1. Define Company?

The word ‘company’ S. 2 (20) has no strictly technical or legal meaning. It may be
described to imply an association of persons for some common object or objects. The
purposes for which people may associate themselves are multifarious and include
economic as well as non-economic objectives. But, in common parlance, the word
‘company’ is normally reserved for those associated for economic purposes, i.e., to carry
on a business for gain.
Used in the aforesaid sense, the word ‘company’, in simple terms, may be described to
mean a voluntary association of persons who have come together and decided to register
themselves as company for carrying on some business and sharing the profits there from.
Prof Hanley defines it as an artificial person created by law having separate entity with
perpetual succession and a common seal.
Under Indian law 2 or more person in case of pvt company or 7 or more in case of public
company who have conceived the idea of doing business in corporate form prepare
certain documents and file them with registrar of companies, on being satisfied with the
documentation the ROC issues a certificate of incorporation which is like birth certificate
of company. the company is born that day as separate entity distinct from it shareholders
and members who constitute it.
As in English law on the formation and registration of corporate bodies was not well
defined several unscrupulous persons took advantage of the situation formed companies
collected huge amounts of money from public and vanished overnight such companies
were called bubble companies. The analogy is quite apt because like bubble these
companies were there today and gone tomorrow.

2. Difference between company and partnership firm?

Company Partnership Firm
it is a separate legal entity it is an aggregation of all the partners.
property belongs to the company and not The firms property is property of its
to members of company partners.
It can sue and be sued on its own name it can be sued and sue only in name of
partners.
Shares are freely transferrable Shares cannot be transferred by the
partners without the consent of other
partners.
Min no. of members is 2 in pvt co. and 7 At least 2 person are required to form a
in public co. firm
Limited liability of shareholders/members Unlimited liability of partners
Mandatory audit is required every year No audit required
Memorandum of Association and article of Partnership Deed required for the creation
 association is mandatory for incorporating of a partnership firm
a company
Managed by directors and officers Managed by partners or designated
managing partners

