UNIT – IV

MANAGEMENT OF COMPANIES

DIRECTORS OF A COMPANY

12.1. INTRODUCTION

We know that company is an artificial legal person having independent existence in the eyes
of law. It being an artificial person, has no mind, and cannot act in its own person. It can act
only through some human agents. As a matter of fact, the company is owned and managed by
its members. The members being large in number and scattered all over the country, cannot
conveniently carry on the business of the company. Thus, to carry on the business, they elect
certain persons, from among themselves, to look after the general administration of the
company. These persons are known as 'directors', and collectively as 'Board of Directors'.

The director is defined in Section 2(34) of the Companies Act, 2013 as under:
"A 'director' means a director appointed to the Board of a company" Thus, a director is a
person appointed as director under the provisions of the Companies Act, 2013.

The directors manage and control the overall affairs of the company. They generally confine
themselves to the general business policies and overall supervision of the management of the
company. The day to day working of the company is left to other managerial personnel [as
discussed in Chapter 13]. Thus, the director is a person who controls and supervises the
overall management of company's affair. It is immaterial by what name he is called. Following
points be noted with regard to the directors:

1. Only an individual can be appointed a director. A firm, association, or a company cannot be

a director of the company [Section 149(1)].

2. An individual can be appointed or re-appointed as a director only if he has been allotted a

Director Identification Number [Section 152(3)].

Note: The provisions relating to directors' appointment and qualifications etc. are provided in
Sections 149 to 172 of the Companies Act, 2013 all of which have been notified to be
effective. The corresponding provisions of the Companies Act, 1956 stands deleted and are no
more relevant.

12.2. NUMBER OF DIRECTORS

The Companies Act, 2013 has fixed the minimum and maximum number of directors, vide
Section 149, which is as under:
1. Minimum number of directors [Section 149(1)(a)]: Section 149 has fixed the minimum
number of directors which a company must have. These are different for different type of
companies as stated hereunder:

(a) A public company must have at least 3 directors.

(b) A private company must have at least 2 directors.

Note: A 'one person company', which is always a private company, shall have at least one
director [Section 149(1)(a)].

2. Maximum number of directors [Section 149(1)(b)]: Section 149 has also fixed the
maximum number of directors which a company must have. This section makes the following
provisions in this regard:

(a) A company can have maximum of 15 directors.

(b) A company may also appoint more than 15 directors after passing a special resolution
[Section 149(1)(b) first proviso].

3. Other important points: Following points are important to note with regard to directors:

(a) Woman director: The companies prescribed by the Central Government shall have at least
one woman director [Section 149(1)(b), 2nd proviso].

(b) Compulsory stay in India: Every company shall have atleast one director who have stayed
in India for a total number of not less than 182 days in previous calender year [Section 149(3)].

(c) Independent directors: Every listed public company shall have at least 1/3rd of the total
number of directors as independent directors. The Central Government may prescribe the
minimum number of independent directors in case of any class of companies [Section 149(4)].

Note: This point will be discussed in detail in Art. 12.17 in the following pages.

(d) Small shareholders' director: A listed company may have one director appointed by small
shareholders in such manner as may be prescribed [Section 151]. A 'small shareholder' means
a shareholder holding shares of nominal value of not more than Rs. 20,000 or such other sum
as may be prescribed [Section 151, Explanation].
(e) Minimum number in articles: The minimum number of directors which the company
should have may be fixed in its articles of association. However, the minimum number so fixed
should not be less than the statutory minimum limit as stated above.

(f) Minimum number statutory requirement: The provision as to the minimum number of
directors is mandatory i.e. legally compulsory. Thus, every company must have the minimum
number of directors at all times during its existence i.e., from the date of incorporation till
dissolution of the company. Any business transacted after the number of directors falls below
statutory minimum limit would be invalid. 2 Ch. 430)

Changes brought in by the Companies Act, 2013

1. A one person company to have atleast one director. The concept of one
person company is new.
2. The prescribed class of companies to have atleast one woman director.
It is also a new provision.
3. The requirement of 182 days stay in India of atleast director, as stated
in point 3(b) above is a new provision.
4. The concept of independent directors by listed public company, as
stated in point 3(c) above is also new.

12.3. INCREASE IN NUMBER OF DIRECTORS

Once the Board of Directors is constituted, the company can also increase the number of
directors. The legal provisions in this regard are as under:

1. A company (public or private) may increase the number of directors within the maximum
limit of 15 directors specified under the Act. The company can do so by passing an ordinary
resolution in general meeting.

2. If the company wants to increase the number of directors beyond 15, it can do so only after
passing a special resolution [Section 149(1)(b), proviso].

Changes brought in by the Companies Act, 2013

The Companies Act, 2013 makes the following changes vide Section 149,
with regard to the maximum number of directors for a company (public
and private), and the increase in number of directors:

1. The maximum number of directors for a company is now fixed at 15

directors [Section 149(1)(b)]. Thus, the maximum number of
director has been increased from 12 to 15 directors.
2. The increase beyond 15 directors can be made by the company after
 passing a special resolution. No Central Government approval is required
to increase the maximum number of directors beyond 15 as was the case
earlier for increasing number of directors beyond 12.

12.4. APPOINTMENT OF DIRECTORS

We know that the directors manage the overall affairs of the company. And the success of the
company depends upon their competence and integrity. It is, therefore, necessary that only
the proper persons should be appointed as the directors. Keeping this in view, the
appointment of directors is strictly regulated by the Companies Act. It may be noted that only
an individual (i.e., natural person) can be the directors of a company. No company or
association or firm can be appointed as a director of the company [Section 149(1)].

Section 152 of the Companies Act, 2013 further provides a person can be appointed as a
director of the company only if he has been allotted a Director Identification Number (D.I.N.).
The provisions relating to Director Identification Number have been provided in new Sections
154 to 159 of the Companies Act, 2013 and will be explained in Art. 12.18.

The various modes of the appointment of directors are given in the Companies Act itself which
may be discussed under the following heads:
1. Appointment of first directors.
2. Appointment of directors by shareholders at general meeting.
3. Appointment of small shareholders directors.
4. Appointment of directors by the Board of Directors.
5. Appointment of directors by third parties.
6. Appointment of directors by Central Government.
All these modes of appointment are discussed in detail in the following pages.

12.5. APPOINTMENT OF FIRST DIRECTORS

The first directors are usually named in company's articles of association and are appointed by
promoters in the manner laid down in the articles of association. In case the articles of
association are silent about the first directors, then the subscribers of the memorandum of
association, who are individuals, shall be considered as the directors of the company. They
shall hold the office until the directors are duly appointed at the first annual general meeting
[Section 152(1)].

Thus, the first directors are appointed in accordance with the provisions of articles of
association. And if company's articles do not provide for appointment of first directors, then
as provided in section 152(1), the individual subscribers memorandum shall be deemed to be
the first directors.
It is to be noted that, the provisions of section 152(1) are attracted only if there is no provision
in company's articles for the appointment of first directors.

QUICK REVIEW TABLE: MANNER OF APPOINTMENT OF FIRST DIRECTORS

The following table gives the quick review of the manner of appointment of first directors:

Table: Manner of Appointment of First Directors

S. No. Situation Appointment of First Directors

1. If the directors are named in The directors named in the articles
the articles. shall be the first directors.
2. If the directors are not The first directors shall be
named in the articles, but determined in the manner
the articles prescribe the provided by the articles. The
manner of appointment of names of first directors shall be
first directors. determined in writing by the
subscribers to the memorandum
or a majority of them [Regulation
60 of Table F of Schedule I].
However, until first directors are
so determined, all the subscribers
who are individuals shall continue
to be deemed as directors.
3. If the director are neither The subscribers to memorandum
named in the articles nor the who are individual shall be
articles contain any provision deemed to be the directors until
for appointment of first directors are duly appointed at a
directors. general meeting. The deemed
directors shall hold office until the
first general meeting held after
incorporation. If all the subscribers
to the memorandum are body
corporates, then the company will
have no directors until first
directors are appointed at the
annual general meeting.

Notes: 1. The provision of Section 152 relating to appointment of first directors apply to all
companies whether public or private.
2. In case of 'One Person Company' an individual being the member shall be deemed to be the
first director until the directors are duly appointed by the member in accordance with
provisions of this section [Section 152(1)].

12.6. APPOINTMENT OF DIRECTORS BY SHAREHOLDERS AT GENERAL MEETING

The appointment of directors is the primary managerial function of the company, as such
majority of the directors are required to be appointed by the company at its general meeting
of shareholders. The legal provisions in this regard are contained in Sections 152(6) of the
Companies Act, 152(6).
These provisions apply only to a public company.

Section 152(6) provides that not less than 2/3rd of the total number of directors of a
public company, shall be the rotational directors i.e. who shall be liable to retire by rotation.
And the remaining 1/3 rd may be non-rotational i.e. who may be given permanent
appointment. The legal provisions relating to appointment of directors are, therefore,
discussed separately as under:

(a) Appointment of rotational directors.

(b) Appointment of non-rotational directors.

1. Appointment of rotational directors: We have noted above that not less than 2/3rd of the
total number of directors shall be liable to retire by rotation. These directors shall be
appointed by the company in general meeting of shareholders [Section 152(6))(a)].

Notes: 1. The general meeting in which 2/3 rd of the total number of director are appointed
may be annual general meeting or extra-ordinary general meeting.

2. The term 'total number of directors' does not mean the maximum number of
directors fixed by the articles, but only the number of directors for the time being
appointed as directors.

2. Appointment of non-rotational directors: The directors other than the rotational directors
are called non-rotational directors. Thus, the remaining 1/3rd of the total number of directors
are non-rotational directors. These 1/3rd directors may be appointed in accordance with the
provisions contained in company's articles of association. The company may prescribe, in its
articles, the manner of appointment of remaining 1/3rd directors e.g., the articles may
empower the Board of directors to appoint 1/3rd of total number of directors. In the absence
of any such provision in articles or in case of default in such appointment, these directors shall
also be appointed by the company in general meeting [Section 152(6)(b)].
As stated in last point, not less than 2/3rd of the total number of directors shall be liable to
retire by rotation. This means that only the remaining 1/3rd can be given permanent
appointment. Thus, the provision about permanent directors and the retirement of directors
by rotation may be stated as under:

(a) One-third of the total number of directors can be given permanent appointment.
(b) Two-third of the total number of directors are liable to retire by rotation. This point will be
discussed in detail in Art. 12.19.

Notes: 1. The reappointment of retiring directors and the appointment of a new director in
place of retiring director will be discussed in Art. 12.19 on Retirement of Directors by Rotation

2. The non-rotational directors can be appointed for such period as may be determined by the
general meeting and there is nothing in the Act which prohibit even an appointment for life.
However, the articles of a company may provide the term of office of a non- rotational
director.

3. Applicability of Section 152: The provisions of Section 152 relating to appointment of

directors, as discussed above, apply only to a public company.

These provisions do not apply to a private company. In case of a private company, the
appointment of directors is made in accordance with the provisions provided in company's
articles of association. If the articles of a private company are silent on this point, then the
following provisions shall apply:

(a) All the directors shall be appointed in the general meeting.

(b) No director shall be liable to retire by rotation. This means that all the directors
shall hold office till death, resignation, removal or disqualification.

Note: A private company may provide in its articles that certain portion of directors
shall be liable to retire by rotation.

4. Procedure for appointment: Generally, the appointment of directors is made by an

ordinary resolution at the general meeting i.e., by simple majority of shareholders. Thus, the
procedure to be adopted for appointment of directors is the passing of ordinary resolution.

Following points are important to note with regard to procedure of appointment:

(a) Separate resolution for each appointment: The resolution for appointment of each
director is to be moved separately i.e., there should be separate resolution for each
appointment. Thus, two or more directors cannot be appointed by a single resolution [Section
162].
(b) Appointment by proportional representation: The articles of the company may provide
for the appointment of directors by a system of proportional representation [Section 163]. If
the articles so provide, then the appointment cannot be validly made by. ordinary resolution.

The above stated two provisions will be discussed in detail in Arts. 12.12 and 12.13.

QUICK REVIEW TABLE : APPOINTMENT OF DIRECTORS AT GENERAL MEETING

The following table gives the quick-review of legal provisions relating to appointment of
directors at general meeting:

Table: Appointment of Directors at General Meeting [Section 152(6)].

S. No. Relevant Point Legal Position

1. Applicability 1. Section 152(6) applies only
to: a public company;
2. Proportion of directors to be 1. Not less than 2/3 rd of
appointed in the General the total number of
Meeting directors shall be
rotational directors
and they shall be
appointed at the
general meeting.

2. The remaining 1/3 rd

may be non-rotational
directors and may be
appointed as per
provision in
company's articles.
3. Appointment 1. Generally, the
directors shall be
appointed by an
ordinary resolution,
i.e., by simple
majority.
2. The articles of the
company may provide
for appointment by
proportional
representation. If
articles so provide,
 then this system shall
be adopted. [Section
163].
3. The resolution for
appointment of each director
shall be moved separately i.e.
each director to be appointed
by separate resolution
[Section 162].

12.7. APPOINTMENT OF SMALL SHAREHOLDERS' DIRECTOR

A 'small shareholders' director' is one who is appointed to represent small shareholder in the
company.
The provision relating to appointment of small shareholders director are made in Section 151
of the Companies Act, 2013. The Companies (Appointment of Small Shareholders' Director)
Rules, 2001 have also been made for the appointment of such director. These are discussed in
the following pages :

1. Meaning of small shareholder: A small shareholder means a shareholder who holds shares
of the nominal value of not more than Rs. 20,000 or such other such as may be prescribed in
the company [Section 151(1), Explanation]. He may be a holder of equity shares or preference
shares or both.

It is to be noted that what is relevant here is nominal value of shares, and not the paid up
value' or 'market value'. For example, A holds 4000 equity shares of 10 each ( 5 paid up) in
ABC Ltd. In this case, A is not a small investor as the nominal value of shares held by him is
40,000 (10 × 4000) which exceeds the limit of ₹ 20,000.

2. Applicable to listed company only: The provisions relating to appointment of small

shareholders director apply only to listed companies.

A listed company may have one director elected by the small shareholders in such manner and
with such terms and conditions as may be prescribed [Section 151].

3. Appointment of small of small shareholders director - optional or obligatory: A small

shareholders' director may be appointed by the company suo moto i.e., on its own. In this
sense, the appointment of such director is optional.

However, where a notice is served on the company by the small shareholders for the
appointment of such director, then it is obligatory (i.e. legally compulsory) for the company to
appoint small shareholders' director [Rule 4 of the Companies (Appointment of Small
Shareholders' Director) Rule, 2001].

4. Requirements of notice by small shareholders: The small shareholders may serve a notice
on the company for the appointment of small shareholders' director. The requirements of
such a notice are:

(a) The notice must be given in writing.

(b) The notice shall be given at least 14 days before the meeting.

(c) The notice shall be given by at least 1/10th in number of small shareholders.

(d) The notice shall be signed by at least 100 small shareholders.

(e) The notice shall specify the name, address, number of shares held, particulars of shares
with differential rights as to dividend or voting (if any) and folio numbers of - (1) shareholders
proposing the resolution; and

(ii) the person whose name in proposed as a 'Small Shareholders' Director'.

5. Procedure of appointment of small shareholders director: A small shareholders' director

shall be appointed in such manner and with such terms and conditions as may be prescribed
[Section 151].

6. Small shareholders director to be a small shareholder: Only a small shareholder can be

appointed as a small shareholders' director.

The small shareholders' director shall also file his consent in writing to act as a director.

7. Disqualifications and vacation of office: In this regard, the provisions are as under:

(a) Disqualifications of a 'Small Shareholders' Director' are same as that of any other director,
as specified under Section 164.

(b) Grounds for vacation of office of a 'Small Shareholders' Director' are same as applicable to
any other director as specified under Section 167, except that

(c) He shall vacate his office if he ceases to be a small shareholder;

8. Tenure of a small shareholders' director: In this regard, the provisions are as under: (a) A
'Small Shareholders' Director' shall be appointed for a maximum period of three years.
(b) He shall not retire by rotation.

(c) He may be re-elected for another period of three years.

9. Number of small shareholders' directorships: A person can be appointed as a Small

Shareholder's Director in not more than 2 companies.

12.8. APPOINTMENT OF DIRECTOR BY THE BOARD OF DIRECTORS

As discussed above, the power to appoint directors is vested in the shareholders who make
appointment in general meeting. However, the Board of Directors may also appoint directors
in the following cases:

1. Appointment of additional directors.

2. Filling of casual vacancies.

3. Appointment of alternate directors.

4. Appointment of nominee directors

The powers of the Board of Directors to make these appointment were earlier contained in
Sections 260, 262 and 313 of the Companies Act, 1956 which have now been incorporated in
Section 161 of the new Companies Act, 2013, and discussed in the following pages.

12.8.1. Appointment of Additional Directors

The Board of Directors may appoint additional directors from time to time if it is authorised by
the articles of association. Legal provisions in this regard are contained in Section 161(1) of the
Companies Act, 2013, which apply to all companies, whether public or private. These
provisions may be stated as under:

1. Authorisation by articles of association: The Board of Director may appoint additional

directors only if it is authorised by the articles of association to make the appointment
[Section 161(1)].

However, a person who fails to get appointed as a director in a general meeting, cannot be
appointed by the Board as an additional director.

It is to be noted that the total number of directors (additional and others) must not exceed the
maximum number fixed by the articles of association [Regulation 66, Table F of the Companies
Act, 2013].
Note: The additional director can be appointed by the Board of Directors by passing a
resolution at the Board meeting, or by passing a resolution by circulation.

2. Term of office of additional director: The term of office of additional director is limited. He
shall hold office only upto the date of next annual general meeting or the last date on which
the annual general meeting should have been held, whichever is earlier [Section 161(1)].
Thus, if the annual general meeting of the company is not held or cannot be held, then such
additional director vacates his office on the last day on which the annual general meeting
should have been held in terms of Section 96.

3. Position of an additional director: An additional director has the same rights, powers,
duties and liabilities as any other director. The provisions relating to qualification,
disqualifications, grounds for vacation of office, disclosure of interest by a director, etc. are
applicable to an additional director as they apply other director. He can also be appointed as a
whole-time director or managing director in accordance with the provisions of the Act.

4. Other important points: Following points are important to note in respect of additional
directors:

(1) In any case, the approval of Central Government is not required for appointment of
additional director.

(ii) In case the strength of directors fall below the legal minimum, the appointment of
additional director by the remaining directors would be valid.

Notes: 1. The provisions of Section 161 applies to all companies, whether public or private.

2. An additional director holds office upto the next annual general meeting. This means that
he does not retire at the next annual general meeting, but his term expires on this meeting
Therefore, he is not a 'retiring director' within the meaning of Sections 152 and 160
[Explanation to Section 152, the Companies Act, 2013].

3. Regulation 66 of Table F of the Companies Act, 2013 authorises the Board of Directors to
appoint an additional director. Thus, in a company which adopts Table F as its articles, the
Directors will have the power to appoint additional directors.

4. Since additional directors is not a retiring director, he shall not be included in total number
of directors for the purposes of determining the 2/3rd directors who shall be liable to retire by
rotation.

12.8.2. Filling of Casual Vacancies

A casual vacancy occurs when the office of a director is vacated before the expiry of his term
of office. It may be caused by death, resignation, insanity insolvency, etc., of the director. The
Board of Directors may fill a casual vacancy by passing a resolution at the Board meeting. Legal
provisions in this regard are contained in Section 161(4) of the Companies Act, 2013 which
apply only to public company. These provisions may be stated as under:

1. Manner of filling casual vacancy: A casual vacancy may be filled as under [Section 161(4)

(i) Where company's articles contain a provision for filling a casual vacancy: In this case,
casual vacancy is filled in accordance with the regulation and procedure prescribed in the
company's articles of association;

(ii) Where company articles contain no such provision: In this case, casual vacancy may be
filled by the Board of Directors at a Board meeting by passing a resolution at the Board
meeting.

The power to fill casual vacancy may also be given to directors in company's articles of
association. However, the directors may fill a casual vacancy even if no express power is given
to them in the articles, if company's articles are silent as to the manner of filling a casual
vacancy.

2. Term of office of director appointed to fill a casual vacancy: The term of office of a person
appointed to fill a casual vacancy is also limited. He shall hold office only upto the date, upto
which the director in whose place he is appointed would have held the office [Section 161(4)].

12.8.3. Appointment of Alternate Director

The provisions relating to appointment of alternate director have been amended and are
incorporated in Section 161(2) of the new Companies Act, 2013, which were earlier contained
in section 313 of the Companies Act, 1956. An 'alternate director' is appointed to act in place
of director who is absent for a period of more than three months from India. The Board of
Directors may appoint an alternate directors if it is so authorised by the articles of association,
or by a resolution passed by the company in general meeting. The person in whose place an
alternate director is appointed is referred to as original director.

Legal provisions in this regard as contained in Section 161(2) apply to all companies, whether
public or private, and may be stated as under:

1. Authorisation by articles or resolution in general meeting: The Board of Directors may

appoint an alternate director only if it is authorised by:

(i) articles of association; or

(ii) an ordinary resolution passed by the company in general meeting. It is important to note
that the right to appoint an alternate director vests in the Board. The original director has no
right to appoint an alternate director.

Further, the members also have no right to appoint an alternate director. The members can
only empower the Board to make the appointment as per Board's discretion on case to case
basis.

Note: Since there is no condition that an alternate director shall be appointed only by passing
a resolution at the Board meeting, he can therefore be appointed by the Board either by
passing a resolution at the Board meeting or by passing a resolution by circulation.

2. Term of office of alternate director: The term of office of alternate director is also limited.
An alternate director acts during the absence of the original director. He shall not hold office
for a longer period than that permissible to the original director in whose place he is
appointed.

Thus, the alternate director shall vacate his office when the original director returns to India. It
is important to note that an alternate director automatically ceases to be a director as soon as
the original director returns to India.

Note: In case the original director ceases to be a director by reason of death or vacation of
office under Section 167, the alternate director shall immediately cease to hold his office as he
holds the office for a period which is permissible to original director.

3. Position of an alternate director: An alternate director is appointed by the Board of

directors and not by the director in whose place he is appointed (i.e., the original director).
Therefore, he is not a representative, proxy or an agent of original director. He is a director in
his own right. He has same rights, duties and liabilities like any other director.

4. Other important points: Following points are important to note in respect of alternate
directors:

(a) A person can be appointed as an alternate director for an independent director only if he is
qualified to be appointed as an independent director under the Act [Section 161(2), first
proviso].

(b) An alternate director cannot be appointed as an alternate director for another director at
the same time [Section 161(2)].

(c) The approval of Central Government is not required for the appointment of an alternate
director.
(d) In case the term of original director expires before he return to India, the provisions of
automatic re-appointment of retiring director shall apply to the original director and not to
the alternate director [Section 161(2), third proviso]

(e) An alternate director is excluded for the purposes of counting number of directorships
which a person can hold in companies as per the provisions of Sections 165 [Section 165(1)].

Notes: 1. The provisions of Section 161(2) apply to all companies, whether public or private. 2.
There is no provision in table F regarding appointment of an alternate director. Thus, in a
company which has adopted Table F, the directors can appoint alternate directors only if the
Board of Director is so authorised by the company by a resolution in general meeting.

Changes brought in by the Companies Act, 2013

The changes brought in by new Section 161(2) relating to alternate
directors are as under:

1. An alternate director is appointed in place of a director who is absent for

a period of 3 months from India. Earlier under Section 313, the absence
was from a State in which Board meetings are ordinarily held.

2. An alternate director shall automatically vocates his office as and when

the original director returns to India and not to the State in which Board
meetings are ordinarily held as was the position earlier.

3. It is clarified that a person can be appointed as an alternate director for

an independent director only if he is qualified to be appointed at an
independent director under the Act. It is new provision.

4. An alternate director cannot be appointed as an alternate director to

another director at the same time. It is also a new provision.

12.8.4. Appointment of Nominee Directors

This is the new provision added by Section 161(3) of the Companies Act, 2013 w.e.f.
12.9.2013.

As per this section, subject to the articles of a company, the Board may appoint any person as
a director nominated:

(a) by any institution in pursuance of the provision of any law or of any agreement; or (b) by
the Central or State Government by virtue of its shareholdings in a government company.
Thus, now the Board may also appoint a nominee director who is nominated by an institution
or by the Central or State Government. Other provisions relating to nominee directors'
appointment are discussed below.

12.9. APPOINTMENT OF DIRECTORS BY THIRD PARTIES

OR

APPOINTMENT OF NOMINEE DIRECTORS

The term 'third parties' here means debenture-holders', financial or banking companies or
financial corporations who have advanced loan to the company. The directors so appointed
are known as nominee directors. The nominee directors are watchdogs of the financial
institutions .. third parties) to safeguard their funds in the assisted company.

The legal provisions relating to the appointment of directors by 'third parties' may be stated as
under:

1. Nominee directors representing financial companies other than those constituted under
special Acts: The articles of association of a company may authorise a financial company (.e.,
third party) to appoint their nominees on company's Board of Directors. It is to be noted that
such financial company may appoint a nominee director only if articles of assisted company
(i.e., to whom financial assistance is given) authorise the financial company to appoint a
nominee director. Following points are important to note with regard to nominee directors:

(a) The number of directors so nominated must not exceed one-third of the total number of
directors. This is so because 2/3 of the total number of directors must be appointed by the
company at its general meeting of the shareholders [Section 152(6)].

(b) All the provisions of the Companies Act also apply to a nominee director. He holds a
fiduciary position in the company and he is required to display utmost care, skill and care in
the discharge of his duties. Therefore, a nominee director can also be prosecuted for any
default, non-compliance or contravention of the Act if he is proved guilty. They are also liable
to retire by rotation.

(c) The appointment of such nominee directors must be made in conformity with the
provisions of Sections 152 of Companies Act, 2013, i.e., such a nominee director shall be
included in total number of directors, and if he is appointed as a non rotational director, he
must fall within 1/3rd of total number of directors. Also, his appointment should be within the
maximum number of directors as specified in company's articles of association.
Note: ICICI and IFCI are the companies formed and registered under Companies Act, and not
under a special statute. Therefore, ICICI and IFCI can appoint a nominee director on the Board
of an assisted company only if the articles of the assisted company empower the company to
appoint a nominee director. All the provisions of the Companies Act will apply to the nominee
directors appointed by ICICI Ltd. or IFCI Ltd.

2. Nominee directors representing financial institutions constituted under special Acts: In

case of financial institutions constituted under Special Acts e.g., UTI, IDBI, LIC, etc., the
relevant Special Acts under which they are constituted empower them to appoint a nominee
director on the Board of an assisted company. Their appointments are governed by the special
provisions which override the provisions of the Companies Act, 2013. The provisions
applicable to such nominee directors may be stated as under:

(a) He shall not retire by rotation.

(b) He shall not be required to hold qualification shares.

(c) He is not counted for the purpose of total number of directors.

(d) In reckoning two-third or any proportion thereof, they shall not be taken into account.

(e) He can be appointed even if there is no provision in the assisted company's articles for the
appointment.

(f) He can be appointed even if his appointment would result in increasing the strength of the
Board beyond the 'maximum number of directors' as specified in the articles.

(g) He can be removed only by the authority appointing him.

12.10. APPOINTMENT OF DIRECTORS BY THE TRIBUNAL

The Tribunal has the power to appointment a nominee director on the Board of Directors of a
company where the company's affairs are conducted in a manner prejudicial or oppressive to
the members or prejudicial to public interest or company interest [Section 242(1)(k)].

