Study Material on

CORPORATE REGULATIONS AND

ADMINISTRATION
Prepared as per syllabus

C.B.C.S.S B.Com PROGRAMME

Semester -1
Core Course -3

M.G.
UNIVERSITY
 Core Course -3:
CORPORATE REGULATIONS AND ADMINISTRATION
Instructional Hours: 72

Objective: To familiarise the students with the management and administration of joint stock companies in
India as per Companies Act, 2013

Module 1
Company – Definition – Characteristics – Classifications –History and framework of Company Law in
India – Companies Act 2013 – one person company, small company, associate company, dormant
Company, producer company; association not for profit; illegal association (Instructional Hours – 10)

Module 2
Promotion and formation of a company- Body Corporate – promoter- legal position-duties - remuneration
– Memorandum of Association – Articles of Association – Contents and alteration – Incorporation of
Company – On-line registration of a company – CIN – Companies With Charitable Objects – Doctrines of
Indoor Management, Constructive Notice, Ultra-vires – Lifting up of Corporate Veil – Conversion of
Companies (Instructional Hours – 12)

Module 3
Share Capital – Types – Public Offer – Private Placement – Prospectus – Contents of Prospectus – Types
Of prospectus – Deemed prospectus – Shelf Prospectus – Red Herring Prospectus – Abridged prospectus -
Liability for Misstatements in Prospectus – Issue and Allotment of Securities – Types – Voting Rights –
DVR- Application of Premiums – Sweat Equity Shares – Issue and Redemption of Preference Shares
Transfer and Transmission of Securities- Punishment for impersonation of Shareholder – Further Issue of
Share Capital- Bonus Shares- Debenture Issue – (Instructional Hours – 15)

Module 4
Membership in company and meetings- modes of acquiring membership-rights and liabilities of Members-
cessation of membership- Register of Members – Company meetings – Annual General Meeting –
Extraordinary General Meeting- Notice Of Meeting – Quorum – Chairman – Proxies – Voting – Show of
Hands – E-Voting – Poll- Postal Ballot- Motions – Resolutions – Types – Minutes – Books of Accounts –
Annual Return- Directors – Types – legal position – Appointment – Duties – Disqualifications -DIN –
Vacation of Office – Resignation – Removal – Meetings of Board – Resolutions and Proceedings -Powers
of Board – Key Managerial Personnel- CEO- CFO – Audit and Audit Committee – related Party-
transactions – Corporate Social Responsibility. (Instructional Hours – 20)

Module 5
Winding up – Contributory – Modes of winding up – Winding Up by Tribunal – Petition for Winding Up -
Powers of Tribunal- Liquidators – Appointments- Submission of Report – Powers and Duties – Effect of
Winding Up Order- Voluntary Winding Up – Circumstances – Declaration Of Solvency – Meeting of
Creditors- Commencement of Voluntary Winding Up- Appointment of Company Liquidator- Final
Meeting and Dissolution of Company Official Liquidators –Appointment -Powers – Functions – Winding
Up of unregistered companies. (Instructional Hours – 15)
 CORPORATE REGULATIONS AND ADMINISTRATION

INTRODUCTION TO INDIAN COMPANY LAW

MODULE – I (Unit -1)

HISTORY OF COMPANY LAW

The principles behind Indian Company Law owe a lot to English Law relating to companies.

In England, Companies originated as voluntary association of individuals based on contractual relationship.

There was no proper mechanism to regulate the functioning of these companies and these companies
cheated the innocent people. That induced the legislature to intervene and in 1720, it passed what is known
as the Bubble Act. The Act made it a criminal offence to act as a corporation without the sanction of an Act
of Parliament or a charter. The history of modern corporate law in England began in 1844 when the Joint
Stock Companies Act was passed. The Act provided that Act denied to the members the facility of limited
liability. The English Parliament in 1855 passed the Limited Liability Act providing for limited liability to
the members of a registered company. The concept of a private company was introduced for the first time
in the companies Act, 1908 (the earlier ones were called public companies). The Companies Act 1948 –
The most remarkable legislation in the field of company law

HISTORY OF COMPANY LAW IN INDIA

The history of Indian company law began with the Companies Act of 1850, modelled on British Companies
Act of 1844.It provided for the registration of companies and transferability of shares. After India become
independent, the Govt. Appointed a committee of 12 members under the chairmanship of Mr Bhabha.
Report of the committee resulted in the most comprehensive legislation, namely, The Companies Act,
1956.Came into force on 1 April 1956

The Companies Act, 1956 has been amended several times to include different provision in the Act.

 Companies (Amendment Act) 1960:

Various aspects of company management were revised based on recommendation of Shastri committee.

 Companies (Amendment Act) 1963:

Board of Company Law Administration and Companies Tribunal were created.

 Companies (Amendment Act) 1965:

The division of object clause of the company into main and subsidiary objects was made mandatory. It also
prohibited contributions to any political party or political purpose.

 Companies (Amendment Act) 1985:

Permitted political contribution by non- govt. Companies. The right to receive remuneration by the
employees of a company was placed as the first debt in the event of winding up of a company.

 Companies (Amendment Act) 1988:

Role of company secretary was spelt out in clear terms. It also created Company Law Board to exercise
judicial function.

 Companies (Amendment Act) 1999:

Buy back of shares and issue of sweat equity shares were introduced.

 Companies (Amendment Act) 2000:

Minimum paid up capital requirement for private and public companies were introduced. The concept of
deemed public companies was made inoperative.

 Companies (Amendment Act) 2002:

New chapter on producer companies was introduced. National Company Law Tribunal was established

 Companies (Amendment Act) 2006:

Director Identification Number (DIN) was introduced. Changes were effected to facilitate electronic filing
of documents.

In spite of all these changes the law was still found in adequate in several aspects.

FEATURES OF COMPANIES ACT 2013

 Flexibility:
One of the important features of the new legislation is the greater flexibility offered to the executive
in the administration of the company law. Central Government has the power to make changes in
the law in as many as 416 areas.
 Wider scope:
The new legislation has a wider scope than the 1956 Act. The new act covers companies, body
corporates, statutory entities created under other legislations etc.
  Liberal administration:
The new Act falls into a different paradigm in the area of administration. 1956 Act was a legislation
which was based on the of concept of “license Raj” where each step required permission from the
Government. Grants autonomy to companies to a very great extent.
 Strict punishment:
A new act is stricter punishment for offences. If any violation of norms the punishments prescribed
are really deterrent in nature.
 Strong administrative framework:
Both in civil and criminal law violations regarding matters connected with the companies, fast
dispute settlement is essential and for this purpose a strong administrative system is created.
 Suitable for global world:
The new legislation accepts the globalised platform in which companies function. Permits cross
border mergers, jurisdiction of foreign court etc.
 Corporate Governance and Corporate Social Responsibility:
Companies Act 2013 demand certain class of companies to spend a certain sum of amount every
year to improve society. New dimensions of corporate governance & corporate social responsibility
 Information Technology:
Facilitates the use of all the possibilities offers by information technology.

Law Administration

1.Central Government

 Supreme authority responsible for the administration of Companies Act 2013

2. National Company Law Tribunal (NCLT).

 NCLT is a quasi-judicial body in India

 It was formed on June 1, 2016
 It has the role to settle disputes in relation to the companies. It also handles the structures and laws
of the companies.
 All proceedings under the Companies Act such as arbitration, arrangements, compromise,
reconstruction, and winding up of the company will be disposed of by the Tribunal.
3. National Company Law Appellate Tribunal (NCLAT)

 It was constituted under Section 410 of the Companies Act, 2013 for hearing appeals against the
orders of National Company Law Tribunal.
 11 members
 The chairman and members are appointed by the Central Govt. through notification
 The chairperson shall be a person who is or has been a judge of supreme court or the chief justice
of a high court.
 Appeal has to filed within 45 days from the date of receipt of the copy of the order.

4. The Supreme Court

 For hearing appeals against the orders of National Company Law Appellate Tribunal.
 Appeal has to filed within 60 days from the date of receipt of the copy of the order.

5. Serious Fraud Investigation Office

 A fraud-investigating agency set up to investigate corporate frauds of very serious and complex
nature.
 The authorization of SFIO is limited to investigating frauds related to a company under the
Companies Act.
 The Vajpayee Government decided to set up SFIO on 9 January 2003.
 SFIO starts an investigation only after receiving an order from the Union government in this respect
which means, it cannot take up cases on their own initiative.

6. Special Courts

 To deal with and dispose of criminal offences under the CA, 2013
 To ensure speedy trial of such offence
 It constitutes a single judge appointed by Central govt.

COMPANY

A business entity which acts as an artificial legal person, formed by a legal person or a group of legal
persons to engage in or carry on a business or industrial enterprise.

Section 2(20) of the 2013 Act defines the term “company” to mean “a company incorporated under the
Companies Act 2013 or any previous company law.
Features & Characteristics of a Company:

1. Separate Legal Entity:

A company has a distinct entity and is independent of its members or people controlling it.

2. Limited Liability:

A company may be limited by guarantee or limited by shares. In a company limited by shares, the liability
of the shareholders is limited to the unpaid value of their shares. In a company limited by guarantee, the
liability of the members is limited to the amount they had agreed upon to contribute to the assets of the
company in the event of it being wound up.

3. Perpetual Existence:

Unlike other non-registered business entities, a company is a stable business organization. Its life doesn’t
depend on the life of its shareholders, directors, or employees. Members may come and go but the company
goes on forever.

4. Common Seal:

A company being an artificial legal person, uses its common seal (with the name of the company engraved
on it) as a substitute for its signature. Any document bearing the common seal of the company will be
legally binding on the company.

5. Artificial Legal Person:

In the eyes of the law, a company is an artificial legal person which has the rights to acquire or dispose of
any property, to enter into contracts in its own name, and to sue and be sued by others

6. Transferability of shares:

The shares of the company are freely transferable. They can be bought and sold in stock market.

7. Capacity to Sue and to be Sued:

The capacity is almost similar to human being

8. Incorporated association:

A company comes into existence when it is registered under the Companies Act (or other equivalent act
under the law). A company has to fulfil requirements in terms of documents (MOA, AOA), shareholders,
directors, and share capital
Advantages and disadvantages of Incorporation:

Incorporation of a company refers to the process of legally forming a company or a corporate entity.

Advantages of Incorporation (NB: same as characteristics of a registered company)

 Corporate Personality/Separate Legal Entity

 Limited Liability
 Transferable shares
 Perpetual succession
 Separate property
 The capacity to sue and to be Sued
 Professional management:
Shareholders doesn’t have the right to manage the company this allows the directors to take prudent
decisions in the larger interest of the company.
 Opportunity to involve large number of investors:
Only public company can raise capitals form lakhs of people. This option is not available for any
other association

Disadvantages

❖ Procedural Formalities: The company has to undergo procedural rules provided by the Companies Act
and other relevant legislations.

❖ Expensive: The process of incorporation and running of a company is expensive affair. Sending notices,
annual report, holding of meeting and complying with the norms fixed by Companies Act are all expensive

❖ The company is not a citizen: An incorporated company does not get a citizenship. The fundamental
rights of a citizen are not applicable to an incorporated company.

❖ Lifting the corporate veil: The advantages of incorporation will not be available in few circumstances.
In such situations the responsible person has have to incur personal liability.

❖ Corporate scams: The promoters may float companies with the intention of cheating the innocent
public.
 MODULE-1
Unit -2 Classification of Companies

Classification on the basis of incorporation

 Royal Chartered Companies

These companies are formed under a special charter by the monarch or by a special order of a king or a
queen. Few examples of royal chartered companies are BBC, East India Company, Bank of England, etc.

 Statutory Companies

These companies are incorporated by a special act passed by the central or state legislature. These
companies are intended to carry out some business of national importance. For example, The Reserve Bank
of India was formed under RBI act 1934

 Registered or Incorporated Companies

These companies are formed/incorporated under the companies’ act passed by the government. These
companies come into existence only after these are registered under the act and the certificate of
incorporation is passed by the Registrar of companies.

Classification on the basis of Liability of the Members

 Companies with Limited liability: These may be

1. Companies Limited by shares
2. Companies Limited by Guarantee
1. Companies by Shares

These companies have a defined share capital and the liability of each member is limited by the
memorandum to the extent of the face value of shares subscribed by him

2. Companies Limited by Guarantee

These companies may or may not have a share capital and the liability of each member is limited by the
memorandum to the extent of the sum of money s/he had promised to pay in the event of liquidation of the
company for payments of debts and liabilities of the company.

 Unlimited Companies

There is no formal restriction to the amount of money that the shareholder/member of the company has to
 pay in the event of the liquidation of an unlimited company.

Classification of Companies basis of number of Members

 Private Company

Section 2(68) of Companies Act, 2013 defines private companies. According to that, private companies are
those companies whose articles of association restrict the transferability of shares and prevent the public at
large from subscribing to them.

 Public Company
As per the Companies Act, 2013 a public company is
-A company that is not a private company
-Has a minimum of seven members, no maximum limit is mentioned

-Has a minimum paid-up capital of five lacks, again there is no maximum limit
A private company that is a subsidiary of a public company, will be considered a public company

 One Person Company

Section 2(62) of Companies Act defines a one-person company as a company that has only one person as
to its member.

Companies on the basis of Control or Holding

 Holding Companies

A company is known as the holding company of another company if it has control over that company.

 Subsidiary company
A company is known as a subsidiary of another company when control is exercised by the latter over the
former called a subsidiary company. Holding companies exercise control over their subsidiaries by
dictating the composition of their board of directors. Furthermore, parent companies also exercise control
by owning more than 50% of their subsidiary companies’ shares.