3. Discuss advantages/salient features of incorporation of company?

Advantages of Incorporation of a Company are: separate legal existence, limited liability,
easy transfer of shares, separate property, capacity to sue in its own name, perpetual
succession, professional management, democratic set up, capacity to raise funds.
1. Creates a Separate Legal Entity: A co. is a legal person in eyes of law. It is not a
natural person like a student or his professor nevertheless it has its own personality
and often referred as its corporate personality. Thus the co. is an artificial person.
This states that a company is independent and separate from its members, and the
members cannot be held liable for the acts of the company, even when a particular
member owns majority of shares. This was held in the case of Salomon vs Salomon &
Co. Ltd. (1897) AC 22. Salomon transferred his business of boot making, initially run
as a sole proprietorship, to a company (Salomon Ltd.), incorporated with members
comprising of himself and his family. The price for such transfer was paid to Salomon
by way of shares, and debentures having a floating charge (security against debt) on
the assets of the company. Later, when the company’s business failed and it went into
liquidation, Salomon’s right of recovery (secured through floating charge) against the
debentures stood prior to the claims of unsecured creditors, who would, thus, have
recovered nothing from the liquidation proceeds. The claims of certain unsecured
creditors in the liquidation process of Salomon Ltd., where Salomon was the majority
shareholder, was sought to be made personally liable for the company’s debt. Hence,
the issue was whether, regardless of the separate legal identity of a company, a
shareholder/controller could be held liable for its debt, over and above the capital
contribution, so as to expose such member to unlimited personal liability. The House
of Lords held that, as the company was duly incorporated, it is an independent person
with its rights and liabilities appropriate to itself, thus, making Salomon & Co. Ltd
liable, and not Salomon.
In another case Abdul Haq v. Das Mal (1910) 19 IC 595 an employee of a co. sought
to recover wages not paid to him and his chaprasi. However, since the suit was filed,
not against co. but against the Managing Director and secretary of the Co. the same
was dismissed.
2. Company has Perpetual Succession: The term perpetual succession means
continuous existence, which means that a company never dies, even if the members
cease to exist. The membership of a company changes from time to time, but that has
no effect on the existence of the company. The company only comes to an end, when
it is wound up according to law, as per the provisions of the Companies Act, 2013. Re
Noel Tedman Holdings Pty Ltd (1967) Qd R 56 stated that a company’s members may
come and go but this does not affect the legal personality of the company
3. Can own Separate Property: Since a company is termed as a separate legal entity in
the eyes of law, it can hold property in its own name and the members cannot claim to
be the owner of the companies’ property(s). The Supreme Court, in the case of Bacha
F. Guzdar v CIT Bombay stated that a company being a legal person, in which all its
property is vested and by which it is controlled, managed and disposed of a member
cannot, ensure the companies property on its own name. thus a creditor cannot
proceed against the assets of a member for a debt owed to him by the co. conversely
co. assets cannot be used to pay debts of any shareholders.
4. Capacity to sue and be sued: The company has the capacity of suing a person or
being sued by another person in its own name. A company, though can be sued or sue
in its own name, it has to be represented by a natural person and any complaint which
is not represented by a natural person is liable to be dismissed in the same way in
which an individual complaint is liable to be dismissed in the absence of the
complainant. Just as a person has right to his reputation co. also has the right to
protect its name from being tarnished and can sue a 3 rd party for the defamatory
statements made by him against co. (aspro travel ltd vs owners abroad plc,)
5. Easier access to Capital: Raising capital is easier for a corporation, since a
corporation can issue shares of stock. This may make it easier for your business to
grow and develop. If the in the market for a bank loan, that’s another reason to
incorporate, since n most cases, banks prefer and easily lend money to incorporated
business ventures.
6. Limited Liability: A corporate form of business is far superior to - and much safer
than that of a partnership firm as far as the monetary risk factor is concerned. a
shareholder of a company limited by shares is liable only up to the unpaid amount on
the shares held by him. Thus, for instance, if a shareholder holds one share of the face
value of 100, on which 80 has already been paid up, his maximum liability on that
share is 20 - whatever may be the liabilities of the company. After he pays this
amount (20), his liability is reduced to nil-even if the liabilities of the company run
into millions. It is thus this "blessing of limited liability" that has made the corporate
form of business ideal for investors. The risk taken by a person who purchases shares
of a company has a pre-defined ceiling beyond which it cannot be extended. Even if
the company is heavily in debt, the liabilities are those of the company- and not of its
shareholders, individually or collectively.
7. Easy transfer of shares: Section 44 of the company’s act states that ‘The shares or
other interest of any member in a company shall be movable property, transferable in
the manner provided by the articles of the company. This leads to the investment of
funds in shares. It is done so that members can members can encash shares at any
given time upon their will. It also serves the purpose of providing liquidity to the
investors. They can sell shares, anytime they are willing to, on the open market or the
stock exchange.
8. Professional Management: In company business, the management is in the hands of
the directors who are elected by the shareholders and are well experienced persons. In
order to manage the day-to-day activities, talented professional managers are hired
 and appointed. Thus, the company business offers professional management which
adds quality of management of Co.