The legal provisions in this regard are contained in Section 242 of the Companies Act, 2013
which apply to all companies, whether public or private. These provisions will be discussed in
detail in Chapter 18 in Art. 18.11 under chapter Prevention of Oppression and
Mismanagement.
12.11. CONSENT OF DIRECTORS TO ACT AS DIRECTORS

The provision relating to consent of director to act as director has been modified and
incorporated in Section 152(5) of the new Companies Act, 2013, which were earlier provided
in Section 264 of the Companies Act, 1956.

The new provision now requires a person appointed as director to give his consent to the
company to hold the office as director, and also to file such consent with the Registrar. The
object of this section is to bring on record sufficient material to prove that the person
appointed as director has consented to act as director. This section makes provisions for filing
of consent with the company as well as with the Registrar of companies which are as under:

1. Filing of consent with the company [Section 152(5)]: A person appointed as director shall
not act as director unless he gives his consent to hold the office as director. It is to be noted
that now the consent is required to be given by an appointed director, and it is the consent to
hold the office as director. Whereas, earlier under Section 264 the consent was required to be
given by a proposed director to act as director.

2. Filing of consent with Registrar [Section 152(5)]: A newly appointed director shall not act
as a director of the company unless he has signed and filed with the Registrar his consent in
writing to hold the office as such director. Such consent is to be filed within 30 days of his
appointment as a director.

Changes brought in by the Companies Act, 2013

The changes brought in by new Section 152(5) relating to the filing of consent by the
directors are as under:

(a) The filing of consent to act as director is now necessary in case of all companies
including private companies.
(b) A person appointed as director can act as director only if:
(i) he gives his consent to hold the office as director; and
(ii) he files such consent with the Registrar within 30 days of his appointment.
Under the new provision, a person proposed as a candidate for the office of director
is not required to file his consent with the company as was the case earlier. Only the
person appointed as director is required to file his consent.

12.12. SEPARATE RESOLUTION FOR EACH APPOINTMENT

We know that the appointment of directors is made by an ordinary resolution at the general
meeting of shareholders. However, the resolution for appointment of each director is to be
moved separately i.e., each director must be appointed by passing a separate resolution. The
purpose of this provision is that it will enable the shareholders to accepts or reject a particular
individual standing for directorship without being compelled to accept or reject all of them.
Legal provisions in this regard are now made in Section 162 of the Companies Act, 2013. which
were earlier provided in Section 263 of the Companies Act, 1956. The provisions of new

Section 162 are applicable to all companies including a private company, and may be stated as
under:

1. Appointment by a separate resolution: At a general meeting, every director must be

appointed by passing a separate resolution, and two or more persons cannot be appointed as
directors by passing a single resolution [Section 162(1)].

If two or more directors are appointed by a single resolution, the appointment shall be void
and non-existent in the eyes of law [Section 162(2)].

2. Appointment of two or more persons as directors: This is an exception to the above stated
rule provided in Section 162 itself. Two or more persons can be appointed as directors by a
single resolution, if a proposal to the effect that appointment shall be so made has first been
agreed to by the meeting without any vote being given against it. [Section 162(1)]. Thus, two
or more directors may be appointed by a single resolution as per the following procedure:

(a) Firstly, a proposal for the appointment of two or more directors by a single resolution has
first been agreed to at the meeting without even one vote being given against the proposal.

(b) Then, a resolution appointing such directors (i.e. two or more directors) by a single
resolution should be passed. Such resolution shall be passed as an ordinary resolution.

EXAMPLE 12.1. In a general meeting, 100 members were present. All the 100 members passed
a single resolution appointing 2 directors A and B. The single resolution appointing the
directors is void since a proposal has not first been agreed to by the meeting that appointment
of 2 directors shall be made by a single resolution.

EXAMPLE 12.2. In a general meeting 15 members were present. A proposal to the effect that
A and B shall be appointed by a single resolution was agreed with the consent of 13 members,
but the other 2 members abstained from voting on the proposals. At the time of voting on the
composite motion for appointment of both A and B, 12 members voted in favour of the
resolution and 3 members voted against the resolution. The single resolution appointing the
two directors is valid as at the time of proposal, no vote was cast against it.

3. Applicability of Section 162: Section 162 applies to all companies including a private
company.
12.13. APPOINTMENT OF DIRECTORS BY PROPORTIONAL REPRESENTATION

We know that the directors of the company are appointed by an ordinary resolution (i.e.,
simple majority) of the shareholders. In this way, the minority of the shareholders may not be
in a position to send their representatives to the Board of Directors. The system of voting by
proportional representation for appointment of directors is enacted to make the minority
votes effective. This system enable a minority of respectable strength to elect its
representatives and at the same time the majority shareholders retain their right to appoint
the directors in proportion to their voting strength.

The legal provisions in this regard are now made in Section 163 of the Companies Act, 2013,
which are similar to earlier provisions contained in Section 265 with the change that now
these are also applicable to a private company. The new provisions may be stated as under:

1. Appointment by proportional representation where articles so provide: The directors shall

be appointed by the system of proportional representation only if the company's articles
provide for appointment by this method.
The articles of association of a company may provide for the appointment of not less than
two-third of the total number of directors of a company according to the principle of
proportional representation. Where, the articles so provide, then this system must be adopted
for appointment of directors.

Any of the following modes of voting may be adopted for appointing the directors by
proportional representation:

(a) Voting by single transferable vote

(b) Cumulative voting

(c) Any other method.

It is to be noted that specific provision in the articles is required for appointment of directors
by proportional representation. The articles must contain the detailed provisions prescribing
the procedure for appointment of directors by this method.

2. Number of directors and periodicity of appointment: Where the company adopts this
method, not less than 2/3rd of the total number of directors shall be appointed by
proportional representation, and the appointment shall be made once in every 3 years.

3. Filling of casual vacancies: Any casual vacancy created shall be filled as provided under
Section 161(4). Thus, a casual vacancy shall be filled according to the provisions of the articles.
In the absence of any provision in the articles, any casual vacancy shall be filled by the Board
of directors at the Board meeting.
4. Applicability of Section 163: The provisions of Section 163 apply to both a public company
as well as a private company. However, this section does not apply to a wholly owned
government company.*

Notes: 1. In case of proportional representation, several directors are to be voted for at the
same time.

2. Directors appointed by way of proportional representing cannot be removed by the

company under Section 284 (now Section 169 of the Companies Act, 2013).**

12.14. SHARE QUALIFICATIONS OF DIRECTORS

The share qualifications of a director means the share which a director is required to hold in
the company to enable himself to be the director. It is to be noted that the Companies Act
does not impose any share qualifications for a person to be a director in the company.
However, the articles of association of the company usually provide for the share qualification
of a director. When the articles of the company provide that a certain number of shares will
have to be held by each director, such shares are called qualification shares. It was earlier
provided in Section 270 of the Companies Act, 1956 that the nominal value of these
qualification shares must not exceed 5,000. Where the nominal value of one share exceeds
5,000, the nominal value of the qualification must not exceed one share.

EXAMPLE 12.3. The articles of association of a public company contained a clause that a
director should hold 300 shares of 10 each as a qualification. Subsequently, at the annual
general meeting the company altered its articles of association and increased the share
qualification to be held by a director to 550 shares. In this case, the alteration of articles is
invalid as the nominal value of the qualification shares must not exceed 5,000 [Section 270]
Here, the nominal value of the qualification shares has been raised to 5,500 (i.e., 550 × 10).

Note: Now the Companies Act, 2013 does not make any provision corresponding to Section
270 of the Companies Act, 1956.

12.15. DISQUALIFICATIONS OF DIRECTORS

The disqualifications of directors are specified in Section 164 of the Companies Act, 2013
which were earlier provided in Section 274 of the Companies Act, 1956.

As per new Section 164, the following persons are disqualified for appointment as directors of
a company:

1. A person who is of unsound mind and stands declared so by a competent court [Section
164(1)(a)].
2. A person who is an undischarged insolvent [Section 164(1)(b)]. But where the insolvent
proceedings are discharged by the court, the direction would be qualified for appointment.

3. A person who has applied to the court to be declared as an insolvent and his application is
pending [Section 164(1)(c)].

4. A person who has been sentenced to at least six months imprisonment for an offence
whether involving moral turpitude or otherwise, and five years have not elapsed from the
date of the expiry of the sentence [Section 164(1)(d)].

The expression 'moral turpitude' though vague but generally, it means a conduct contrary to
justice, honesty, modesty or good morals. It implies depravity and wickedness of character.
[Joy v. State of Kerala, (1991) 72 Comp. Cas. 57]

Note: A person convicted of any offence and sentenced to imprisonment of 7 years or more
shall not be eligible to be appointed as director in any company [Section 164(1)(d), proviso].

5. A person has not paid for six months any calls on his shares [Section 164(1)(f)].

6. A person who has been disqualified for appointment as director by an order of the court or
Tribunal and the order is in force [Section 164(1)(e)].

7. A person who has not been allotted a Director Identification Number [Section 164(1)(h)].

8. A person who is already a directors of a company which

(a) has not filed financial statements or annual returns for any continuous period of three
financial years; or

(b) has failed to repay its deposits or interest or redeem its debentures on due date or pay
dividend and such failure continues for one year or more. Such a person shall not be eligible to
be appointed as a director of any other company for a period of 5 years from the date of
default by such a company [Section 164(2)].

It is important to note that a private company which is not a subsidiary of a public company
may, by its articles of association, provide for additional disqualifications of directors [Section
164(3)]. However, in case of a public company, the disqualifications of directors are specified
as enumerated above. It cannot provide for any additional disqualification. If it does so, the
action of the company is not valid, and the director cannot be asked to quit because of the
additional disqualification.
EXAMPLE 12.4. A was a properly appointed director of a public limited company. The
company altered its articles of association, and made it compulsory qualification for directors
to be at least commerce graduate. A was not a commerce graduate, and thus was asked to
quit the office. In this case, the action of the company is not justified as a public company
cannot provide for any additional disqualification of directors.

12.16. QUALIFICATIONS OF DIRECTORS

We have discussed, in the last article, the disqualifications of directors. As regards the
qualification, there is no direct provision (i.e., section) in the Companies Act. In fact, the
Companies Act has not prescribed any academic or professional qualification for directors.
However, keeping in view the various provisions relating to directors, their qualifications may
be summed up as under:

1. A director must be an individual. An association, a firm, or a body corporate such as a

company etc. cannot be appointed as a director of the company [Section 149(1)].

2. A director must not suffer from any of the disqualifications as discussed in the last article.

12.17. INDEPENDENT DIRECTORS

This point is discussed under the following topics/articles:

12.17.1. Definition of Independent Directors

The concept of 'independent director' is a new one and is defined in Section 2(47) of the
Companies Act, 2013, as under:

"Independent director means an independent director referred to in sub-section (6) of Section

149".

As per Section 149(6), an independent director, in relation to a company, means a director

other than a managing director or a whole-time director or a nominee director, and who fulfils
the following requirements:

(a) who, in the opinion of the Board, is a person of integrity and possesses relevant expertise
and experience.

(b) (i) who is or was not a promoter of the company or its holding, subsidiary or associate
company;

(ii) who is not related to promoters or directors in the company, its holding, subsidiary or
associate company;
(c) who has or had no pecuniary relationship with the company, its holding subsidiary or
associate company, or their promoters, or directors, during the two immediately preceding
financial years or during the current financial year;

(d) who, neither himself nor any of his relatives

(i) holds or has held the position of a key managerial personnel or is or has been
employee of the company or its holding, subsidiary or associate company in any of the
three financial years immediately preceding the financial year in which he is proposed
to be appointed.

(ii) is or has been an employee or proprietor or a partner, in any of the three financial
years immediately preceding the financial year in which he is proposed to be
appointed, of

(A) a firm of auditors or company secretaries in practice or cost auditors of the

company or its holding, subsidiary or associate company; or

(B) any legal or a consulting firm that has or had any transaction with the
company, its holding, subsidiary or associate company amounting to ten per
cent or more of the gross turnover of such firm.

(iii) holds together with his relatives two per cent or more of the total voting power of
the company.

(iv) is a Chief Executive Officer or director of any non-profit organisation that receives
25% or more of its receipts from the company.

(f)who possesses such other qualifications as may be prescribed.

The above stated clauses are in fact the criteria for a director to be appointed (or known) as an
independent director. A director who meets these criteria would fall in the category of an
independent director.

In simple words, we can say, an independent director means a director

(a) who fulfils the criteria of being an independent director specified in Section 149(6); and

(b) who is not a managing director or a whole-time director or a nominee director.

12.17.2. Legal Provisions Relating to Independent Directors

These are as under:

1. Every listed public company to have Independent Directors [Section 149(4)]: Every listed
public company shall have at least 1/3 of the total number of directors as independent
directors.

The Central Government may prescribe the minimum number of independent directors in
case of any class of companies.

2. Declaration by independent director [Section 149(7)]: Every independent director shall

give a declaration at the Board meeting that he meets the criteria of being an independent
director as provided in Section 149(6), as discussed in definition part. Such a declaration is
required to be given by an independent director

(a) at the first Board meeting in which he participates as a director; and thereafter

(b) at first Board meeting in every financial year; and

(c) whenever there is any change in the circumstances which affects his status as an
independent director.

3. Remuneration by way of fee only [Section 149(9)]:

An independent director shall not be entitled to any remuneration, other than sitting fee,
reimbursement of expenses for participation in Board meeting and profit related commission
as approved by the members.

4. Term of office [Section 149(10)(11)]: An independent director shall hold office for a term
upto 5 consecutive years on the Board of a company. However, he shall be eligible for re-
appointment on passing of special resolution by the company, and disclosure of such
appointment in Board's report. Following further provisions in this regard are [Section
149(11)]:

(a) No independent director shall hold office for more than 2 consecutive terms;

(b) After two consecutive terms, an independent director shall be eligible for appointment
after the expiration of 3 years of ceasing to be an independent director.

(c) During the said period of 3 years, he shall not be appointed in or be associated with the
company in any other capacity, either directly or indirectly.
5. Not liable to retire by rotation [Section 149(13)]: The provisions of retirement of directors
by rotation shall not be applicable to independent directors, and also an independent director
shall not be included in the total number of directors liable to retire by rotation.

6. Abiding by the provisions of Schedule IV [Section 149(8)]: The company and the
independent directors shall abite by the provisions of Schedule IV of the Companies Act, 2013.
Schedule IV exclusively deals with independent directors and specifies the following code for
independent directors:

(a) The guidelines of professional conduct, role and functions, duties and evaluation
mechanism of independent directors.

(b) Separate meetings: The independent directors shall hold at least one meeting in a year,
without the attendance of non-independent directors and members of management.

The meeting shall review the performance of non-independent directors, of Board a a whole
and of the chairperson of the company.

(c) Manner of appointment: The appointment process of independent directors shall be

independent of company management, and shall be approved at the meeting of shareholders.
The appointment of independent director shall be formalised through a letter of appointment
setting therein term of appointment, expectations, of Board from him, code of business ethics,
periodic fee payable etc.

12.18. DIRECTOR IDENTIFICATION NUMBER

Director Identification Number (DIN) means an identification number allotted by the Central
Government to an individual director for the purpose of his indentification as a director of the
company. The DIN will give individual identity to any person intending to become a director. It
will also help in keeping track of the directors of such companies which treat the investors and
vanish with public funds.

An individual can be appointed as a director of a company only if he has been allotted a

Director Identification Number. Legal provisions in this regard are contained in the new
sections 153 to 159 of the Companies Act, 2013 which were earlier provided in Sections 266A
to 266G of the Companies Act, 1956. The new provisions are explained hereunder.

1. Meaning of Director Identification Number: The Director Identification Number means an

identification number which the Central Government may allot to any individual intending to
be appointed as directors or to any existing directors of a company, for the purposes of his
identification as such director.
2. Application for allotment of Director Identification Number [Section 153]: An application
for the allotment of Director Identification Number shall be made to the Central Government
in the prescribed form and manner (including electronic form) alongwith the prescribed fee.

Such an application is required to be made by every individual intending to be appointed as a

director of a company.

An individual cannot be appointed as a director until he is allotted DIN [Section 153(3)]

3. Allotment of Director Identification Number [Section 154]: The Central Government shall
allot the Director Identification Number within one month from the receipt of the application
for allotment of DIN.

4. Prohibition to obtain more than one Director Identification Number [Section 155]: An
individual who had already been allotted a Director Identification Number cannot apply.
obtain or possess another Director Identification Number.

5. Intimation of Director Identification Number by the Director [Section 156]: Every existing
director shall intimate his Director Identification Number to the company or companies
wherein he is a director within one month of the receipt of his number from the Central
Government.

6. Information of DIN to Registrar [Section 157]: Within 15 days of receipt of intimation from
the director, every company shall furnish the Director Identification Number of all its directors
to the Registrar or to any other officer or authority as may be specified by the Central
Government.

It is to be noted that with the payment of prescribed additional fee, the company can so
furnish the DIN within a further period of 270 days after the expiry of initial days as prescribed
under Section 403.

If the company fails to furnish the DIN even with the additional fee, then the company and its
officer in default is punishable with minimum fine of Rs. 25,000 which may extend to Rs. one
lakh [Section 157(2)].

7. Obligation to indicate Director Identification Number [Section 158]: Where any return,
information or particular relating to the director is required to be furnished under the
Companies Act, every person or company furnishing such return etc. must quote the Director
Identification Number in such return, information, etc.

8. Punshiment for contravention [Section 159]: Any individual or director or company who
contravenes any of the provisions of Section 152, 155, Section 156 as discussed above, in
points (2), (4) and (5) respectively, shall be punishable as under: (a) with imprisonment upto 6
months or with fine upto Rs. 50,000, and (b) where contravention continues, then with further
fine upto Rs. 5,000 for each day of contravention.

12.23. REMOVAL OF DIRECTORS

The director of a company may also be removed before the expiry of his period of office. The
legal provisions relating to removal of directors are provided in Section 169 of the Companies
Act, 2013, which were earlier provided in Section 284 of the Companies Act, 1956. The
provisions of new Section 169 for removal of directors may be discussed under the following
heads:

12.23.1. Removal by the Company

The company may remove a director before the expiry of his period of office. The company
may do so by passing an ordinary resolution at the general meeting of the shareholders. Legal
provisions in this regard are as under:

1. Procedure for removal: The company may remove a director by complying with the
following procedural requirements as specified in Section 169 itself:

(a) A special notice of any resolution to remove a director is required i.e., the notice of the
intention to move such resolution should be given to the company not less than 14 days
before the meeting.

(b) On the receipt of such notice, the company must send its copy to the director concerned.
And the director shall be entitled to make a representation against the resolution, and to be
heard at the meeting.

(c) Where the director submits his representation and requests the company to circulate it
among the members, then the company should send a copy of the representation to every
member of the company to whom the notice of meeting is sent. However, the company shall
do it if there is time to do so.

(d) If the copy of representation is not sent to the members either because it was received too
late or because of company's default, the directors may require that the representation shall
be read out to the members at the meeting.

(e) A general meeting of the company shall be held and the proposal to remove the director
shall be discussed at the meeting. The director concerned shall have the right to be heard at
the meeting. If the resolution for removal is passed by way of an ordinary resolution, the
director shall be removed from the office [Section 169(1)].
Following provisions/points are to be noted with regard to removal of directors.

2. Circumstances in which directors cannot be removed by the company: In the following

circumstances the company cannot remove a director under the provisions discussed above:

(a) Where a director is appointed by the system of proportional representation under Section
163 [Section 169(1), proviso].

(b) Where a director is the director appointed by the Tribunal under Section 242 for
precaution of oppression and mis-management [Section 169(1)].

3. Filling the vacancy caused by removal: The legal provisions in this regard are as under:

(a) The vacancy created by the removal of the director may be filled up at the same meeting
provided the special notice of proposed appointment had already been given together with
the notice of removal.

(b) The director so appointed would hold office for the period for which the director removed
would have held the office if not removed [Section 169(6)].

(c) If the vacancy is not filled at the same meeting, it may be filled by the Board of Directors as
a casual vacancy. But the Board shall not re-appoint the removed director [Section 169(7)].

4. Other important points: The following points, based upon the judicial decisions, are
important to note in connection with the removal of directors by the company: (1) The
resolution removing the director passed without giving special notice would be invalid
irrespective of the fact whether the meeting was valid or not.

(ii) The resolution removing the director passed without giving the director an opportunity of
making a representation would be null and void i.e., ineffective.

(iii) The shareholders cannot be restrained from calling a general meeting to remove existing
directors and appoint new directors. Where a meeting is called by the shareholders for
removing a director, it is not necessary for the shareholders to state the reasons on which
they wish to proceed against the director.

Note: The above provisions for removal of director do not deprive the person removed of any
compensation or damage payable to him for the termination of his appointment [Section
169(8)(a)].
12.23.2. Removal by the Tribunal

Sometimes, an application is made to the Tribunal for the prevention of oppression and
mismanagement. On such application, if the Tribunal is satisfied that the relief should be
granted, it may terminate any agreement of the company with a director (or managing
director) and may also remove the managing director, manager or any of the directors of the
company [Section 242(2)(e)(h)].

On such termination, the person concerned cannot serve the company in that capacity for a
period of five years. However, he may do so with the permission of the Tribunal. And also he
cannot sue the company for damages or compensation for loss of office [Section 243(1)].

12.24. RESIGNATION BY DIRECTORS

We have discussed in the last article that a director may be removed from his office before the
expiry of his term. A director may also himself resign from his office before the expiry of his
term. The legal provisions relating to resignation of directors are provided in Section 168 of
the Companies Act, 2013. It is a newly introduced provision, and there was no such provision
in the earlier Companies Act, 1956.

The provisions of Section 168 have been notified to be effective w.e.f. 1.4.2014 vide MCA
Notification dated 26.3.2014, and are as under:

1. Resignation by notice to company [Section 168(1)]: A director may resign from his office by
giving a notice in writing to the company. On receipt of such notice, the provisions to apply are
as under:

(a) The Board shall take notice of the same;

(b) The company shall intimate the Registrar in such manner and within such time as may be
prescribed; and

(c) The company shall place the fact of director's resignation in the report of directors laid in
the immediately followed general meeting.

2. Copy of resignation to Registrar Section 168(1), provisol: The director shall also forward a
copy of his resignation to the Registrar within 30 days of resignation in such manner as may be
prescribed.

The copy forwarded to the Registrar should be accompanied by detailed reasons for the
resignation.
3. Effective date of resignation Section 168(2)]: The resignation of the director shall take
effect as under:

• from the date on which notice of resignation is received by the company; or

• from the date, if any, specified by the director in the notice whichever is later.

4. Liability for offences [Section 168(2), proviso]: The director who has resigned shall be
during tenure. liable even after his resignation for the offences which occurred his the

Note: Where all the directors of a company resign from their office or vacate their office
under Section 167 (already discussed), then the promoter shall appoint the minimum number
of directors; or in his absence, Central Government shall appoint the directors who shall hold
office till the directors are appointed by the company in general meeting [Section 168(3)].

12.25. POWERS OF DIRECTORS

We know that the directors manage and supervise the overall affairs of the company.
Therefore, they enjoy all such powers as are necessary for the effective control and
management of the company's affairs. The powers to the directors are given by the
Companies Act, memorandum, and articles of association. Their powers may be discussed
under the two heads, namely:

1. General powers
2. Specific powers

12.26. GENERAL POWERS OF DIRECTORS

This point may be discussed under two sub-heads namely (a) powers of the board of directors,
and (b) shareholders' intervention in exceptional circumstances:

12.26.1. Powers of the Board of Directors

The general power of the Board of Directors are provided in Section 179(1) of the Companies
Act, 2013 which were earlier provided in Section 291 of the Companies Act, 1956.

The 'Board of Directors' of a company enjoy all such powers as are enjoyed by the company
itself. Thus, the Board is entitled to exercise all such powers and to do all such acts and things
as the company is authorised to exercise and do. This means that the powers of the Board of
Directors are co-extensive with those of the company i.e., as great as those of the company.

Following provisions/points are to be noted with regard to the general powers of directions.
1. Limitations on directors powers: There are the following two important limitations upon the
powers of the directors:

(i) The Board of Directors must exercise its powers subject to the provisions contained
in the Companies Act, company's memorandum or articles of association, or in any
regulations made by the company in general meeting [Section 179(1), 1st proviso)

(ii) The Board of Directors cannot exercise those powers which are required to be
exercised by the shareholders in the general meeting [Section 179(2), 2nd proviso

The powers of the directors are normally set out in company's articles of association. And the
directors can exercise all such powers which are not contrary to the Companies Act and
articles of association.

2. Other important points: The following points, based upon judicial decisions, are important
to note in connection with the powers of the directors:

(i) The individual directors have only such powers as are given to them by the memorandum
and articles of association. An individual director has no authority to institute a suit on behalf
of the company unless such power is specifically conferred on the directors by the board of
directors by passing a resolution in that regard.

(ii) In case the board of directors, by passing a resolution, authorise a particular director to file
an appeal in the court, and such authorised director delegates his power to an officer of the
company, then an appeal filed by that officer would be competent.

(iii) The courts generally do not interfere in decisions of corporate bodies i.e., companies or
corporations) made through responsible organs. In a case before it, the Supreme Court did not
interefere in the decision of a corporation to enforce the recovery of loans by disposing of the
unit of the borrower.

(iv) In exercising their powers, the directors do not act as agents of the majority of the
shareholders. They act as the agents of the company as a whole i.e., of the whole entity made
up of all the shareholders. Thus, where company's articles empower the directors for a
particular act, the shareholders cannot interfere in the exercise of powers by the directors so
long as they exercise their power within the limits

12.26.2. Shareholder's Intervention in Exceptional Circumstances

We have noted above that in the exercise of their powers, the directors act as the agents of
the company as a whole, and the shareholder cannot interfere with Board's powers so long as
the Boards acts within the limits of their powers. However, the fact cannot be overlooked that
the company is an institution owned and controlled by its shareholders, and the ultimate
powers of a company lie with the general meeting of shareholders. Keeping this aspect in
view, the general meeting of the shareholders has been made competent to act in certain
circumstances. As a matter of fact, the shareholders have the right to meet and decide
whether the destiny of the company is safe in the hands of present management. Where the
shareholders find that the future of company is not safe in the present management, they can
interfere and replace the existing management with a new one which would be more
responsible and competent to safeguard the interest of the company.

In the following circumstances, the general meeting of the shareholders is competent to act
and interfere even in the matters delegated to the Board of Directors:

(a) Where the directors act mala fide and against the interest of the company e.g., when their
personal interest is in conflict with their duties towards the company.

(b) Where the directors have, for some valid reasons, become incompetent to act e.g., when
all the directors are interested in the transaction of the company.

(c) Where the directors are unwilling to act, or on account of deadlock are unable to act e.g.,
when there are only two directors in a meeting and one refuses to act with the other.

It may, however, be noted that the shareholder can interfere with directors' powers only in
the three circumstances as stated above. They cannot interfere with directors' powers of
carrying on the business of the company. The reason for the same is that as a general rule, the
powers given to the management (i.e., directors) can be exercised by them alone. If the
shareholders are dissatisfied with the working of directors, their remedy is to suitably alter the
company's articles of association, or to remove the directors in the manner provided by
company's articles.

Note: No regulation made by the company in general meeting shall invalidate any prior act of
the Board which would have been valid if that regulation had not been made [Section 179 (2)].
Thus, a valid act of the Board of Directors cannot be invalidated by the general body of the
shareholders at the company's general meeting.

12.27. SPECIFIC POWERS OF DIRECTORS

The specific powers of the Board of Directors are provided in Section 179(3) of the Companies
Act, 2013, which were earlier provided in Section 292 of the Companies Act, 1956.