 Associate Companies
Associate companies are those in which other companies have significant influence. This “significant
influence” amounts to ownership of at least 20% shares of the associate company.
Classification on the basis of Size of company

 Small company

Small Company u/s 2(85) of the Companies Act, 2013 is as follows:

Small Company means a company, other than a public company-

I. Paid up share capital which shall not be more than ten crore rupees,

II. Turnover of which as per profit and loss account for the immediately preceding financial year does
not exceed one hundred crore rupees

Classification on the basis of Ownership

 Government Companies

Government companies are those in which more than 50% of share capital is held by either the
central government, or by one or more state government, or jointly by the central government and
one or more state government.

 Foreign Companies

Foreign companies are incorporated outside India. They also conduct business in India using a
place of business either by themselves or with some other company.

Association Not for Profit

Section 8 Company or a Non-Profit organization (NPO)
 A Company established for promoting commerce, art, science, religion, charity or any other useful
object,
 provided the profits. if any, or other income is applied for promoting only the objects of the
Company and
 no dividend is paid to its members.
Sec. 8 provides that the central govt. may by license direct that any association be registered as a company
with limited liability without using the limited" or the words 'Private limited'.

Illegal Association

According to section 464 any company or association of persons or partnership in which the number of
members is more than such number of persons as may be prescribed and if it carries on business for profit
 if it's not registered under any act then it will be called as an illegal association.

It cannot sue and be sued in the court of Law.

The liability of all the members of the illegal association is unlimited for all the liabilities of the association.

Penalty or Fine Every person who is a member of an illegal association is liable to pay a fine of Rs.100k.

Producer Company

The concept of PC was introduced in 2002 by incorporating a new part IXA (581) A to 581 ZT) to the
company’s act, 1956.

It was on the basis of recommendation of an expert committee led by economist, Y.K. Alagh

The name Producer Company, is appropriated for these types of companies mainly because of two reasons

1. Only persons who are primary producers can participate in the ownership.

2. The object for which a PC could be registered is

 Production, harvesting, procurement, grading, pooling, handling, marketing, selling, export of

primary production of the Members or import of goods or services for their benefit.

 Processing including preserving, drying, distilling, brewing, venting, canning, and packaging of
the produce of its members

 Manufacture, sale or supply of machinery, equipment or consumables mainly to its Members.

 Providing education on the mutual assistance principles, to its Members and others.

 Rendering technical services, consultancy services, training, research and development

 Generation, transmission, and distribution of power, revitalization of land and water resources

 Insurance of producers or their primary produce.

Incorporation

Any 10 or more producers (Individuals) can join together to form a production company or, any 2 or more
producer institutions can form a producer company.

A combination of ten or more individuals and producer institution, each of them being a producer.
A company incorporated as a producer company gets the status of a private limited company.

Rules applicable to producer companies

1. Membership to primary producers. In a Producer Company, only persons engaged in an activity

connected with, or related to, primary produce can participate in the ownership.

2. Limited liability Company. The name of the company shall end with the words "Producer
Company Limited". The liability of the members will be limited to the amount, if any, unpaid on
the shares.

3. Private Company. On registration, the producer company shall become as if it is a private limited
company for the purpose of application of company law.

4. Share Capital. The share capital of a Producer Company shall consist of equity shares only.
Moreover, these equity shares cannot be publicly traded but only transferred.

5. Voting Rights. Voting rights depend on the composition of member.

 If the membership is only of individuals, then voting rights shall be based on a single vote
for every member.

 If the members are producer institutions only, then voting rights shall be on the basis of
their participation in the share capital.

 If the membership is a combination of both individuals and producer institutions, then

voting rights shall be based on a single vote for every member.

6. Management. Every producer company is to have at least five and not more than 15 directors. The
provisions mandate that a full time chief executive should be appointed by the board and shall be
entrusted with substantial powers of management as the board may determine.

7. Reserves. Every producer company has to maintain a general reserve in every financial year. In
case there are not sufficient funds in any year for such transfer, the shortfall has to be made up by
members' contribution in proportion to their 'patronage in the business'. 'Patronage' is defined as
the use of services offered by producer companies to their members by participation in their
business activities.
 Module 2 Unit-1

Formation of Company

Various stages in the formation of a company are

1. Promotion
2. Registration or incorporation
3. Raising of capital
4. Commencement of business

Body Corporate

Body corporate broadly means a corporate entity which has legal existence.

The term body corporate is defined in section 2(11) of companies act 2013. This includes a private company,
public company, one-person company, small company, etc.

“Body corporate” or corporation also includes a company incorporated outside India.

However, body corporate does not include;

i. A co-operative society registered under any law relating to co-operative societies; and
ii. Any other body corporate (not being a company as defined in the companies act 2013) which the
central government may, by notification, specify in this behalf.

1. Promotion

Promotion is the first stage in the formation of a company. Promotion is the stage of conceiving an idea of
forming a company to do a business and working on that idea. The person involved in this task is termed as
promoter. The promoter may work up the idea with the help of his own resources, influence or competence
or he may, if necessary, take the help of technical and legal experts to bring a company into existence.

1.1 Who is a promoter?

The person who does all the preliminary work needed for the formation of a company. He is a person
who brings a company into existence.
Sec. 2(69) of the Companies Act, 2013 defines the term promoter as a person:
 • Who has been named as such in a prospectus or is identified by the company in the annual return
referred to in section 92; or
• Who has control over the affairs of the company, directly or indirectly whether as a shareholder,
director or otherwise; or.
• In accordance with whose advice, directions or instructions the Board of Directors of the company
is accustomed to act. This shall, however not apply to a person who is acting merely in a
professional capacity.

1.2 Legal position of a promotion

A promoter can neither be termed as an agent nor a trustee of a company which has not come into
existence. The reason is that there was no principal or trust in existence for whom or for whose benefit
the promoter has acted. Thus, the legal position of the promoter cannot be precisely established. The
position of a promoter is termed as quasi-trustee. This is because of the fiduciary position he has with
the company he is promoting. A fiduciary position signifies a position of trust and confidence.

1.3 Duties and Liabilities of Promoter

The promoter stands in a fiduciary relationship with the company.

(i) Not to make Secret Profit: Promoters should not make any secret profits at the cost of the company
without its knowledge and consent. If any such secret profit is obtained, the company can claim the
benefit from the promoter.

(ii) Disclosure of Material Facts: It is the duty of the promoters to disclose fully all material facts
relating to the formation of the company.

(iii) The promoter should not cause any undue influence or fraud over any contracts with the company.
They should not make any unfair use of their position.

1.4 Remuneration of Promoters

The promoter does not have a right to remuneration against the company.

But, the promoter is allowed to take reasonable remuneration for his service. Generally, he is paid in any
one of the following ways:

1. He may have paid a lump sum in cash

2. He may be given fully paid up shares in the company or partly in shares or debentures.

3. He may be paid a commission on the shares sold

4. If he sells his own business, he may paid on the basis of the profit disclosed by him.

2. Registration of company or Incorporation

Incorporation is the second stage in the formation of company. Incorporation brings a company into
existence as a separate corporate entity. Incorporation refers to the registration of the company under the
companies Act.

As per Sec. 3(1) a company may be formed for any lawful purpose by:

(a) Seven or more persons, where the company to be formed is to be a public company;
(b) Two or more persons, where the company to be formed is to be a private company; or
(c) one person, where the company to be formed is to be One Person Company that is to say, a private
company,

Formation of one Person Company

The MOA shall also contain the name of one other Natural person (Nominee) who shall become the member
of company with in 180 days of two events –

1. On the death of Member; or

2. If the member losing his capacity to make a contract. Note – Such Nominated Person shall become
nominee only of one OPC at a time.

Nominee shall give his prior written consent to company and it shall be filed by company to ROC at the
time of Incorporation of Company

Documents to be filed with the Registrar

a) Approval of name: It has to be ensured that the name selected for the company does not match with
the name of any other company. For this, the promoter has to fill in a “name availability form” and
submit it to the registrar of companies along with necessary fees.
b) Filing of documents: For registration an application has to be filed with the registrar of the
companies along with the following documents:
• Memorandum of association properly stamped and signed by the signatories
• Articles of association properly stamped and signed by the signatories.
 • Notice of the address of the registered office of the company.
• Copy of the letter received from the department of company law and administration of the
Government, giving intimation about the availability of the proposed names of the company.
• Statutory declaration stating that all the requirements of the company’s act have been compiled
with statement of nominal capital of the company
• Details of persons (name, addresses, occupation etc.) who have accepted to act as the first director
of the company.
• The written consent of the directors to act so
• An undertaking by the directors to take up and pay for the qualification shares
• Particulars of managing directors, manager, secretary, etc., if any.
c) Payment of filing and registration fees: Along with application and the necessary documents
promoter must also pay required stamp duty, filing fees, registration fees. The registrar will
scrutinize the documents and if satisfied will enter the name of the company in the register and will
issue the company its birth certificate called the ‘Certificate of Incorporation.

Corporate Identity Number (CIN)

The corporate identity number or company CIN No. is a 21 digits’ alpha- numeric code number issued
to every company incorporated in India when it is registered by ROC.

3. Capital Subscription or Raising of Share Capital

A private company can commence the business immediately after incorporation but a public Company
having a share capital can commence business only after obtaining another certificate called “Certificate of
Commencement of Business” from the registrar of companies.

In this stage the company has to make arrangements for obtaining the necessary capital for the Company.

a) Issue of prospectus: In order to raise the requires capital a prospectus has to be issued inviting the
public to subscribe for the shares. After receiving the applications from the public the company
proceeds with the allotment if the minimum subscription has been reached.
b) Minimum Subscription: It is the minimum amount of capital that should be subscribed for by the
public before the company can proceed with allotment of shares. This amount should be stated in
the prospectus. It has to be 90% of the issued share capital.
c) Allotment of shares: it means distribution of the shares among the applicants or subscribers. A
company can proceed with the allotment of shares only after receiving the minimum subscription
from the public. After the distribution is done by the director’s letter of allotment should be sent to
 those applicants who have been allotted the shares and letter of regret should be sent to those
applicants who have not been allotted any shares and their application money should be returned.

Online Registration of a New Company

The MCA 21 Project of the Ministry of Corporate Affairs enables online registration of a company on the portal
of the MCA. The steps for online registration of a company are as follows:

Step 1: Application for DIN (Director Identification number)

To register a company, first Director Identification Number (DIN) is to be obtained. One needs to file eForm
DIN1 in order to obtain DIN.

Step 2: Acquire/Register DSC (Digital Signature Certificate)

All filings done by the companies under MCA 21 e-Governance programme are required to be filed with the use
of Digital Signatures by the person authorized to sign the documents.

Acquire DSC — A licensed Certifying Authority (CA) issues the digital signature.

Step 3: Application for approval of names for the company to be incorporated

At the time of company registration important documents like memorandum of associations and articles of
associations need to be submitted to the register of the companies. These companies need to specify the
name of the company along with the other particular. After verification the registrar shall approve one name
for company.

Step 4: Preparation and submission of important documents like MOA and AOA

After the name of the company is identified and approved by the registrar, promoters should submit
applications for registrations, prescribed fees and the following documents to the registrar.

• MOA
• AOA
• Declaration from Directors

• Affidavits of the Directors

Step 5: Subscribing to MOA and AOA

As per the companies act 2013, a subscriber must subscribe the shares of the company incorporated. It
means each subscriber must have at least one share of the company. Each subscriber should sign the
Memorandum in presence of at least one witness and must clearly state the following:

1. Address of the subscriber

2. Personal Description
3. Occupation
4. No of shares subscribed
5. Nature of shares etc.

Step 6 : Declaration regarding the fulfilment of requirements.

A statutory declaration in the form-1 by an advocate, attorney or pleader entitled to appear before the High
Court or a CS/CA in whole time practice in India who is engaged in the formation of the company or by a
person who is named as a director or a manager or secretary of the company that the requirements of the
Companies Act have been complied with in respect of the registration of the company and the matters
precedent and incidental thereto.

Step 7: Certificate of Incorporation

Once all the above documents have been filed and they are found to be in order, the Registrar of companies
will issue certificate of incorporation of company. This document is the birth certificate of the company and
is proof of the existence of the company. Once this certificate is issued, the company cannot cease it’s
existence unless it is dissolved by order of the court.

4. Commencement of Business

To obtain certificate of commencement of business the promoter should apply to the registrar together with
prescribed fees. This will be granted only if the following conditions are fulfilled:

• A prospectus or a statement in lieu of prospectus has to be filed with the registrar of companies. A
statement in lieu of prospectus has to be prepared by those companies which do not find it necessary
to issue a prospectus.
• Company has received the minimum subscription amount. (Paid up share capital is not less than
5lakh rupees in public company and not less than 1 lakh in case of private company)
• Directors have paid the application and allotment money payable on the shares held buy them
 • Declarations by the directors or secretary of the company that the requirement of companies Act
have been complied with

If the registrar is satisfied, he will issue the business commencement certificate. From the date of receipt
of this certificate the company is legally authorized to commence the business.

In case of default by a company in complying with the requirement of this provision on commencement of
business, the company shall be liable to a penalty of Rs. 50,000 and every officer in default with a penalty
of Rs. 1000 for each day during which such default continues which may go up to Rs. 1 lakh.

Further, the Registrar of Companies may initiate action for the removal of the name of the company from
the register of companies when the Registrar has reasonable cause to believe that the company is not
carrying on any business.

Pre-incorporation Contracts or Preliminary contracts

The promoter may enter into contracts for a company even before it is incorporated. Such contracts may
relate to the purchase of property for the company, or machinery, or to acquire know how. These contracts
are generally termed as pre-incorporation or preliminary contracts.

The promoters generally enter into such contracts as agents for the co. about to be formed. But the legal
position is that two consenting parties are necessary to a contract where as a company before incorporation
is a non-entity. The promoters, therefore, cannot act as agent for a co. which has not yet come into existence.
Therefore, the co. is not liable for the acts of the promoters done before its incorporation. A Pre-
incorporation contract purported to be made by a co. which does not exist is a nullity. As such the co., when
it comes into existence, can neither sue nor be sued on that contract.