4. Note on Salomon Vs Salomon and Co. ltd.?

The landmark decision of the House of Lords in Salomon v. Salomon & Co. Ltd. (1897 AC
22) highlights this basic characteristic of a company. The facts of the case may briefly be set
out as under:
Mr. S was a prosperous leather merchant, engaged in a flourishing business of manufacture
and sale of shoes and boots. He decided to convert his business into a company, which had as
its members - his wife, his four sons, his daughter and Mr. S himself. The purchase price
received by Mr. S from the new company was 20,007 Pounds, by way of fully-paid shares of
one Pound each (of which Mr. S held 20,001 shares) and debentures worth 10,000 Pounds,
with a charge over all the assets of the company and the balance in cash. The company had
three Directors-Mr. S (who was the managing director) and his two sons. In less than a year,
the company ran into financial difficulties (mainly due to the general depression in the trade
and not on account of any malpractice, misconduct or negligence on the part of the Salomon
family) and liquidation proceedings were commenced against it. At the time of liquidation,
the company's financial position was as follows:
Assets: £ 6,000, Unsecured creditors: £ 7,000, Secured creditor: £ 10,000 (i.e. Mr. S)
It was argued - quite vehemently - that the business, though in the form of a company,
belonged to Mr. S, and that the company was a sham, or at best, only a legal form in which
Mr. S himself carried on the business. Not only did he manage the company but he also held
20,001 of the 20,007 shares of the company. If, therefore, as a secured creditor, Mr. S was
allowed to get all the assets of the company (applying the general principle of law that
secured creditors are to be paid before the unsecured creditors). It was, therefore, argued that
all the assets of the company, that is, 6,000 Pounds ought to be ratably distributed amongst
the unsecured creditors of the company (to whom the company actually owed 7,000 Pounds).
the above logic made sense to the Court of Appeal, which ruled in favour of the unsecured
creditors. However, in appeal, a unanimous judgment of the House of Lords held that since
the company had been validly constituted, it could not be held to be a sham. The business
done by the company belonged to the company and not to Mr. S, and although all seven
members of the company belonged to the same family, this made no difference as every
company is a distinct and separate legal entity.
One interesting argument put forth on behalf of the unsecured creditors was that the company
was only the agent of Mr. S and, in truth, the business belonged to him and not to the
company. Lord Halsbury was quick to refute this argument and point out that the legal
position was, in fact, the other way around; if at all, Mr. S was the agent of the company and
not vice versa. Since Mr. S was held entitled to all the assets of the company and the
unsecured creditors got nothing, this ruling was widely criticized, both in and outside
England, one writer terming it as "a calamitous decision". However unjust or unfair the ruling
may seem at first sight, it cannot be denied that it emphasized the most fundamental principle
underlying company law, namely, that a company is a separate juristic entity independent
from the members who constitute it. The business belongs to the company and not to those
who constitute the company.