Section 179(3) makes a specific mention of certain powers of the Board of Directors', and also
lays down the manner in which these powers are to be exercised. Following are the specific
powers given to the 'Board of Directors' which can be exercised by the Board only by means of
resolutions passed at the Board meetings:
(a) The power to make calls on shareholders in respect of the money unpaid on their shares.

(b) The power to authorise buy-back of securities under Section 68.

(c) The power to issue securities including debentures whether in or outside India.

(d) The power to borrow money.

(e) The power to invest the funds of the company.

(f) The power to grant loans or give guarantees or provide security in respect of loan.

(g) The power to approve financial statement and the Board's report.

(h) The power to diversify the business of the company.

(i) The power to approve amalgamation, merger or reconstruction.

(j) The power to take over a company or acquire a controlling or substantial stake in another
company.

(k) The power on any other matter which may be prescribed.

The powers specified at serial numbers (d), (e) and (f) above may be delegated by the Board of
Directors to any committee of directors, the managing director, the managers or any other
principal officer of the company. However, such delegation can be made by the Board by
passing a resolution at the meeting of the Board which may specify such conditions subject to
which the powers can be exercised by the delegate.

It is important to note here that the delegation of power by the 'Board of Directors' must be
by a specific resolution of the Board. Thus, where a hire-purchase agreement was entered into
i.e., made by the directors without any authorisation by the Board of Directors, the agreement
was held to be not binding on the company.

12.30. DUTIES OF DIRECTORS

We know that the directors of a company occupy an important position in the management
and administration of the company and enjoy immense powers. However, they should
exercise their powers for the public good, and for the protection of the interest of those
whose investments are involved.

Under the earlier Companies Act, 1956, there was no provision in the Act specifying the duties
of directors.
Now the duties of directors have been specified in Section 166 of the Companies Act, 2013
which also provides that a director of a company shall act in accordance with articles of the
company.

The following duties have been specified in Section 166:

1. Duty of good faith [Section 166(2)]: A director of a company shall act in goodfaith

● in order to promote the objects of the company for the benefit of its members as a whole;
and

● in the best interest of the company, its employees, shareholders, the community, and for
protection of environment.

2. Duty of due and reasonable care [Section 166(3)]: A director of a company shall exercise
his duties with due and reasonable care, skill and diligence, and shall exercise independent
judgement.

3. Duty not to involve in conflict of interest (Section 166(4)]: A director of a company shall
not involve in a situation in which he may have interest, direct or indirect, that conflicts with
the interest of the company.

4. Duty not to obtain gain or advantage [Section 166(5)]: A director of a company shall not
achieve or attempt to achieve any undue gain or advantage either to himself or to his
relatives, partners, or associates.

If the director is found guilty of making any such undue gain, then he shall be liable to pay an
amount equal to that gain to the company.

5. Duty not to assign his office [Section 166(6)]: A director of a company shall not assign his
office. Any assignment so made shall be void.

Note: Penalty for contravention (Section 166(7)]: If a director of the company contravenes the
above discussed provisions, then he shall be punishable with a minimum fine of Rs. One lakh
which may extend to Rs. 5 lakhs.

12.31. LIABILITIES OF DIRECTORS

The liabilities of the directors may be discussed under the following heads:
1. Liability to outsiders: Ordinarily, the directors are not personally liable to outsiders if they
act for the company and within the scope of their powers. However, there are certain
circumstances in which the directors are personally liable to the outsiders. These are as under:

(a) Where the directors act in their own name rather than in the name of the company.

(b) Where the directors act ultra-vires the company i.e., beyond their powers.

(c) Where the directors do some tortuous act (i.e., civil wrong).

(d) Where the prospectus issued by them contains any untrue statement. They are liable for
damages.

(e) Where the directors fail to repay the application money within the specified time, the
amount of minimum subscription is not subscribed.

(f) Where the directors fail to repay the application money if allotment of shares or
debentures is not dealt in on stock exchange where it is intended to be so dealt in the
prospectus. Note: A director can be held personally liable for the offence of cheating by
issuing a cheque if he knew of the inadequacy of funds in company's account and also
intended to cheat.

2. Liability to company: In certain circumstances, the directors are held liable to the
company. These are as under:

(a) Where the acts of the directors are ultra-vires the company i.e., beyond their power. The
directors are liable to the company for any loss or damage suffered due to such ultra-vires
acts.

(b) Where the directors are negligent in performing their duties e.g., when they do not use
reasonable care and skill in the management of company's affairs.

(c) Where there is a breach of trust i.e., where they do not act honestly and in the interest of
the company e.g., misapplication of company's fund or property.

(d) Where they are guilty of misfeasance. The 'misfeasance' means the wilful misconduct or
wilful negligence which results in loss to the company.

3. Criminal Liability: The directors' liability discussed in the above two points is their civil
liability. It is to be noted that the Companies Act contains various provisions which make them
criminally liable (i.e., liable to punishment by way of fine or imprisonment) if they fail to
comply with these statutory provisions. The important legal provisions relating to the criminal
liability of the directors, as contained in the Companies Act, 2013, may be summed up as
under:

(a) Where a prospectus containing an untrue statement is issued, every officer authorised to
issue the prospectus shall be punishable with imprisonment of 6 months which may extend to
10 years, and also with fine minimum [Section 34, 447].

(b) Where the money receives from the applicants for shares is not kept in the Scheduled
Bank, every director shall be punishable with imprisonment upto one year or with minimum
fine of Rs. 50,000 which may extend to Rs. 3 lakhs or with both [Section 40(5)].

(c) Where the return of allotment is not filed with Registrar within 30 days of allotment, every
officer in default shall be punishable with fine which may extend to 1,000 for every day during
which the default continues or Rs. One lakh, whichever is less [Section 39(5)].

(d) Where the notice of consolidation of shares, sub-division of shares, or conversion of shares
into stock is not given to the Registrar within 30 days of such consolidation etc. every officer in
default shall be punishable with fine which may extend to 1,000 for every day during which
the default continues or Rs. 5 lakhs, which ever is less [Section 64(2)].

(e) Where the certificate of shares or debentures is not delivered within 2 months after
allotment, or in case of certificate of transfer, within one months after transfer, every officer
in default shall be punishable with minimum fine of Rs. 10,000 but which may extend to Rs.
One lakh [Section 56(6)].

(f) Where the particulars of a charge are not filed with the Registrar, within the prescribed
time, then, every officer in default shall be punishable with imprisonment upto 6 months or
with minimum fine of Rs. 25,000 which may extend to Rs. One lakh or with both [Sections 77,
86]

(g) Where the Registrar of charges is not maintained by the company, every officer in default
shall be punishable as stated above [Section 85, 86].

(h) Where the annual return is not filed with the Registrar within the specified time, then,
every officer in default shall be punishable with with imprisonment upto 6 months or with fine
from Rs. 50,000 to Rs. 5 lakhs or with both [Sections 92(5)].

(i) Where a default is made in holding the annual general meeting of the company, every
officer in default shall be punishable with fine which may extend to one lakh, and if the default
continues, a further fine may extend to 5,000 for every day during which such default
continues [Section 99].
(j) Where the dividend is not distributed within 30 days of the declaration of the dividend.
every director shall be punishable with simple imprisonment upto 2 years, and shall also be
liable to fine of Rs. 1,000 for everyday during which the default continues [Section 127].

(k) Where the register of directors, managing directors, and managers, is not maintained.
every officer in default shall be punishable with fine from Rs. 50,000 to Rs. 5 lakhs [Sections
170, 172].

Note: The term 'officer in default' used in the above provisions includes director also [Section
2 (60))

4. Liability for the acts of co-directors: The directors are the agents of the company for which
they act. It may, however, be noted that they are not agents of one another i.e., a director is
not the agent of his co-director. It, therefore, follows that a director is not liable for the acts of
his co-directors if he has no knowledge about those acts and is also not a party to the same.
Thus, nothing done by the Board of Directors can impose liability upon a director who did not
know about their action, and also did not participate in the meeting, even if he attends the
subsequent Board meetings.

EXAMPLE 12.9. A company had no power to invest in the shares of other companies. At a
meeting of the Board of Directors, a decision was taken to invest a substantial amount in the
shares of other companies. A, a director, was not present at this meeting, but was present at
the meeting at which minutes of the earlier meeting authorising the ultra-vires investments
was confirmed. It was held that A was not liable for the ultravires investments authorised by
the Board of Directors.

Similarly, the absence of a director from a meeting of the Board of Directors does not make
him liable for the fraudulent acts of the co-directors at the Board meeting.

Thus, ordinarily, a director is not liable for the acts of his co-directors, He can be made liable
only if he was a party to the wrongful act or he has given his consent to such act. Where a
director is made liable for the acts of his co-directors, he is entitled to claim contribution from
the co-directors who were party to the wrongful act.

12.33. DISABILITIES OF DIRECTORS

The term 'disability' means the restrictions on directors' powers to do certain act. To protect
the interest of the company and the shareholders, the Company Act, 2013 impones certain
restrictions on directors. These may be summed up as under:

1. A director cannot delegate his powers to another person unless expressly authorised by the
articles of association of the company
2. A director cannot assign his office to another person [Section 166(6)

3. A director cannot take any loan, or a guarantee or security for a loan from the company
[Section 185],

4. A director cannot enter into a contract with the company in which he is interested, witho
the consent of the Board of Directors [Section 188].

5. A director cannot hold any office or place of profit except with the consent of the Pred of
Directors [Section 188].

Note: An office or place shall be deemed to be an office of profit, if the director holding it is
entitled to receive from the company any remunerations over and above the remunerations
to which he is entitled as such director [Section 188(1), Explanation (a)].

12.34. REMUNERATION OF DIRECTORS (OR MANAGERIAL REMUNERATION)

The managerial remuneration (t.e., the remuneration payable to directors and other
manageral persons) is governed by the provisions contained in Section 197 and Schedule V of
the Companies Act, 2013, which were earlier contained in Sections 198, 309 and Schedule XII
of the Companies Act, 1956.

The provisions of Section 197 and Schedule V, which have been notified to be effective we.f
1.4.2014, may be discussed under the following heads:

1. Mode of determination of managerial remuneration [Section 197(4)).

2. Payment of managerial remunerations [Section 197, and Schedule V].

Note: The provisions of Section 197 and Schedule V prescribing the restrictions on payment
managerial are applicable to public companies only, and do not apply to private companies

12.35. MODE OF DETERMINATION OF MANAGERIAL REMUNERATION

The managerial remuneration payable to the directors (including any managing or whole-time
director or manager) shall be determined, in accordance with the provisions of Section 197, in
the following manner:

(a) by the articles of association of the company; or

(b) by an ordinary resolution passed in general meeting; or

(c) by a special resolution, if articles so require, passed in general meeting.

It is to be noted that unless there is a clear provision to that effect in company's articles, the
remunerations cannot be determined by the director themselves at the Board meeting. Note:
The provisions of Section 197 relating to managerial remuneration are not applicable to
private companies.

12.36. PAYMENT OF MANAGERIAL REMUNERATION

The provisions relating to the payment of managerial remuneration are provided in Sections
197 and Schedule V of the Companies Act, 2013 and may be discussed under the following
heads

1. where company has adequate profits [Section 197].

2. where company has inadequate or no profits [Section 197(3), Schedule V].

12.37. MANAGERIAL REMUNERATION BY COMPANIES HAVING ADEQUATE PROFITS

The legal provisions in this regard, as contained in Sections 197, are as under:

12.37.1. Overall Maximum Managerial Remuneration [Section 197(1)]

The total managerial remuneration which can be paid by a public company to its director
including managing director and whole-time director and its manager in respect of a financial
year shall not exceed 11% of the net profit of the company for that year.

Following points are important to be noted in this regard:

(a) The company may in general meeting, with the approval of Central Government, authorise
the payment of remuneration exceeding 11% of net profits subject to provisions of Schedule V
(Provisions of Schedule V will discussed later in the chapter) [Section 197(1), proviso].

(b) The net profits are calculated according to the provisions of Sections 198. Except that,
remuneration of director shall not be deducted from gross profits [Section 197(1)].

(c) The sitting fee i.e., the fee received by a director for attending each meeting of the Board
shall not be considered for computing the maximum limit of managerial remunerations
[Section 197(2)].

(d) The remunerations payable to a director for rendering services any other capacity shall
also be considered for computing overall managerial remunerations except where the services
rendered are of a professional nature [Section 197(4), proviso].
12.37.2. Remuneration to Managing Director, Whole-Time Director or Manager

The remuneration payable to a managing director, whole-time director or a manager shall not
exceed the limit stated below:

(a) 5% of net profits: If the company has any one managing director; or whole-time director or
manager, then the maximum remuneration payable to him shall not exceed this limit.

(b) 10% of net profit: If the company has more than such directors, then the maximum
remuneration payable to all such directors and manager taken together shall not exceed this
limit.

The above percentage may be increased with the approval of the company in general meeting.
However, in any case, the quantum of total remunerations payable to a whole-time director or
a managing director or manager should be within the overall maximum limit of managerial
remuneration which is 11% of the net profits of the company for that financial year [Section
197(1)].

Note: No bar in receiving remuneration from holding or subsidiary company: A managing

director or a whole-time director who receives any commission from the company is not
disqualified from receiving any remuneration or commission from any holding company or
subsidiary company of such company. It is however, subject to the provisions of this Section
197 meaning thereby that the limits of maximum remunerations should not be exceeded. Also
the company should disclose in its Board's report the remuneration so received from a holding
or subsidiary company [Section 197(14)].

12.37.3. Remuneration to Other Directors (i.e., Ordinary Directors)

1. Maximum limit of remunerations: The remuneration payable to other director (i.e., other
than a managing director or whole-time director) shall not exceed the limit stated below
[Section 197(1) 2nd proviso]:

(a) 1% of net profits, if the company has employed a managing director or whole time director
or a manager; or

(b) 3% of net profit, if the company has not employed a managing director or whole time
director or a manager; or

However, the company may in its general meeting approve the higher percentage than stated
above.

2. Refund of excess remuneration: If any director draws or receives, directly or indirectly, any
remuneration in excess of the prescribed limit, as stated above, he shall refund such excess
sum to the company. The remuneration received by the director without the prior sanction of
the Central Government, where it is required, is also to be refunded by him to the company.
[Section 197(9)]. Other provisions in this regard are:

(a) Until such sum are not refunded by the director, he shall hold it in trust for the company
[Section 197(9)];

(b) The company shall not waive the recovery of any sum refundable to it (which was
overdrawn by the director) unless permitted by the central government [Section 197(10)].

12.38. MANAGERIAL REMUNERATION BY COMPANIES HAVING NO PROFITS OR INADEQUATE

PROFITS

Legal provisions in this regard are provided in Section 197(3) and Schedule V of the Companies
Act, 2013. Where in any financial year, during the currency of tenure of a managerial persons,
a company has no profits or its profits are inadequate, the remuneration to the managerial
person i.e., director, including any managing or whole-time director or manager may be paid
eithers:

(a) in accordance with the provisions of Schedule V, or

(b) with the previous approval of Central Government, if the company is not able to comply
with such provisions.

12.38.1. Payment in Accordance with Provisions of Schedule V

Part II of Schedule V specifies the maximum yearly limit and the conditions which shall be
observed while making payment of remuneration to the managerial person in case of no
profits or inadequate profits. The company can pay remuneration to the managerial person,
without Central Government approval, if these limit and conditions are observed.

The yearly limit (i.e., ceiling on remuneration) and conditions to be observed are as under:

1. Maximum yearly limit on the basis of effective capital: In case of no profits or inadequate
profits remuneration to a managerial person can be paid, within the limits stated below
without any approval of Central Government:
 S.No. Where the effective Capital Limit of yearly remuneration
of Company is (Rupees) payable shall not exceed
(Rupees)
1. Negative or less than Rs. 5 30 lakhs
crores
2. 5 crores and above but less 42 lakhs
than 100 crores
3. 100 crores and above but less 60 lakhs
than 250 crores
4. 250 crores and above 60 lakhs plus 0.01% the
effective capital exceeding Rs.
250 crores

It is to be noted that the above limit shall be doubled if the resolution authorising/ approving
the managerial limit is a special resolution.

The above table shows that a company having an effective capital of less than Rs. 5 crores may
pay remuneration to a managerial person upto Rs. 30 lakhs per year and so on.

2. Maximum yearly limit on the basis of time of appointment of the managerial person: In
case of a managerial person who was not a shareholder, employee, or a director of the
company during the two years prior to his appointment as a managerial person, then the
yearly remuneration to such a managerial person can be paid upto maximum of 2.5% of the
current relevant profit, without Central Government approval. In this case also, if the
resolution passed by the shareholders is a special resolution, then this limit shall be doubled.

Note: The ceiling limit of yearly remuneration as given in above stated points (1) and (2) is
with regard to each managerial person employed by the company.

3. Conditions for payment of remuneration: In case of no profits or inadequate profits the

managerial remuneration within the limits stated above in points (1) and (2), can be paid by
the company, without the approval of Central Government, only if the following conditions
are complied with:

(a) Approval of remuneration: The requirements of approval are as under:

(i) The payment of remuneration must be approved by a resolution of shareholders in general

meeting [Part III, Schedule V].

(ii) The payment of remuneration must also have been approved by a resolution passed by the
Board; and
(iii) In case of listed companies and such companies as may be prescribed, the payment of
remuneration must also be approved by the Nomination and Remuneration Committee
constituted by such companies under Section 178.

(b) No default in payment of debt etc: The company has not made any default in the
repayment of any of its debts (including public deposits), or debentures or interest payable
thereon for a continuous period of 30 days in the preceding financial year before the
appointment of such managerial person.

(c) Special resolution: The company shall pass a special resolution at the general meeting of
the company for payment of such remuneration. The special resolution shall remain valid for a
period not exceeding three years.

(d) Disclosure of detail in notice calling the general meeting: A statement shall be given to
the shareholders alongwith the notice calling the general meeting. The statement shall
contain the following particulars:

. General information about industry;

• Information about the appointee;

• Other information such as reasons for loss or inadequate profits etc. • Disclosures in the
Board's report about the remunerations package of the managerial person. Such disclosure
shall be mentioned under the heading "Corporate Governance".

4. Payment of remuneration in excess of limits specified in Schedule V: A company having no

profits or inadequate profits may also pay remuneration to a managerial person in excess of
the limits specified in points (1) and (2) above, with Central Government approval, in the
following circumstances [Section III, Schedule V]:

(a) Where the remuneration is paid by

 a foreign company; or

• a company that has got the approval of its shareholder in general meeting for
such payment.

However, the overall remuneration must be within the limits of Section 197 discussed earlier.

(b) Where the remuneration is paid by

• a newly incorporated company, for a period of 7 years from date of its incorporation, or
• a sick company for which scheme of revival has been ordered by the Tribunal or the Board
for Industrial Financial Reconstruction (BIFR), for a period of 5 years from the date of sanction
of revival scheme.

However, in the above cases, a company can pay remuneration upto two times the amount of
limits specified in points (1) and (2) above.

(c) Where the remuneration exceeding limits stated in points (1) and (2) above, has been fixed
by the Tribunal or BIFR, and while making payments the company satisfies the condition of
Schedule V for the such payment.

(d) Where the company is in a Special Economic Zone as notified by the Department of
Commerce from time to time.

Note: The payment of managerial remuneration in the above mentioned circumstances shall
be subject to approval by the resolution of shareholders in the general meeting [Part III,
Schedule V].

12.38.2. Payment with Previous Approval of Central Government

Where in any financial yea, a company has no profits or inadequate profits, and the company
is not able to comply with the conditions of Schedule V, as discussed above, then the company
can make the payment of managerial remuneration to its managerial persons only with the
previous approval of the Central Government [Section 197(3)].

Cases for Approval of Central Government

Under the Companies Act, 2013, the approval of Central Government with regard to the
managerial remuneration is required in the following cases:

1. The payment of managerial remuneration exceeding the overall limit of 11% specified
in Section 197(1) as discussed in Art. 12.37.1, can be authorised by the company only
with the approval of Central Government [Section 197(1)].

2. The payment of managerial remuneration by a company having no profits or

inadequate profits, without compliance of provisions of Schedule V, can be made by a
company only with the previous approval of Central Government [Section 197(3)].
3. Any provision having the effect of increase in the managerial remuneration by a
company having no profit or inadequate profit, without compliance of conditions of
Schedule V, shall not have effect unless the approval of Central Government is obtained
[Section 197(11)].
COMPANY SECRETARY

14.1. INTRODUCTION

The secretary is an important officer of the company who is appointed to perform the
ministerial or administrative duties. In modern times, the secretary has become almost an
indispensable person in trade, industry and other social institutions. Every organisation thinks
it necessary to appoint a secretary for conducting its affairs properly. The reason for the same
is that the secretary helps in conducting all correspondence, keeping all records and accounts,
writing of minutes, and also acts as public relations officer of the employer i.e., acts as a
liaison officer between the management and the staff as well as the outsiders. The importance
of a secretary is specially felt in the business world since the business organisations have to
abide by certain legal requirements. And the secretary is entrusted with the responsibility for
due compliance with all such legal formalities. As a matter of fact, the secretary ensures that
the affairs of the organisation are conducted in accordance with law.

14.2. DEFINITION OF COMPANY SECRETARY OR SECRETARY

The term company secretary or secretary is defined in' Section 2 (24) of the Companies Act,
2013 which reads as under:

"Company Secretary or Secretary means a company secretary within the meaning of clause (c)
of sub-section (1) of Section 2 of the Company Secretaries Act, 1980, who is appointed by a
company to perform the functions of a company secretary under this Act".

Clause (c) of sub-section (1) of Section 2 of the Companies Secretaries Act, 1980, referred to in
the above section, reads as under:

"A company secretary is a person who is a member of the Institute of Company Secretaries of
India".

Thus, it is evident from the above two provisions that a company secretary is a person who is a
member of the Institute of Company Secretaries of India. It is to be noted that under the new
Companies Act, 2013, the definition of the secretary has been modified as compared to the
one given in Section 2(45) of the Companies Act, 1956.

As per the new definition, only a member of the Institute of Company Secretaries of India is
the secretary under the Act. Any other person with the prescribed qualification as was
mentioned in the earlier provision, is now not included in the definition of secretary. It may,
also, be noted that a secretary's duty is not to manage the affairs of the company but to
ensure that company's affairs are conducted in accordance with law. Though, it is not
secretary's duty to manage the affairs of the company, but he plays an important role in the
day to day business of the company. Nowadays, he has become an important executive officer
of the company. He regularly makes representations on behalf of the company and enters into
contracts on its behalf which come within the day-to-day running of company's business.

EXAMPLE 14.1. A was running a business of giving cars on hire basis. B, the secretary of a
company, hired cars from A ostensibly for company's business, telling him that the cars were
required to carry important customers of the company. In fact, B used the cars for his own
private purposes and not for company's purposes. It was held that the secretary had
ostensible authority to enter into contracts for hiring cars on behalf of the company, and the
company was liable to pay the hire charges.

In the above case, Lord Denning M.R. observed that a secretary is no longer a mere clerk. He is
an officer of the company with extensive duties and responsibilities. He is certainly entitled to
sign contracts connected with the administrative side of a company's affairs, such as
employing staff, and ordering cars, and so forth. All such matters now come within the
ostensible authority of a company's secretary.

Keeping in view the importance of a secretary, Section 203 of the Companies Act, 2013
provides that every company belonging to a class of companies as may be prescribed (by rules
made by the Central Government) shall have a whole-time company secretary.

Now the companies (public as well as private) having paid up share capital of 5 crores or
more* are compulsorily required to appoint a whole-time company secretary

Notes: Under the English Companies Act, it is obligatory (i.e., legally compulsory) for every
company to appoint a company secretary.

14.3. APPOINTMENT OF A SECRETARY

Following points/topics are discussed under this article:

14.3.1. Mandatory Appointment

Every company (public or private)having such paid up capital as may be prescribed by the
Central Government, must have a whole-time secretary, who should be the member of the
Institute of Company Secretaries of India (ICSI). At present 5 crores has been prescribed for
this purpose by the Companies (Appointment and Remuneration of Managerial Personnel)
Rules, 2014 framed in this regard.

Following points are important to be noted in this regard:

1. A person to be appointed as a whole-time secretary must be a member of ICSI [Section

2(24)].
2. A person can be a whole-time secretary of only one such company [Section 203(3)].

3. If the company having paid-up share capital of 5 crores or more fails to appoint a wholetime
secretary, then the company shall be punishable with fine from One lakh to ₹ 5 lakh; and
every director and key managerial personnel in default shall be punishable with fine upto
50,000 and where contravention continues, then with further fine up to 1000 for every day
during which the default continues [Section 203(5)].

4. A director of a company can also be appointed as secretary if he is otherwise qualified

[Section 203(3), first proviso].

14.3.2. Optional Appointment

A company having a paid up share capital of less than 5 crores is not compulsorily required to
appoint a whole-time secretary. It is optional for such a company to appoint a whole-time
secretary. If it wishes so, it may appoint any individual as a whole-time secretary. Following
points are important to be noted in this regard:

1. Any person can be appointed as a secretary by such company who need not necessarily be
the member of ICSI. However, he must have one or more of the qualifications as discussed in
Art. 14.5 in the following pages.

2. Where the paid up capital of such company is increased to 5 crores or more then within one
year from the date of increase, the company must appoint a qualified whole-time secretary
who should be the member of ICSI.

Note: A non-profit association (i.e., a company registered for charitable purposes under
Section 8) is not compulsorily required to appoint a company secretary even if its paid up
share capital is 5 crore or more.

14.3.3. Mode of Appointment

The secretary shall be appointed by a resolution of the Board of Directors, containing the
terms and conditions of his appointment, remuneration, retirement, etc. [Section 203(2)]

The first secretary, if any, like the first directors, may be nominated in company's articles of
association whose appointment may subsequently be confirmed by a resolution of the
directors passed in their first meeting after his appointment. It may, however, be noted that a
mere nomination in the articles of association does not give a person the right to be appointed
as the secretary, unless an independent contract is proved between the company and the
secretary so named in the articles. As a matter of fact, a mere nomination in the articles does
not constitute a contract binding on the company to employ the person so nominated. The
person so nominated should ensure that his appointment is confirmed at the first meeting of
the Board of Directors after the incorporation of the company. Otherwise, he will have no
right against the company.

EXAMPLE 14.2. A was nominated as secretary in company's articles of association. But his
appointment was not confirmed by a resolution of the Board of Directors. Subsequently, A
was removed from the post. Consequently, he filed a suit against the company for declaration
that he was still the secretary under company's articles of association, and the Board of
Directors had no power to remove him. In this case, A's action failed. It was held that such
appointment did not give any right to the secretary (ie, A) against the company. The court also
held that for any right against the company, A must prove a contract outside and
independently of articles of association.

14.3.4. Other Important Points

Following points are important in connection with the appointment of a company secretary: 1.
Only an individual can be appointed as a secretary. A firm or a body corporate cannot be
appointed as a secretary of the company.

2. A person cannot be a whole-time secretary in more than one company at the same time
[Section 203(3)].

3. The particulars about the appointment of a secretary by the company must be sent to the
Registrar of Companies within 30 day of appointment [Section 170(2)]

14.4. DISMISSAL OF A SECRETARY

We have already discussed in the last article that a secretary is generally appointed by a
resolution of the Board of Directors. Likewise, a secretary may be dismissed (ie, removed from
office) by a resolution of the Board of Directors. Since, the secretary is an employee of the
company, his dismissal is governed by the general law applicable to master and servant. Thus,
a notice of termination of secretary's employment must be given to him. In case, secretary's
contract of employment provides for the notice of termination, then his services can be
terminated by giving him the agreed notice. And if there is no express provision about such
notice in his contract of employment, then he is entitled to a reasonable notice. It will be
interesting to know that in certain circumstances, a secretary may also be dismissed from
service without giving any notice of termination e.g., where he is guilty of wilful disobedience,
misconduct or is incompetent or suffers from permanent disability. The services of a secretary
may also be terminated without giving any notice if he makes secret profits.