Lifting or piercing the corporate veil

The general rule is that a company is a legal person and is distinct from its members. This concept of
separate entity can be considered as a veil between the company and its members. In ordinary situations
any reference to the company is a reference only to the corporate entity and the shareholders who constitute
the company are spared. However, the advantages of incorporation are to be enjoyed only by those who
want to make an honest use of the company. In case of dishonest or fraudulent practice by use of the
incorporation facility, the court may break through or lift the corporate veil and look at the persons behind
the company who are misusing this function. This process is termed as corporate veil.

The following are the situations where the corporate veil of the company may be lifted.
A. Common Law Exceptions.
 For the protection of revenue: It is the duty of every earning person to pay taxes. The
company is no way exempted from this liability. If the company unlawfully avoided the
tax duty, it is an offence.
 Prevention of fraud or improper conduct: The company cannot commit fraud or
misconduct on its own as it needs human agency The court can uplift the doctrine of
corporate veil in cases of fraud, misrepresentation, diversion of funds.
 Determination of enemy character of a company: In times of war the court may lift the
corporate veil of a company to see whether a company is controlled by alien company.
 Avoidance of welfare legislation: When a company is formed for the purpose of escaping
from the liability of complying with the provisions of aby welfare legislation, the court
may lift the corporate veil.
 Where the company is acting as agent of the shareholders: In such situations the
shareholders will be held liable for the acts of the company.

B. Statutory Exceptions

 If the number of members go below the statutory minimum.

 Failure to refund the application money.
 Company not mentioned on a negotiable instrument.
 Fraudulent trading.
 Module 2 Unit 2

Memorandum of Associations

Memorandum of Association (MOA) is a legal document prepared in the formation and registration
process of a limited liability company to define its relationship with shareholders. The memorandum
contains rules regarding the capital structure, the liability of the members, the objects of the company
and all other important matters relating to the company.

Purpose of Memorandum of Association

The main purpose of the memorandum is to explain the scope of activities of the company. The
prospective shareholders know the areas where the company will invest their money and the risk they
are taking in investing the money.

The outsiders will understand the limits of the working of the company, and their dealings with it should
remain within the prescribed scope.

Printing and Signing of Memorandum of Association

It is mandatory for every company to print its Memorandum of Association and have it signed by each
of its members. The address, occupation and shares held by each member of the company must also be
mentioned in this charter.

For the formation of a Private Limited Company, a minimum of 2 members are necessary. For a Public
Company, it is 7. In case of a One Person Company, the nominee has to be stated in the Memorandum
of Association as in case of death of the founding member or his incapacity to perform, the legal rights
of the company will be transferred to him or her.

Form of Memorandum

The memorandum of a company should be formulated in accordance with the respective forms as
mentioned in the tables A, B, C, D & E under Schedule 1 of the Companies Act, 2013.

 Form in Table A is applicable to companies that are limited by shares.

 Form in Table B is applicable to companies that are limited by guarantee and do not have an
authorised share capital.

 Form in Table C is applicable to companies limited by guarantee and have an authorised share
capital.
  From is Table D is applicable to unlimited companies that do not have an authorised share
capital.

 Form in Table E is applicable to unlimited companies that have an authorised share capital.

Contents of Memorandum

1. Name Clause

A company being a legal person must have a name to establish its identity. The name of the company
should be stated in this clause. A company is free to select any name it likes. But the name should not
be identical or similar to that of a company already registered. It should not also use words like King,
Queen, Emperor, Government Bodies and names of World Bodies like U.N.O., W.H.O., World Bank
etc. If it is a Public Limited Company, the name of the company should end with the word ‘Limited’
and if it is a Private Limited Company, the name should end with the words ‘Private Limited’.

2. The Registered Office Clause

This clause states the name of the State in which the registered office of the company will be situated.
Every company must have a registered office which establishes its domicile, and it is also the address
at which the company’s statutory books must normally be kept and to which notices, and all other
communication can be sent.

3. Object clause

This clause is the most important clause in the memorandum of association of a company, because it
not only shows the object or objects for which the company is formed but also determine the extent of
powers which the company can exercise in order to achieve the object or objects.

4. Liability Clause

This clause states the liability of the members of the company. The liability may be limited by shares
or by guarantee. This clause may be omitted in case of unlimited liability.

5. Capital Clause

This clause mentions the maximum amount of capital that can be raised by the company. The division
of capital into shares is also mentioned in this clause. The company cannot secure more capital than
mentioned in this clause. If some special rights and privileges are conferred on any type of shareholder’s
mention may also be made in this clause.
 6. Subscription Clause or Association Clause

It contains the names and addresses of the first subscribers. The subscribers to the Memorandum must
take at least one share. The minimum number of members is two in case of a private company and seven
in case of a public company.

Thus the Memorandum of Association of the company is the most important document. It is the
foundation of the company.

Alteration of Memorandum

A company cannot alter the conditions contained in memorandum except in the cases, and in the mode,
and to the extent, express provision has been made in the Act.

1. Change of Name

The name of a company may be changed at any time by passing a special resolution at a general meeting
of the company and with the written approval of the central Government.

A change of name which involves the deletion or addition of the word ‘private’ on the conversion of a
public company into private of vice versa doesn’t require the approval of Central Government.

Rectification of name of company by passing ordinary resolution: A company is registered by a

name which, in the opinion of the Central Government, is identical with or too nearly resembles the
name by which a company in existence had been previously registered, it may direct the company to
change its name and the company shall change its name or new name, as the case may be, within a
period of 3 months from the issue of such direction.

Registration of change of name: Where a company changes its name or obtains a new name, it shall
within a period of 15 days from the date of such change, give notice of the change to the Registrar along
with the order of the Central Government, who shall carry out necessary changes in the certificate of
incorporation and the memorandum.

2. Change of registered office

Shifting of the Registered Office outside the city, town or village: Where such office is situated
requires passing of special resolution by the company and notice of the change shall be given to the
Registrar within 15 days of the change, who shall record the same.

Shifting of the registered office within the same State from the jurisdiction of one Registrar of
Companies to the jurisdiction of another Registrar of Companies: requires passing of special
resolution by the company and confirmation by the Regional Director on an application made by the
company in this regard. The shifting of registered office shall not be allowed if any inquiry, inspection
or investigation has been initiated against the company or any prosecution is pending against the
company under the Act.

Shifting of Registered Office from one State or Union territory to another State. The alteration of
the memorandum relating to the place of the registered office from one State to another requires

 Passing of the special resolution, and

 Approval of the Central Government

A certified copy of the confirmation from the Central government shall be filed with the registrars of
both states.

3. Change of Objects Clause [Section 13(8)]

A company, which has raised money from public through prospectus and still has any unutilised amount
out of the money so raised, shall not change its objects for which it raised the money through prospectus
unless

 a special resolution is passed by the company through postal ballot and the notice in respect of
the resolution for altering the objects.
 the details, as may be prescribed, in respect of such resolution shall also be published in the
newspapers (one in English and one in vernacular language) which is in circulation at the place
where the registered office of the company is situated and shall also be placed on the website
of the company, if any, indicating therein the justification for such change;
 the dissenting shareholders shall be given an opportunity to exit by the promoters and
shareholders having control in accordance with regulations to be specified by the Securities and
Exchange Board of India.

In case of companies which have not raised money through prospectus, objects can be changed any
time by passing of special resolution.

The Registrar shall register any alteration of the memorandum with respect to the objects of the
company and certify the registration within a period of 30 days from the date of filing of the special
resolution.

4. Change in the Liability Clause

Ordinarily it cannot be altered so as to make the liability of the members unlimited. However, with the
authority of the Articles of Association, a company may pass special resolution altering liability clause
of the Memorandum of Association so as to make the liability of directors or of any one director or
manager unlimited.
 5. Change in Capital clause

Following kinds of alteration in share capital may be made by a limited company having a share capital,
if authorised by its articles by passing of ordinary resolution at the general meeting (Section 61):

1. increase its authorized share capital;

2. consolidate or sub-divide its share capital into shares of larger or smaller

denominations;

3. convert its fully paid–up shares into stock, and re-convert that stock into fully paid–up
shares of any denomination;

4. cancel shares which have not been taken or agreed to be taken by any person, and
diminish the amount of its share capital by the amount of the shares so

Doctrine of ultra vires

The term ultra means ‘beyond’ and vires means ‘powers’. Therefore, ultra vires means ‘beyond
the powers’ of a company. Generally, the company has the powers to carry out the objects set
out in the memorandum and also everything which is reasonable necessary to enable to carry
out these objects. The objects clause also requires that the company should devote itself only
to the objects set out in the memorandum and to no others. The memorandum is thus the area
beyond which the company cannot travel. Any activities not expressly or impliedly authorised
by the memorandum are ultra vires the company. The doctrine serves two purposes.

 It protects the shareholders. They are assured that their investment is not spent on
activities which they did not have in mind when they invested in the company.
 It safeguards the interests of the creditors as the property of the company cannot be
diverted to unauthorised objects.
 Module 2 Unit 3

Articles of Association

The articles of association are the rules and regulations of a company framed for the purpose of internal
management of its affairs. It deals with the rights of the members of the company inter se (within the
company). It plays a very important role in the affairs of a company. Articles are as such subordinate to and
controlled by the contents of the Memorandum. Articles that are profound to be registered should be printed,
segmented well and sequenced consecutively. Each subscriber to Memorandum of Association must sign
the Articles in the presence of at least one witness.

Form of Articles of Association

The articles of a company shall be on respective forms specified in tables F, G, H, I and J under Schedule
1 of the Companies Act 2013.

 Table F – Companies that are limited by shares

 Table G – Companies that are limited by guarantee and having a share capital
 Table H – Companies that are limited by guarantee and not having a share capital
 Table I – unlimited companies that having a share capital
 Table J – unlimited companies that do not have share capital.

Contents of Articles

1. Share capital including sub-division, rights of various shareholders, the relationship of these rights,
payment of commission, share certificates.
2. Lien of shares: Lien of shares means to retain possession of shares in case the member is unable to
pay his debt to the company.
3. Calls on shares: Calls on shares include the whole or part remaining unpaid on each share which
has to be paid by the shareholders on the company’s demand.
4. Transfer of shares: The articles of association include the procedure for the transfer of shares by
the shareholder to the transferee.
5. Transmission of shares: Transmission includes devolution of title by death, succession, marriage,
insolvency, etc. It is not voluntary but is in fact brought about by operation of law.
6. Forfeiture of shares: The articles of association provide for the forfeiture of shares if the purchase
requirements such as paying any allotment or call money, are not met with.
7. Surrender of shares: Surrender of shares is when the shareholder’s voluntary returns the shares they
own to the company.
8. Conversion of shares in stock: In consonance with the articles of association, the company can
convert the shares into stock by an ordinary resolution in a general meeting.
9. Share warrant: A share warrant is a bearer document relating to the title of shares and cannot be
issued by private companies; only public limited companies can issue a share warrant.
10. Alteration of capital: Increase, decrease or rearrangement of capital must be done as the articles of
association provide.
11. General meetings and proceedings: All the provisions relating to the general meetings and the
manner in which they are to be conducted are to be contained in the articles of association.
12. Voting rights of members, voting by poll, proxies: The members right to vote on certain company
matters and the manner in which voting can be done is provided in the articles of association.
13. Directors, their appointment, remuneration, qualifications, powers and proceedings of the boards
of director’s meetings.
14. Dividends and reserves: The articles of association of a company also provide for the distribution
of dividend to the shareholders.
15. Accounts and Audits: The auditing of a company shall be done subject to the provisions of the
articles of association of the company.
16. Borrowing powers: Every company has powers to However, this must be done according to the
articles of association of the company.
17. Winding up: Provisions relating to the winding up of the company finds mention in articles of
association of the company and must be done accordingly.

Alteration of articles

A company may, by passing a special resolution alter regulations contained in its article. A copy of
every special resolution altering the articles should be filed with the registrar within a 30 days of its
passing.

Limitations to alteration

 Must not be against the provisions of the Act: The alteration must not be in contravention of
the provisions of the Act.
 Must not be inconsistent with the memorandum: The alteration must not go beyond the area
specified by the memorandum.
 Must not sanction anything illegal: Alteration must be legal.
 No increase in the liability of members
 Alteration by special resolution only
  Must be for the benefit of the company

Difference between Memorandum of Association and Articles of Association

Basis Memorandum of association Articles of association

Meaning Memorandum of association is a Articles of association is a document
document that contains all the containing all the rules and regulations
fundamental information which are that governs the company.
required for the incorporation of the
company.
Relationship Defines the relation between company Regulates the relationship between
and outsider. company and its members and also the
members inter se
Status It is subordinate to the Companies Act It is subordinate to the memorandum
Need for filing of Required Not required at all
documents
Alteration Alteration can be done, after passing Alteration can be done in the articles
special resolution in annual general by passing special resolution at annual
meeting and previous approval of general meeting
central government

Legal effect of memorandum and articles

The effect of the Memorandum of Association and the Articles of Association when registered is that

 Members to the company: It is presumed that each member has signed both the Memorandum
and the Articles of the company. These documents are treated as contracts entered into between the
company and outsiders. So these documents bind the members to the company.
 Company to members: Articles of the company bind the company and the members. Under the
terms of the articles, a company is bound to comply with the provisions thereof. A member is
entitled to enforce compliance by the company with a clause in the Articles conferring on him a
right to a share certificate. Now it is settled that a member can enforce or protect the rights given
to him as a member of the company.
 Members inter se: There is no contract between the members on the basis of these documents.
Even then the Articles have the effect of binding every member’ to other members. But the
members cannot sue each other. Usually, one member can sue other members through the medium
 of the company.E.g. If a member does a wrong thing against the interest of the company, another
member can sue him only through the company
 Company to the outsiders: Articles do not constitute any contract between the company and an
outsider. This is because an outsider is not a party to the contract, and therefore, cannot sue on it.