5. Disadvantages of Incorporation of a Co.? note on Lifting of corporate veil?

Main are: lifting of corporate veil, formalities, expenses, publicity and loss of privacy,
denial of some fundamental rights, fraud, control possible without majority.
1.) Lifting of Corporate veil: At times it may happen that the corporate personality
of the company is used to commit frauds and improper or illegal acts. Since an artificial
person is not capable of doing anything illegal or fraudulent, the façade of corporate
personality might have to be removed to identify the persons who are really guilty. This is
known as ‘lifting of corporate veil’.
Understanding the Lifting of the Corporate Veil: There might be some instances wherein
it is necessary to know who the people behind the corporate veil are and, in these
instances, the corporate veil needs to be lifted and the real culprits need to be punished. It
is in cases such as these that the court discard the notion of company laid down in
Salomon’s case and lift the corporate veil. This raising of curtain or cracking of corporate
shell enables court to appreciate the realities that exists behind the mask of incorporation.
The courts usually lift the corporate veil where fraud has been committed, improper
conduct wherein the public interest is at large, or where the sole purpose of incorporating
the company is the evade taxes, etc.
The main instances where the lifting of corporate veil is applied are as follows – Trading
with Enemy, Benefit of revenue, Fraud or Improper conduct, Intentional deception of
name, Fraudulent conduct of business, holding subsidiaries company, government
companies, criminal acts.
 Determination of enemy character: In certain situations, it becomes essential to lift the
corporate veil and check the character of the individuals and to determine whether they
are enemies of the country. In Daimler Co. Ltd. v Continental Tire and Rubber Co.
Ltd a company was set up in England for selling tires, the company was a German
company and most of the control was held by German individuals. The court observed
that since the real control of this English co. was in hands of German and it would be
considered as enemy nationality and co. would not be allowed to file a suit in England for
recovery of trade debt as England was at war with Germany.
 Fraud: In order to prevent fraudulent activities or improper conduct, the courts can lift
the corporate veil. Since the fraudulent or improper conduct cannot be committed by the
company, which is an artificial legal person, hence the people who manage it are
responsible. In Gilford Motor Company Ltd. v Horne, it was held that companies
cannot be used as a cloak by members for their wrongdoings.
 Tax Evasion: Where it is evident that the company is trying to evade taxation, then the
courts can lift the corporate veil and punish the people responsible.
in Re. Dinshaw Maneckjee Petit (AIR 1927 Bom 371). In this case, a wealthy
businessman sought to avoid payment of tax on his substantially huge income from
 investments. So, he formed four private companies and such income, when received, was
credited to the accounts of these companies. Later, the companies transferred the money
to him by way of loans which were never repaid. The court held that the companies were
formed by him only for the purpose of dividing his income into four parts, thereby
avoiding payment of t which he was otherwise liable to pay. Therefore, the companies
were nothing but the assessee himself, their income was his income and he was liable t
taxed on the aggregate income.
 Fraudulent conduct [Section-339]: If at the time of winding-up of a company, it come
into view that any business of the company has been carried on with intent to defraud
creditors of the company, the person, who is or has been a director, manager, or officer of
the company or any other person shall be personally responsible, without any limitation
of liability, for all the debts of the company as the Tribunal may direct.
 Misdescription of name [Section-147]: If an officer of a company signs any document
such as bill of exchange, promissory note, hundi, cheque, etc., on behalf of the company
and the name of the company is not mentioned in such document in a manner prescribed,
then the person signing shall be held personally liable to the holder of such instrument.
 Misrepresentation in the prospectus: Under sections 34 and 35 of the Act, there is civil
and criminal liability for false representation in the prospectus. Every director, promoter,
and every other person who is in charge of the issue of prospectus shall be held liable for
such misrepresentation.
 Holding and Subsidiary Companies: It was a requirement of the Companies Act, 1956
(now repealed) that the Balance Sheet of a holding company must have attached to it, a
copy of the Balance Sheet, Profit and Loss Account and the Report of the board of
directors of all its subsidiary companies. This clubbing together of the accounts indicated
that the law did not, to that extent, recognize each company as a separate and distinct
entity. Under the Companies Act, 2013 also, a company is required to prepare a
consolidated financial statement of the company and all its subsidiaries, and such a
statement is to be placed before its members at the annual general meeting of the
company. [S. 129]
 Criminal Activities: When the crime is committed by the company, it is not only the
company that is liable to pay fine, but also the officers in default are also similarly
punishable. A company as a legal entity cannot be send to prison but its officers who are
guilty can be punished. As SC a co. is not immune from criminal liability on the plea that
it is not human being and cannot therefore possess any criminal intent. In such cases
criminal intent of the officers of co. get imputed to the co. (aneeta hada vs godfather
travels & tour ltd AIR 2012 SC 2795)
 Government Companies: A government company is, after all, a distinct entity in the eyes
of the law. Even though the government may hold most, or even one hundred per cent, of
De shares, the company itself is not "government". Therefore, it was earlier aid that no
writ petition could be filed against such a company. However judicial thinking began to
change when Justice Krishna lyer took the bold view that if the corporate veil of such a
 company is lifted, what lies behind the veil is the government, against whom writ
petitions can be entertained. (S. P. Rekhi v. Union of India, AIR 1981 SC 212)
Conclusion : The separate identity of a company is of utmost importance but there needs to
be a balance and the corporate veil needs to be lifted whenever it is needed. The idea of
removing the corporate veil is a versatile weapon that aids in the administration of justice
since it elaborates on one of the principles of law. Further, it states that a person cannot
profit from their own wrongdoings. The inclusion of a veil is essential to the existence of
each business since it serves as its basic foundation. But its removal is occasionally
necessary to guarantee that no wrongdoing has taken place under the guise of a body
corporate.
2.) Loss of Privacy: A public company has to publish all its accounts, capital
structure, changes in assets, minutes of meeting, interest of directors, MOA, AOA with
Registrar and are open to public inspection.
3.) Formalities: The formation of a company requires a lot of planning, paperwork
and has to go through different stages before registration. The first stage of promotion is itself
expensive and tiring. A prescribed num. of persons is to be associated to make a company. A
number. of documents are to be filed with the registrar of companies of the state in the
registered office. and then raising of capital. Then, after incorporating the company, all
requirements and compliances are needed to be complied with the as per the law provided.
Most corporations are required to file annual reports on the financial status of the company.
The ongoing paperwork also includes tax returns, accounting records, meeting minutes and
any required licenses and permits for conducting business.
4.) Expenses: The initial cost of incorporation includes the fee required to file
your articles of incorporation, potential attorney or accountant fees, or the cost of using an
incorporation service to assist you with completion and filing of the paperwork. There are
also ongoing fees for maintaining a corporation such as fees of solicitor’s auditors Roc. Some
types of corporations such as a C Corporation, have the potential to result in “double
taxation.” Double taxation occurs when a company is taxed once on profits, and again on the
dividends paid to shareholders.
5.) possibility of fraud: If the shareholding of a huge public company is spread out
amongst thousands of small shareholders, it affords a good opportunity to the management of
the company to play a financial fraud on the unsuspecting shareholders located in different
parts of the country. Despite public accounting and strict auditing provisions, recent history
has shown that huge frauds are possible, and by the time such frauds are detected, it may be
too late to remedy the situation or undo the damage.
6.) Control possible without majority shareholding: One may feel that, to exercise
control over the affairs of a company, a shareholder or a group of shareholders would have to
own a majority of its shareholding. However, this is not always so. If a business family
promotes a company and holds only 10% of its shares, if the rest of the shares are held in
small numbers by thousands (or lakhs) of shareholders spread over the country it can still
have an effective control over the company. In such a case, a group of shareholders holding
10% of the share capital can virtually exercise effective control over 100% of its resources,
including its finances, and may, in a given case, use this control for personal gains and
benefits.