It may be noted that even if the appointment of the secretary is for a fixed period, he can be
removed from office before the expiry of his term after giving proper notice in this regard.
Note: An order by the court for compulsory winding up of the company will operative as
termination of secretary's services.

14.5. QUALIFICATIONS OF A SECRETARY

The qualifications of a secretary are prescribed in the Companies (Appointment and

Qualifications of Secretary) Rules, 1988.³ These qualifications are different for those
companies having the paid up share capital of 5 crores* or more (i.e., not less than 5 crores),
and for all other companies, and are discussed separately hereunder:

1. In the case of a company having a paid up share capital of not less than rupees five crore:
In the case of such a company, a person to be appointed as a secretary must have the
following qualification [Rule 2]:

Membership of the Institute of Company Secretaries of India (ICSI).

2. In the case of any other company: In the case of any other company i.e, other than that
mentioned above, a person to be appointed as secretary must have one or more of the
following qualifications [Rule 4]:

(a) Member of the Institute of Company Secretaries of India.

(b) Membership of the Institute of Chartered Accountants of India.

(c) Membership of the Institute of Cost and Works Accountants of India.

(d) Membership of the Association of Secretaries and Managers, Calcutta.

(e) Degree in law granted by any University.

(f) Post-graduate degree in commerce or corporate secretaryship granted by any University.

(g) Post-graduate degree or diploma in management sciences granted by any University or

Management, Ahmedabad, Bangalore, Calcutta or Lucknow.

(h) Diploma in corporate laws and management granted by the Indian Law Institute.

(i) Post-diploma in company secretaryship granted by the Indian Law Institute of Commercial
Practice, Delhi.

(j) Pass in the intermediate examination conducted by the Institute of Company Secretary of
India.
It may, however, be noted that when the paid up share capital of such company is increased
to rupees 5 crores or more, it must appoint a whole-time secretary with the prescribed
qualification (i.e., who is a member of the Institute of Company Secretaries of India) within
one year from the date of such increase in the paid up share capital.

Note: The secretaries appointed by non-profit companies registered under Section 8 of the
Companies Act, 2013 are exempted from the above rules prescribing the qualifications for a
secretary.

14.6. DUTIES AND FUNCTIONS OF A SECRETARY

We know that a secretary is an important officer of the company. However, he is only a

subordinate officer, and has no managerial functions. He being appointed by the Board, has
no original authority. He is required to perform the duties assigned to him under the
Companies Act, and by the Board of Directors. The duties and functions of a secretary are
discussed separately as under:

14.6.1. Duties of a Secretary

Following are some of the important duties which a secretary is required to perform under the
Companies Act 2013:

1. To keep and maintain various registers (i.e., statutory books) of the company, such as (a)
egister of investments held by the company in the name of its nominees [Section 187 (3)].

(b) Register of charges [Section 85].

(c) Register of members [Section 88].

(d) Register of debenture-holders [Section 88].

(e) Register of contracts in which directors are interested [Section 189].

(f) Register of Directors, managing director, manager, and secretary and the shares held by
each of them [Section 170].

It is also secretary's duty to make available for inspection the aforesaid registers.

2. To file with the Registrar of Companies, necessary documents and returns, such as

(a) Return of allotment of shares [Section 39(4)].

(b) Annual return [Section 92].

(c) Special resolutions and agreements [Section 117.]

(d) Annual accounts i.e., Balance sheet, and Profit & Loss Account [Section 137].

3. To give notice to the Registrar for increase of share capital [Section 64].

4. To issue the certificates the shares, debentures and debenture stock [Section 56(4)].

5. To deliver for registration, to the Registrar, the particulars of mortgages and charges
[Sections 77].

6. To file the declaration required to be filed for the of commencement of business [Section
11].

7. To keep minutes of the general meetings and make them available for inspection [Section
119].

8. To sign the annual accounts of the company and send out their copies to every member
[Sections 134].

9. To issue the necessary notices for calling the meetings of the shareholders, and of the
directors on the instructions of the Board of Directors [Sections 101, 173].

10. To arrange for issue of capital, to send letters of allotment, to issue call notices, to certify
valid transfer of shares, and to prepare dividend warrants etc.

Note: The above-mentioned are the duties of a secretary under the Companies Act, 2013. A
secretary is required to perform various duties under certain other Acts e.g., the Income Tax
Act, and the Indian Stamp .

Under the Income Tax Act, a secretary is a principal officer of the company, and is required to
perform the following duties:

1. To ensure that proper income tax is deducted at source from the salaries paid to the
employees, and in case of shareholders and debenture-holders from dividend or interest paid
or payable to them.

2. To ensure that a certificate of income tax deducted at source is furnished to every

shareholder and debenture-holder.

3. To ensure that the tax so deducted has been deposited in government treasury. 4. To
submit and verify miscellaneous statements, forms and returns.
Under the Indian Stamp Act, it is the duty of a secretary to ensure that various documents
such as letters of allotment of share, share certificate, share warrant, debenture certificate,
share transfer form, etc., are properly stamped.

14.6.2. Function of a Secretary

Under the Companies Act, 2013, the clear functions of a secretary have been prescribed in
Section 205. It is for the first time that the functions of a secretary have been prescribed under
the Companies Act.

Section 205 which has been notified to be effective w.e.f. 1.4.2014 vide MCA notification
dated 26.3.2014 prescriber the following functions of a secretory about compliance:

1. Report to Board: The secretary shall report to Board about compliance with the provisions
of the Companies Act, 2013, with the rules made thereunder, and with other laws applicable
to the company [Section 205(1)]

2. Ensure compliances: The secretary shall ensure that the company complies with the
applicable secretarial standards.

3. Discharge prescribed duties: The secretary shall discharge such other duties as may be
prescribed by rules.

The Central Government has, vide Gazette Notification No. G.S.R. 249(E) dated 31.3.2014,
formed the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014
which were recently amended vide Notification No. G.S.R. 390(E) dated 9.6.2014, and Rule 10
of these rules has prescribed the following duties to be performed by a secretary:

(a) To guide directors of the company regarding their duties, responsibilities and powers.

(b) To facilitate convening of meetings.

(c) To attend Board meetings, committee meetings and general meetings.

(d) To maintain minutes of meetings.

(e) To obtain approval from the Board, general meeting, government and other authorities as
required.

(f) To represent before various regulators and authorities.

(g) To assist the board in conducting the affairs of the company.

(h) To assist and advise the Board in ensuring good corporate governance. (i) To assist and
advise the Board in ensuring the compliance of corporate governance requirements and best
practices.

() To discharge such other duties as specified under the Companies Act and Rules made
thereunder.

(k) To discharge such other duties as may be assigned by the Board from time to time.

14.8. LIABILITIES OF A SECRETARY

The liabilities of a secretary may be discussed under the two heads, namely (a) statutory
liabilities, and (b) contractual liabilities.

1. Statutory liabilities: These are the liabilities which have been expressly provided in the
statute i.e.,the Companies Act. We have already noted that it is the duty of a secretary to see
that company's affairs are conducted in accordance with the provisions of the Companies Act,
rules made thereunder and articles of association. If default is made in complying with certain
provisions of the Companies Act, the secretary may be held liable for fine and punishment.
The reason for the same is that the Companies Act imposes criminal liability on the officers in
default' for noncompliance of certain provisions. A secretary being included in the definition,
he is also liable in such cases. The secretary has been specifically included in the definition of
'officer who is in default' [Section 2(60)]. The liability of the officer in default' has already been
discussed in detail Chapter 12 under the heading 'criminal liability of directors'. Some of the
important provisions the Companies Act, 2013, are stated below, and the secretary may be
held liable in these cases:

1. If default is made in filing the return of allotment of shares with the Registrar, every officer
in default shall be punishable with fine 1,000 for every day during with all in of the default
continues or one lakh, whichever is less [Section 39(5)].

2. If default is made in delivering the certificates of share or debenture, every officer in default
shall be punishable with fine from 10,000 to one lakh [Section 56(6)].

3. If default is made in maintaining the register of members or debenture-holders, then, every

officer in default shall be punishable with imprisonment upto 6 months or with fine from
25,000 to one lakh or with both [Section 86].

4. If default is made in maintaining the register of directors, managing director, every officer in
default shall be punishable with fine from 50,000 to 5 lakh [Section 172].
5. If default is made in exhibiting the name and address of the registered office of the
company, every officer in default shall be punishable with fine of 1000 for every day during
which the default continues, but not exceeding one lakh [Section 12(8)].

6. If default is made in filing the particulars of charge with the Register of Company, every
officer in default shall be punishable with imprisonment upto 6 months or with fine 25,000 to
one lakh or with both [Section 86].

7. If default is made in filing the annual return with the Registrar of Companies, every officer in
default shall be punishable with imprisonment upto 6 months, or with fine from 50,000 to 5
lakh or with both [Section 95(5)].

8. The default in holding the annual general meeting is punishable with fine upto one lakh, and
if the default continues, a further fine may extend to ₹ 5,000 for every day during which the
default continues [Section 99].

9. If default is made in circulating members' resolution, every officer in default shall be

punishable with fine of 25,000 [Section 111(5)].

10. If default is made in registering the resolutions and agreements requiring registration
under the Act, the company and every officer in default shall be punishable with fine of Fone
lakh to 5 lakh [Section 117(2)].

11. If default is made in recording the minutes of the meetings of the shareholders and of the
Board, every officer in default shall be punishable with fine of 50,000 [Section 118(11)].

12. If default is made in giving the due notice of the Board meetings, every officer in default
shall be punishable with fine of 25,000 [Section 173(5)].

13. If the secretary makes a false statement in any return, report, certificate, balance sheet,
prospects, etc., he shall be punishable with imprisonment from 6 months upto two years, and
shall also be liable to fine upto 3 times the amount involved in fraud [Section 448].

14. If the secretary intentionally gives the false evidence, he shall be punishable with
imprisonment of 3 years upto seven years, and shall also be liable to fine upto 10
lakhs [Section 449].

Thus, in the above important provisions, the liability of the officer in default has been
specifically provided, and the secretary shall be liable in all these cases. Sometimes, the
secretary is guilty of the contravention of any provision (section) of the Companies Act, for
which no punishment is specifically provided in that provision. In such cases, Section 450 is
applicable which provides penalty for contravention of those provisions for which no specific
penalty is provided in the concerned provision (section). According to this section, the person
guilty of contravention of any such provision shall be punishable with fine upto 10,000, and if
the contravention is continuing one, with a further fine upto 1,000 for every day during which
the contravention continues, after the first contravention.

2. Contractual liabilities: These are the liabilities which arise out of secretary's contract of
service with the company. These liabilities are in addition to the statutory liabilities as
discussed above. As per his contract of service, the secretary is in a fiduciary relationship (i.e.,
relationship of trust and confidence) to the company, and thus he should not misuse his
position, and also should not allow his personal interest to clash with that of the company.
Following are the cases in which a secretary may be held liable:

(a) If he makes any secret profits by virtue of his position as a secretary, he is liable to account
for the same to the company.

(b) If he acts beyond his authority, he is personally liable to the company for any loss or
damage suffered by it.

(c) If he is guilty of wilful neglect or negligence in discharging his duties, he is liable to the
company for any loss or damage caused by his wilful neglect or negligence.

(d) If he reveals the trade secrets which he comes to know by virtue of his employment, he
may be held liable for any loss or damage suffered by the company by his such acts. He may
also be restrained by an injunction (i.e., court order) from disclosing the trade secrets.

14.9. IMPORTANT POINTS RELATING TO SECRETARIES

Following are some of the important points relating to secretaries:

1. A company (public or private) having the paid up share capital of such amount as may be
prescribed by the Central Government, must have a whole-time secretary [Section 203(1)].

2. A person can work as a whole-time secretary of only one such company as stated above
[Section 203(3)].

3. A whole time secretary must be a member of ICSI.

4. Only an individual can be appointed as a secretary. A firm or a body corporate cannot be

appointed as the secretary of the company.
MEETINGS AND RESOLUTIONS

15.1. INTRODUCTION

We know that the business of the company is carried on by the selected representatives of the
members, called the directors. The directors take decisions by calling their meetings. There
are also certain matters which are to be decided by the whole body of shareholders of the
company. The shareholders also decide the matters by calling their meetings from time to
time. A meeting may be defined as a gathering or assembly of a number of persons for
transacting any lawful business. It may be noted that every gathering of persons does not
constitute a meeting. A meeting would be valid if it is held by following the prescribed rules
and regulations. A company meeting to be valid, must be convened and held as per the
provisions of the Companies Act, 1956 and the rules framed thereunder. The matters are
decided by passing resolutions at the meetings.

15.2. KINDS OF MEETINGS

The meetings of a company may broadly be classified into the following two categories: 1.
Meeting of members (shareholders) and 2. Other meetings.

15.3. MEETINGS OF MEMBERS (SHAREHOLDERS)

The meetings of the shareholders can be of following kinds, namely:

1. Annual general meeting

2. Extraordinary general meeting

3. Class meeting

Note: Statutory Meeting

The Companies Act, 2013 does not contain any corresponding section to Section 165 of the
Companies Act, 1956, relating to the statutory meeting and statutory report.

It was to be the first meeting of the members of the company after its incorporation and was
required to be held within 6 months from the date at which the company became entitled to
start business [Section 165]. It was held only once in the life time of the company. The
purpose of this meeting was to acquaint the members with all the important facts relating to
the new company to enable them to know the position and future prospects of the company.
The following companies were required to hold the statutory meeting:

(a) Every public company limited by shares.

(b) Every public company limited by guarantee and having a share capital.

The statutory meeting was required to be held within a period of not less than one month and
not more than six months from the date on which the company is entitled to commence
business [Section 165(1)].

15.4. ANNUAL GENERAL MEETING

It is the regular meeting of the members of the company. It must be held in each year in
addition to any other meeting [Section 96(1)]. The purpose of this meeting is to provide an
opportunity to the members of the company to express their views on the management of
company's affairs. Every company public or private is required to hold this meeting.

Note: One Person Company is not required to hold any annual general meeting [Section
96(1)].

The legal provisions relating to the annual general meeting are contained in Sections 96 to
99, which may be summed up as under:

1. The annual general meetings in each year: The annual general meeting must be held once
in each year in addition to any other meetings [Section 96(1)].

2. Time of holding first annual general meeting: The first annual general meeting must be
held within 9 months from the date of closing of first financial year, and this time cannot be
extended even by the Registrar [Section 96(1), 1st and 3rd Proviso]. When the first annual
general meeting is held within this period of 9 months, then it shall not be necessary for the
company to hold any annual general meeting in the year of incorporation [Section 96(1) 2nd
proviso].

3. Time of holding subsequent annual general meetings: The subsequent annual general
meetings should be held in each year within a period of 6 months from the date of closing of
the financial year [Section 96(1), 1st proviso]

However, the gap between the two meetings should not be more than 15 months. The
Registrar may, for special reasons, extend the time of holding general meeting by a period not
exceeding 3 months [Section 96(1), 3rd proviso]

4. Notice of meeting: At least 21 days clear notice of the meeting in writing, or through
electronic mode must be given to every member of the company. A shorter notice may also be
given if agreed to by 95% of the members who are entitled to vote at the meeting. The place,
day and hours should be specified in the notice [Sections 101].

5. Time of holding meeting: The meeting must be held during the business hours (ie. between
9 a.m. and 6 p.m.) and on a day which is not a national holiday [Section 96(2)].

6. Place of holding meeting: The meeting must be held either at the registered office of the
company, or at some place within the city, town or village in which the registered office is
situated [Section 96 (2)].

Note: The Central Government may exempt any company from the provisions at No. 5 and 6
above subject to such conditions as it may impose [Section 96 (2)].

7. Consequences of failure to hold the meeting: If the company fails to hold the annual
general meeting, the consequences will be as under:

(a) Any member of the company can apply to the Tribunal for calling the meeting. On
such application, the Tribunal may order the calling of the meeting, or it may issue
directions for calling the meeting. A meeting called by the order of the Tribunal shall be
deemed to be an annual general meeting of the company [Section 97].

(b) The company and every officer in default shall be punishable with fine up to one
lakh, and if the default continues, with a further fine upto 5,000 for every day after the
first day of default during which the default continues. This penalty is also there if the
meeting is not held in accordance with the directions of the Tribunal [Section 99].

Thus, there must be one annual general meeting per year, and as many meetings as there are
years. If this meeting is not held in any year, the company and every officer in default shall be
punishable with fine, as stated above.

EXAMPLE 15.1. The annual general meeting of a company was called in December 1934. But
this meeting was adjourned in March 1935 and was then held. The next meeting was held in
February 1936. The company was prosecuted for not holding the meeting in 1935. The
company contended that the annual general meeting was held in 1935. But the court held that
the meeting of March 1935 was the adjourned meeting of 1934. And in fact no meeting was
held for the year 1935. The company was, therefore, held liable to pay the fine.

It may, however, be noted that when the first annual general meeting is held within 9 months
from the date of closing of the first financial year, then no annual general meeting will be
required for the year of incorporation [Section 96(1), 1st proviso].

EXAMPLE 15.2. A company was incorporated in January 2013, and it adopts the financial year
closing on 31st December. The first annual general meeting of the company was held in May
2014. In this case, the company is not guilty of not holding the annual general meeting for the
year 2013. The reason for the same is that the first annual general meeting was held within 9
months from the date of close of first financial year i.e. 31st Dec. 2013.

8. Importance of meeting: The annual general meeting is an important meeting of the

company which gives an opportunity to the members to review the working of the company
and to express their views on the management of company's affairs. The importance of this
meeting is evident from the following points:

(a) The annual accounts of the company are presented at this meeting for consideration of the
shareholders.

(b) The dividends are declared at that meeting.

(c) The auditors of the company retire at this meeting, and their appointments are also made.

(d) The directors, liable to retire by rotation, retire at this meeting, and appointments in their
place are also made at the meeting. This enables the shareholders to appoint the directors
who can best protect their interest.

Changes brought in by the Companies Act, 2013

The new provisions of Section 96 relating to AGM has made the following
departures from earlier provision of Section 166 of the Companies Act, 1956.

1. Time of holding first meeting: Now the first annual general meeting is required
to be held within 9 months from the closing of first financial year. Earlier under
Section 166, it was required to be held within 18 months of incorporation.

2. Business hours defined: The meeting is required to be held during business

hours as stated in point (5) above. Now the business hours are defined as between
9 AM to 6 PM. Earlier the time was not specified.

3. One Person company: It is a new concept, and the one person company is
exempted from holding any annual general meeting.

15.5. EXTRA-ORDINARY GENERAL MEETING

All general meetings other than Annual General Meeting shall be called extra-ordinary annual
general meeting of the company [Clause 42 of Table F, Schedule I of the Companies Act, 2013].
This meeting is called for dealing with some urgent special business which cannot be
postponed till the next annual general meeting. This meeting can be convened
(a) by the Board of Directors on its own;

(b) by the Board of Directors on requisition of members;

(c) by the requisitionists themselves;

(d) by the National company Law Tribunal (i.e. Tribunal)

The legal provisions relating to the extra-ordinary general meeting have been provided in
Sections 100 and 98 of the Companies Act, 2013, which were earlier incorporated in Section
169 and Section 186 of the Companies Act, 1956, and are discussed here under:

15.5.1. Calling of Extra-Ordinary General Meeting by the Board of Directors [Section 100(1)]

The extra-ordinary general meeting may be called by the Board of Directors on its own motion
whenever it thinks fit to call the meeting.

Note: This meeting may also be called by any director or by any two members of the company
if the quorum of the Board of Directors is not complete due to directors being not within India
at the time when the calling of extra-ordinary general meeting became necessary [Clause
43(ii), Table F, Schedule 1 of the Companies Act, 2013].

15.5.2. Calling of Extra-Ordinary General Meeting on the Requisition of Members [Section

100(2)]

The extra-ordinary general meeting becomes necessary on the requisition of members. As a

matter of fact, on the requisition of members, the directors are bound to call an extra-
ordinary general meeting. The legal provisions relating to the calling of the extra-ordinary
general meeting on the requisition of members, may be stated as under:

1. Requisite number of members to make requisitions: The requisition for calling this meeting
must be made by such number of members who hold at least 1/10 of the paid up capital of
the company, and have the right to vote at the meeting on the matter. And if the company has
no share capital it must be signed by such number of members who have at least 1/10 of the
total voting power [Section 100(2)].

2. Signing of requisition and sending to registered office: The requisition must set out the
matters for the consideration of which the meeting is to be called, and it must be signed by
the requisitionists. And it should be deposited at the registered office of the company [Section
100(3)].
3. Board to call meeting: On the receipt of a valid requisition at company's registered office,
the directors must move to call a meeting within 21 days, and the meeting must actually be
held within 45 days from the date of receipt of requisition [Section 100(4)].

15.5.3. Calling of Extra-ordinary General Meeting by the Requisitionists Themselves [Section

100(4)(5)]

If the Board does not proceed to call the meeting within the time stated above, then, the
requisitionists may themselves proceed to call the meeting. However, the requisitionists must
the meeting within 3 months from the date of the requisition. It is to be noted that the
meeting called and held by the requisitionists must be concluded within 3 months from the
date requisition [Section 100(4)].

Following points are important to note in this regard:

1. Claim of expenses: The requisitionists may claims from the company the reasonable
expenses incurred by them in calling the meeting by reason of Board's failure to call the
meeting. And the company may deduct such sums out of the remunerations payable to the
directors in default [Section 100(6)].

2. Legal right to call meeting: The shareholders have the right to requisition the extraordinary
general meeting in accordance with the provisions of the Companies Act. They cannot be
restrained from requisitioning this meeting. Moreover, they are not bound to disclose the
reasons for the resolutions proposed to be moved at the meeting.

3. Cancellation of meeting: If in a meeting called upon the requisition of member, the quorum
is not present within half an hour from the time appointed for holding the meeting, the
meeting shall stand cancelled [Section 103(2)(b), the Companies Act, 2013].

Note: 1. It has been judicially decided that the refusal on directors' part to call a meeting on
requisition does not amount to any offence Section 169 (now new Section 100). In such a case
the requisitionists have their own alternative of calling the meeting by themselves under
Section 169 (6), [new Section 100(4)], as stated above in point 15.5.3 above

2. The Board of Directors is justified in refusing to call an extra-ordinary general meeting on

the requisition of the members where there is a court order restraining the company from
holding any meeting. [A.D. Chaudhary v. Mysore Paper Mills, (1976) 46 Comp. Cas. 548
Karnataka).

15.5.4. Calling of Extra-ordinary General Meeting by the Tribunal [Section 98]4

Sometimes, it is impracticable to call, hold or conduct the meeting of a company, other than
an annual general meeting. In such cases, the Tribunal is empowered to call, hold and conduct
the meeting. The following points may be noted in this regard:
1. The Tribunal can order a meeting to be called, held or conducted in accordance with its
directions.

2. The Tribunal can make such order either of its own motion or on the application of any
director or member who is entitled to vote at the meeting.
The expression 'impracticable' means not possible to call, hold or conduct the meeting in a
manner prescribed by the Companies Act or company's articles of association. The Tribunal
may call an extra-ordinary general meeting under Section 98 on the ground of
'impracticability'.

In the following cases, the holding of a meeting is held to be 'impractiable':

(i) The holding of a meeting is impracticable where the registered office of the company is
locked, the Tribunal may order meeting in such a case.

(ii) The holding of a meeting is impracticable where there is a dispute between the company's
shareholders as to who are the lawful directors of the company entitled to call a meeting. The
Tribunal may interfere and order meeting in such a case.

(iii) The holding of a meeting would be impracticable where the company has no duly
constituted board of directors. The Tribunal may order the meeting for putting the company
on rail by removing impediments that have arisen in the way of proper functioning.

Changes brought in by the Companies Act, 2013

The new provisions for calling extra-ordinary general meeting makes the
departure from earlier provisions in the following respects:

1. Earlier under Section 169(7), Explanation, the extra-ordinary meeting called

by the requisitionists within 3 months of deposit of requisition could be
adjourned to a date even after the expiry of said period of 3 moths. Now this
provision has been dispensed with. It means that now the meeting called by
requisitionists must be held and concluded within 3 months of date of
requisition See Art. 15.6.3. above

2. The power of Board to call extra-ordinary meeting has been provided in

Section 100 itself. Earlier it was conferred through Regulation 48 of Table-A of
Schedule-I of Companies Act, 1956.
15.6. CLASS MEETING

It is the meeting of a particular class of shareholders. Generally, the companies have two
classes of shareholders, namely (a) equity shareholders and (b) preference shareholders. In
order to discuss the matters affecting one class, only a meeting of the particular class of
shareholders is held. It may be noted that at a class meeting, only the shareholders of the
particular class have the right to be present e.g., if the rate of dividend on preference shares is
to be reduced, the meeting of preference shareholders will be called at which only the
preference shareholders are entitled to be present. The most frequent case of holding the
class meeting is that if the rights attached to the shares of any particular class of shareholders
are to be varied, a separate meeting (i.e., class meeting) of that particular class of
shareholders must be held and the matter should be approved at the meeting by a special
resolution [Section 48].

15.7. OTHER MEETINGS

We have discussed in Arts. 15.3 to 15.6, only the meetings of the members of the company. In
addition to these meetings, there are other company meetings also which are briefly
discussed under the following heads:

1. Meetings of directors: We know that the directors are responsible for the overall control
and supervision of the affairs of the company. The directors generally act collectively i.e., as
Board of Directors unless the powers have been delegated to individual directors. It will be
interesting to know that their meetings are more frequent than the meetings of shareholders.
A company must hold meeting of its Board of Directors at least once in every three calendar
months. And there must be at least four meetings of the Board of Directors in every year
[Section 173].

Note: The meetings of directors have already been discussed in detail in Chapter 12.

2. Meetings of creditors: The meetings of creditors are held by an order of the Tribunal.
Sometimes, a compromise or arrangement is proposed between a company and its creditors
or any class of creditors. In such cases, the Tribunal may order a meeting of creditors or a class
of creditors to be called, held and conducted in such manner as the Tribunal directs. The
Tribunal orders such a meeting on the application of the company, or of any creditor or
member of the company. In case the company is in liquidation, the application may be filed by
the liquidator [Section 230].

3. Meetings of debenture-holders: The meetings of the debenture-holders may be held from

time to time in accordance with the provisions contained in the debenture trust deed. Their
meetings are usually held when the conditions of the issue of debentures are to be altered.
Where a scheme of compromise or arrangement is proposed, the meetings of the debenture-
holders may also be held through an order of the Tribunal.

15.8. ESSENTIALS AND LEGAL RULES FOR A VALID MEETING

The company meetings are called to take decisions on the matters discussed in the meeting.
And such decisions are binding on the persons in respect of whom the matters are decided.
However, the decisions will have binding effects only if the meeting is valid and is conducted
in accordance with the procedure. The following are the essentials and legal rules (or
procedure) for a valid meetings.

1. Proper authority: It is an important requirement of a valid meeting that it should be called

by a proper authority. The proper authority to call a general meeting of the members is the
Board of Directors. The Board of Directors should pass a resolution at Board meeting to call
the general meeting. If meeting of Board of Directors is itself unlawful (e.g., some lawfully
constituted directors are prevented from attending the Board meeting), then the decision
taken at such meeting to call the general meeting of the shareholders shall also be invalid.

EXAMPLE 15.4. The directors of a company held a meeting of the Board, but they prevented
some lawfully constituted directors from attending the Board meeting. Though certain
directors were prevented from attending the meeting, but the quorum was present. And thus,
at this Board meeting, the directors passed a resolution calling the general meeting of the
company. In this case, the resolution convening (ie, calling) the general meeting is not valid.
The reason for the same is that the Board meeting itself was unlawful as certain directors
were prevented from attending the Board meeting.