Constructive notice of articles and memorandum

The memorandum and articles of association of every company are required with the registrar of companies.
The office of the registrar is a public office and consequently the memorandum and articles on registration
become public documents. They are open and accessible to all. These documents are open for public
inspection on payment, and therefore it is presumed that every one dealing with the company, whether a
shareholder or an outsider, have read the documents. This deemed knowledge of its contents of these two
documents known as constructive notice of memorandum and articles.

Doctrine of Indoor Management

It is an exception to the rule of constructive notice. A person dealing with the company is deemed to have
knowledge of memorandum and articles of association of company. But he is not bound to enquire into the
internal affairs of the company as to whether they are being conducted in accordance with the articles of
the company. He has a right to assume that internal proceedings and affairs of the company are being
regularly carried on in accordance with the rules and regulations. This limitation of constructive notice is
called doctrine of Indoor Management.

Exceptions to the doctrine of indoor management

1. Actual or constructive notice: Where a person dealing with a company has actual on constructive
notice of the irregularity as regards internal management, he cannot claim benefit under the rule of
indoor management. This exception is himself part of the internal procedure.
2. Negligence: Where a person dealing with the company would discover the irregularity if he had
made proper enquiries, he cannot claim the benefit of the rule under he doctrine of indoor
management
3. Acts void ab initio and forgery: Where the acts done in the name of a company are void ab initio,
the doctrine of indoor management does not apply. It applies only to irregularities that otherwise
might effect a genuine transaction. It does not apply to a forgery. Company can never be bound by
forgeries committed by its officers
4. Agent acting outside the scope of his authority: If an agent of a company enters into a contract
with a third party and if the act of the agent is beyond the scope of his authority, the company is
not bound.
5. No knowledge of the contents of the articles A person who has not actually read the memorandum
and articles of a company and who has not at the time he entered into the contract, was aware of
their contents, cannot seek to rely on a statement contained in it.

Conversion of Companies already registered

Section 14 of the companies’ act, 2013 deals with the alteration of articles. This section clearly
prescribes the requirement of special resolution for alteration of articles. Thus the special resolution is
required for both the cases, whether it is conversion of a Private company into a public Company or a
public Company into a Private Company. Thus one can say that special resolution is the most basic
requirement for conversion of a public ltd Company into a Private Limited Company. However, the
consequence for both types of conversions is different: -

a.) In case of conversion of Private Limited companies to public limited companies shall be effective
from the date of alteration i.e., the date of passing of special resolution. The process of filing of
Special resolution etc. proceeds after that.
b.) Opposite of that in case of conversion of a public Company into a Private Company, no such
alteration would be effective unless and until the order is approved by the order of NCLT.

Thus one must note that the NCLT (National Company Law Tribunal) is the ultimate authority to
sanction the plan of conversion of a public limited Company into a private limited Company.
 Module 3

Share Capital and Debentures

Shares

A share is the interest of a shareholder in a company. The capital of a company is divided into certain
indivisible units of a fixed amount. These units are called shares.

Kinds of Share Capital

The share capital of companies limited by share shall be of two kinds namely:

 Equity share capital

 Preference share capital

Equity Share Capital

Equity share capital means the capital raised by a company by issuing the shares to the general public.
Equity share capital is also known as risk capital.

Section 43 of companies act 2013 “equity share capital”, with reference to any company limited by shares,
means all share capital which is not preference share capital. The holders of these shares are entitled to
dividend after the fixed dividend on preference shares has been paid. The dividend to equity shareholders
will vary with the amount of profits available for distribution. In any year of the profits are insufficient, the
equity shareholders may not get dividend at all.

Preference share capital

With reference to any company limited by shares, means that part of the issued share capital of the company
which carriers a preferential right with respect to

a) Payment of dividend
b) Repayment of capital in the case of a winding up when the company goes into liquidation.

Kinds of Preference shares

1. Cumulative preference share: Cumulative preference shares are those type of shares that gives
shareholders the right to enjoy cumulative dividend pay-out by the company even if they are not
making any profit. These dividends will be counted as arrears in years when the company is not
earning profit and will be paid on a cumulative basis the next year when the business generates
profits.
2. Non-cumulative preference share: Non – Cumulative Preference Shares do not collect dividends
in the form of arrears. In the case of these types of shares, the dividend pay-out takes place from
the profits made by the company in the current year. So if a company does not make any profit in
a single year, then the shareholders will not receive any dividends for that year. Also, they cannot
claim dividends in any future profit or year.
3. Participating preference share: Participating preference shares help shareholders demand a part
in the company’s surplus profit at the time of the company’s liquidation after the dividends have
been paid to other shareholders. However, these shareholders receive fixed dividends and get part
of the surplus profit of the company along with equity shareholders.
4. Non Participating preference share: These shares do not benefit the shareholders the additional
option of earning dividends from the surplus profits earned by the company, but they receive fixed
dividends offered by the company.
5. Convertible preference share: Convertible preference shares are those shares that can be easily
converted into equity shares.
6. Non-Convertible preference share: Non-Convertible preference shares are those shares that
cannot be converted into equity shares.
7. Redeemable preference share: Redeemable preference shares are those shares that can be
repurchased or redeemed by the issuing company at a fixed rate and date.
8. Irredeemable preference share: Non-redeemable preference shares are those shares that cannot
be redeemed or repurchased by the issuing company at a fixed date.

Share Capital

Share Capital means the capital raised by a company by the issue of shares. Share capital can be divided
into different categories.

 Authorised Capital: Also called as Nominal or registered capital. It is the maximum amount
of capital a company can issue. It is stated in Memorandum of Association.
 Issued Capital: This is part of authorized capital which is offered to public for subscription. It
cannot exceed authorized capital.
 Subscribed Capital: It is no necessary that all the capital issued by the company is purchased
by the public. That part of the issued capital for which applications are sent by the public and
which is accepted is called subscribed Capital.
 Called Up Capital: It is the amount of nominal value of shares that has been called up by the
company for payment by the subscriber towards the share.
  Paid Up Capital: It is part of called up capital that the members of company or shareholders
have paid.
 Reserve Capital: Reserve capital refers to that part of the authorised capital which is yet to be
called up and will be available for drawing when needed.

Public Offer

When shares are offered to the public through prospectus it is called a public offer. If the promoters want
to raise money through issue of shares to the public, they have to prepare prospectus. The purpose of the
prospectus is to give a prospective shareholder some ideas about the company.

Private Placement

Private Placement means any offer of securities or invitation to subscribe securities to a selected group of
people by the company through issue of a private placement offer letter. Securities under Private Placement
can only be issued to a group of maximum 200 people in aggregate in a financial year, excluding QIP &
ESOP. It is to be noted that the limit of 200 people is per security.

Deemed Public offer: If offer or allotment is made to more than 200 persons in FY. It shall be deemed to
be public offer.
Prospectus

A prospectus is a document which contains all the relevant information about the company, its promoters,
projects, financial details, objects of raising money, terms of issue, etc. It is an invitation to subscribe the
issue made by the company.

Definition section 2(36)

“A prospectus means any document describe or issue as a prospectus and includes any notice, circular.
advertisement or other documents inviting deposits from the public or inviting offers from the public for
the subscription or purchase of shares in or debentures of a day corporate.”

Contents of Prospectus

1. The prospectus contains the main objectives of the company, the name and addresses of the
signatories of the memorandum of association and the number of shares held by them.
2. The name, addresses and occupation of directors and managing directors.
3. The number and classes of shares and debentures issued
4. The qualification shares of directors and the interest of directors for the promotion of company.
5. The number, description and the document of shares or debentures which within the two preceding
years have been agreed to be issued other than cash.
6. The name and addresses of the vendors of any property acquired by the company and the amount
paid or to be paid.
7. Particulars about the directors, secretaries and the treasures and their remuneration.
8. The amount for the minimum subscription
9. If the company carrying on business, the length of time of such businesses.
10. The estimated amount of preliminary expenses.
11. Name and address of the auditors, bankers and solicitors of the company.
12. Time and place where copies of balance sheets, profits and loss account and the auditor’s report
may be inspected.
13. The auditor's report so submitted must deal with the profit and loss of the company for each year
of five financial years immediately preceding the issue of prospectus.
14. If any profit or reserve has been capitalised, the particulars of such capitalisation will be stated in
the prospectus.
Deemed Prospectus

If a company allots or agrees to allot any securities with a view to there being offered for sale to the public,
any document by which the offer of sale to the public is made, shall be known as the deemed prospectus of
the company.

Shelf Prospectus and information memorandum

Company can issue more than one issue of securities from the single document called shelf prospectus.
Information memorandum consist all the facts regarding new charges created and changes undergone in the
financial position of the company.

Red herring prospectus

Red herring prospectus (RHP) is a preliminary registration document that is filed with SEBI in the case of
book building issue which does not have details of either price or number of shares being offered.

Abridged prospectus

An abridged prospectus is a summary of the prospectus containing such details as it is prescribed by the
SEBI. It is mandatory for public issue. It is short in length (5 sheets) and contains all information bullets.

Misstatements in prospectus and their consequences

Misstatement may occur when a statement which is untrue or misleading in form or context is included in
the prospectus.

The Golden Rule of Prospectus- Whatever information comes from the company to the public, through the
medium of a prospectus, must be true, fair and accurate.

Liabilities for misstatements in prospectus

A Misstatement in prospectus can invoke

1. Civil Liability
2. Criminal Liability

Civil Liability

A person who has been induced to purchase shares or debentures on the faith of a misleading prospectus
has remedies against the (1) company and (2) directors, promoters and experts.

There are two remedies available against company:

 i. Revocation of the Contract- The person who purchased the securities can cancel the contract. The
money will be refunded to him, which he paid to the company.

ii. Damages for Fraud- After revocation, the shareholders can claim damages from the company by
filing a case in the court.

Remedies against the Directors, promoters and the authorized persons who issued the prospectus:

Every person and the company is liable who-

 Is a director when prospectus was issued

 Named as the director or authorized himself or has agreed to become a director

 The promoter of the corporation

 Has authorized the issue of the prospectus

i. Damages for misstatement- Compensation will be given to the shareholders for the loss by the
directors, promoters and the authorized persons.

ii. Damages for non-disclosure- Fine of Rs. 50000 ad recovering the damages must be given by the
people who mislead the purchasers from the one that is chargeable for the damages.

Criminal liability

Remedies for criminal liability

 Imprisonment up to 2 years or Rs. 50000 fine must beard by the people that mislead.

 Person who knowingly issued a misstatement is punishable for imprisonment up to 5 years or with
a fine Rs. 100000 or both.

Exceptions from liability for misstatements in Prospectus

A person shall not be criminally liable under sec. 34

 If he proves that: the statement is true

 if he proves that: the statement or omission was immaterial or he had reasonable grounds to believe
that the statement was true.

A person shall not be liable (civil liability), if he proves that:

  he withdrew his consent to become a director of the company before the issue of the prospectus,
and that it was issued without his authority or consent; or
 the prospectus was issued without his knowledge or consent, and
 On becoming aware of its issue, he gave a reasonable public notice that it was issued without his
knowledge or consent.

Statement in Lieu of Prospectus

The Statement in Lieu of Prospectus is a document filed with the Registrar of the Companies (ROC) when
the company has not issued prospectus to the public for inviting them to subscribe for shares. The statement
must contain the signatures of all the directors or their agents authorized in writing. It is similar to a
prospectus but contains brief information. The Statement in Lieu of Prospectus needs to be filed with the
registrar if the company does not issue prospectus or the company issued prospectus but because minimum
subscription has not been received the company has not proceeded for the allotment of shares.

Allotment of securities

‘Allotment’ is the acceptance of the offer by the company. However, allotment shall not be made unless
the following requirements are satisfied.

Conditions/ provisions/ requirements for the allotment of securities.

1. Minimum Subscription: Every company needs a minimum subscription of 90% of the issued
amount on the date of closure.
2. Application money: Money to be deposited in a Scheduled Bank. Return of Application Money if
the minimum subscription has not been raised the director has to return the money received from
the applicant.
3. Opening of the Subscription List: Prospectus has to state the dates of the opening and closing of
the issue.
4. Securities listed on a stock exchange: debentures and shares to be listed on stock exchange
5. Allotment return filed to registrar: Within 30 days of allotment of shares by the company, the
company shall file with ROC a return showing the details of the shares allotted, the consideration
received etc. The document is known as return as to allotment.

Underwriting Contracts

It is a contract between company and underwriter. When a company wants to raise funds by the issue of
shares or debentures, it should raise at least 90% of the issue within a time limit of 120 days from the date
of opening the issue. In order to avoid that risk, the public companies enter into underwriting arrangements
and underwriter takes up the balance shares.

The commission is limited to 5% of issue price in case of shares and 2.5% in case of debentures. The rate
should be disclosed in the prospectus.

Voting Rights

Every member of the company limited by shares holding equity share capital has right to vote in Company.
Every equity shareholder has right to participate in the general meeting held by the company and vote on
every resolution placed before the company. Voting right on a poll shall be in proportion to their share in
the paid-up equity share capital of the company.

Every member holding preference share capital of the company have right to vote only on the
agenda/resolutions placed before the company which directly affect the rights attached to their share as
below;

 Resolution for winding up of the company

 Resolution for repayment of the company
 Reduction of equity share capital
 Reduction of preference share capital

(voting rights on poll shall be in proportion to his shares in paid up preference share capital of the
company)

Differential Voting Rights (DVR) Shares

The shares with Differential Voting Rights (DVRs) in a company means those shares that give the
holder of the shares the differential rights related to voting, i.e. either more voting rights or less voting
rights compared to the ordinary shareholders of the company.

