
(a) unless a sum in respect of which the lien exists is presently payable; or
(b) until the expiration of fourteen days after a notice in writing stating and
demanding payment of such part of the amount in respect of which the lien
exists as is presently payable, has been given to the registered holder for
the time being of the share or the person entitled thereto by reason of his
death or insolvency.
11. (i) To give effect to any such sale, the Board may authorise some person to
transfer the shares sold to the purchaser thereof.
(ii)The purchaser shall be registered as the holder of the shares comprised in
any such transfer.
(iii) The purchaser shall not be bound to see to the application of the
purchase money, nor shall his title to the shares be affected by any
irregularity or invalidity in the proceedings in reference to the sale.
12. (i) The proceeds of the sale shall be received by the company and applied in
payment of such part of the amount in respect of which the lien exists as is
presently payable.
(ii) The residue, if any, shall, subject to a like lien for sums not presently
payable as existed upon the shares before the sale, be paid to the person
entitled to the shares at the date of the sale.
Different kinds of share capital of a company. (Refer Page No. 315 (Dec2014)
(June2015) (Dec2018)
Refer Main Question
Transfer of shares. (Refer Page No. 305) (June2014)

TRANSFER OF SHARES (Section-56)
It is one of the characteristic features of companies their shares are treated as
movable property capable of being transferred. The shares of a company are
movable property, transferable in the manner prescribed in the Companies Act,

2013, and the AOA of a company.
Section 44 of the Companies Act, 2013 provides that the share-holders are free
to transfer their shares.
In Thenppa Chettiar v/s Indian Overseas Bank Ltd. (1943), it was observed that
‘the right of a shareholders to transfer his shares in a company is absolute as it is
inherent in the ownership of the shares, but it can be restricted by contract which has
to be found in the AOA of the company. Thus, every shareholder has a right to
transfer his shares in an open market without the consent of other shareholders
subject to express restriction if any to that effect by articles. However, the articles of
the company may empower the directors to refuse to register the transfer. In case,
the directions are induced to register the transfer by concealment or fraud, such
transfer is invalid and the transfer cannot avoid liability on the shares.
Rules relating to transfer of shares/ Procedure for Transfer of Shares : Section
56
1. Transfer not to be registered except on production of instrument of transfer:
(i) Instrument of Transfer: A company shall not register a transfer of shares unless
a proper transfer deed duly stamped, executed and signed by both the transferor
and the transferee is delivered to the company. The transfer deed shall specify the
name, address and the occupation, if any, of the transferee. It shall be delivered to
the company along with the share certificate or if no such share certificate is in
existence, then along with the letter of allotment of shares.
(ii) Prescribed Form: Every transfer deed shall be in prescribed form. It shall be
presented to the prescribed authority before it is signed by or on behalf of the
transferor and before any entry is made therein. Normally the prescribed authority is
the registrar of Companies. The prescribed authority shall stamp or otherwise
endorse thereon the date on which the instrument is so presented.
(iii) Period for delivery of transfer deed: The transfer deed shall be delivered to the
company in the case of shares quoted on a recognised stock exchange before the
date on which the register of member is closed for the first time after the date of
presentation, or within 12 months from the date of presentation to the prescribed
authority whichever is later. In any other case, the transfer deed shall be presented
to the company within 2 months of the date of presentation to the prescribed
authority. The Central Government may extend the period for delivery of instrument
of transfer to the company.
2. Transfer by legal representatives:
A transfer executed by the legal representative of a deceased member, although he
is not himself a member, is as valid as the one executed by the member himself.
3. Application for transfer:
An application for the registration of a transfer of shares of a company may be made
either by the transferor or by the transferee. Where the application is made by the
transferor and relates to partly paid shares, the transfer shall not be registered,
unless the company gives notice of the application to the transferee and the
transferee makes no objection to the transfer within 2 weeks from the receipt of the
notice.
4. Power to refuse registration and appeal against refusal:
With a view to protect the interest of the investors against the refusal of a company
to register transfer of shares, company is required to give reasons before they refuse
any transfer of shares. It also confers a right on the aggrieved investor to apply for
relief to the NCLT on specified grounds.

Kslu Unit 4 Q & A Company Law

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UNIT 4 COMPANY LAW Q & A

Forms of Share Capital:

6. Called- Up Capital: Generally, a company does not need entire value of

ALLOTMENT OF SHARES (Section-39)

RESTRICTIONS ON ALLOTMENT OF SHARES

1. There must be proper Offer and Acceptance:

2. Allotment must be made by Proper Authority:

3. Allotment Must be Made Within Reasonable Time:

4. Allotment Must be Communicated:

5. Allotment Must be Unconditional:

Statutory Restrictions On Allotment Of Shares: There are some statutory

a) To pay the purchase price of any property.

2. Opening of Subscription List:

3.Obtaining Permission from Stock Exchange (Section 46)

2. What is allotment? And what are the statutory restrictions on allotment

FIXED AND FLOATING CHARGES

A charge which is to be satisfied out of a particular fund or the proceeds of a

2. Kinds of charges: — The charge may be fixed charge or floating charge.

(c) When floating charge becomes fixed charge or crystalisation of floating

In Illingworth v. Houldsworth [(1904) AC 355], Lord Macnaghten stated that, "A

MEANING OF CHARGES – The Companies Act, 2013 defines a Charge as an

Crystallisation of Floating Charge This conversion of floating charge into a fixed

 Company goes into liquidation Company cease to carry on its business

7. Convertible Debentures: These debentures give an

Refer Q.1 above

'X' company lends to Y company a loan on a mortgage of its assets. The

The Auditors of a company made a confidential report to the directors stating

RE LONDON AND GENERAL BANK:

A company inserted an advertisement in a newspaper stating that some

Advertisement in newspaper to invite application for purchase of remaining shares of

Summary of the case and judgment

Origin of Doctrine of Indoor Management

UNIT 4 SHORT NOTES

PROHIBITION OF BUY BACK

Call on Shares. (June2016)

RULES REGARDING DIVIDEND

The amount of dividend and interim dividend shall be deposited in a separate

No offence under this section shall be deemed to have been committed:—

Forfeiture of shares. (Dec2016)

Lien on shares. (June2017)

Kinds of lien: Lien of two kinds: general and particular.

Articles 9 to 12 of Para II of Table F of Schedule I of Companies Act, 2013 provides

Transfer of shares. (Refer Page No. 305) (June2014)

movable property, transferable in the manner prescribed in the Companies Act,

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