But if the meeting of the Board of Directors is only irregular i.e., not properly constituted (e.g.,
there is some defect in the appointment or qualifications of the directors), then the general
meeting of members called by a resolution at such Board meeting may not be invalid.

Note: If the directors fail to call the general meetings, the meeting may also be called by the
membersor by the Tribunal as already discussed in Arts 15.4 and 15.5.

2. Proper notice: It is another important requirement of a valid meeting that a proper notice
to call every meeting should be given to the following persons [Section 101(3)]:

(a) to every member of the company;

(b) to legal representative of a deceased member or the assignee of an insolvent;
(c) to the auditor(s) of the company;
(d) to every director of the company;

It may be noted that deliberate omission to give notice to a single member may invalidate the
meeting. However, an accidental omission to give notice to, or non-receipt of it by, a member
will not invalidate the meeting [Section 101 (4)]. Following points are important to be noted
with regard to notice:

(i) The notice should be in writing, or through electronic mode, and it should be given 21 clear
days before the date of the meeting [Section 101(1)]. In computing the period of 21 clear days,
the date of receipt of notice and the date of the dispatch should be excluded. In a case, a
notice posted on 16th October, for a meeting to be held on 6th November was held to be
invalid. Here, the gap was only of 20 clear days (i.e., from 17th October to 5th November).

(ii) A meeting can also be called by giving a shorter notice (i.e., notice of less than 21 days) if
not less than 95% of the members entitled to vote at such meeting give their consent in
writing or by electronic mode [Section 101(1), proviso] It may also be noted that the members
may give their consent for a shorter notice either before the meeting, at the meeting or after
the meeting.

(iii) The person issuing the notice and callings the meeting should also be authorised to do so.
Thus, where a secretary of the company issued notices calling the general meeting but he had
no power to do so under company's articles of association, it was held that notices were null
and void (i.e., without any effect) and the meeting held on the basis of such notices was also
null and void.

Note: The requirement of notice, though shorter, is must. But if all the members are present,
the notice can be dispensed with. [Younger LJ in Engineering Works (1920) 1 Ch. 466].

3. Contents of notice: The notice of meeting must specify the following particulars:

(a) The place, day and hour of the meeting.

(b) The statement of the nature of the business to be transacted at the meeting [Section
101(2)].

The business to be transacted at the meeting may be of the following two kinds [Section 102]:

(1) Special business, and

(it) General business.

In the case of transacting special business, a statement containing the following particulars
must be attached to the notice of calling meeting:

• The nature of concern or interest of every director, key managerial personnel and their
relatives.
• Any other information and facts that may enable members to understand the meaning,
scope and implication of the items of business and to take decision thereon.

Thus, the notice of special business must state the purpose of meeting giving full disclosure of
all facts for which the meeting is called. It is necessary to enable the shareholders to
understand the nature of the business. If this statement does not give full disclosure of the
purpose of the meeting, the notice is bad in law i.e., invalid. And the meeting held in
pursuance of such notice is also invalid.

EXAMPLE 15.3. A notice convening a meeting stated that the purpose of the meeting was to
adopt an agreement for the sale of company's undertaking to another company. Out of the
sale proceeds, certain amount was to be paid to the directors as compensation for loss of
office. But the notice did not disclose that the directors were interested in the agreement as
substantial part of the sale proceeds was to be paid to the directors as a compensation for loss
of office. It was held that the notice was invalid as it did not fairly disclose the purpose for
which the meeting was called. In this case, the nature of the business was special. But the
notice did not specify the same.

The requirements as to contents of notice and explanatory statement are mandatory (i.e.,
legally compulsory) and must be complied with.

Notes: 1. General business. In the case of an annual general meeting, the four kinds of
business are regarded as general business, namely, (a) the consideration of the accounts,
balance sheet and the report of Board and of auditors, (b) declaration of a dividend, (c) the
appointment of directors in place of those retiring, and (d) the appointment of auditors and
fixing their remuneration.

2. Special business. In the case of any other meeting, all the business are regarded as special
business. The business other than the above four types are also regarded as special business
at the annual general meeting.

3. The above stated sections 101 and 102 of the Companies Act, 2013 have been notified to be
effective w.e.f. 1.4.2014 vide Ministry of Corporate Affair notification dt. 26.3.2014.

4. Quorum for meeting: The term 'quorum' may be defined as the minimum number of
members that must be present at the valid meeting so that the business can be validly
transacted at the meeting. If the quorum is not present, the meeting shall not be valid and the
proceedings of such meeting shall be invalid. Generally, the quorum is fixed by the articles of
association of the company. The provisions relating to quorum have been amended by the
Companies Act, 2013 and are incorporated in Section 103 of the new Act. This section has
been made effective w.e.f. 12.9.2013.
The minimum number of members that constitute quorum, in view of new Section 103, is as
under:

(i) In case of a public company': In this case, the quorum will depend upon the number of
members of the company as on the date of meeting, and is as under:

Number of Members as on the date of Quorum

meeting
Upto 1000 members 5 members
Between 1000 to 5000 members 15 members
More than 5000 members 30 members

(ii) In case of a private company: In this case, the quorum will be 2 members personally
present at the meeting.

It is important to note here that the articles of association cannot provide for a smaller
quorum than the above though it may provide for a larger quorum. It may be noticed that for
the purpose of quorum, only the members present personally are counted, and no 'proxy'
shall be counted. Even the company cannot, by its articles of association, provide for the
'proxy' being counted for the purpose of quorum.

EXAMPLE 15.4. A public company summoned the general meeting of the shareholders for the
purpose of altering a clause of its articles. Four members were personally present at the
meeting, and two members were present by 'proxy'. At the meeting, the necessary resolution
was passed for altering the articles. In this case, the decision taken at the meeting is invalid
i.e., not effective. The reason for the same is that the meeting was not valid as the 'quorum'
was not present. In case of a public company five members present personally constitute a
quorum.

The following points are important in connection with the quorum of a meeting:

(a) Members personally present: For the purpose of quorum, only the members personally
present are counted, and no 'proxy' shall be counted. Even the company, by its articles, cannot
provides for proxy being counted for the purposes of quorum [Section 103(1)].

(b) Quorum to be present at the beginning: The quorum required is the quorum to be present
at the time of beginning to consider the business, and it need not be present throughout or at
the time of taking vote on any resolution. [Re Hartley Baird Ltd.,(1955) 1 Ch. 143; (1954) All
England Reporter 695] ¹0 10

(c) Resolution without quorum invalid: Any resolution passed without a quorum is invalid.
(d) Quorum where number of members are reduced: In case, the total number of members
of a company becomes reduced below the quorum fixed for a meeting, then the rules as to
quorum will be satisfied if all the members of the company are present e.g., where the
number of members of a company is 400 and the quorum fixed by the articles is 75 members.
Subsequently 350 members have sold their shares to the remaining 50 members. In this case,
all the 50 members present personally will constitute a valid quorum even if the quorum fixed
by the articles is 75 members.

(e) Position when quorum not present within half an hour: In this regard, legal position is as
under:

(i) Meeting called on requisition: In case, the meeting is called on the requisition of
members, it shall stand cancelled if the quorum is not present within half an hour from
the time for holding the meeting of the company [Section 103(2)].

(ii) Meeting other than on requisition: In other cases (i.e., where it is not called on the
requisition of members), the meeting shall stand adjourned to re-assemble in the next
week on the same day at the same time and place, or to such other day, time and
place as the Board of Directors may determine. However, in this case, the company
shall give not less than 3 days notice to the members either individually or by
publishing an advertisement in the newspaper (one in English and one in vernacular
language) which is in circulation at the place of registered office of the company
[Section 103(2)].

(iii) Quorum not present at adjourned meeting: If at the adjourned meeting also the
quorum is not present within half an hour from the time of holding the meeting, as
many members as are actually present shall constitute quorum [Section 103(3)]. It is
important to note here that if only one member is present at the adjourned meeting,
he alone will not constitute the quorum as Section 103(3) reads that members present
shall be the quorum. The point of 'one-member meeting' will be discussed in detail in
the next article.

5. Chairman of the meeting [Section 104]: A chairman is necessary for conducting a meeting
properly. He presides over the meeting, and his main function is to keep order and see that
the business is properly conducted. Legally speaking, the chairman is the proper person to put
resolution to the meeting, count the votes, declare the result and authenticate the minutes by
signature.

The appointment of the chairman is usually regulated by the articles of association of the
company. But if there is nothing in the articles, the members personally present at the
meeting shall elect one of themselves to be the chairman of the meeting [Section 104, the
Companies Act, 2013]. Sometimes, there are difference among the members, and a peaceful
meeting is impossible under the chairmanship of a person appointed by one group. In such
cases, the chairman may be appointed by the court. It may, however, be noted that apart
from such extraordinary circumstances, the courts do not interfere in the conduct of meetings
by appointing a chairman.

The important duties of a chairman may briefly be stated as under:

(a) He must act honestly and in the interest of the company as a whole.

(b) He must ensure that the meeting is properly called and constituted, and also ensure that
the proceedings at the meeting are properly and regularly conducted.

(c) He must give a reasonable chance to members who are present to discuss any proposed
resolution.

(d) He must exercise correctly and honestly his powers of adjournment of the meeting and of
demanding a poll.

(e) He must preserve order in the meeting.

Note: The Arts, 15.9, 15.10, 15.11 discussed in the following pages are also the legal rules
relating to meeting.

Changes brought in by the Companies Act, 2013

The new provisions of Section 103 relating to quorum for a meeting has made
the following departures earlier provisions of Section 174 of the Companies
Act, 1956.

1. Quorum for public companies: The quorum for meetings of public

company will now depend upon the number of members of the company as
stated in point (4) above. Earlier, under Section 174, the quorum in case of
public companies was of 5 members personally present.

2. Notice in case of adjourned meeting for want of quorum: In case of the

meeting adjourned for want of quorum, at least 3 days notice is required to
be given to the members as stated in point 4 (e) (ii) above. Under the earlier
Section 174, there was no such requirement.
15.9. ONE-MEMBER MEETING

This point is discussed as under:

1. One member meeting is not valid: We know that the quorum must be present for a valid
meeting, which is minimum five members in case of a public company, and two members in
case of private company. Thus, a single member cannot constitute a valid meeting. As a
matter of fact, the word 'meeting' means the coming together of more than one person.
Moreover, Section 103 also states that the members actually present shall be the quorum.
Thus, where only one member attends the meeting, the meeting cannot be validly held. This is
known as the rule of Sharp v. Dawes as this point was decided in this case which is discussed in
the following example.

EXAMPLE 15.7. A general meeting was called for the purpose of making a call on the
shareholders. Only one shareholder attended the meeting. He, however, held the proxies of
other shareholders. He took the chair and passed a resolution for making a call. Accordingly, a
call was made on the shareholders. A, one of the shareholders, contended that the call had
not been validly made as there was no meeting. It was held that the meeting attended by 4
was not a meeting within the meaning of the Companies Act as one member cannot
constitute a meeting. The court observed that the word 'meeting' prima facie means a coming
together of more than one person.

Note: On analogy of the above case, it may be said that even in the case of a meeting
adjourned for want of quorum, the attendance of only one member at the re-assembled
meeting may not be enough.

2. Exceptions: There are certain exceptional circumstances in which a single member present
may constitute a quorum, and meeting can be validly held. These are as under:

(a) Where one person holds all the shares of a particular class, he alone can constitute a
meeting of that class and can pass a resolution by signing it.

(b) Where the general meeting is called by an order of the Tribunal, then the Tribunal may
give the direction that one member of the company present in person or by proxy shall be
deemed to constitute a meeting [Section 97(1), proviso].

(c) Where the meeting (other than the annual general meeting) is called by an order of the
Tribunal, this Tribunal may give the direction that one member of the company present in
person or by proxy shall be deemed to constitute a meeting [Section 98(1), proviso].

Note: The circumstances in which a meeting may be ordered by the Tribunal have already
been discussed in Arts 15.5.
15.10. VOTING AT MEETINGS

The provisions relating to voting are now contained in Section 106 (which corresponds to
earlier Sections 181, 182 and 183), and Section 107 (which corresponds to earlier Sections 177
and 178) of the new Companies Act, 2013. These sections have been made effective w.e.f.
12.9.2013 and the text has been amended accordingly.

The business of the meeting is conducted in the form of resolution passed at the meeting. And
the resolutions proposed in the meeting are decided on the votes of the members of the
company. The members also have the right to discuss the proposed resolution. After the
resolution has been discussed, it is put to votes. Every member has a right to vote on such
resolution. It may, however, be noted that the holders of equity shares have the right to vote
on every resolution placed before the company. But the holders of preference shares can vote
only on such resolution which directly affects their rights [Section 47(2)]. Legal provisions
relating to voting are discussed under the following sub-articles:

15.10.1. No Restriction on Voting Rights

The voting is the right of every member, and he may use his vote in any manner he likes. The
company cannot prohibit any member from exercising his voting right on any ground except
those mentioned in company's articles. The company's articles of association can restrict
member's voting right only in two cases, namely:

(i) where the call or any other amount payable by the member has not been paid, and (ii)
where the company has exercised its right of lien on the shares [Section 106(1)]. It is
important to note here that the company cannot prohibit any member from exercising his
voting rights on any other ground [Section 106(2)].

15.10.2. Modes of Voting

The voting may take place in either of the following two ways:

1. Voting by show of hands: In the first instance, unless poll is demanded by members or the
voting is carried out electronically, the voting at the general meeting takes place by show of
hands, and the resolutions are decided by counting the hands held up in favour of the
resolution. On a voting by show of hands, one member has one vote, and a proxy cannot vote
unless the articles of association provide otherwise. After counting the hands for or against
the resolution, the chairman declares the result. The declaration by the chairman of the result
of voting by show of hands shall be conclusive evidence of the fact that the resolution has or
has not been passed [Section 107]. In other words, in case of voting by show of hands, the
declaration of results by the chairman shall be final. However, where a poll is demanded by
the members (as discussed in the following pages), chairman's declaration shall not be final.
Moreover, chairman's declaration shall also not be final where the declaration is conflicting on
the face of it.

EXAMPLE 15.6. A special resolution was put to voting by show of hands, and the chairman
declared that the resolution has been passed. However, chairman's declaration contained a
statement that six members are in favour of the resolution; twenty-three against the
resolution; but there are two hundred voting by proxy, and I declare the resolution carried". It
was held that chairman's declaration was not conclusive (i.e., final) as on the face of the
declaration the resolution had not been passed by the required majority (i.e., three-fourth
majority). The court observed that the chairman had no right to count the proxies. In case of
voting by show of hands, the votes of the proxies are to be counted only if company's articles
of association contains a provision in this regard. [Based on Re Cartal (New) Mines Ltd. (1902)
2 Ch. 498].

It may, however, be noted that voting by show of hands does not reflex the wishes of the
members as the votes by proxy are not counted. Moreover, it does not pay regard to the
wishes of the members holding a large number of shares as one member has only one vote.

2. Voting by poll: The legal provisions relating to voting by poll are provided in Section 109 of
the Companies Act, 2013, which were earlier contained in Sections 179, 180, 184 and 185 of
the Companies Act, 1956.

Section 109 has been notified to be effective w.e.f. 1.4.2014 vide Ministry of Corporate Affairs
notification dated 26.3.2014.

Sometimes, there is dissatisfaction about the result of voting by show of hands. In such cases,
a poll can be demanded. The poll may also be demanded even before the declaration of the
result on a show of hands [Section 109]. On a poll, the voting right of a member shall be in
proportion to his shares of the paid up equity capital of the company [Section 47 (1) (b)]. Legal
provisions relating to voting by poll are as under:

(i) Order of poll by the chairman and demand of poll: A poll may be ordered by the chairman
either of his own motion, or on a demand made by the members. Where the poll is demanded
by the members, the chairman is bound to order the poll. But where the poll is not demanded,
the chairman is not under any obligation to order poll [Section 109(1)]. A shareholder who did
not demand poll cannot subsequently challenge the resolution.

(ii) Demand of poll by members: A poll may be demanded by either of the following persons,
and the chairman is bound to order poll in these cases:

(a) In the case of a company, having a share capital, by the members (in person or by proxy)
[Section 109 (1) (a)]:
• Who have not less than 10% of the total voting power; or
• Who have shares, worth 5 lakhs i.e., the shares on which at least 2,5 lakhs or such higher
amount as may be prescribed has been paid up."

(b) In the case of any other company, by any member (or members) present in person or by
proxy who have at least one-tenth of total voting power [Section 109 (1) (c)].

Note: The demand for poll may be withdrawn at any time by the person who made the
demand [Section 109(2)].

(iii) Time of taking poll: The poll demanded must be taken within 48 hours of the demand for
poll. But a poll demanded on a question of adjournment, and on the election of chairman
must be taken immediately [Section 109 (3) (4)].

(iv) Rules relating to voting by polls: Other rules relating to voting by polls may be summed up
as under:

(a) The manner of taking poll is to be decided by the chairman.

(b) The chairman shall appoint such number of persons as he deems necessary to scrutinise
the process and votes given on the poll [Section 109 (5) (6)].

(c) The result of the poll shall be deemed to be the decision of the meeting on the resolution.

(d) The poll is complete when the result is ascertained, by counting the votes, and not on the
earlier day on which the votes are polled. Thus, the meeting is a continuing one until the result
of the poll is ascertained.

EXAMPLE 15.7. On 14th July, 1989 the votes on a poll on the election of directors were taken.
The counting of votes took place the next day i.e., on 15th July and the result was also
declared on 15th July. Under company's articles of association, the directors were required to
hold 200 shares, and under the Companies Act, the directors were required to obtain the
qualification shares within two months of their appointment. The directors obtained the
necessary qualification shares, and their names were entered in the register of members on
15th September, 1989. A, one of the shareholders, sought to restrain the directors from acting
as such on the ground that they had not obtained their qualification shares within the
requisite time i.e., within two months of appointment. A contended that the directors were
appointed on 14th July (i.e., on the date when the pole was taken), hence the shares obtained
on 15th September are not within two months of their appointment. In this case, A's
contention is wrong as the directors are appointed on the day when the poll is complete, and
the poll is complete when the result is declared.
 Changes brought in by the Companies Act, 2013
The new provisions of Section 109 relating to demand for poll makes the following
departures from earlier provisions of the Companies Act, 1956.

1. Uniform criteria for demanding poll: The eligibility criteria for members for
demanding poll has been made uniform for both public and private companies as
discussed in point (2) (ii) above. Earlier it was different for these companies.

2. Increase in eligibility limit to demand poll: Now the members having shares of worth
P. 5 lakh, as discussed in point (2) (ii) above, is eligible to demand poll. Earlier this limit
was of 50,000 under Section 179 of the Companies Act, 1956.

15.11. PROXIES

The provisions relating to 'proxy' have been amended by the Companies Act, 2013 and are
incorporated in Section 105 of the new Act. This section has been made effective w.e.f.
12.9.2013, and the text has been revised accordingly.

The term 'proxy' may be defined as the representative of a member appointed by him to
attend and vote at the meeting on his (member's) behalf. Thus, he is a person authorised to
attend and vote for another at the meeting. It is to be noted that the instrument (Le.,
document) appointing a person as proxy is also known as 'proxy'. It is important to note here
that any person may be appointed as a proxy whether he is a member of the company or not.
And any member of a company who is entitled to attend and vote at the meeting, may
appoint any other person as his proxy to attend and vote at the meeting in his place. As the
proxy is appointed to vote on behalf of the shareholder, he is not entitled to act contrary to
the instructions of the shareholder in the matter.

It may be noted that the member of a company having no share capital, is not entitled to a
proxy unless the articles of association provide otherwise. The legal provisions relating to the
proxy as contained in Section 105, may be stated as under:

1. Proxy to represent members not exceeding 50: A person appointed as proxy shall act on
behalf of such number of members, not exceeding 50, as may be prescribed. Thus, a proxy
cannot be appointed to represent more than 50 members.

The number of shares that a proxy can represent may also be prescribed by the Central
Government [Section 105(1), fourth proviso].

2. Document appointing proxy to be in writing: The document appointing the proxy must
be in writing and signed by the appointer or by his duly authorised agent (Section 105(6)].

3. Deposit of document of proxy with the company: The document appointing the proxy
should be deposited with the company sometime before the commencement of the meeting.
Usually, it shall be deposited 48¹2 hours before the meeting. If public company's articles of
association contains a clause which requires a longer period than 48 hours for the deposit of
the proxy, such a clause shall be ineffective. Thus, even if the articles require a longer period
for deposit of proxy, but the proxy deposited 48 hours before the meeting shall also be
considered for voting as such a clause will not affect shareholder's right to deposit proxy
within 48 hours before the meeting [Section 105(4)).

4. Document of proxy valid for adjourned meeting: The proxy (ie, the document appointing
the proxy) properly deposited before the meeting shall also be valid for the adjourned
meeting.

5. Proxy's right to vote, not to speak: The proxy is entitled to vote only on voting by polls.
Also, the proxy has no right to speak at the meeting i.e., he cannot discuss the matter [Section
105(1), first proviso]. However, he can demand a poll [Section 109].

6. Appointment of more than one proxy: A member of the company may appoint more than
one proxy t.e., he may appoint one proxy in respect of certain shares and another proxy in
respect of other shares held by him [Section 105(2)].

7. Member's right of proxy to be stated in meeting notice: The notice of a meeting must
clearly state that a member is entitled to appoint a proxy, and also that the proxy need not be
a member. If it is not stated, every officer in default shall be punishable with fine upto 5,000
[Section 105(3)].

8. Member's right to inspect proxy: Every member entitled to vote has the right to inspect the
proxy (i.e., document appointing the proxy) deposited with the company [Section 105(8)].

9. Revocation of proxy: The proxy is always revocable. However, it can be revoked before the
proxy has voted. Moreover, the revocation is subject to the provisions of articles of
association. The articles generally provide that the revocation must be received at the
company's office before the commencement of the meeting. But if there is no provision in the
articles, the proxy can be revoked at anytime before the proxy has voted¹3 But if the company
has no notice of revocation, the vote given by proxy will be valid. Following points are
important to be noted in this regard:

(a) The death of the member appointing the proxy revokes the proxy. But if the company has
no notice of death, the vote given by the proxy will be valid.
(b) Where the member appointing the proxy personally attends and votes at the meeting, the
proxy shall stand revoked. ¹4

10. Companies not entitled for proxy provision: The members of a company having no share
capital, are not entitled to a proxy unless the articles of the company provide otherwise
[Section 105(1), second proviso].

The Central Government may also prescribe a class or classes of companies whose members
shall not be entitled to appoint another person as a proxy [Section 105(1), third proviso].

Notes: 1. The company cannot send invitations at its expenses to members to appoint as
proxy the person specified in the invitation. If the company does so, every officer in default
shall be punishable with fine upto Rupees one lakh [Section 105(5)].

2. It is also common practice to make out alternative proxies i.e., in favour of A, or in his
absence, in favour of B so that if A is prevented from attending the meeting, B may attend and
vote under the same proxy.

3. As regards filing of proxy through fax, a beginning has been made in case of creditors
meeting. It has been held that a creditor can attend the meeting through a proxy by sending
the proxy form by fax.

15.12. RESOLUTIONS

The provisions relating to resolutions (ordinary and special) have been amended by the
Companies Act, 2013 and are incorporated in Section 114 of the new Act which were earlier
provided in Section 189 of the Companies Act. 1956. New Section 114 has been made
effective w.e.f. 12.9.2013, and the text has been revised accordingly.

1. Meaning and kinds of resolutions: The term 'resolution' may be defined as the proposal
which is voted at the meeting and accepted by the members. In other words, it is the decision
taken at the meeting. The business of a meeting is conducted in the form of resolutions. The
Companies Act provides for the two kinds of resolutions, namely:
(i) Ordinary resolution, and (ii) Special resolution

The kind of resolution to be passed in particular case depends upon the nature of the business
to be transacted, and not upon the kind of meeting at which it is passed. In addition to the
above resolutions, there is another type of resolution known as a ‘resolution requiring special
notice'. It is in fact a kind of an ordinary resolution and will be discussed separately in Art.
15.15.

2. Validity of resolution: The validity of a resolution passed at a meeting depends on the

constitution and conduct of the meeting, which means that
(a) the notice convening the meeting had been given according to law.

(b) the quorum was present.

(c) the proper person was in chair.

resolution.

(d) the meeting was competent to pass the resolution.

(e) the reasonable discussion was allowed on the resolution.

(f) the resolution was correctly voted upon.

Note: Section 110 of the Companies Act, 2013, also makes a provision for passing of resolution
by postal ballot. Now, the companies may get the resolutions passed by means of postal
ballots instead of transacting the business in general meeting. This will be discussed in detail in
Art. 15.16.

15.13. ORDINARY RESOLUTION

It is the resolution which is passed, at a validly called general meeting, by simple majority of
the members i.e., where the votes cast in favour of the resolution exceed the votes cast
against it. The voting may be either by show of hands or electronically or by polls. In
determining the simple majority, all the votes cast by the members whether personally or by
proxy are considered. The casting vote of the chairman is also taken into account [Section
114(1) The casting vote means the deciding vote in case the members are equally divided.

In determining whether the resolution has been passed by simple majority, only the votes cast
at the meeting shall be considered. If the votes cast in favour of the resolution exceed the
votes cast against it, the resolution is said to be passed. If certain members abstain from
voting i.e., do not cast their votes, then their presence shall not be taken into account. Thus,
only the votes cast in favour of the resolution and against the resolution are counted. And the
votes remaining neutral are not considered either way.

EXAMPLE 15.8. At a general meeting of the company, 2,000 members were entitled to vote.
But only 1,500 members were present at the meeting. Out of these 1,500 members, 501
members voted in favour of the resolution, and 500 members against the resolution. And the
remaining 499 members remained neutral i.e., did not cast their votes. In this case, the
resolution is passed by simple majority. Here, the total votes cast at the meeting were 1001.
And the votes cast in favour of the resolution were more than the votes cast against the
resolution.
An ordinary resolution is sufficient to carry out any matter within company's powers unless
the Companies Act, the memorandum or articles of association expressly requires it to be
carried out in some other manner (i.e., by special resolution or by resolution requiring a
special notice). Thus, to pass annual accounts, to declare dividends, to hold elections of
directors, to appoint auditors, etc. the ordinary resolution is sufficient.

15.14. SPECIAL RESOLUTION

It is the resolution which is passed, at a validly called general meeting, by special majority of
the members i.e., by the support of 3/4th majority of the members present and entitled to
vote at the meeting. The voting may be either by show of hands or electronically or by polls. In
determining the 3/4th majority, all the votes cast by the members, whether personally or by
proxy or by postal ballot, are considered [Section 114(2)]. In case of special resolution, it is
also necessary that the intention to propose the resolution as special resolution should have
been specified in the notice calling the general meeting of the members [Section 114 (2)]. It
may be noted that the requirement of giving notice specifying the 'intention to propose the
resolution as a special resolution' is mandatory (i.e., legally compulsory). If such an intention is
not made clear, the resolution would be ineffective.

In determining whether the resolution has been passed by special majority only the votes cast
at the meeting shall be considered. If the votes cast in favour of the resolution are three times
the votes cast against it, the resolution is said to be passed. In this case also, the votes
remaining neutral are not considered either way.

EXAMPLE 15.9. At a general meeting of the company, 2,000 members were entitled to vote.
But only 1,500 members were present at the meeting. Out of these 1,500 members, 900
members voted in favour of the resolution and 300 members against the resolution. And the
remaining 300 members remained neutral i.e., did not cast their votes. In this case, the
resolution is passed by special majority. Here the total votes cast at the meeting were 1,200.
And the votes cast in favour of the resolution were three times the votes cast against the
resolution.