Advantages of DVR shares issue

1. Issue of shares with lower voting rights to public shareholders would help the
promoters to retain their voting rights.
2. Investors are compensated for lower control over the company by giving them higher
dividends.
3. Companies can raise substantial capital
4. The holders shall enjoy all other rights such as bonus shares, right shares etc.
Conditions regarding the issue of DVR

 The articles of association of the company authorize the issue of shares with differential rights;
 The issue of shares is authorized by an ordinary resolution passed at a general meeting of the
shareholders.
 When the equity shares of a company are listed on a recognized stock exchange, the issue of such
shares shall be approved by the shareholders through a postal ballot.
 The company has not defaulted in filing financial statements and annual returns for three financial
years immediately preceding the financial year in which it is decided to issue such shares.
 The voting power of DVRs equity shares should not exceed 74% of the total voting powers.

Securities premium account

Share Premium is the difference between the issue price and the par value of the stock and is also known
as securities premium. The shares are said to be issued at a premium when the issue price of the share
is greater than its face value or par value. This premium is then credited to the share premium account
of the company.

Application of premiums received

The securities premium account may be applied by the company only for the designated purposes.The
Securities Premium Account can be used for the following purposes:

1. Issuing fully paid bonus shares to the members of the company.

2. Write off the preliminary expenses of the company
3. Writing off the expenses of, or commission paid, or discount allowed on issue of shares
or debentures of the company
4. Providing for the premium payable on the redemption of any redeemable preference
shares or debentures of the company
5. For buy back of shares.

Issue of shares at discount

A company shall not issue shares at a discount. Any share issued by a company at a discount price shall
be void. The company shall be punishable with fine which shall not be less than one lakh rupees but
which may extend to five lakh rupees and every officer who is in default shall be punishable with
imprisonment for a term which may extend to six months or with fine which shall not be less than one
lakh rupees but which may extend to five lakh rupees, or with both.
Issue of Sweat equity shares

Sweat equity shares are shares issued by a company to its employees or Directors, either at a discount or
for consideration other than cash. Sweat equity shares are often issued for providing the know-how or
creation of valuable intellectual property rights or key value additions to the company.

There are certain conditions that need to be fulfilled by the company before issuing sweat equity
shares.

 A special resolution is passed for authorizing the issue of sweat equity share.

 The Listed companies have to follow the provisions of SEBI for the issue of Sweat equity shares
while the unlisted company can issue as per Section 54 of the Companies Act, 2013.

 These shares can be issued by the company after the expiry of one year from the date of
commencement of business.

Issue and redemption of preference shares

Redemption of preference shares means repayment of preference share capital to the existing preference
shareholders during the life time of the company after expiry of the stipulated period. In India the
Companies act permits Indian Companies to issue only redeemable preference shares which are to be
redeemed within a period of 20 years.

As per sec 80 of the company’s act shares can be redeemed subject to following:

 The shares shall be redeemable only if they are fully paid up: If the shares are to be redeemed are
partly paid up, they could be made fully paid up before they are redeemed.
 The shares shall be redeemed either out of profits of the company which would otherwise be
available for dividends or out of proceeds of a fresh issue of shares made for the purpose of
redemption.
 Premium, if any, payable on redemption should be provided for out of profits of the company or
out of the existing securities premium account of the company.
 Where redemption of preference shares is made out of profits a sum equivalent to the amount paid
on redemption should be transferred to CRR (capital redemption reserve account).
 The redemption of preference shares should not be regarded as a reduction of authorised capital of
the company as such the reduced shares should remain the par of authorised capital.
Difference between Transfer of Shares and Transmission of shares

Basis Transfer of shares Transmission of shares

Meaning Transfer takes place by a voluntary of Transmission is the result of the
the transferor operation of law
Transfer deed A valid transfer deed and execution is No transfer deed is required
required
Effected by Effected by voluntary act of transferor Takes place on death or insolvency of a
and transferee holder of securities
Consideration Generally made for some consideration No consideration is required
Initiated by Transferor and transferee Legal Heir or Receiver
Stamp duty Stamp duty is payable No stamp duty is payable
Liability Liability of transferor ends Original liability of the members
continues

Provision regarding transfer of share

1. Necessary documents should be produced before the company

Transfer deed (Instrument of transfer), Share certificate, letter of allotment in case of no share
certificate
2. Application for transfer should be submitted to the company
3. Legal representative of a deceased member (transferor) can transfer shares
4. Application for registration of transfer (made by transferor or transferee)
5. Within a fixed time period (1 month) the company shall provide the certificate of securities

Punishment for personation of shareholder

It is the act of one person pretending to be another person for the purpose of deceiving the second person.

Punishment: Imprisonment of 1 to 3 years

Fine Rs.100000 to Rs.500000

Further issue of share capital

An existing company can expand its business operations and raise funds through the issue of right or bonus
shares to existing shareholders in proportion to the shares held by them.
Procedure for issue of share capital

1. If the company needs additional capital, then they have to give notice to every member to get the
consent from them and mention the required capital for further.
2. The notice shall be sent within 15 days but does not exceed 30 days otherwise it will be rejected.
3. If the further issue is not mentioned in the articles of association, then the company has to issue
notice to every member aforesaid.
4. If the replay of the members where not accepted or rejected, then the board of directors shall dispose
it in any manner.
5. If the shares are issued under ESOP, then a special resolution to be passed by the company subject
to some conditions.
6. If any of the members where accepted towards it, then specify the name of the member and price
of the share they issue.
7. The acceptance order of the company from the member or the shareholder should be sent before 3
days of the opening of the issue through registered post.
8. If the existing capital of the company is a debenture, then it should be converted into shares by
passing a special resolution in the general body meeting.
9. If the above said debentures were purchased from a government company and if the government is
satisfied that the conveyancing is useful for public interest, then they may pass the order for
conversion.
10. The conversion procedure has to be completed within 60 days after hearing the appeal order by the
tribunal if necessary.
11. If the debentures had interest, and it was not duly payable or paid, then the aggregate amount of
debentures with interest should be taken into consideration.
12. If the company going for alteration of capital, the procedure has to be followed by the tribunal.
13. If the appeal has been dismissed by the tribunal, then the company has to follow the memorandum
of association under the capital clause of the company.

Issue of Bonus shares

Shares issued to the existing shareholders out of accumulated profits in the proportion of shares held
by them without receipt of anything as consideration from them is called bonus issue/bonus shares.As
per section 63(1) a company may issue fully paid bonus shares to its members out of the following

(i) Its free reserves;

(ii) The securities premium account; or
 (iii) The capital redemption reserve account.

Conditions for Issue of Bonus Shares

 Articles must contain provision for issue of bonus shares [As per Section-62(2) (a)].
 Bonus issue must be authorised by the members of the company (by passing of Ordinary resolution)
on recommendation of Board.
 Company should not have defaulted in payment of interest or principal in respect of fixed deposits
debt securities issued by it and no defaulted in respect of the payment of statutory dues of the
employees, such as, contribution to provident fund, gratuity and bonus.
 Check is there any partly paid up share on the date of allotment.
 If there are partly paid up share, then first make them fully paid up shares.

Issue of Debentures

Section 2 (30) of the Companies Act, 2013 defines the term Debentures 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;

A Company may issue debentures with an option to convert into shares, wholly or partly, at the time of
redemption but cannot issue debentures with voting rights.

Rules regarding issue of debentures

 Debentures cannot be issued with voting rights.

 A company cannot issue debentures to more than 500 people without appointing a debenture
trustee, whose duty would be to protect the interest of Debenture Holders and redress their
grievances.
 On issue of debenture a company shall create a Debenture Redemption Reserve. (DRR)
 If there is any default in repayment of amount in the event of maturity or default in payment of the
interest thereon then the Tribunal will be approached by the Debenture Trustee to take appropriate
measures.
 If there is any default with the provisions of this section, then the Company and the Officers shall
be liable to imprisonment which may extend to a period of 3 years or with fine which will not be
less than Rs. 2 lakhs but which may extend to Rs. five lakh or with both.
Book Building

Book building is a systematic process of generating, capturing, and recording investor demand for shares.
Usually, the issuer appoints a major investment bank to act as a major securities underwriter or book runner.

Book Building Process

 The issuing company hires an investment bank to act as an underwriter who decides the price range
of the security.
 The investment bank then, invites large scale buyers, fund managers and others, to submit bids on
the shares.
 The book is then built through the listing and evaluation of the aggregated demands for the issue
from the submitted bids. The final price of the security is termed as the cut-off price.
 The underwriter publicises the details of the bids in order to maintain transparency in the entire
process.
 Shares are allocated to the accepted bidders, thereafter.
 The prices determined in the book building process does not suggest that the price is the best price,
nor is it mandatory for the company to use the said price in an IPO.
 Module 4
Administration of Companies
Member/ Membership in a company
A person whose name is entered in “register of members”. A person who signs MoA is deemed to be a
member.
Difference between Member and Shareholder
Members Shareholders
A person whose name is entered in register of A person who holds shares in a company.
Members.
The holder of a share warrant is not a member. The holder of a share warrant is a shareholder.
The person who signs the memorandum of After signing the memorandum, a person can be a
association with the company becomes a member. shareholder only when the shares are allotted to him.
If the share is transferred and transferor name is still When a person transfer his shares to another person,
in register of members, then he is a member. the transferor will not be a shareholder.

Who can become a member in a company?

The general rule is that any person who is legally competent to enter into a contract may become a member
of a company
Foreigners: Foreigners can become a member only by the approval of RBI.
Company: A company is a legal person hence it can be a member of an another company if the
memorandum authorizes it.
Who cannot become member -Minor, Insolvent, and Partnership firm.
Modes of acquiring membership
A person can be the member of a company in following ways:
• Membership by subscription: Every subscriber to MOA is deemed to have agreed to become its
member and on its registration must be put on the register of members.
• Members by application and allotment: a person may become a member of a company by an
application for shares.
• Membership by transfer: A person may become a member of a company when transfer of shares
and his name is entered in the register of members.
• Membership by succession: A deceased member continues to be a member of the company so
long as his name appears in the register of members. His legal representative who acquires a legal
right to shares is entitled to have his name entered in the register of members.
 • Membership by beneficial ownership: Every person holding equity share capital of a company
and whose name is entered as beneficial owner in the records shall deemed to be a member of the
company
• Membership by qualification shares: Before a person can be appointed a director of a public
company, he must take or sign an undertaking to take and pay for the qualification shares.
Rights and Liabilities of members
a) Rights of a member of the company
• To receive notice of general meetings
• To receive the financial statements and auditor’s report.
• To inspect and get copies of registers and returns.
• To attend meeting and to vote.
• To appoint proxies for attending the meetings.
• Right to receive dividend.
• Right to transfer the shares.
• To resist the increase in his liability without his written consent.
• To have ‘right shares’ issued.
• To appoint directors.
• To approach the tribunal for grievances.
• To make the company act lawfully.
• To receive surplus assets if any at the time of winding up.
• To proceed against any misstatements in prospectus.
b) Liabilities of a member of the company
• Any unpaid value of share in case of company limited by share.
• Any guaranteed amount payable in case of company limited by guarantee.
• Unlimited liability in case of an unlimited company.
• Liability due to lifting of corporate veil.
• Liability as contributories – If any person ceased to be a member of the company within one year
from the date of winding up may become liable for the liability arises at the time when he was a
member.
Cessation of membership
When a shareholder ceases to be a member of the registered company and consequently his name is
removed from the register of members.
A shareholder ceases to be a member of the registered company in following cases (Cessation of
membership)
o By the acts of parties
• If he transfers shares to another person.
• If the share forfeited.
• If preference shares are redeemed.
• If he surrendered his shares.
• If share warrants issued to him against fully paid up shares.
• If company sells his shares under some provisions in the articles.
• If he cancels the agreement to take the share because of misappropriation in the prospectus.
o By Operation of law
• Insolvency
• Death
• Winding up of a company
• Sale of share by execution of court order.
Register of members
It is a record of the individuals who own the company and details of the share held by them. It is a statutory
register which should be maintained by the Company.
Every company shall keep a register of its members and enter therein the following particulars:
▪ Name and address and occupation of each member.
▪ The shares held by each member and the amount paid or agreed to be paid on those shares.
▪ The date at which each person was entered in the register
▪ The date at which any person ceased to be a member.
Company Meetings
A meeting is a gathering or an assembly of a number of persons with certain objects in view or for certain
purposes.
Kinds of Meeting / Types of Meeting
• Members Meeting: It is the meeting of the shareholders or the members of the company.
• Director’s Meeting: These are meetings of the members of the board of directors of the company.
Director’s Meeting may be-
a) Board Meeting: Meeting of all the directors
b) Committee Meeting: Meeting of the members of a committee of directors.
• Creditors Meeting: These meetings of the creditors of the company. Such meetings are
 a) Meetings of the Debenture holders
b) Meetings of the creditors
c) Meetings of the creditors and contributories while the company is in liquidation.
A. Meeting of Members (Shareholders)
The following are the different kinds of meeting of the shareholders of a company.
o Annual General Meeting – It is a regular meeting of the members held compulsorily once in a
year. It is also known as ordinary meeting.
Objects:
A company may hold its first general meeting within 18 months from the date of its incorporation.
The purpose of holding the annual general meeting is to enable the shareholders to know the
financial position of the company and get explanations from the directors regarding the affairs of
the company.
Legal formalities and Procedure
• To be held every year
• Time for holding – Within 18 months from the date of its incorporation.
• Gap between two AGM- not more than 15 months.
• Time of meeting: during business hours.
• Day of the meeting: on a day that is not a public holiday
• Place of meeting: at its registered office or at some place within the city, town or village in
which registered office of the company is situated.
• Notice of meeting: given to every member not less than 21 days’ notice in writing.
Consequence of default
The company and every officer who is in default is punishable with a fine up to Rs. 5000 and
in case of continuing default with a further fine which may extend to Rs. 250 per day during
the default.
o Extra Ordinary general meeting- It is held to deal with some urgent special businesses which
cannot be postponed till the next AGM.
Objects:
The main object of holding an extra Ordinary general meeting is to transact an urgent business
which cannot be postponed to the next annual general meeting.
Extra Ordinary meeting can be called by any of the following:
➢ By the Board of Directors- Board may whenever it thinks fit, call an extraordinary
general meeting. The board shall call such a meeting only after passing a resolution at its
meeting.
 ➢ By the Board on the requisition of members- The board of directors is bound to call
extra ordinary general meeting on the requisition of a specified number of members:
• In case Company having a share capital, members holding at least one tenth of
such paid up capital of the capital which carries a right voting in regard to that
matter.
• In case Company not having share capital, members holding at least one tenth of
total voting power of all the members who have a right to vote to that matter.
On receipt of requisition the Board of Directors shall proceed to call Extra Ordinary
General Meeting within 21 days from the date of the deposit of requisition, on a date,
which shall not be later than 45 days of the date of deposit of requisition.
➢ By the Requisitionist – In case the Board fails to call for an EGM, it can be called for by
the requisitionists themselves during a period of 3 months from the day the requisition was
deposited. If the EGM is held within this specified period of 3 months, it can be adjourned
to any day in the future after the 3 months.

o Class Meeting – Meetings of different classes of shareholders are conducted to discuss the matters
affecting them. The purpose of this meeting is effecting variation in the Articles in respect of their
rights and privileges or for conversion of one class into another.
Other Meetings
1. Meeting of Debenture Holders These meetings are called according to the rules and regulations
of the trust deed or debenture bond (Rules printed on the reverse of the debenture certificates issued
by the company). Such meetings are held from time to time where the interests of debenture holders
are involved at the time of re-organization, reconstruction, amalgamation or winding-up of the
company. The rules regarding the appointment of chairman, notice of the meeting, quorum etc. are
contained in the trust deed. The meetings of the debenture holders are called;
(i) When the terms of repayment of debentures need to be altered.
(ii) When the rights of the holders of debentures need to be alter.
2. Meeting of Creditors- Sometimes, a company calls meeting of its creditors. Such meetings may
be called either during the life of the company or in the event of its being wound up for the
following:
• To finalize reconstruction of the capital of the company.
• To settle any dispute existing between the company and the creditors.
• To pass a special resolution by creditors for voluntary winding-up of the company.
 • To present the actions taken by the liquidator before the creditors, in case voluntary winding
up exceeds one year.
3. Meeting of Contributories -A contributory means any person who is liable to contribute to the
assets of the company in the event of its winding up. A meeting of all such contributories may be
called by the liquidator during the process of winding up of the company.
Essentials of a valid Meeting.
• Proper Authority
• Notice
• Agenda
• Chairman
• Quorum
• Minutes
✓ Proper Authority
The first important requisite of a valid meeting is that it must be called by the right persons.
The members meeting may be called by the following authorities:
a) Board of Directors- The board of Directors are empowered to called every type of general
meeting of the members of the company. The board may authorise the secretary to give
notice of a general meeting.
b) Directors, on the requisition of members- when a requisition is made by the members
of the company to call a general meeting, the directors must within 21 days of the
requisition issue a notice for holding the meeting on a date, fixed within 45 days of the
receipt of the requisition.
c) The Tribunal- When the directors make a default in holding annual general meeting of a
company, the Tribunal may call or direct the calling of such a meeting.
✓ Notice
A proper notice is essential requirement for a valid meeting. All those who are concerned with the
business of the meeting and are entitled to attend it should be communicated of the details of the
meeting. Such a communication is called the notice of the meeting.
Requirements of a valid notice
a) Proper Authority- A notice will be valid only if it is issued by the proper authority.
b) Issue of Notice- A company shall issue a notice to
• Every member of the company
• Every auditor or auditors of the company.
• Every director of the company.
 c) Length of the period -Usually 21 days’ notice is required.
d) Day, Date, Time and Place of the Meeting – Should clearly state the date, time and place
of the meeting. Usually it is held on a working day at the registered office of the company.
e) Business to be done – The notice must state the nature of the business to be transacted at
the meeting.
✓ Agenda
Agenda means things to be done at a meeting. The agenda is a statement of the business to be
discussed and transacted at a meeting. It takes the shape of a timetable or programme which sets
out the items to be taken up at a meeting in chronological order. The secretary is responsible for
preparing the agenda of the meeting in consultation with chairman of the meeting.
The business transacted in a shareholder’s meeting can be divided into two:
• Ordinary Business- The business transacted in AGM in the normal course by passing an
ordinary resolution is known as ordinary business.
• Special Business- Any business transacted in AGM other than ordinary business is known as
special business.
✓ Quorum
Quorum is the minimum number of members who must be present at a meeting in order that the
business of the meeting may be validly transacted
Public company
No. of members of the company Quorum required
Not more than 1000 5 members personally present
More than 1000 but less than 5000 15 members personally present
Exceeds 5000 30 members personally present
Quorum of a private company: Two members personally present

The members need not be personally present:

o Where the company is a member of another member.
o Where the president or Government holds shares in a company.
Consequences of absence of quorum
1. If the quorum is not present within half an hour from the time appointed for holding a meeting of
the company—
a. the meeting shall stand adjourned to the same day in the next week at the same time and place, or
b. to such other date and such other time and place as the Board may determine; or
c. The meeting, if called by requisitionists, shall stand cancelled.
 ✓ Chairman
There should be a chairman for every meeting to preside over and conduct the proceedings of the
meeting. He is the chief authority at a meeting. He enjoys the right to control and regulate the
speeches of the members at the meeting.
Appointment
The chairman is usually appointed by the articles.
Unless the articles of the company otherwise provide, the members personally present at the
meeting shall elect one of themselves to be the Chairman thereof on a show of hands.
If a poll is demanded on the election of the Chairman, it shall be taken forthwith in accordance with
the provisions of this Act and the Chairman elected on a show of hands shall continue to be the
Chairman of the meeting until some other person is elected.
Qualification of a chairman
It is not necessary to lay down any specific academic qualification.
Powers of the Chairman
• To maintain order and decorum – The chairman has the power to ask any member to
behave properly at the meeting. To maintain order and decorum at meeting he can even
suspend the member who does not obey his order.
• To decide point of order- The point of order is vested with the chairman. (Point of order
– announcement of member that the rules are not being followed)
Chairman ruling is final and no discussion is allowable on his ruling.
• To close the discussion, if sufficient time has been given.
• To decide the priority of speakers
• To adjourn a meeting; -If the meeting becomes disorder
If the quorum of the meeting is not present
If the majority of the members so, decide.
• To give a casting vote
• To reject a decision (if members passed a decision against company)
• To grant poll (Granting voting/election)
CASTING VOTE
The chairman of the company has two votes, one of his own capacity and another in his capacity as
chairman. The first vote is to express his personal views. The second is to be used in case of equality of
votes. The second vote is called the casting vote.
 ✓ Minutes
Minutes are the short notes of the proceedings at a meeting of any company. The minutes are a
record of business transacted at meetings. Every company must keep minutes containing a fair and
correct summary of all proceedings of general meetings (including the resolutions passed by postal
ballot) and those of Board meetings or those of meetings of Committee of the Board or meeting of
the Creditors, in books kept for that purpose.
The minutes’ books must have their pages consecutively numbered, and the minutes must be
recorded therein within 30 days of the meeting, along with the date of such recording. They have
to be written directly on the numbered
Uses of Minutes
a. As they record the business truncates and the decisions taken at the meeting, they can be
further referred to.
b. Since they are written, they remain as permanent records of the proceedings of a meeting.
c. They are acceptable by the court as an evidence of the proceedings of a meeting.
d. They are concise records of the decisions arrived at a meeting.
PROXY
A person who can attend and vote in general meeting on behalf of the member of the company. The
appointment of a proxy must be made by a written instrument signed by the appointer and deposited with
the company, not more than 48 hours before the meeting.
Provisions regarding Proxies
a. Any member of a company entitled to attend and vote at the meeting shall be entitled to appoint a
proxy to attend and vote at the meeting on his behalf.
b. A proxy is not allowed to speak at the meeting.
c. The proxy can vote only on resolutions passed by voting by poll.
d. The appointment of a proxy must be received by the company at least 48 hours before the meeting.
e. A member of company not having share capital cannot appoint a proxy.
f. For each meeting a separate proxy is required.
g. A member of private company cannot appoint more than one proxy to attend on the same occasion.
h. No invitation to any member to appoint a proxy must be sent at the expense of the company.

Methods of Ascertaining Sense of Meeting

The object of holding meetings is to discuss some specific issues and take decisions on them. After certain
matters are discussed at large, the decisions in favour or against is taken by vote. This is known as
ascertaining the sense of meeting.
There are several methods by which the chairman can ascertain the sense of meeting.
1. Voting by Voice: Under this method, the Chairman requests the members in favour of a motion to
say ‘Yes’ and the members against the motion to say 'No. The volume of voice indicates the sense
of the meeting. The main defect of this method is that it is not possible to trace the votes expressed
by the members. Moreover, the voice of Yes ‘or 'No' may not always give the correct idea about
the majority of votes in in the meeting. This method of voting is not secret.
2. Voting by Division: Under this method, the Chairman requests the members in favour of a
proposition to go in one room and those against the proposition to another, the number of members
in the two rooms is counted by the 'teller. If more members are in favour of the proposal the proposal
is accepted. This method is rarely used in company meetings as the voting does not remain secret.
3. Voting by show of hands: This is the most popular method of ascertaining the sense of a meeting.
The members in favour of a proposition are first asked to raise their one hand. Thereafter similar
procedure adopted for those who are against the proposition. After counting the hands in both the
cases The majority of votes are easily known. If the number of hands raised favour of the proposal
exceeds the number. of hands raised against the proposal the proposal is accepted.
4. Voting by Ballot: Under this method Every member given ballot paper (Voting paper). The voter
has to record his vote and drop the paper in the ballot box The Chairman appoints scrutineers to
count the votes. The result is declared by the Chairman on the basis of the counting. This method
ensures complete secrecy. In this method, every member can cast only one vote.
5. Voting Electronically: Electronic voting is voting that uses electronic means to take care of casting
and counting votes. In this method, electronic voting machine or computer connected to internet is
used. Members view ballot on a screen and make choice using device such as button or touch
screen. Now Central Government prescribe certain Companies for having compulsory electronic
voting in general meeting. Chairman declares the result by studying output data and result shown
by the voting machine.
6. Voting by Postal Ballot: Postal ballot is a system of voting in which members get ballot papers
sent to them through post. Members have to record vote on the ballot paper and send their vote by
post when they cannot be present at the meeting. Election officials count the votes by processing
the mailed in ballots through electronic means or may count the votes manually. Now central
government prescribe certain companies for having voting by postal ballot.
7. Voting by Poll: This method is similar to the secret ballot method with the only change that every
member is entitled to cast his votes in proportion to the number of shares held by him. Members or
their proxies are given polling papers to record their votes. A poll can he demanded at any time
before or immediately after the declaration of results by other voting methods. If the demand is
 valid the Chairman accepts it and fixes the time and place for taking the poll. In any case, the poll
must be taken within 48 hours of the demand made by the members.

Resolution
A resolution may be defined as the formal decision of a meeting on any proposal before it. A resolution is
a motion or proposition which has been passed at a meeting of the company.
Different kinds of resolution
• Ordinary resolutions
• Special resolutions
• Resolution requiring special notice
• Resolution by postal ballot
Ordinary Resolution
An ordinary resolution is a motion which has been passed by a simple majority of the members present at
a meeting and entitled to vote personally or by proxies.
Special Resolution
A special resolution is a motion which has been passed at a general meeting of the shareholders for which
–
a. A prior notice to the shareholders had been given that the motion was intended to be passed
as a special resolution, and
b. A three-fourth majority has been obtained.
A special resolution may be passed either at an extraordinary general meeting or at any general meeting of
the shareholders.
The aim of passing a special resolution is to ensure that every important change shall be made only after
deliberation and with the sanction of the body of shareholders.
A special resolution is necessary in the following cases:
• Change in the name of the company
• Change of registered office from one state to another state
• Change in the object clause of the company
• Voluntary Winding Up
Difference between ordinary resolution and special resolution
Ordinary Resolution Special Resolution
An ordinary resolution is required to transact A special resolution is required to be passed, in
ordinary business of a routine nature. case the matter involved is of a serious nature
 Notice need not specify the intention to move Notice must be specify the intention to propose
ordinary resolution. the resolution as a special resolution.
Only a simple or numerical majority is required A three-fourth majority is required to pass a
to pass an ordinary resolution special resolution.
It does not require filing with the registrar A certified copy of it must be filed with the
Registrar within 15 days.

Resolution requiring special notice

Sometimes, the members of a company wish to move a resolution at the company’s meeting. The members
of company should give a special notice to the company at least 14 days before the date of the meeting.
The company on receipt of such a special notice will give the notice of the resolution to the members at
least 7 days before the meeting.
The following matters require special resolution:
• Appointment of an auditor
• Removal of auditor before the expiry of his term.

Resolution by postal ballot

Postal ballot is a system of voting in which members get ballot papers sent to them through post. Members
have to record vote on the ballot paper and send their vote by post when they cannot be present at the
meeting. Election officials count the votes by processing the mailed in ballots through electronic means or
may count the votes manually. Now central government prescribe certain companies for having voting by
postal ballot.