The special resolution is necessary to take decision relating to important matters affecting the
constitution, administration and affairs of the company. The articles of association may
provide that certain types of matters shall be approved by special resolution. The Companies
Act has also prescribed the formality of special resolution in certain specified cases. The
matters requiring the sanction of shareholders by a special resolution have been stated in
Appendix III of this book.

Some of the important matters, requiring special resolution, are as under:

1. To alter the memorandum of association for changing the place of registered office from
one State to another, or for changing the objects of the company [Section 13]. 2. To change
the name of the company [Section 13].

3. To alter the articles of association having the effect of conversion of a public company into
private or vice versa [Section 14].

4. To issue further shares to the outsiders without first being offered to the existing
shareholders [Section 62].

5. To reduce the share capital of the company [Section 66].

6. To shift the registered office of the company out of the local limits of the city, town or
village in which it is situated [Section 12].

7. To request the Central Government to appoint inspectors to investigate the affairs of the
company [Section 212].

8. To obtain an order from the Tribunal for winding up of the company [Section 271]. 9. To
wind up the company voluntarily [Section 304].

10. To direct the manner of disposing company's books and papers when in case of voluntary
winding up, the affairs of the company have been completely wound up [Section 347].

Note: Sections mentioned above are those of the new Companies Act, 2013.

15.15. RESOLUTION REQUIRING SPECIAL NOTICE

The legal provisions relating to special notice are now incorporated in Section 115 of the
Companies Act, 2013 which were earlier provided in Section 190 of the Companies Act, 1956.
New Section 115 has been notified to be effective w.e.f. 1.4.2014 vide MCA Notification dated
26.3.2014.

We have discussed in Arts. 15.13 and 15.14 the two main kinds of resolutions namely the
ordinary, and special. In addition to these, there is another type of resolution which requires
special notice to be given to the company. As a matter of fact, a resolution requiring special
notice is not an independent class of resolutions. It is only a kind of ordinary resolution in
which a prior notice of intention to move the resolution has to be given to the company.

In those cases, where the special notice of the intention to move the resolution is required by
the Companies Act or by the articles of association of the company, the same must be given.
Such a notice of intention shall be given to the company by such number of members .
  who hold not less than 1% of the total voting power; or

• who hold shares on which the prescribed amount not exceeding Rs. 5 lakhs has been
paid-up.

On receipt of such notice, the company shall give the notice of the proposed resolution to its
members in such manner as may be prescribed. In the following cases, the special notice is
required for the resolution:

1. Appointment of the auditors other than the retiring auditor [Section 140]. 2. Providing
expressly that the retiring auditor shall not be re-appointed [Section 140].

3. Removal of a director before the expiry of his term [Section 169].

4. Appointment of a director in place of the director removed before the expiry of his term
[Section 169].

Note: The above cases are specified in the Companies Act, 2013 itself. The articles of
association may also provide for the matters in respect of which special notice is required.

Changes brought in by the Companies Act, 2013

1. Eligibility criteria: An eligibility criteria for giving special notice has been
introduced. Now the notice of intention to move special resolution can be given
by the members who hold 1% of the total voting power or the shares on which
Rupees 5 lakhs has been paid up. Earlier there was no such requirement.

2. Time period of notice dispensed with: The requirement of giving 14 days

notice to the company, and 7 days notice by the company, has been dispensed
with. Now the notice is to be given in such manner as may be prescribed.

15.16. RESOLUTION BY POSTAL BALLOT

The legal provisions relating to postal ballot are now incorporated in Section 110 of the new
Companies Act, 2013, which were earlier contained in Section 192-A of the Companies Act,
1956. The new Section 110 has been notified to be effective w.e.f. 1.4.2014 by MCA
Notification dated 26.3.2014.

The voting by postal ballot, by post or electronic mode, shall be applicable to all companies
whether listed or unlisted. Thus, instead of transacting a business at general meeting, the
companies may also get the resolution passed by postal ballot.

Section 110 makes the following further provisions with regard to postal ballot:
1. Mandatory postal ballot voting on notified items [Section 110(1)(a)]: The Central
Government may declare by notification that in respect of the notified items of business, the
resolution shall be passed by means of postal ballot.

In such notified items of business, the company is compulsorily required to transact business
only by means of postal ballot.

2. Optional postal ballot voting [Section 110(1)(b)]: The company may transact any other
business by postal ballot instead of transacting such business at a general meeting except the
following:

(a) ordinary business; and

(b) any business in respect of which directors or auditors have a right to be heard at any
meeting.

3. Prescribed manner [Section 110(1)(b)]: The postal ballot voting shall be conducted by the
companies in such manner as may be prescribed by the rules made by the Central
Government.

4. Passing of resolution [Section 110(2)]: If the resolution is assented to by the requisite

majority of shareholders by means of postal ballot, it shall be deemed to have been duly
passed at a general meeting convened in that behalf.

Changes brought in by the Companies Act, 2013

1. Now the provisions of postal ballot voting shall be applicable to all

companies whether listed or unlisted. Earlier under Section 192-A, these
were applicable to the listed companies only.

2. The manner of conducting business by postal ballot shall be such as

may be prescribed by rules.

15.17. REGISTRATION OF RESOLUTIONS AND AGREEMENTS

There are certain resolutions and agreements which must be filed with the Registrar within 30
days of the passing of the resolution or making of the agreement. These are contained in
Section 117 of the Companies Act, 2013 which are as under:

15.17.1. Registration of Resolutions

Following are the resolutions which are to be registered with the Registrar:
1. Special resolutions.

2. Resolutions which have been agreed to by all the members of the company, which if not so
agreed would have to be passed as special resolutions.

3. Any resolution of the Board of Directors of the company relating to the appointment, re-
appointment or renewal of appointment, or variations of the terms of appointment of a
managing director.

4. Resolutions which have been agreed to by all the members of any class of shareholders,
which if not so agreed would have to be passed by some particular manner.

5. All resolutions which effectively bind all the members of any class of shareholders though
not agreed to by all those members.

6. Resolutions passed by a company giving the following powers to its Board of Directors: (a)
To sell, lease or otherwise dispose of the whole or substantially the whole of the undertaking
of the company. (b) To borrow money exceeding the aggregate of the paid up capital and free
reserve of the company.

7. Resolutions requiring a company to be wound up voluntarily.

8. Resolutions passed at meetings of the Board in pursuance of Section 179(3). These have
been additionally included in the scope of the section.

9. Any other resolution as may be prescribed and placed in the public domain.

15.17.2. Registration of Agreements

Following are the agreements which are to be registered with the Registrar:

1. Any agreement executed by the company relating to the appointment, re-appointment,

renewal of appointment or variations of the terms of appointment of a managing director.

2. Agreements which have been agreed to by all the members of any class of shareholders,
which if not so agreed would have to be effective only if approved by some particular majority
or in some particular manner.

3. All agreements which effectively bind all the members of any class of shareholders though
not agreed to by all those members.

The copy of every resolution or agreement stated above must be filed with the Registrar
within 30 days after the passing of the resolution or making of the agreement. It may also be
filed with additional fee within a further period of 270 days [Section 403]. The Registrar shall
record the same. [Section 117 (1)].

If the company fails to file the resolution or agreement within the time stated above, then the
penalty is as under [Section 117(2)]:

(a) The company shall be punishable with minimum fine of Rs. 5 lakhs, but which may extend
to Rs. 25 lakhs.

(b) Every officer in default, including liquidator of the company shall be punishable with
minimum fine of Rs. one lakh which may extend to Rs. 5 lakhs.

15.18. CIRCULATION OF MEMBERS' RESOLUTION

The legal provisions relating to circulation of members resolution have been amended by the
Companies Act, 2013, and are incorporated in Section 111 of the new Act which were earlier
provided in Section 188 of the Companies Act, 1956, Section 111 has been made effective
w.e.f. 12.9.2013, and the text has been revised accordingly.

The provisions of Section 111 may be discussed as under:

1. Circulation of resolution on written requisition: Sometimes, certain members of the

company desire to propose a resolution at the next annual general meeting of the company,
and also desire that the explanation in advance be circulated among the members. In such
cases, they may serve a requisition in writing on the company requiring the company to give a
notice of resolution to the members and to circulate the explanation to the members. On
receiving the requisition of the members, the company is bound [Section 111 (1)].

(a) To give to the members, the notice of any resolution which is intended to be moved at the
next annual general meeting [Section 111(1) (a)]

(b) To circulate to the members, any statement with respect to the matter referred to in any
proposed resolution, or with respect to any business to be dealt with at the meeting [Section
111 (1)(b)].

2. Requisite number of members for making requisition for circulation: The requisition for
circulation of resolution must be made by such number of members as stated below [Section
111(1); 100]:

(a) In case of company having share capital, by such number of members who hold at least
1/10 of the paid up capital of the company and have the voting rights; or
(b) In case of company having no share capital, by such number of members who have at least
1/10th of the total voting power.

Note: Under, earlier Section 188 of the Companies Act, the requisition of members was to be
signed either (i) by the members who hold at least 1/20 of the total voting power of all the
members having right to vote on the resolution, or (ii) by at least 100 members who have the
right to vote and hold the shares on which at least a sum of one lakh rupees has been paid up.

3. Conditions for notice and circulation by the company: On a valid written requisition made
by the members, the company is bound to give notice of the resolution or to circulate the
statement only if the following conditions are satisfied [Section 111(2)]:

(a) A copy of requisition signed by all the requisitionists must be deposited at the registered
office of the company. In case the requisition requires a notice of resolution to be given to the
members, it must be deposited at least 6 weeks before the meeting. And in any other case, at
least 2 weeks before the meeting.

(b) A sum reasonably sufficient to meet the expenses of the requisition must also be deposited
alongwith the requisition.

On the fulfilment of the above conditions, the company becomes bound to give the notice of
the intended resolution and to circulate the explanatory statement. It may be noted that
these conditions (i.e., requirements of Section 111(2)) are mandatory and must be complied
with strictly. Thus, where the consenting shareholders did not sign as requisitionists, but
instead gave a power to a single shareholders to represent them at the meeting, it was held
that there was no sufficient compliance of the provisions of Section 188 (4) [new Section
111(2)].

4. Relief from circulation of statement: The company may be received from circulation of
statement. The company is not bound to circulate any statement if on the application of the
company or of any aggrieved person, the Central Government is satisfied that this right to
circulation of statement is being abused to secure needless publicity for defamatory matter.
The Central Government¹ may relieve the company of the burden to circulate the statement
[Section 111(3)].

Notes: 1. The new Section 111 discussed above does not give any exemption to a banking
company. Under the old Section 188(b), banking company was not bound to circulate any
statement, if in the opinion of its Board of Directors, the circulation would injure the interest
of the company. 2. In case of default in complying with provisions of section 111, discussed
above, the company and its every office in default shall be liable to penalty of ₹ 25,000. Under
Section 188 of the Companies Act, 1956, the penalty was 50,000.
15.19. MINUTES OF PROCEEDINGS OF MEETINGS

The legal proceedings relating to the minutes of meeting are now provided in Section 118 and
119 of the Companies Act, 2013 which correspond to Section 193, 194, 195 and 197 of the
Companies Act, 1956. Sections 118 and 119 have been notified to be effective w.e.f. 1.4.2014
vide MCA Notification dated 26.3.2014.

The term 'minute' may be defined as the written record of the proceedings of a meeting.
Every company must keep a fair and correct record of all proceedings of every general
meeting, and of every meeting of its Board of Directors or of every committee of the Board.
The record is kept by making the entries in the book kept for that purpose. This record is
known as the minutes, and the book in which the record is kept is known as 'minute book'.

Now the minutes are also to be maintained for resolutions passed by postal ballot.

The legal provisions relating to the minutes of proceedings of meetings may be discussed as

1. The minutes of proceedings of the meeting must be recorded in the minute book within 30
days of the conclusion of every meeting [Section 118 (1)].

2. The minutes of each meeting must contain a fair and correct summary of the proceedings at
the meeting [Section 118 (2)].

3. All the appointments made at the meeting must be included in the minutes of the
proceedings [Section 118 (3)].

4. In case of a meeting of the Board of Directors or of a committee of the Board, the minutes
must also contain the following particulars [Section 118 (4)]: (a) The names of the directors
present at the meeting; and

(b) On the passing of each resolution at the meeting, the names of the directors, if any, who
dissent or do not concur in the resolution passed at the meeting.

5. The chairman of the meeting has the discretion to exclude from the minutes any matter,
which, in his opinion, is defamatory, irrelevant, immaterial or detrimental to the interest of
the company [Section 118 (5)].

6. The pages of the minute book must be consecutively numbered [Section 118 (1)]. 7. The
minutes book of the meetings, maintained as stated above, is to be prepared and signed in
such manner as may be prescribed [Section 118(1)].
8. If default is made in complying with the above provisions in respect of any meeting, the
company shall be liable to a penalty of Rs. 25,000 and its every officer in default shall be liable
to a penalty of Rs. 5,000 [Section 118(11)].

9. The minutes books are to be maintained at the registered office of the company. These
books are open to inspection of members during business hours [Section 119 (1)].

10. The minutes of meetings, kept in accordance with the above mentioned provisions of
Section 118, are evidence of the proceedings recorded therein [Section 118(7)].

11. In case the minutes of a meeting have been kept properly, it shall be presumed that such a
meeting has been duly called and held. Moreover, the proceedings at the meeting and the
appointments of directors or key managerial personnel, auditor or company secretary in
practice are also considered to be valid. These presumptions are, however, rebuttable. This
means that these points are presumed to be true unless contrary is proved by some other
evidence [Section 118(8)].

15.20. ADJOURNMENT OF A MEETING

The expression 'adjournment of a meeting' means the suspension of meeting after it has been
duly commenced to be resumed at a later time or date. Sometimes, a meeting is adjourned
without specifying the time at which it will be resumed. In such a case, the meeting is said to
have adjourned sine die. Following points are important to note in connection with the
adjournment of a meeting:

1. The power of adjournment vests in the majority of those present at the meeting. However,
for the proper conduct of a meeting, the power of adjournment is generally conferred upon
the chairman.

2. The chairman should exercise the power of adjournment in good faith and for proper
conduct of the meeting. He cannot adjourn the meeting at his will without there being a good
cause for such an adjournment. He should exercise this power in accordance with the
provisions made in company's articles in this regard.

3. The chairman cannot arbitrarily adjourn a meeting. If he does so, his act will be irregular
and it will be open to the meeting to select another chairman and proceed with the business.

4. The adjourned meeting is simply the continuation of the original meeting as such a fresh
notice is not necessary if the time, date and place of holding the adjourned meeting are
decided and declared at the time of adjournment. However, if the meeting is adjourned sine
die, fresh notice of adjourned meeting is necessary.
A three days notice to the members would also be required if the meeting was a adjournedfor
want of quorum [Section 103(2), proviso].

5. The old proxies can be used at the adjourned meeting and the meeting where old proxies
have been used will be a proper meeting.

Notes: The 'postponement of a meeting' means to defer the holding of a meeting before the
date already fixed for a meeting has arrived. In simple words, to defer a meeting without
waiting for the date of meeting is the postponement of the meeting. It is the act of a
convening authority as the holding of a meeting is deferred before the date of meeting. On
the other hand, the adjournment is the act of the meeting itself, as the meeting is suspended
after it was being held.
 UNIT - V
WINDING UP OF A COMPANY

20.1. INTRODUCTION

The term 'winding up' of a company may be defined as the proceedings by which a company is
dissolved (i.e., put to an end). According to Prof. Gower¹.

"Winding up of a company is the process whereby its life is ended and its property is
administered for the benefit of its creditors and members. And an administrator, called a
liquidator, is appointed and he takes control of the company, collects its assets, pays its debts
and finally distributes any surplus among the members in accordance with their rights"

Thus, the winding up is the process of putting an end to the life of the company. And during
this process, the assets of the company are disposed of, the debts of the company are paid off
out of the realised assets or from the contribution of its members. If any surplus is left, it is
distributed among the members in proportion to their rights in the company. The winding up
of the company is also called the liquidation' of the company. The process of winding up
begins after the Tribunal passes the order for winding up. And till such order is passed there
cannot be any winding up in fact.

It may be noted that the company is not dissolved immediately on the commencement of the
winding up proceedings. As a matter of fact, the winding up of a company precedes its
dissolution i.e., the winding up is the prior stage and the dissolution, the next. On the
dissolution, the company is no more in existence, and its name is struck off by the Registrar
from the register of companies. But on the winding up, company's name is not struck off from
the register. Thus, in between the winding up and dissolution, the legal status of the company
continues and it can be sued in a Court of Law.

The company is dissolved by an order of the Tribunal. Until the company is dissolved by the
Tribunal order, it remains a tax payer.

20.2. MODES OF WINDING UP

The following two types of the modes of winding up are specified in Section 270 of the
Companies Act, 2013:

1. Compulsory winding up (i.e., winding up by the Tribunal);

2. Voluntary winding up (i.e., winding up without the intervention of the Tribunal). The powers
to order winding up were earlier vested in the court. Now these have been vested in the
Tribunal to be known as the National Company Law Tribunal which is to be constituted under
Section 408 of the Companies Act, 2013. On the Commencement of the new Act, these
powers would be exercised by the Tribunal. The text has been amended accordingly.
20.3. COMPULSORY WINDING UP (i.e., WINDING UP BY THE TRIBUNAL)

The winding up of a company by an order of the Tribunal is called the compulsory winding up.
Section 271 of the Companies Act, 2013 contains the cases (i.e., grounds) in which the
company may be wound up by the Tribunal. The Tribunal may wound up the company on a
petition submitted to it on any of these grounds. The power of the Tribunal to order winding
up, on these grounds, is discretionary. The Tribunal is not bound to make an order of winding
up.

Section 271 of the Companies Act, 2013 has deleted three existing grounds for winding up,
namely (a) default in providing statutory report to the Registrar or default in holding statutory
meeting, (b) failure to commence business within one year of incorporation or suspension of
business for a whole year; (c) reduction in company membership below the minimum
prescribed limit. And the following new grounds have been added by this section, namely:

(a) The affairs of the company have been conducted in a fraudulent manner; (b) The company
was formed for fraudulent and unlawful purpose;

(c) The persons concerned in formation or management of the company have been guilty of
fraud, misfeasance, or misconduct.

All the grounds/circumstances for winding up of the company as provided in Section 271, are
as under:

1. Company's inability to pay its debts [Section 271(1)(a)]: If, the company is unable to pay its
debts, then the Tribunal may order the winding up of the company.

The term 'debt' here means a definite sum of money which is due and immediately (i.e..
presently) payable by the company. A conditional liability (i.e., amount payable upon some
condition) is not a debt unless the condition has happened.

The term 'inability to pay' here means company's inability to pay its current liabilities. In other
words, it is the company's inability to pay its liabilities (i.e., claims) as and when they arise in
the ordinary course of business. Thus, inability to pay debts is to be taken in the commercial
sense. The test of 'inability to pay debts', therefore, is whether the company can pay its
existing liabilities so long as it is a going concern. If the company is not in a position to meet its
existing liabilities, a petition for winding up is maintainable even if it may have very valuable
assets not presently realisable. The Companies Act recognises the following three cases in
which a company shall be deemed to be unable to pay its debts [Section 271(2)]:
(a) If a creditor to whom the company owes a sum exceeding One lakh, has served on the
company, at its registered office, a demand notice for the payment of his amount. And the
company has failed to pay the sum within 21 days after the receipt of such demand, or to
provide adequate security or restructure or compound the debt to the reasonable satisfaction
of the creditor [Section 271(2)(a)]².

(b) If a creditor of the company obtains a decree from any court or Tribunal for the payment of
his debts by the company, and the execution issued on the decree in favour of the creditor is
returned unsatisfied in whole or in part [Section 271 (2) (b)].

(c) If it is proved to the satisfaction of the Tribunal that the company is unable to pay its debts
[Section 271 (2) (c)].

It is important to note that under clause (a) above, a winding up petition can be filed against
the company only if the company owes an amount exceeding rupees one lakh to a creditor.
There is no such condition as to amount in respect of clause (b). The unsatisfied execution of a
decree for any amount, however, small, amounts to inability to pay debts. The cases of
commercial insolvency (i.e., where a company is not in a position to meet its current liabilities)
are covered under clause (c). Commercial insolvency may be presumed from the company's
silence inspite of statutory notice.

EXAMPLE 20.1. A company borrowed rupees fifteen lakh from A, a money-lender, repayable
in 10 equal instalments. The company repaid 9 instalments on due states, but did not pay the
last instalment in time. Consequently, A served a notice upon the company demanding the
repayment of the amount due. In spite of the notice, the company did not pay anything, nor
did the company give any reason for not paying the amount. Three weeks passed thereafter.
Here the company has neglected to pay the amount even after the service of notice of
demand. In this case, A may file a winding up petition under clause (a) above, and the Tribunal
may order winding up of the company if it is proved that the company has omitted to pay the
amount without reasonable excuse..

Notes: 1. In computing the time of 21 days, the day on which the notice is despatched and the
day on which it is served should both be excluded.

2. A notice of demand giving less than 21 days time does not make the demand ineffective. It
only postpones the right of action to a date after the expiry of three weeks.

EXAMPLE 20.2. A company owed 50,000 to A, a money-lender. As the company did not pay
the amount on due date, A filed a suit against the company for the recovery of the amount
alongwith the interest. The court decided the suit in favour of A, and passed a decree (i.e.,
final order) in this behalf. On the basis of the decree, A filed execution proceedings in the
court. And the court issued execution i.e., passed an order to recover the amount of decree
from the company. The company paid the principal amount, but did not pay the interest
amount. In this case, A may file a winding up petition under clause (b) above, and the Tribunal
may order winding up of the company³.

Notes: 1. In execution proceedings, a person against whom a decree is passed is ordered to

pay the amount for which decree is passed. In fact, by way of execution proceedings, a
practical shape is given to a decree i.e., a court's final order in which a person is held liable to
pay.

2. A creditor who has obtained a money decree against the company is not bound to initiate
execution proceedings in order to bring his case under clause (b) for the purpose of winding
up. He may also give a statutory notice to the company as required under clause (a) above if
the amount of the decree exceeds one lakh, and may file a winding up petition if the company
neglects to pay.

EXAMPLE 20.3. A company borrowed a huge amount of money in order to carry on its
activities on Ilarge scale. At one stage, it was found that the company was heavily indebted as
its liabilities amounted to rupees ten lacs. The current assets of the company were insufficient
to meet its liabilities. However, its total assets amounted to rupees fifteen lacs (including land,
building and machinery worth rupees seven lacs). All the assets of the company were under
mortgage, and there was no chance of business progressing. A winding up petition against the
company was filed by the Registrar on the ground that the company was commercially
insolvent i.e., unable to pay its debts. The company contested the petition on the ground that
its total assets far exceeded its total liabilities. In this case, the winding up may be allowed as
the company is unable to pay its current demands. As a matter of fact, for the purpose of
knowing company's ability to pay, the value of such assets for which the company cannot
carry on its business (eg., land, building, machinery etc.) are not to be taken into account.

EXAMPLE 20.4. A company issued a cheque for the repayment of a deposit. The cheque was
dishonoured. The company admitted liability and asked for one month's time for the
repayment. The time was granted but even then the company could not pay the amount. It
was held that the circumstances created a presumption of company's inability to pay its debts,
and the company was liable to be wound up. Gujarat]

However, a company cannot be said to be unable to pay its debts if it has substantial profits
and current assets. [Trend Designs Ltd., Re, (1998) 29 Corpt. LA 135 (Kerala)]. A winding up
petition on the ground of company's inability to pay can be filed by the creditor, contributory
or Registrar of Companies.

Above, we have noted the cases where the winding up of a company may be allowed by the
Tribunal on the ground of company's inability to pay debts. However, in the following cases, a
winding up order will not be made by the Tribunal:

(a) Where the debt is not presently payable by the company.

(b) Where the debt is not a definite (i.e., certain) amount, and includes unliquidated damages.

(c) Where the debt has become time-barred on the date of petition. A 'time barred debt' is
that which cannot be recovered due to the expiry of limitation period within which it should
have been recovered.

(d) Where the debt is bona fide (i.e., honestly) disputed by the company. In other words, when
there is a bona fide and reasonable dispute about the debt. In such cases, there will be valid
and genuine excuse for non-payment of the debts. However, if the dispute is not real but is
raised by the company for the sake of avoiding payment or raising a controversy on flimsy (or
false) grounds, the winding up order may be passed by the Tribunal.

(e) Where there is a bona fide counter claim put forward by the company. The 'counter claim'
means the claim (i.e., amount) which the company has to recover from the creditor who has
presented the petition. In such cases also, there will be valid excuse for nonpayment of the
debts.

2. Special resolution by the company [Section 271(1)(b)]: If, the company passes a special
resolution to the effect that the company be wound up by the Tribunal then, the Tribunal may
order the winding up of the company on a petition (i.e., application) presented to it by the
company or contributory.

It important to note that the passing of special resolution by the company itself is a ground for
presenting a petition to the Tribunal. And no other ground (or reason) is required for
presenting the petition. Thus, a winding up petition under this clause is maintainable simply if
the company passes a special resolution that it be wound up by the Tribunal. However, the
Tribunal is not bound to order the wind up of the company. It has discretionary power in this
regard, and may refuse to wind up the company, when it is opposed to public interest or
company's interest.

EXAMPLE 20.5. A & Co. Ltd. passed a special resolution to the effect that it be wound up by
the Tribunal, and presented a petition to the Tribunal for its winding up. B, one of company's
creditors filed objections on the ground that the company cannot opt for winding up by
merely passing a special resolution. In this case, the petition is maintainable, and the Tribunal
may pass the winding up order if it is not opposed to the interest of the company or public
interest.

A winding up petition under this clause can be presented by the company or the contributory.
The persons who are entitled to apply for winding up on different grounds will be discussed in
detail in Art. 20.4.

Note: The winding up under this clause is not common because normally the members prefer
to wind up the company voluntarily as will be discussed in Art. 20.14.
3. Acting against interest of sovereignty and integrity of India [Section 271 (1)(c)]: If the
company has acted against the interests of

• the sovereignty and integrity of India;

• the security of the state;

• the friendly relations with foreign states;

• the public order, decency or morality,

then the company may be wound up by the Tribunal.

It is important to note here that on this ground, the application (i.e., petition) for winding up
can be made by the Central Government or the State Government [Section 272 (1)(g)].

4. Company becoming a sick company [Section 271 (1)(d)]: If the company has become a sick
company and its revival is not feasible and the revival scheme is not approved by the
creditors, then the Tribunal shall order the winding up of the company.

Note: A company may be declared as a sick company by the Tribunal when on the demand by
secured creditors representing 50% or more of its outstanding amount of debt, the company
has failed to pay the debt within 30 days of the service of notice of demand [Section 253].

5. Conducting company's affairs in fraudulent manner [Section 271(1)(e)]: It is a new clause

providing three new grounds for winding up of the company by the Tribunal. Under this
clause, a company may be ordered to be wound up by the Tribunal in the following cases:

(a) If the affairs of the company have been conducted in a fraudulent manner; or

(b) If the company was formed for fraudulent and unlawful purpose; or

(c) If the persons concerned in the formation or management of its affairs have been guilty of
fraud, misfeasance or misconduct in connection their with.

The Tribunal may order the winding up of the company under this clause if he is of the opinion
that any of the above circumstances exist and it is proper that the company be wound up. The
Tribunal may order the winding on the above grounds on an application made to it by the
Registrar or by any other person authorised by the Central Government by notification under
this Act.