Books of Accounts
Every company should prepare and keep its books of accounts and financial statement at the end of every
financial year which give a true and fair view of the state of the affairs of the corporation and explains each
transaction. The accounts should be maintained on accrual basis and double entry system of accounting.
Books of Account involve records maintained in connection with these:
• The sum of money received or expanded by a company for which the receipts and expenditure has
taken place.
• The assets and liabilities of the company.
• All sales and purchases of goods and services made by the company during the financial year.
• All the items of cost which belongs to any class of the companies specified.
Rules regarding maintaining of books of accounts
✓ True and fair view of state of affairs: The books of account should reveal a true and fair view of
the state of affairs of the company including that of its branch office or offices if any.
✓ Manner of keeping books: The books of accounts should be kept on accrual basis and according
to double entry system of accounting.
✓ Place of keeping of books: Every company shall prepare and keep the books of accounts and other
relevant books at it registered office. The books and other documents can be kept in another place
provided the Board of Directors may decide and the company shall within 7 days file with the
registrar and notice in writing.
✓ Books in electronic form: The books of accounts may be kept in electronic form also.
✓ Books of accounts in respect of Branch offices: In case a company has more than one office, the
main book of accounts of the company must be maintained at the registered office. In addition, a
records of transaction effected at its branch, should be kept at branch office itself. A regular
summary report must be sent to registered office and it should be kept open to inspection by the
Directors.
✓ Inspection of Book of Accounts: The Board of Directors of the company have rights to inspect
the book of accounts and other books and papers of a company. However, in case of inspection of
records of a subsidiary company, it can be done only by a person authorised by the Board of
Directors.
✓ Time Limit for Maintaining Book of Accounts: Books of accounts of a company must be
maintained and preserved for a period not less than 8 years immediately preceding a financial year.

Annual Return
Annual return is a yearly statement required to be filed by every company irrespective of their nature
or status, which highlights the information about the company’s various aspects pertaining to its
composition, activities and financial position.
Contents of Annual Return
• Details of registration
• Particulars of the company’s registered office
• Principal business activities pursued by the company
• Particulars of Holding, Subsidiary and Associate Companies
• Particulars of the shares, debentures and other securities of the company
• Particulars of turnover and net worth of the company
• Details of shareholding pattern.
 • Indebtedness
• Details of members, debenture holders and other securities holder
• Details of shares/Debenture transfers of the particular financial year
• Particulars of promoters
• Particulars of directors
• Particulars Key Managerial Personnel
• Details of meetings of members/class of members/Board/Committees of the Board of Directors
• Remuneration of directors
• Remuneration of Key Managerial Personnel
• Details on penalties/punishment/compounding of offences on company, directors and other
officers in default
• Details of matters pertaining to certification of compliances and disclosure
• Details in respect of shares held by or on behalf of the Foreign Institutional Investor (FII)
• Details of other pertinent disclosures

Time for filing annual return

The due date for filing annual return of a company is within sixty days from the date on which the annual general

meeting of the Company is held.

If a company fails to file annual return, then it shall be punishable with a fine which shall not be less than
Rs.50,000 but which may extend to Rs.5 lakhs and every Officer of the Company shall be punishable with a fine
that is not less than Rs.50,000 which may extend to Rs.5 lakhs and imprisonment.
 Unit -2

Company Management

Who is a director?

A director is a person appointed to perform the duties and functions of director of a company in accordance
with the provisions of the Companies Act, 2013. They are collectively known as Board of Directors or the
Board. The directors are the brain of a company.

Therefore a director may be defined as a person having control over the direction, conduct, management of
the affairs of a company.

Number of directors

A minimum of 3 directors in case of public company, 2 directors in case of private company and 1 director
in the case of one person company.

A maximum of 15 directors. A company may appoint more than 15 directors after passing a special
resolution.

Composition of the Board of Directors

Every company shall have at least one director, who has lived in India for a minimum of 182 calendar days
of the previous year, shall be appointed by every company’s board. It is a mandatory rule.

Every company shall have at least, one woman director must be appointed by the company.

All listed companies must have at least one-third proportion of their board of directors as independent
directors.

Independent director

An independent director is a non-executive director of a company who helps the company in improving
corporate credibility and governance standards. They also ensure that there is no dominance of one
individual or special interest group . They act as a coach, mentor and sounding board for their full time
colleagues.

Position of directors

It is really difficult to explain as to what is the exact legal position of directors in a company. They have
been described as agents, trustees, managing partners. They are the persons who are duly appointed by the
company for the purpose of directing and managing the company’s affairs.
 1. Directors as agents: A company as an artificial person, acts through directors who are
elected representatives of the shareholders and who execute decision made for the benefit
of shareholders. Hence directors share a relationship of an agent and a principal with the
company.
2. Directors as employees: Though directors are termed as professional employees of the
company, they are not strictly employees. They cannot claim remuneration as a preferential
creditor in the event of its winding up.
3. Directors as officers: The directors are treated as officers of the company. Sometimes,
they may be also liable for punishments in form of penalties, under Companies Act, when
the provisions of the Act are not strictly complied with.
4. Directors as trustees: Directors are trustees of the company’s money and property and
they have to safeguard them and use them for the sake of the company and on behalf of the
company.
5. Directors as Managing partners: The directors are also sometimes described as
managing partners because like a partner of a firm, they manage the affairs of the company.

Appointment of directors

A. First Directors
The first directors are usually named in the articles. The articles may also provide that both the
number and the names of the first directors shall be determined in writing by the subscribers to the
memorandum or a majority of them. Where the articles are silent regarding the appointment of
directors, the subscribers of the memorandum who are individuals shall be deemed to be the first
directors of the company. They shall hold office until the directors are appointed at the first annual
general meeting.
B. Appointment by the company: Appointment of director is made by the company general meeting.
No person shall be appointed as a director of a company unless he has been allotted the DIN. Not
less than 2/3 of the total numbers of a public company must be appointed by the company in general
meeting.
C. Appointment by Directors :The directors are empowered to appoint
• Additional directors.
• Alternate directors.
• Directors filling casual vacancy.
• Additional Directors: The board of directors may appoint additional directors from time
to time. The number of directors and additional directors must not exceed the maximum
 strength fixed for the board by the articles. The additional directors shall hold office only
up to the date of the next annual general meeting.
• Alternate directors: The board of directors may appoint an alternate director if authorized
by the articles or by a resolution of the company in general meeting. An alternate director
acts in the place of a director who is absent for more than three months from the state in
which board meetings are held. He cannot hold office for a period longer than that
permissible to the original director in whose place he has been appointed. He must vacate
office on the return of the original director.
• Casual vacancy: Where the office of any director appointed by the company in general
meeting is vacated before the expiry of his term, the directors may fill up the vacancy at a
meeting of the board. The director so appoint will hold office till the end of the term of the
director in whose place he is appointed. These provisions are applicable only to a public
company and a private company which is a subsidiary of the public company.
D. Appointment by third parties :
The articles may gives right to debenture-holders, financial corporations or banking companies who
have advanced loans to the company to nominate director on the board of the company. The number
of directors so nominated should not exceed one-third of the total strength of the board. They are
not liable to retire by rotation.
E. Appointment by proportional representation :
The articles of a company may provide that the appointment of not less than 2/3 of the total number
of director of a public company shall be according to the principle of proportional representation,
either by the single transferable vote or by a system of cumulative voting or otherwise. Such
appointments shall be made once in three years and interim casual vacancies.

Duties of directors

• To act in good faith

• Act in accordance with the Articles of Association of the Company
• To act so as to promote the objects of the Company
• Act in best interest of the Company and its stakeholders
• Exercise duties with due and reasonable care
• To exercise independent judgement
• Not to get involved in a situation where his interest conflicts with the interest of the Company
• He cannot assign his office to any other person.
• Not to achieve undue gain or advantage
Disqualification of directors

Under company law, a director can be disqualified for any of the following reasons:

• He is of an unsound mind and is declared so by the court.

• He is insolvent.
• He is in the process of declaring insolvency and his application is pending.
• He has been convicted by a court of any offence and has been imprisoned for at least 6 months.
However, if a person has been convicted of any offence and has served a period of 7 years or more,
he shall not be eligible to be appointed as a director in any company.
• If an order has been passed disqualifying him from being appointed as a director by a court or
Tribunal.
• He has not paid any calls with respect to any shares of the company held by him, whether alone or
jointly with others, and a period of 6 months has elapsed from the last day fixed for the payment of
the call.
• He has been convicted of offences dealing with related party transactions at any time during the
last preceding five years.
• He has failed to acquire a Director Identification Number.

Director Identification Number (DIN)

A unique identification number is issued by the Central Government to a person who intends to be a Director
in a new company or an existing company, that UIN is called Director Identification Number (DIN). It is
compulsory for a person to obtain a DIN who is to be appointed as a director in a company. A person cannot
be appointed as a director in a company unless he is in possession of a valid DIN.

Vacation of office by Directors

The office of a director shall become vacant in case:

• He incurs any of the disqualifications specified in section 164;.

• He absents himself from all the board meeting in 12 months with or without seeking leave of
absence.
• He acts in contravention of Section 184
- entering into contracts or arrangements in which he is directly or indirectly interested
- fails to disclose his interest in any contract or arrangement in which he is directly or indirectly
interested
• He becomes disqualified by an order of a court or the Tribunal
 • He is convicted by a court of any offence, whether involving moral turpitude or otherwise and
sentenced in respect thereof to imprisonment for not less than six months

Resignation of director

A director may resign from his office by giving a notice in writing to the company and the Board shall on
receipt of such notice take note of the same.

A director shall also forward a copy of his resignation along with detailed reasons for the resignation to the
registrar within 30 days of resignation.

Removal of directors

A director may be removed from office

1. By the shareholders
2. By the Tribunal

Removal by shareholders

The shareholders may remove a director from his office by an ordinary resolution except in the following
cases

(a) a director appointed by the Tribunal

(b) directors appointed in accordance with the principle of proportional representation under section 163.
This is to ensure that the directors appointed by the minority are not removed by a bare majority.

Removal by Tribunal

On an application to the Tribunal for prevention of oppression and mismanagement, the Tribunal may
terminate, or set aside or modify any agreement between the company and the managing director or any
other director or manager.

On such termination, the director cannot serve the company in managerial capacity for a period of 5 years
from the date of the order of termination, without the permission of the Tribunal. The director on removal
cannot sue the company for damages or compensation for loss of office.

Meetings of Directors

Any meeting of the directors of a company is called directors meeting. Such meetings may be of two types

• Meeting of the Board of Directors

 • Meeting of the committees of directors

Meeting of the Board of Directors

a) First Meeting : The first board meeting of the company (private limited or public limited) is to be
held within 30 days of incorporation of the company.
b) Period and Frequency: The company shall hold at least four Meetings of its Board in each
Calendar Year with a maximum interval of one hundred and twenty days between any two
consecutive Meetings.
c) Right of Government to exempt: The Central Government may by notification direct that the
provisions of this subsection shall not apply to any class or description of companies.
d) Mode of participation: The participation of directors in a meeting of the board may be either in
person or through video conferencing or other audio-visual means, as may be prescribed, which are
capable of recording and recognizing the participation of the directors and recording and storing
the proceedings of such meetings along with date and time.
e) Notice: Every board meeting shall be held by giving at least seven days notice in writing to every
director at his address registered with the company and such notice shall be sent by hand delivery
or by post or by electronic means.
f) Shorter Notice: In order to transact urgent business, board meeting can be called by giving shorter
notice subject to the condition that at least one independent director should be present at the
meeting.
g) Exemptions: In case of one person company, dormant company, small company, section 8
company and private company (if such private company is a start-up) this section is deemed to have
been complied if at least one board meeting has been held in each half of a calendar year and the
gap between two meetings shall not be less than 90 days.
h) Quorum: The Quorum for a Meeting of the Board shall be One-third of the total strength of the
Board, or two Directors, whichever is higher.

Meeting of the Committee of Directors

The board of directors can appoint committees of the board of directors and delegate some of its powers to
such committees. The Committee shall exercise the powers delegated to it. It cannot further delegate its
powers unless authorized.

Resolutions and Proceedings of the Board

• The decision of a board is formally made by passing of resolution

 • The details of resolutions passed should be included in the minutes of the board meeting.
• The minutes should be prepared and kept within a period of 30 days from the conclusion of such
meetings.
• In the case of board meetings or meetings of Committee of board of directors the minutes shall
contain, the name of the directors present at the meeting.
• The resolutions of directors can also be passed by the mode of circulation.
• Resolution by circulation shall be deemed as passed only if the draft of the resolution and the
necessary papers are circulated to all the directors and has been approved by a majority of the
directors who are entitled to vote on the resolution.

Powers of directors

General Powers of the Board

The powers of the Board of directors are co-extensive with those of the company. This proposition is,
however, subject to two conditions:

First, the Board shall not do any act which is to be done by the company in a general meeting.

Second, the Board shall exercise its powers subject to the provisions contained in the Companies Act, or in
the Memorandum or the Articles of the company or in any regulations made by the company in general
meeting.

Powers to be exercised at Board meetings

The Board of directors of a company shall exercise the following powers on behalf of the company by
means of resolutions passed at the meetings of the Board, viz, the power to-

(a) make calls on shareholders in respect of money unpaid on their shares

(b) issue debentures

(c) borrow money otherwise than on debentures

(d) invest the funds of the company

(e) make loans

Powers to be exercised with the approval of company in general meeting

(a) sale or lease of the company’s undertaking

(b) extension of the time for payment of a debt due by a director

(c) investment of compensation received on the acquisition of the company’s assets in securities other
than trust securities

(d) borrowing of money beyond the paid-up capital of the company.

Key Managerial Personnel

A Key Managerial Personnel in relation to a company, means-

• The Chief Executive Officer or the Managing Director or the Manager

• The Company Secretary
• The Whole-Time Director
• The Chief Financial Officer
• Such other officer as maybe prescribed.

Appointment of Key Managerial Personnel

The Board must pass a resolution before appointing any whole time key managerial personnel, and the
resolution must include the terms and conditions of the appointment as well as remuneration.
In the case, the seat of whole-time KMP is vacant then the board shall conduct a board meeting and appoint
a successor within six months form the date on which the position became vacant.

Chief Executive Officer

A chief executive officer (CEO) is the highest-ranking executive in a company, and their primary
responsibilities include making major corporate decisions, managing the overall operations and resources
of a company, acting as the main point of communication between the board of directors and corporate
operations.

Chief Financial Officer (CFO)

The term chief financial officer (CFO) refers to a senior executive responsible for managing the financial
actions of a company. The CFO’s duties include tracking cash flow and financial planning as well as
analyzing the company’s financial strengths and weaknesses and proposing corrective actions.

Role of CFO

• Maintenance of books of accounts, preparation and filing of annual accounts, disclosure of financial
information in offer document, risk management, internal control etc.
• He is required to sign audited financial statements of the company
 • CFO is responsible to provide necessary input for meeting the requirement related to Board
Reports.

Audit and Audit Committee

Audit Committee

An audit committee must comprise a minimum of three directors as its members.

Two-thirds of the total number of an audit committee’s members must comprise of independent directors.

Every member of an audit committee must be financially knowledgeable with at least one of the members
having accounting or related financial management expertise.

An independent director must be appointed as the Chairman of an audit committee.

Powers and Duties of the audit committee

• Recommendation for appointment, remuneration and terms of appointment of auditors of the

Company.
• Review and monitor the auditor’s independence and performance, and effectiveness of audit
process.
• Valuation of undertakings or assets of the Company, wherever it is necessary.
• Scrutiny of inter-corporate loans and investments.
• Evaluation of internal financial controls and risk management systems.
• To formulate the scope, functioning, periodicity and methodology for conducting the internal audit
in consultation with the Internal Auditor.
• Reviewing with management, performance of statutory and internal auditors, and adequacy of the
internal control systems
• Discussion with internal auditors any significant findings and follow up there on.

Related Party Transactions

Related parties with reference to a company means

(i) a director or his relative;

(ii) a key managerial person or his relative;
(iii) a firm, in which a director, manager or his relative is a partner;
(iv) a private company in which a director or manager or his relative is a member or director;
 (v) a public company in which a director or manager is a director or holds along with his relatives,
more than 2% of its paid-up share capital;
(vi) any body corporate whose director/ manager acts in accordance with the advice, directions or
instructions of a director or manager;
(vii) any person on whose advice, directions or instructions a director or manager is accustomed to
act;
(viii) a director (who is not an independent director) or key managerial personnel of the holding
company or his relative with reference to a company; or
(ix) any company which is a holding, subsidiary or an associate company; or a subsidiary of the
same holding company; or an investing company/venture, of the company.

Transactions which are deemed as related party transactions

• Sale, Purchase or supply of any goods or materials

• Selling or otherwise disposing of, or buying, property of any kind
• Leasing of property of any kind
• Availing or rendering of any service
• Appointment of any agent for purchase or sale of goods, materials, service or property.

Corporate Social Responsibility

Corporate Social Responsibility is essentially a management concept where companies address the social
concerns of the community in which they operate.

Applicability of CSR

• Having a net worth of rupees 500 crore or more.

• Turnover of rupees 1000 crore or more.
• Net profit of rupees 5 crore or more.
 Module -5

Winding Up

Winding up of a company

Winding up of a company is the process whereby its life is ended and its property administered for the
benefit of its creditors and members.

An administrator called liquidator, is appointed and then controls the company, collects its assets, pay its
debts, and finally distribute any surplus among the members.

Dissolution of a company

Dissolution of a company means the termination of the life of a company. It is the end result of the process
of winding up.

Modes of winding up

• Winding up by the Tribunal/ Compulsory winding up

• Voluntary Winding up

Winding up by the Tribunal

The winding up of a company as per the order of the National Company Law Tribunal is termed as
Compulsory winding up.

Under compulsory winding up, the Tribunal directs and supervises the winding up proceedings.

Grounds for Compulsory winding up

• If the tribunal thinks that the company is unable to pay debts.

• If the company has taken a special resolution to wind up the affairs of the company.
• If the company has acted against the sovereignty and integrity of India and goes against the state,
friendly relations with foreign countries.
• If the tribunal has considered to wind up the company because it is a sick company.
• If the tribunal is of the opinion that the company has done something fraudulently or unlawful
purpose for which the company.
• If the company has regularly defrauded and faulted in filing the annual returns.
• If the tribunal is of the opinion that it is just and equitable for the company to wind up.
Just and equitable clause

The tribunal may order the winding up of a company whenever it appears to be just and equitable.

It may order the winding up in the following cases:

• Deadlock in management: when shareholding is more or less equal and there is a deadlock in the
company.
• Loss of substratum: Where the objects for which a company was constituted have either failed or
become substantially impossible to be carried out, i.e., ‘substratum of the company’ is lost; the
company may be ordered to be wound up on just and equitable grounds.
• Oppression of minority: where there is evidence that minority shareholders have been excluded
from the management of the company. For example, or where minority shareholder rights have
been ignored, it is within their rights to petition the court.
• Fraudulent Purpose: Where a company has been formed to carry on any fraudulent or illegal
business.
• Public interest: Where public interest demands, the Tribunal may order winding up of the
company.

Petition for Compulsory winding up

The Petition for winding up of a Company may be presented by any of the following persons:

(1) The Company.

(2) The creditors which include contingent creditors, prospective creditors, secured creditors, debenture
holders, or a trustee for debenture holders.

(3) The contributories.

(4) The Registrar.

(5) Any person authorised by the Central Government on the-basis of report of inspectors.

Powers of the Tribunal on Hearing Petition

The tribunal may exercise any one of the following powers:

1. Dismiss it with or without costs.

2. Make any interim order as it thinks fit.
3. Appoint a provisional liquidator of the company.
 4. Make an order for winding up of the company with or without costs.
5. Make any order that it thinks fit.

Liquidator

Liquidator is a person officially appointed to liquidate a company or firm. His duty is to ascertain and settle
the liabilities of a company. If there are any surplus assets, they are distributed to the contributories.

Provisional Liquidator

A Liquidator appointed provisionally by a court appointment at any time after the presentation of a winding-
up petition usually to protect the company’s assets, preserve the company’s books and records or to protect
the public pending the making of a winding-up order.

Where a provisional liquidator is appointed, the Tribunal may limit and restrict his powers. On a winding
up order being made, the official liquidator shall cease to be provisional liquidator and shall become
liquidator of the company.

Appointment of Official Liquidator

The provisional liquidator or the Company Liquidator, as the case may be, shall be appointed from a panel
maintained by the Central Government consisting of the names of chartered accountants, advocates,
company secretaries, cost accountants or firms or bodies corporate having such chartered accountants,
advocates, company secretaries, cost accountants and such other professionals as may be notified by the
Central Government or from a firm or a body corporate of persons having a combination of such
professionals as may be prescribed and having at least ten years’ experience in company matters.”.

Report by Company Liquidator

Where the Tribunal has made a winding up order or appointed a Company Liquidator , such liquidator shall,
within 60 days from the order, submit to the Tribunal, a report containing the following particulars,
namely:—

(a) The nature and details of the assets of the company

(b) Amount of capital issued, subscribed and paid-up;
(c) the existing and contingent liabilities of the company including names, addresses and occupations
of its creditors
(d) the debts due to the company and the names, addresses and occupations of the persons.
(e) Guarantees, if any, extended by the company;
(f) list of contributories and dues, if any, payable by them and details of any unpaid call;
 (g) details of trade marks and intellectual properties, if any, owned by the company

Powers and Duties of Liquidator in Compulsory Winding up

The liquidator has to exercise these powers subject to the directions of the Tribunal.

(a) To carry on the business of the company so far as may be necessary for the beneficial winding up
of the company;
(b) To do all acts and to execute, in the name and on behalf of the company, all deeds, receipts and
other documents, and for that purpose, to use, when necessary, the company’s seal
(c) To sell the immovable and movable property and actionable claims of the company
(d) To sell the whole of the undertaking of the company as a going concern;
(e) To raise any money required on the security of the assets of the company;
(f) To institute or defend any suit, prosecution or other legal proceeding, civil or criminal, in the name
and on behalf of the company;
(g) To invite and settle claim of creditors, employees or any other claimant and distribute sale proceeds
in accordance with priorities established under this Act;
(h) To inspect the records and returns of the company on the files of the Registrar or any other
authority.

Effects of winding up order of the Tribunal

If the Tribunal makes an order for the winding up of a company, its effects date back to the commencement
of winding up.

The following are the effects of a winding-up order by the Tribunal

• No suit or other legal proceeding can be commenced against the company without the permission
of the Tribunal.
• No suit or other legal proceedings can be continued without the permission of the Tribunal.
• The winding up order operates in favour of all creditors and all contributories of the company as if
such an order has been made on their joint petition.
• The winding up order serves as a notice of discharge to the officers and employees of the company.

Commencement of compulsory winding up

• The winding up of a company takes place by the presentation of the petition to the tribunal.
• The resolution than can be passed by the company for the voluntary winding up and the
commencement of the winding-up shall be deemed as soon as the resolution has been passed.
 • If the tribunal has reason to believe that no fraud or mistake has been made then the procedure of
voluntarily winding up is considered to be valid as per the provisions.
• In any other case, the winding up of a company is considered as soon as the presentation of the
petition before the tribunal.

Contributory

A contributory is every person who is liable to contribute to the assets of the company in the event of its
being wound up.

Voluntary Winding Up

Voluntary Winding Up means winding up by the members or creditors of the company without the
intervention of the Tribunal.

Circumstances of Voluntary Winding up

A company will be wound up voluntarily under the following circumstances:

1. When the period fixed for the duration of the company by the articles has expired and the company
passes an ordinary resolution for winding up.
2. When the event, on happening of which the company is to be wound up, has occurred and the
company passes an ordinary resolution for winding up.
3. When the company passes a special resolution to wind up the company voluntarily.

Declaration of Solvency

A Declaration of Solvency shall be made by a majority of the board of directors stating that the company
is solvent and is able to pay its debts in full within a period of 3 years from the commencement of winding
up.

This declaration shall contain details regarding the assets and liabilities of the company and shall be filed
with the registrar of companies.

The company should at its general meeting, pass a resolution within 5 weeks of the declaration of solvency.

Meeting of creditors

In case of voluntary winding up of company, the company must call for a meeting of creditors on the day
or the day next following the day, on which there is to be conducted the general meeting of the company at
which the resolution for voluntary winding up is to be proposed. The notice for meeting of creditors is to
be sent by post to the creditors at the same time with the sending of the notices related to the general meeting
of the company for voluntary winding up.

The directors must prepare and present to the creditors at the meeting:

1. A list of the creditors

2. A statement of the financial position of the company.
3. Copy of declaration of solvency

Where two-thirds in value of creditors of the company are of the opinion that-

(a) it is in the interest of all parties that the company be wound up voluntarily, the company shall be wound
up voluntarily; or

(b) the company may not be able to pay for its debts in full from the proceeds of assets sold in voluntary
winding up and pass a resolution that it shall be in the interest of all parties if the company is wound up by
the Tribunal, the company shall within fourteen days thereafter file an application before the Tribunal.

The notice of any resolution passed at a meeting of creditors in the company to the Registrar within ten
days of the passing thereof.

If a company contravenes the provisions of this section, the company shall be punishable with fine which
shall not be less than 50000 rupees but which may extend to 2 lakh rupees and the director of the company
who is in default shall be punishable with imprisonment for a term which may extend to 6 months or with
fine which shall not be less than 50000 rupees but which may extend to 2 lakh rupees, or with both.

Commencement of Voluntary Winding Up

A voluntary winding up shall be deemed to commence on the date of passing of the resolution for voluntary
winding up.

Appointment of Company Liquidator

The company in its general meeting, where a resolution of voluntary winding up is passed, shall appoint a
Company Liquidator from the panel prepared by the Central Government for the purpose of winding up its
affairs and distributing the assets of the company and recommend the fee to be paid to the Company
Liquidator.

Where the creditors have passed a resolution for winding up the company the appointment of the Company
Liquidator shall be effective only after it is approved by the majority of creditors in value of the company.

Final Meeting and Dissolution company

The official liquidator shall make a scrutiny of books and papers of the company and report the result of
the scrutiny to the Tribunal. On the basis of this report, the tribunal may order either further investigation
of the affairs of the company or dissolution of the company with effect from the dates specified in the order.

When the affairs of the company are completely wound up, the liquidator shall call final meeting of
members and present all final accounts.

Within 1 week of this meeting, the liquidator should file the final account with the registrar. The company
shall be formally dissolved on the expiry of 3 months of such registration.

Appointment of Official Liquidator

The Central Government may appoint as many Official Liquidators, Joint, Deputy or Assistant Official
Liquidators as it may consider necessary to discharge the functions of the Official Liquidator. The liquidator
appointed shall be whole time officers of the central government. The salary and allowance shall be paid
by the central government.

Powers and functions of Official Liquidator

1. The Official Liquidator shall exercise such powers and perform such duties as the Central
Government may prescribe
2. Conduct inquiries or investigations, if directed by the Tribunal or the Central Government, in
respect of matters arising out of winding up proceedings.

Winding up of unregistered companies

It includes any partnership, association or company having more than 7 members at the time when the
petition for winding up is presented.

It can only be wound up by the Tribunal. It cannot be wound up voluntarily. An unregistered company can
be wound up by the tribunal if:

• It is dissolved or has ceased business or is carrying on business only for the purpose of winding up
its affairs.
• It is unable to pay its debts
• The tribunal thinks that it is just and equitable.
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