6. Default in filing financial statements or annual return [Section 271(1)(f)]: If the company
has made a default in filing with the Registrar its financial statements or annual returns for
immediately preceding 5 consecutive financial years, then the company may be wound up by
the Tribunal.

7. Just and equitable to order winding up [Section 271(1)(g)]: If, the Tribunal is of the opinion
that it is just and equitable that the company should be wound up then, the Tribunal may
order the winding up of the company. This clause gives a very wide discretionary power to the
Tribunal to order the winding up whenever it appears desirable.

Following points are important to note with regard to this clause:

(a) The words 'just and equitable' are not to be interpreted as covering the cases of like nature
as discussed above.

(b) Under this clause, the Tribunal may order winding up on any ground.

(c) There must be some strong ground for winding up of the company. The Tribunal should
give due weight to the interest of the company, its employees, creditors and shareholders.
The interest of general public should also be considered.

(d) The Tribunal may refuse to make an order of winding up if it is of the opinion that some
other remedy is available to the petitioner, and instead of pursuing other remedy, he is acting
unreasonably in seeking the winding up of the company [Section 273(3)].

(e) A winding up petition on 'just and equitable' ground can be filed by a contributory,
Registrar of Companies or by a person authorised by the Central Government.

Following are some of the circumstances in which the winding up on 'just and equitable'
grounds has been allowed :

(i) Complete deadlock in the management of the company: Sometimes, there is complete
deadlock in the management of the company. In such cases, the Tribunal may order the
winding up of the company on just and equitable ground. The 'deadlock' in company's
management occurs where the directors lose confidence in each other and disagree on each
and every matter.

EXAMPLE 20.6. A and B were the two shareholders in a private limited company and were the
only directors of the company. They had the equal voting rights. The articles of association
provided that any dispute would be resolved by arbitration. A dispute arose which was sent to
arbitration. But one of them did not agree with the decision of the arbitration. Thereafter,
they became so hostile to each other that they did not agree on any point. Even they were
speaking through secretaries only. It was held that there was a complete deadlock in the
management, and the company was ordered to be wound up. [Re Yenidijije Tobacco Co. Ltd.
(1916) 2 Ch. 420; Subsequently applied and considered in cases reported in (1966) 2 Company
Law Journal 115; (1970).1 Company Law Journal 213].
(ii) Failure of company's main object: Sometimes, the main object of the company fails to
materialise. In such cases, the Tribunal may order the winding up of the company on just and
equitable grounds.

EXAMPLE 20.7. A company was formed for the purpose of manufacturing coffee from dates
under a German patent to be granted by the Government of Germany. The German patent
was never granted. But the company acquired Swedish patent, and started manufacturing
coffee from dates. Two shareholders of the company filed a winding up petition on the ground
that the main object of the company has failed, and it was not possible for the company to
carry out the object for which it was formed. It was held that it was 'just and equitable' to
wind up the company.

Similarly, where the only business of a company was life insurance business, it was ordered to
be wound up on just and equitable ground when the life insurance business was taken over by
the Central Government.

However, a winding up order is not passed on the basis of a temporary difficulty which does
not make it impossible for the company to carry out its objects.

(iii) Recurring losses: Sometimes, it is not possible for the company to carry on the business
except at losses i.e., there is no reasonable hope of trading at a profit. In such cases, the
Tribunal may order the winding up of the company on just and equitable grounds.

EXAMPLE 20.8. A company was carrying on its business at losses, and was paying its debts by
making new calls on members. Moreover, there was no chance of earning profits in the near
future. In this case, the company is liable to be wound up on just and equitable grounds.

However, a winding up order is not passed by the Tribunal on the ground that the company
has made losses in the current year and is likely to make further losses. As a matter of fact, a
mere apprehension on the part of shareholders that losses will occur in future is no ground for
winding up. To obtain a winding up order from the Tribunal, it must be shown that there is no
reasonable prospect of earning profit.

(iv) Aggressive or oppressive policy of majority shareholders: Sometimes, the majority

shareholders adopt an aggressive or oppressive policy towards the minority shareholders. In
such cases, the Tribunal may order the winding up of the company on 'just and equitable'
ground.

EXAMPLE 20.9. The directors of a company were able to exercise dominating influence on the
management of the company. The managing director of the company refused to hold
meeting. The dividends were also not paid to the shareholders, with a view to squeezing out
the minority by purchasing their shares at an under value. In this case, the company is liable to
be wound up on just and equitable ground as the minority is being disregarded, and the
majority is using their powers unfairly.

(v) Incorporation of company for fraudulent or illegal purpose: Sometimes, the company is
incorporated for fraudulent or illegal purposes. In such cases, the Tribunal may order the
winding up of the company on just and equitable ground.

EXAMPLE 20.10. A, B and C were working in a firm carrying on the business of piano
manufacturing. After some time, they left the firm, and formed their own company for
carrying on a similar business. Moreover, they also used a part of the firm's name in the name
of their company. In this case, the company is liable to be wound up on just and equitable
ground as it was started for fraudulent purpose i.e., with the intention of competing with the
original firm.

EXAMPLE 20.11. A company was formed mainly for the purpose of conducting lottery. In this
case, the company is liable to be wound up on just and equitable ground as it was formed for
illegal purpose. [See Universal Mutual Aid and Poor Houses Association v. A.D. Thoppa Naidu,
AIR 1933 Madras 16] Similarly a company which has ceased to carry on its authorised business
and is engaged in illegal business, is liable to be wound up on just and equitable ground.

(vi) Public interest: Sometimes, it is in the public interest to wind up the company. In such
cases, the Tribunal may order winding up of the company on just and equitable ground e.g.,
where a company is wasting the capital resources of the country and befooling the small
investors, the court may order the winding up of such a company. However, the Tribunal may
refuse an order of winding up where it would operate against public interest. A creditor's
petition for winding up was rejected where the company was running profitably and had
about seven hundred workers who opposed the winding up.

Changes brought in by the Companies Act, 2013

The grounds on which a winding up petition may be filed before the Tribunal are
provided in Section 271 of the Companies Act, 2013. The changes brought in by this
provision are:

1. The following existing grounds under the earlier Companies Act, 1956, have been
deleted:
(a) Default in providing statutory report to the Registrar, or default in holding the
statutory meeting.
(b) Failure to commence business within one year of incorporation or suspension of
business for a whole year.
(c) Reduction in membership below the minimum prescribed limit.

2. The following new grounds of winding up have been added vide Section 271(1)(e):

(a) The affairs of the company have been conducted in a fraudulent manner;
 (b) The company was formed for fraudulent and unlawful purposes;

(c) The persons concerned in company's formation and management have been
guilty of fraud, misfeasance or misconduct in connection therewith.

20.4. PERSONS ENTITLED TO APPLY FOR WINDING UP

The petition for winding up of a company may be presented to the Tribunal by any of the
following persons [Section 271]*:

1. Petition by the company: The company may itself present a petition for its winding up on
any of the grounds discussed in the last article.

A petition for winding up presented by the company must be accompanies by a statement of

affairs in such form and manner as may be prescribed [Section 272(5)]. It is to be noted that a
winding up petition by a person on behalf of the company is valid only when the decision to
file the petition is taken by the company at its general meeting. If no such decision is taken,
then the winding up petition is not valid i.e., not maintainable.

EXAMPLE 20.12. A company passed a special resolution to the effect that it be wound up by
the court. However, the decision as regards the filing of winding up petition was not taken at
the general meeting. Before such decision was taken, an application for company's winding up
was made by the managing director of the company. The court rejected the application and
observed that "the petition by the company must have behind it the decision of the general
meeting. The managing director or director cannot constitute the company for this purpose".

It is also to be noted that a person filing a winding up petition on behalf of the company
must be duly authorised. Where a winding up petition was filed on behalf of the company by a
person who was not authorised by the board of directors, the petition was held to be invalid
i.e., not maintainable.

Note: A company may present a winding up petition on any of the grounds mentioned in
clauses (a) to (g) of Section 271 discussed in the last article. A special resolution enables the
company to present the winding up petition under clause (b). But such a resolution is not
necessary where the company bases the winding up petition on any of the grounds mentioned
in other clauses.

2. Petition by the creditors: The creditors of a company may present a petition in the Tribunal
for winding up of the company. The petition may be presented by any creditor (or creditors).
The creditors may present the petition on the ground that the company is unable to pay its
debts.

The expression 'creditor' means any person who has pecuniary (i.e., monetary) claim against
the company, and includes the following persons:

(a) A contingent (or prospective) creditor: He is a person whose claim is not immediately due.
A guarantor of company's debt, and the holder of a bill of exchange not yet due is a contingent
creditor. It is, however, important to note that a winding up petition filed by a contingent or
prospective creditor shall not be admitted unless the leave (i.e., permission) of the Tribunal is
obtained for the same [Section 272(6)].

(b) A secured creditor: He is a person who is having security (i.e., charge on company's assets)
for the repayment of his dues. He can apply for the winding up of the company even without
giving up his security.

(c) A debenture-holder: He is a person who holds the debentures of a company and has all the
ownership rights in respect of debentures e.g., right to get payment of interest or debt
amount directly from the company.

(d) A trustee for debenture-holders: He is a person who holds the debentures of the company
for the benefit of the debenture-holders, and is given all the rights of ownership in respect of
the debentures e.g., right to receive interest etc. directly from the company.

(e) The Central or State Government or a local authority to whom any public charge i.e., tax
etc. is due by the company.

In case of a winding up petition by the creditor, it is his dut to prove that he is in fact a creditor
i.e., the company owes a debt to him and he is entitled to recover the same.

3. Petition by the contributories: The term 'contributory' may be defined as every person who
is liable to contribute to the assets of a company in the event of its being wound up [Section
2(26)]. Thus, on the commencement of the winding up of a company, its shareholders are
called contributories. It is to be noted that the holders of fully paid up shares are also included
in the term 'contributory' though their liability is nil.

The contributories of a company may present a petition in the Tribunal for winding up of the
company. The petition may be presented by any contributory or contributories [Section
271(1)(c)]. Any contributory may present a winding up petition on any ground whether or not:
(a) the shares were originally allotted; or

(b) he has been the registered holder of the shares for at least 6 months out of the 18 months
before the commencement of the winding up; or
(c) the shares were devolved on him through the death of the former holder of shares [Section
272(3)].

Note: Under the earlier Companies Act, 1956, a contributory could file a winding up petition
only the was covered under the above stated three categories.

EXAMPLE 20.13. A, the shareholder of a company transferred his shares to B. The transfer
deed for the same was executed, stamped and dated in June, 2013. However, the company
registered the transfer of shares in B's name in October, 2013. The transferee of shares (ie., B)
presented a petition for winding up of the company in December, 2013. The company
contended that B's petition is not maintainable as he had not held the shares for 6 months
during the 18 months before the presentation of the winding up petition. The contention of
the company is not valid as under the Companies Act, 2013, such a requirement for filing
winding up petition by the contributory has become inoperative.

Note: The winding up petition may also be presented jointly by the company, creditor(s) and
contributory [Section 272(1)(d)].

4. Petition by the Registrar: The Registrar of Companies may also present a petition in the
Tribunal for winding up of the company [Section 271(1) (e)). The Registrar may present the
petition for winding up on all the grounds discussed in Art. 20.3 except the three mentioned
below, namely:

(a) that the company has, by special resolution, resolved that it be wound up by the Tribunal.
(b) that the company has become sick and it be wound up by the Tribunal.
(c) that it is just and equitable' to dissolve the company.

Following further provisions are also important to be noted with respect to winding up
petition by the Registrar:

(i) The winding up petition on the ground that the company is unable to pay its debts' can be
filed by the Registrar only when it appears him to be so either from the company's financial
condition as disclosed in its balance sheet, or from inspector's report under Section 210 about
investigation into company's affairs [Section 272(4), 1st proviso].

(ii) Before making a petition on any grounds, the Registrar must obtain the previous sanction
of the Central Government. And the Central Government shall not give its sanction unless an
opportunity has been given to the company to make its representations [Section 271(4),
proviso (2nd & 3rd)].

(iii) After obtaining the sanction of the Central Government, the winding up petition must be
filed by the Registrar within reasonable time. If there is unreasonable delay in presenting the
petition, the Tribunal will not recognise the sanction as valid.
EXAMPLE 20.14. A company was incorporated (i.e., formed) on 1st January, 1984. But it did
not start its business till 20th February, 1985 and there was no possibility of starting the
business in the near future. On 1st March, 1985, the Registrar of Companies obtained a
sanction of the Central Government for filing a winding up petition in the court on the ground
that the company has failed to commence its business within one year of incorporation.
However, the Registrar did not take any action for over three years. He filed a winding up
petition in the court only on 11th July, 1988. In this case, the winding up petition is not
maintainable as there is unreasonable delay in presenting the petition. [Based on Re Standard
Brands Ltd. (1980) 50 Company Cases 75 (Calcutta) where the Calcutta High Court has held
that the winding up petition must be presented by the Registrar within 3 years from the date
of sanction, otherwise it would become timebarred and not maintainable].

5. Petition by any person authorised by the Central Government: The Central Government
may authorise any person to present a petition in the Tribunal for winding up of the company
[Section 272(1)(f)]. The Registrar may also be authorised by the Central Government to
present a winding up petition.

6. Petition by the Central Government or State Government: The Central or the State
Government also file a winding up petition where the ground for petition is that the company
has acted against the interest of sovereignty and integrity of India, friendly relations with
foreign state etc. [Section 272(1)(g)]. may

Note: A copy of every winding petition filed by any of the above persons shall also be filed
with the Registrar, and the Registrar shall submit his views to the Tribunal within 60 days of
receipt of such petition [Section 272(7)]. It is a new provision which was not there under the
earlier Companies Act, 1956.

20.5. LEGAL PROVISIONS APPLICABLE TO COMPULSORY WINDING UP

The legal provisions applicable to the compulsory winding up, as contained in various
provisions of the Companies Act, 2013 may be discussed under the following heads:

1. Commencement of winding up [Section 357];

2. Powers of Tribunal on hearing petition [Section 273];

3. Consequences of winding up [Section 277 to 279]:

4. Provisional Liquidator, Official Liquidator and Company Liquidator [Section 273, 359, 275];

5. Winding up Committee [Section 277(4)];

6. Submission of report by the Company Liquidator [Section 281].

All these provisions are discussed in detail in the following pages.

20.5.1. Commencement of Winding Up

The winding up of the company shall be deemed to commence from the time of the
presentation of the petition, and not from the date of the winding up order by the Tribunal.
But where before the presentation of winding up petition to the Tribunal, the company passes
a resolution for the voluntary winding up of the company, the winding up shall be deemed to
have commenced from the time of the passing of the resolution [Section 357]. The date of
commencement of winding up is important for various matters such as liability of past
members, avoidance of fraudulent preferences etc.

Note: Under the Companies Act, 1956, a similar provision was made in Section 441 of the Act.
There is no change in the two provisions.

20.5.2. Powers of the Tribunal on Hearing Petition

On hearing a winding up petition, the Tribunal may exercise any of the following powers
[Section 273]:

(a) It may dismiss the petition with or without costs.

(b) It may make any interim order as it thinks fit.

(c) It may appoint a provisional liquidator of the company till the making of winding up order.

(d) It may make an order for winding up of the company with or without costs.

(e) It may make any order as it thinks fit.

Note: Under this provision, the Tribunal is time bound to pass an order within 90 days of the
date of receipt of winding up petition. There was no such provision under the earlier
Companies Act, 1956.

20.5.3. Consequences of Winding Up Order

The consequences of winding up order are contained in Sections 277 to 279 of the Companies
Act, 2013 which may be summed up as under:

1. Intimation of winding up order: On the making of the winding up order, the Tribunal shall
send the intimation of the winding up order to the Company Liquidator, Provisional Liquidator,
if appointed and the Registrar. Such an intimation is to be given within a period not exceeding
7 days from the date of passing of the order. [Section 277] Note: Under the Companies Act,
1956, such an intimation was to be given within two weeks from the date of passing such
order.

2. Endorsement by the Registrar: On receipt of the copy of winding up order, the Registrar
shall make an endorsement to that effect in his records relating to the company and notify in
the Official Gazette; and in case of listed companies the Registrar shall intimate the concerned
stock exchange. [Section 277(2)].

3. Order to be a notice of discharge: The winding up order shall be deemed to be a notice of

discharge to the officers and employees of the company. This is so because it ceases the
employment being conditional on the continued existence of the company, when the
company is wound up. But where the business of the company is continued, the order shall
not be considered a notice of discharge. [Section 277 (3)].

4. Effect of winding up order: The winding up order shall operate in favour of all the creditors
and of all the contributories of the company as if it had been made on the joint petition of a
creditor and contributory. [Section 278].

5. Suits/proceedings only with permission of Tribunal: After a winding up order has been
made, no suit or other legal proceeding shall be commenced against the company except with
the leave (permission) of the Tribunal. And if any suit or legal proceeding is pending at the
date of the order, it shall not be proceeded with except with the permission of the [Section
279]. Tribunal.

However, this provision shall not apply to any proceeding pending in appeal before the
Supreme Court or High Court [Section 279(2)].

Note: Under this clause, now, a time period of 60 days is provided to the Tribunal to dispose
of any application seeking leave of the Tribunal. This is a new provision.

20.6. PROVISIONAL LIQUIDATOR, OFFICIAL LIQUIDATOR AND COMPANY LIQUIDATORS

These are the officials who are appointed for conducting the proceedings of winding up. These
are discussed separately as under:

20.6.1. Provisional Liquidator

The provisional liquidator is appointed by the Tribunal under Section 273(1)(c) of the
Companies Act, 2013.

On the receipt of a winding up petition, the Tribunal may appoint a provisional liquidator of
the company till the making of a winding up order.
The provisional liquidator is appointed in special circumstances in order to protect the assets
of the company pending the hearing or disposal of the winding up pétition. As such, where
there is a danger to the assets of the company, the Tribunal may appoint a provisional
liquidator in order to protect the interest of the creditors and safeguard the properties of the
company.

Following further provisions may be noted in this regard:

1. Appointment from panel of professionals [Section 275(2)]: The provisional liquidator shall
be appointed:

(a) from a panel maintained by the Central Government

 consisting of the names of professionals such as chartered accountants, advocates, ; or

● company secretaries, cost accountantsconsisting of names of firms or body corporates

having such chartered accountants, advocates, company secretaries, cost accountants or such
other professionals as may be notified by the Central Government; or

(b) from a firm or body corporate of persons having a combination of such professionals as
may be prescribed and having at least 10 years' experience in company matters.

2. Intimation of appointment [Section 277(1)]: On the making of an order of appointment of a

provisional liquidator, the Tribunal shall cause an intimated of the same to be sent to the
provisional liquidator and Registrar within 7 days from the date of passing the order.

3. Filing of declaration with the Tribunal [Section 275(6)]: On his appointment, the
provisional liquidator shall file a declaration in the prescribed form with the Tribunal disclosing
conflict of interest, if any. Such declaration is to be filed with the Tribunal within 7 days from
the date of appointment.

4. Same powers as that of liquidator [Section 275(3)]: The provisional liquidator shall have
the same powers as that of the liquidator. However, the Tribunal may limit or restrict his
powers by an order appointing him or by subsequent order.

5. Term and conditions of appointment [Section 275(5)]: The terms and conditions of
appointment of a provisional liquidator and the fee payable to him shall be specified by the
Tribunal on the basis of task required to be performed, experience, qualification of such
liquidator and size of the company.

20.6.2. Official Liquidator

An official Liquidator is an official who helps the Tribunal in conducting and completing the
winding up proceedings. The Official Liquidator is defined in Section 2(61) of the Companies
Act, 2013 as an Official Liquidator appointed by the Central Government for the purposes of
winding up of companies by the Tribunal.

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 [Section 359(1)].

Following further provisions in the regard are:

1. The liquidators appointed by the Central Government shall be whole-time officers of the
Central Government [Section 359(2)].

2. The salary and allowances of the Official Liquidator shall be paid by the Central Government
[Section 359(3)].

3. The Official Liquidator shall exercise such powers and perform such duties as the Central
Government may prescribe [Section 360(1)].

4. The Official Liquidator may also exercise all or any of the powers as may be exercised by the
Company Liquidator under the Companies Act [Section 360(2)].

20.6.3. Company Liquidator

A Company Liquidator is also an official appointed for the purposes of the winding up of
companies.

Section 2(23) of the Companies Act, 2013 defines the Company Liquidator as under: Company
Liquidator, in so far as it relates to the winding up of a company means a person appointed as
Company Liquidator by

(a) the Tribunal in case of compulsory winding up (i.e., winding up by the Tribunal); or
(b) the company or creditors in case of voluntary winding up.

Thus, in case of compulsory winding up, Company Liquidator is appointed by the Tribunal.
Following further provisions be noted with regard to the Company Liquidator:

1. Appointment at the time of winding up order [Section 275(1)]: At the time of passing of
winding up order, the Tribunal shall appoint either an Official Liquidator or a liquidator (from
the panel of professionals maintained by the Central Government) as the Company Liquidator.

The panel of professional maintained by the Central Government has already been discussed
in case of the provisional liquidator. Further provisions in this regard are explained in the
following points.
2. Provisional Liquidator as Company Liquidator [Section 275(7)]: While passing a winding up
order, the Tribunal may also appoint a provisional liquidator, if already appointed by it, as the
Company Liquidator for the conduct of the proceedings for the winding up of the company.

3. Filing of declaration with Tribunal [Section 275(6)]: On his appointment, the Company
Liquidator shall file a declaration in the prescribed form with the Tribunal disclosing conflict of
interest, if any. Such a declaration is to be filed with the Tribunal within 7 days from the date
of appointment.

4. Terms and conditions of appointment [Section 275(5)]: The terms and conditions of
appointment of Company Liquidator and the fee payable to him shall be prescribed by the
Tribunal on the basis of task required to be performed, experience, qualifications of such
liquidator and size of the company.

20.7. WINDING UP COMMITTEE

The concept of 'winding up committee' is introduced by the Companies Act, 2013 to assist the
Company Liquidator in carrying out the liquidation proceedings.

We know that at the time of making the winding up order by the Tribunal, the Company
Liquidator is also appointed for conducting the liquidation proceedings. Now, the Company
Liquidator has been empowered under the Act to constitute a winding up committee to assist
him in the conducting liquidation proceedings. Legal provisions in this regard are made in
Section 277 of the Companies Act, 2013, which may be stated as under:

1. Constitution of winding up committee [Section 277(4)]: Within three weeks from the date
of passing of winding up order, the Company Liquidator shall make an application to the
Tribunal for constitution of a winding up committee to assist and monitor the progress of
liquidation proceedings.

The winding up committee shall comprise of the following persons, namely:

(a) Official Liquidator attached to the Tribunal;

(b) nominee of secured creditors; and

(c) a professional nominated by the Tribunal.

The Company Liquidator shall be the convener of the meetings of the winding up committee.

2. Functions of windings up committee [Section 277(5)]: The winding up committee shall

assist and monitor the liquidation proceedings in following areas of liquidation functions.
namely:
(a) taking over assets;

(b) examination of the statement of affairs;

(c) recovery of property, cash or any other assets of the company including benefits derived
therefrom;

(d) review of audit reports and accounts of the company;

(e) sale of assets;

(f)finalisation of list of creditors and contributories;

(g) compromise, abandonment and settlement of claims;

(h) payment of dividend, if any;

(i) any other function as the Tribunal may direct from time to time.

3. Submission of reports to the Tribunal (Section 277(6)]: The Company Liquidator shall place
before the Tribunal a report along with minutes of the meetings of the committee, on monthly
basis duly signed by the members present in the meeting, for consideration till the final report
for dissolution of the company is submitted before the Tribunal. Further provisions in this
regard are as under:

(a) The Company Liquidator shall prepare the draft final report for consideration and approval
of the winding up committee [Section 277(7)].

(b) The final report so approved by the winding up committee shall be submitted by the
Company Liquidator before the Tribunal for passing of a dissolution order in respect of the
company [Section 277(8)].

20.8. SUBMISSION OF REPORT BY THE COMPANY LIQUIDATOR

Company Liquidator shall, prepare a report and submit the same to the Tribunal within from
the winding up order.

1. Particulars of report [Section 281(1)]: The report of Company Liquidator shall contain the
following particulars:

(a) the nature and details of the asse of the company including their location and value, stating
separately the cash balance in hand and in the bank, if any, and the negotiable securities, if
any, held by the company.
Provided that the valuation of the assets shall be obtained from registered valuers for this
purpose;

(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, stating separately the amount of secured and unsecured debts,
and in the case of secured debts, particulars of the securities given, whether by the company
or an officer thereof,their value and the dates on which they were given;

(d) the debts due to the company and the names, addresses and occupations of the persons
from whom they are due and the amount likely to be realised on account thereof;

(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;

(h) details of subsisting contracts, joint ventures and collaborations, if any;

(i) details of holding and subsidiary companies, if any;

(j) details of legal cases filed by or against the company; and

(k) any other information which the Tribunal may direct or the Company Liquidator may
consider necessary to include.

Notes: 1. The Company Liquidator shall also report on the viability of the business of the
company or the steps which are necessary for maximizing the values of the assets of the
company [Section 281(3)].

2. This Section also entitles the creditor or a contributory of the company to inspect the report
submitted and to take copies thereof or extract there from on payment of the fee [Section
281(5)]

2. Directions of Tribunal on the report [Section 282]: On consideration of the report of

Company Liquidator, the Tribunal shall fix a time limit within which the entire proceedings
shall be completed and the company be dissolved.

20.9. DUTIES OF THE COMPANY LIQUIDATOR

We know that Company Liquidator is appointed for the purpose of conducting the winding up
proceedings. Thus, the important duty of the liquidator is to conduct the winding up
proceedings. He shall also perform such other duties as the Tribunal may impose. The duties
of the liquidator may be discussed under the following heads:

1. To submit the report: It is the duty of the Company Liquidator to submit a report of the
winding up committee to the Tribunal on monthly basis [Section 277(6)].

The Company Liquidator is also required to prepare a report about company's overall position
and submit the same to the Tribunal within 60 days from the winding up order [Section 281].
These points have already been discussed in Art. 20.7 and 20.8.

2. To take custody of company's property: On the making of the winding up order and on
directions of the Tribunal, it is the duty of the company liquidator to take into his custody or
under his control all the property to which the company is entitled [Section 283].

It may be noted that where company's property has been delivered by way of security, the
liquidator can demand from the security-holder the surplus proceeds of the property.

3. To have regard to directions of creditors or contributories: On taking the custody or

control of company's assets, the company liquidator should administer them and distribute
among the creditors. In the administration and distribution of the company's assets, it is the
duty of the liquidator to have regard to the directions given by the creditors or contributories
by a resolution at any general meeting. Also have regard to the directions given by the
advisory committee. In case of any conflict, the directions given by creditors or contributories
shall override any directions given by the advisory committee [Section 292 (1) (2)].

4. To summon meetings of creditors or contributories: The company liquidator may call the
general meetings of creditors or contributories for the purpose of ascertaining their wishes.
But where the creditors or contributories give directions by a resolution, the liquidator is
bound to call their meeting. Similarly when one-tenth in value of the creditors or the
contributories request in writing, the liquidator must call their meeting [Section 292 (3)].

5. To keep proper books: It is the duty of the company liquidator to keep proper books in the
prescribed manner. In such books he should make the entries of the proceedings at meetings
[Section 293].

6. To submit the accounts: It is the duty of the company liquidator to keep the account of all
receipts and payments made by him as a liquidator. And he must present this account to the
Tribunal at least twice in each year during his tenure of office [Section 294].

7. To appoint an advisory committee: Sometimes, the Tribunal gives the direction that an
advisory committee should be appointed to act with the company liquidator. In such cases, it
shall be the duty of the liquidator to call a meeting of the creditors and contributories for the
purpose of constituting the advisory committee [Section 287]. This will be discussed in detail
in Art. 20.11.
8. To submit information as to pending liquidation: Sometimes, the winding up of a company
is not concluded within one year after its commencement. In such cases, the company
liquidator must file in the Tribunal a statement with respect to the proceedings and position of
the winding up. This statement must be audited by an auditor who is qualified to act as
auditor of the company, The liquidator should file this statement within 2 months of the
expiry of first year, and thereafter at an interval of not more than one year until the winding
up is concluded. However, the Central Government may exempt the liquidator from filing the
statement [Section 348].

20.10. POWERS OF THE COMPANY LIQUIDATOR

In case of compulsory winding up, the Company Liquidator has the following powers, which he
shall exercise subject to directions of the Tribunal, if any [Section 290(1)]:

(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 by
public auction or private contract, with power to transfer such property to any person or body
corporate, or to sell the same in parcels;

(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;

(i) To prove rank and claim in the insolvency of any contributory for any balance against his
estate, and to receive dividends in the insolvency, in respect of that balance, as a separate
debt due from the insolvent, and rateably with the other separate creditors;

(j) To draw, accept, make and endorse any negotiable instruments including cheque, bill of
exchange, hundi or promissory note in the name and on behalf of the company, with the same
effect with respect to the liability of the company as if such instruments had been drawn,
accepted, made or endorsed by or on behalf of the company in the course of its business;

(k) To take out, in his official name, letters of administration to any deceased contributory,
and to do in his official name any other act necessary for obtaining payment of any money due
from a contributory or his estate which cannot be conveniently done in the name of the
company, and in all such cases, the money due shall, for the purpose of enabling the Company
Liquidator to take out the letters of administration or recover the money, be deemed to be
due to the Company Liquidator himself;

(l) To obtain any professional assistance from any person or appoint any professional in
discharge of his duties, obligations and responsibilities and for protection of the assets of the
company, appoint an agent to do any business which the Company Liquidator is unable to do
himself.

(m) To take all such actions, steps, or to sign, execute and verify any paper, deed, document,
application, petition, affidavit, bond or instrument as may be necessary:

(i) for winding up of the company;

(ii) for distribution of assets;

(iii) in discharge of his duties and obligations and functions as Company Liquidator; and (n) To
apply to the Tribunal for such orders or directions as may be necessary for the winding up of
the company.

Note: The exercise of powers by the Company Liquidator under sub-section (1) shall be
subject to the overall control of the Tribunal [Section 290(2)].

20.11. ADVISORY COMMITTEE

The 'Committee of Inspection' which was to be constituted under the Companies Act, 1956
has been replaced by the 'Advisory Committee' to be constituted under the Companies Act,
2013.

The advisory committee is appointed to advise the Company Liquidator and to report to the
Tribunal on such matters as the Tribunal may direct.

Legal provisions relating to the advisory committee are provided in Section 287 of the
Companies Act, 2013, which are as under:

1. Appointment of the committee [Section 287(1)]: The 'advisory committee' is appointed by

the Tribunal. At the time of passing an order of winding up of a company, the Tribunal may
direct that there shall be an advisory committee
(a) to advise the Company Liquidator;

(b) to report to the Tribunal on such matter

2. Composition of advisory committee [Section 287(2)]: The advisory committee appointed

by the Tribunal shall consist of not more than 12 members. The members shall be from among
the creditors and contributories of the companies and such other members as the Tribunal
may direct.
The proportion of the member of the committee shall also be decided by the Tribunal keeping
in view the circumstances of the company in liquidation.

3. Procedure for constitution of committee [Section 287(3)]: Following legal provisions are
made in Section 287(3) in this regard:

(a) The company liquidator shall convense a meeting of creditors and contributories as
ascertained from the books and documents of the company to enable the Tribunal to
determine the persons who may be the members of the committee.

(b) The meeting, as stated above, shall be convened by the company liquidator within 30 days
from the date of the winding up order.

(c) From among the creditors and contributories who attend such meeting, the Tribunal shall
decide about membership of the committee.

4. Other provisions: Following provisions relating to advisory committee are also important to
note:

(a) Right of inspection: The advisory committee shall have the right to inspect the (i) books of
accounts and other documents, and (ii) assets and properties of the company under
liquidation [Section 287(4)]

(b) Convening and procedure of meetings: The provisions relating to (1) the convening of the
advisory committee meetings, (ii) the procedure to be followed at the meetings, and (iii) other
matters relating to the conduct of the business by the advisory committee shall be such as
may be prescribed [Section 287(5)].

(c) Chairman of the meetings: The meeting of advisory committee shall be chaired by the
company liquidator [Section 287(6)].
 Changes brought in by the Companies Act, 2013

Under the new Companies Act, 2013, the following changes are made by Section 287 as
compared to provisions relating to committee of inspection under the Companies Act,
1956:

1. Under this provision the Committee of Inspection has been replaced by the Advisory
committee. It enhances the scope of the Committee as the Advisory Committee is
supposed to supervise, suggest and direct the liquidator in winding up action.

2. The advisory committee may be appointed by the Tribunal at the time of making the
winding up order and not thereafter as was provided under the Companies Act, 1956 in
case of committee of inspection.

3. The meeting of creditors and contributories for deciding membership of the advisory
committee shall be convened within 30 days from the order instead of 2 months as was
the case earlier.

4. The provision giving power to creditors and contributories to appoint any other person
by special power of attorney to represent them in the committee of inspection has been
dispensed with.

20.12. GENERAL POWERS OF THE TRIBUNAL IN CASE OF COMPULSORY WINDING UP

In company winding up, the Tribunal has the following general powers, which it may exercise
after making the winding up orders:

1. Stay of winding up proceedings: After making the winding up order, the Tribunal may still
make an order staying the winding up proceedings. The Tribunal may pass such order on an
application made by the liquidator, or any creditor or contributory, the promoter or any other
interested person [Section 289].

2. Settlement of list of contributories: After making the winding up order, the Tribunal shall
have the power to make the list of the contributories (i.e., the shareholders who are liable to
contribute to the assets of the company). If this requires the rectification of the register of
members, the Tribunal may also do so in all cases where the rectification is required under the
Companies Act. After settling the list, the Tribunal shall have the power to cause the assets of
the company to be collected and applied in discharge of its liabilities [Section 285].

3. Summoning and examination of suspected person: The Tribunal may also summon and
examine any person whom it deems capable of giving information concerning the promotion,
formation, trade, dealings or other affair of the company. If on the examination, such person
admits that he is indebted to the company or has any property belonging to the company in
his possession, the Tribunal may order him to pay the amount or deliver the property to the
liquidator [Section 299].

4. Payment of money by the contributory and allowing set off: Sometimes, after the making
of a winding up order, some money is due from a contributory to the company apart from his
liability as a shareholder (i.e., other than the money payable by way of calls on shares). In such
cases, the Tribunal may order the contributory to pay the money due to the company.
Sometimes, the company also owes some money to such contributory. In such cases, a limited
right of set off is given to the contributory i.e., he may be allowed to deduct the money due
from the company and pay the balance [Section 295].

5. Making the calls i.e., calling the money due on shares: After making the winding up order,
the Tribunal may also make calls on the contributories for the payment of any money which
the Tribunal considers necessary to satisfy the debts and liabilities of the company, and the
expenses of winding up, and for the adjustment of the rights of the contributories. It may,
however, be noted that the Tribunal has the powers to call the money due from the
contributories to the extent of their liability. The Tribunal may make such calls either before or
after it has ascertained the sufficiency of the assets of the company. After making the calls,
the Tribunal may make order for the payment of the money so called [Section 296].

6. Adjustment of rights of contributories: The Tribunal has the power to adjust the rights of
the contributories among themselves and to distribute any surplus among the persons who
are entitled to it [Section 297]. .

7. Public examination: Sometimes, after the winding up order has been made, the Official
Liquidator makes a report to the Tribunal stating that in his opinion a fraud has been
committed by any person in the promotion or formation of the company, or by any officer of
the company in relation to the company since its formation. In such cases, the Tribunal may
direct that such person or officer shall appear before the Tribunal and be publicly examined.
The examination shall relate to the promotion or formation of the company, or to the conduct
of the business of the company, or to the conduct and dealings of the person as an officer of
the company [Section 300]. Thus, under this clause, the promoters and directors can be
publicly examined by the Tribunal.

8. Arrest of absconding contributory: Sometimes, it is shown to the Tribunal that a

contributory is about to quit India, or is about to otherwise abscond for the purpose of
evading payment of calls or of avoiding examination. In such cases, the Tribunal may order
that such a contributory be arrested and kept for such time as the court may order. And
where for the same purpose, a contributory is about to remove or conceal any of his property,
the Tribunal may order that his books and papers and movable property be seized and safely
kept for such time as the Tribunal may order.

Note: The order under this clause may be made at any time either before or after the making
of a winding up order [Section 301].
20.13. DISSOLUTION OF A COMPANY

The legal provisions in this regard are provided in Section 302 of the Companies Act, 2013, and
may be discussed as under:

1. Dissolution of company by Tribunal: The dissolution puts an end to the existence of the
company. And the Registrar then strikes off company's name from the Register of Companies.
The company is dissolved by an order of the Tribunal. Legal provisions in this regard are:

(i) Application by the Company Liquidator: When the affairs of the company have
been completely wound up, the company liquidator shall make an application to the
Tribunal for dissolution of the company [Section 302(1)].

(ii) Dissolution by the Tribunal by an order: On an application filed by the Company

Liquidator, the Tribunal shall make an order of dissolution in any of the following cases
[Section 302(2)]:

(a) When the affairs of the company have been completely wound up.
(b) When the Tribunal is of the opinion that it is just and reasonable to dissolve the
company.

On the making of the order of dissolution, the company stands dissolved from the date of the
order.

(iii) Filing of copy of Tribunal order: Within 30 days of the order, the company liquidator must
forward a copy of the order to the Registrar who shall record the same in his books. If the
company liquidator makes a default in forwarding a copy, he shall be punishable with fine
upto 5000 for every day during which the default continues [Section 302(3),(4)].

2. Application for declaration of dissolution to be void: It is to be noted that the company

liquidator or any other interested person may also apply to the Tribunal for an order declaring
the dissolution to be void. However, such an application must be made to the Tribunal within
2 years of the dissolution. On such application the Tribunal may pass an order declaring the
dissolution to be void [Section 356]. The effect of such an order is that it makes the dissolution
void ab initio i.e., ineffective from the very beginning, and the company revives as if it had
never been dissolved. Consequently, all the consequences resulting from the dissolution are
avoided.

Within 30 days of the Tribunal order, the person on whose application the order was made,
must file a copy of the order with the Registrar of Companies who shall register the same. If
such person makes a default in filing the copy with the Registrar, he shall be punishable with
fine upto 10,000 for every day during which the default continues [Section 356(2)].
20.14. VOLUNTARY WINDING UP (i.e., WINDING UP) WITHOUT THE INTERVENTION OF THE
TRIBUNAL

This point is discussed under the following topics/sub-articles:

1. Meaning of voluntary winding up: In the preceding pages we have discussed the
compulsory winding up of the company i.e., the winding up by an order of the Tribunal. The
company may also be wound up without any intervention of the Tribunal. And it is called the
voluntary winding up. In other words, the voluntary winding up means the winding up by the
members or creditors themselves without any intervention of the Tribunal. Thus, the
members and the creditors are left free to settle their affairs without going to the Tribunal.
However, they may apply to the Tribunal for any directions when necessary.

2. Circumstances of voluntary winding up: Section 304 of the Companies Act, 2013 contains
the cases in which the company may be voluntarily wound up, which are as under:

(i) By ordinary resolution: Sometimes, the article of the company fixes the period for
the duration of the company, or provides that the company shall be dissolved on the
occurrence of some event. In such cases, when that time expires or that event occurs,
the company may pass an ordinary resolution in its general meeting for its voluntary
winding up.

(ii) By special resolution: The company may, at any time, pass a special resolution that
the company be wound up voluntarily. It may be noted that when the company passes
a special resolution for its voluntary winding up, no reason is required to be given for
the winding up. Under this clause, the company may be wound up even if it is
prosperous.

3. Notice by advertisement: Within 14 days of the passing of a resolution (ordinary or special)

for voluntary winding up, the company must give a notice of the resolution by advertisement
in the Official Gazette, and also in some newspaper circulating in the district where the
registered office of the company is situated [Section 307].

Note: (i) Under the Companies Act, 1956, the corresponding sections 484 and 485 were similar
to these provisions.

(ii) The Companies Act, 2013 has dispensed with the distinction between members' voluntary
and creditors' voluntary winding up. Now the concept is only of voluntary winding up.

20.15. LEGAL PROVISIONS RELATING TO VOLUNTARY WINDING UP

The legal provisions relating to voluntary winding up of a company, as contained in various

sections of the Companies Act, 2013, are as under:
1. Declaration of solvency [Section 305]

2. Meeting of creditors [Section 306]

3. Publication of resolution for winding up [Section 307]

4. Commencement of voluntary winding up [Section 308]

5. Effect of voluntary winding up [Section 309]

6. Appointment of company liquidator [Section 310].

7. Powers of the Board to cease on appointment of Company Liquidator [Section 313]. 8.

Appointment of committees [Section 315]

9. Conduct of liquidation proceedings by liquidator.

10. Final meeting and dissolution of company [Section 318].

These are discussed in detail in the following pages.

20.15.1. Declaration of Solvency

When it is proposed to wind up a company voluntarily, then the directors of the company are
required to make a declaration about the financial state of the company. Legal provisions in
this regard are as under:

1. Meaning of declaration of solvency [Section 305(1)]: The ‘declaration of solvency' is the

declaration made by the directors stating that the company has no debts, or that it will be in a
position to pay its debts in full. The legal provisions relating to the declaration of solvency are
contained in Section 305 and may be summed up as under:

(i) The declaration of solvency shall be made by the majority of directors at a meeting of the
Board of Directors, and verified by an affidavit.

(ii) The directors shall declare in it that they have made a full enquiry into the affairs of the
company and have formed the opinion about the following: has no debts, or

(a) That the company

(b) That the company will be able to pay its debts in full from the proceeds of assets sold in
voluntary winding up.
2. Conditions for the Validity of declaration of solvency [Section 305(2)]: A declaration of
solvency shall have no effect unless the following conditions are satisfied:

(i) It must contain a declaration that the company is not wound up to defraud any person(s)
[Section 305(2)(b)].

(ii) It must be made within 5 weeks immediately before the passing of the resolution for
winding up. And must be delivered to the Registrar for registration before that date [Section
305(2)(a)].

(iii) It must be accompanied by a copy of the report of company's auditors on the profit and
loss account, and the balance sheet of the company prepared upto the latest practicable date
before the making of the declaration [Section 305(2)(c)].

(iv) It must also contain a statement of the assets and liabilities of the company as at the latest
practicable date before the making of the declaration [Section 305(2)(c)].

(v) It must be accompanied by a report of valuation of the assets of the company prepared by
a registered valuer (Section 305(2)(d)].

Note: In view of the specific declaration by the directors in 'declaration of solvency' that the
company has no debts or it will be able to pay its debts in full from the proceeds of assets sold
in voluntary winding up, there is no need for creditors' voluntary winding up. As such the
Companies Act, 2013 has dispensed with the distinction between members' voluntary winding
up and creditors' voluntary winding up.

Changes brought in by the Companies Act, 2013

Section 305 of the new Companies Act, 2013, provides the following additional
requirements as compared to earlier provision under the Companies Act, 1956:

1. The declaration of voluntary winding up should be accompanied by an additional

declaration pledging that the company is not wound up for fraudulent purposes.

2. A report of valuation of assets of the company prepared by a registered value is also

required to be attached to the declaration of solvency for voluntary winding up.

20.15.2. Meeting of Creditors

In case of voluntary winding up, the meeting of creditors is mandatorily required to be

convened (i.e., called) by the company alongwith the calling of meeting of the company at
which the resolution for voluntary winding up is to be proposed. It is to protect the interest of
creditors and to make them aware about the state of affairs of the company.
Legal provisions relating to the meeting of creditors are provided in Section 306 of the
Companies Act, 2013, which are as under:

1. Meeting to be called alongwith meeting of the company [Section 306(1)]: The company
shall cause the meeting of creditors to be called alongwith the meeting of the company at
which the resolution for voluntary winding up is to be proposed. Other provisions are as
under:

(a) The notice of the meeting of creditors shall be sent by registered post to the creditors
alongwith the notice of the meeting of the company.

(b) The meeting shall be held either on the same day of the company meeting or on the next
day.

2. Presenting full state of company's affairs [Section 306(2)]: The Board of Director of the
company shall present before the creditors' meeting a full statement of the position of affairs
of the company together with the following:

(a) a list of creditors of the company, if any;

(b) a copy of 'declaration of solvency', and

(c) the estimated amount of the claims.

The Board of Directors shall appoint one of the directors to preside at the meeting.

3. Opinion of creditors by special resolution [Section 306(3)]: The creditors may, with 2/3rd in
value of the creditors of the company, from their opinion as under:

(a) Favouring voluntary winding up: When they form the opinion that it is in the interest of all
the parties that the company be wound up voluntarily, then the company shall be wound up
voluntarily.

(b) Favouring winding up by the Tribunal: When they form the opinion that the company may
not be able to pay its debts in full out of 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, then the company shall file an application before the Tribunal within 14 days
thereafter.

4. Notice to Registrar [Section 306(4)]: The notice of any resolution passed at the meeting of
creditors shall be given to the Registrar within 10 days of the passing of the resolution.
5. Penalty for contravention [Section 306(5)]: If the company contravenes the above discussed
provisions of Section 306, then the punishment is as under:

(a) The company shall be punishable with minimum fine of Rs. 50,000 which may extend to Rs.
2 lakhs; and

(b) The director of company who is in default shall be punishable as under:

 with imprisonment upto 6 months, or

 with minimum fine of Rs. 50,000 which may extend to Rs. 2 lakhs; or

 with both.

20.15.3. Publication of Resolution for Voluntary Winding Up

The requirement of such publication is provided in Section 307 of the Companies Act, 2013,
which provides as under:

1. The resolution passed by the company that it be wound up voluntarily, shall be published by
the company within 14 days of the passing of the resolution.

2. The publication means giving notice of the resolution by advertisement in the Official
Gazette, and also in the newspaper which is in circulation in the district where the registered
office or the principal office of the company is situated.

3. The publication in the same way is also to be done of a resolution passed by the creditors at
their meeting (as discussed in Art. 20.15.2, point 3) to the effect that it is in the interest of all
parties if the company is would up by the Tribunal.

Note: If the company contravenes these provisions, then the company and its every officer in
default shall be punishable with fine which may extend to Rs. 5,000 for every day during which
the default continues Section 307(2)

20.15.4. Commencement of Voluntary Winding Up

A voluntary winding up of the company shall be deemed to commence from the date of
passing a resolution by the company for its voluntary winding up [Section 308].

20.15.5. Effect of Voluntary Winding Up

On the commencement of the voluntary winding up, the company shall cease to carry on its
business. However, it may carry on its business where it is required for the beneficial winding
up of its business.
It may however be noted that the corporate status and corporate powers of the company
shall continue until it is dissolved [Section 309].

20.15.6. Appointment of Company Liquidator

The Company Liquidator is appointed to conduct the proceedings of winding up. In case of
winding up, legal provisions relating to the appointment are provided in Section 310 of
Companies Act, 2013 which are as under:

1. Appointment of Company Liquidator [Section 310(1)(2)]: Section 310 makes the following
provisions in this regard:

(a) Appoint by the company in general meeting [Section 310(1)]: The company shall appoint a
Company Liquidator (from the panel of professionals prepared by the Central Govt.), for the
purposes of winding up its affairs and distributing the assets of the company.

The Company Liquidator shall be appointed in the general meeting in which a resolution of
voluntary winding up is passed.

The fee to be paid to the Company Liquidator shall also be recommended by the company.

(b) Approval by the creditors [Section 310(2)]: The appointment of a Company Liquidator
shall be effective only if it is approved by the majority of creditors in value of the company.

It is to be noted that if the creditors do not approve the appointment of such Company
Liquidator, then they shall appoint another Company Liquidator.

2. Declaration by the Company Liquidator [Section 310(4)]: The Company Liquidator shall file
a declaration in prescribed form with the company and the creditors within 7 days from the
date of his appointment disclosing conflict of interest or lack of independence in respect of his
appointment, if any.

3. Notice of appointment to Registrar [Section 312]: The notice of appointment of Company

Liquidator, alongwith his name and particulars, shall be given by the company to the Registrar
within 10 days of such appointment.

20.15.7. Boards Powers to Cease on Appointment of Company Liquidator

On appointment of the Company Liquidator, all the powers of the Board of Directors including
the powers of the managing director, whole-time director and manager, if any, shall cease i.e.
come to an end.
The Board can exercise power only for the purpose of giving notice to the Registrar of such
appointment of the Company Liquidator [Section 313].

20.15.8. Appointment of Committees

Section 315 of the Companies Act, 2013 makes provision for the appointment of committees
by the company (i.e., members) as well as by the creditors as considered appropriate (a) to
supervise the voluntary liquidation, and

(b) to assist the Company Liquidator in discharging his (or its) functions. As regards the
appointment of committees, the provisions are:

1. A company, where there are no creditors, may appoint such committee in its general
meeting; and

2. The creditors may appoint such a committee at the meeting of creditors called by the
company for consideration of voluntary winding up by the creditors.

20.15.9. Conduct of Liquidation Proceedings by the Company Liquidator

On the appointment of the Company Liquidator, the Liquidation (i.e., winding up) proceedings
are carried on by him, and he proceeds as under:

1. Quarterly report to members and creditors [Section 316]: The Company Liquidator shall
report quarterly on the progress of winding up of the company, in such form and in such
manner as may be prescribed, to the members and the creditors. Further provisions are as
under:

(a) The Company Liquidator shall call a meeting of the creditors and members as and when
necessary, and apprise them of the progress of the winding up.

(b) At least one meeting each of the members and creditors shall be called in every quarter.

(c) If the Company Liquidator fails to report quarterly or to call meetings as stated above, then
he shall be punishable with fine which may extend to Rs. 10 lakh for each failure.

2. Report of winding up and calling final meeting Section 318: As soon as the affairs of the
company are fully wound up, the Company Liquidator shall prepare a report of winding up,
and thereafter call a general meeting of the company. This point will be discussed in detail in
the next article.
20.15.10. Final Meeting and Dissolution of the Company

Legal provisions in this regard are provided in Section 318 of the Companies Act, 2013, which
may be discussed as under:

1. Final Meeting of the Company [Section 318(1): As soon as the affairs of the company are
fully wound up, the Company Liquidator shall prepare a report of winding up showing that the
property and assets of the company have been disposed of and its debts fully discharged or
discharged to the satisfaction of the creditors.

After preparing the final report of winding up, the Company Liquidator shall call a general
meeting of the company for the purpose of laying before it the final winding up accounts and
giving any explanation for the same. Further provisions in this regard are:

(a) Meeting in the prescribed manner: The general meeting of the company shall be
called by the Company Liquidator in such form and manner as may be prescribed
[Section 318(2)].

(b) Resolution for dissolution: After consideration of the report of the Company
Liquidator, if the majority of the members of the company are satisfied that the
company shall be wound up, then they may pass a resolution for its dissolution
[Section 318(3)].

2. Submission of copies to the Registrar [Section 318(4)]: Within two weeks after the final
meeting, the Company Liquidator shall send the following copies to the Registrar:

(a) a copy of final winding up accounts of the company, and shall make a return in
respect of each meeting and of the date there of; and

(b) copies of resolutions passed at the meetings.

3. Dissolution of the Company [Section 318(4)(5)]: On the passing of the resolution by the
company for dissolution of the company, the company is finally dissolved on the order of the
Tribunal. Legal provisions in this regard are:

(a) Application to Tribunal for dissolution: After the company passes a resolution for
dissolution of the company at its meeting, the Company Liquidator shall file an application
before the Tribunal for dissolution of the company.

Such application shall be filed alongwith the books and paper of the company relating to the
winding up [Section 318(4)(b)].

(b) Order of Tribunal: If, after considering the report of the Company Liquidator, the Tribunal
is satisfied that the process of winding up has been just and fair, it shall pass an order
dissolving the company. The Tribunal shall make such order within 60 days of receipt of the
application [Section 318(5)).

(c) Filing copy of order with the Registrar: The Company Liquidator shall file a copy of
dissolution order with the Registrar within 30 days [Section 318(6)].

(d) Publication by Registrar: On receiving the copy of dissolution order, the Registrar shall
forthwith publish a notice in the Official Gazette that the company is dissolved [Section
318(7)].

Note: If the Company Liquidator fails to comply with the provisions of Section 318, discussed
above, he shall be punishable with fine which may extend to Rs. One lakh [Section 318(8)].

20.16. WINDING UP OF UNREGISTERED COMPANIES

This point is discussed under the following sub-articles/heads:

20.16.1. Definition of Unregistered Company

The expression 'unregistered company' is defined in Section 375, Explanation (b) of the
Companies Act, 2013. According to this section, an unregistered company includes any
partnership, limited liability partnership or society or co-operative society, association, or
company consisting of more than seven members at the time when petition for winding up is
presented before the Tribunal. Thus, where at the time of filing the winding up petition, the
membership of any partnership', association or a company not registered as per law, is more
than seven, it will be regarded as an unregistered company. However, it does not include the
following:

(a) A railway company incorporated by any Act of Parliament or other Indian Law, or any Act
of the British Parliament.

(b) A company registered under the Companies Act, 2013.

(c) A company registered under any previous company law other than those having registered
office in Burma, Aden, or Pakistan before their separation from India.

The above definition of an 'unregistered company' as contained in Section 375 states the
partnerships, associations etc. which are to be included in the expression 'unregistered
companies', and the partnerships, associations which are not to be included in it. It is,
however, important to note that the scope of Section 375 is wide and not limited to include
only specified associations. As a matter of fact, every association of persons consisting of more
than seven members (but not more than 100)¹0 is an unregistered company if it is not
registered under the Companies Act or any other law for the time being in force in India.
20.16.2. Applicable Legal Provisions

An unregistered company may be wound up under the provisions of the Companies Act, and
all the provisions of this Act relating to the winding up are applicable to the winding up of
unregistered companies [Section 375 (1)]. However, certain provisions exclusively dealing with
the winding up of unregistered companies are contained in (Sections 375 to 378) of the
Companies Act, 2013. These may be summed up as under:

1. Winding up by Tribunal: An unregistered company can be wound up only by the Tribunal. It

cannot be wound up voluntarily. [Section 375(2)].

2. Grounds of winding up: An unregistered company may be wound up in the following

circumstances [Section 375(3)]:

(a) If the company is dissolved, or has ceased to carry on business, or is carrying on business
only for the purpose of winding up its affairs.

(b) If the company is unable to pay its debts.

(c) If the Tribunal is of the opinion that it is just and equitable to wind up the company.

3. Stay of suits or proceedings: On the making of the winding up order, any suit or other legal
proceeding can be commenced (i.e., filed) against any contributory of the company only with
the leave (i.e., permission) of the Tribunal [Section 373]. The object of this provision is to
prevent a creditor of an unregistered company from filing suit not only against the company
but also against the contributory of the company.

Notes: 1. The above provisions relating to the winding up of unregistered companies are in
addition to (and not in derogation of) the provisions already discussed in respect of winding
up of companies by the Tribunal [Section 377].

2. Now an unregistered company shall also include limited liability partnership, society and a
co-operative society as the definition has been expanded under the Companies Act, 2013.