6.) Note on ROC? Note on registration of Co.?

The ROC is the primary regulatory authority of companies registered under the Companies
Act, 2013. He is a full-time officer employed by the Central Government and is responsible
for the administration of company law in the state in which he is appointed. Thus, there is one
ROC for each state and he is assisted in his work by subordinates.
S. 2(75) of the Act defines the term 'Registrar' to mean a Registrar, an Additional Registrar, a
Joint Registrar, a Deputy Registrar or an Assistant Registrar, having the duty of registering
companies and discharging various functions under the Act. However, the powers and duties
of the ROC go much beyond registering companies. All documents required to be registered
under the Act have to be registered with him. If such a document is found to be defective or
incomplete, the ROC can call upon the company to rectify the defect or to complete the
document.
The ROC must maintain a register of companies in his office in the prescribed form. The
names of all companies are to be entered in this register in the order in which they are
registered. Every company is to be assigned a unique registration number. An alphabetical
index of all such companies is also to be maintained. Powers of search and seizure are also
conferred on the ROC under S. 209 of the Act. If the ROC has reasonable cause to believe
that a company has failed to commence its business within one year of its incorporation or is
not carrying on its business or other operations for a period of two immediately preceding
financial years, he can strike off the name of such a company from the register of companies
and publish a public notice thereof, after following the procedure laid down in S. 248 of the
Act.
Under S. 96 of the Act, it is the ROC who has the power to extend the time for holding an
annual general meeting of a company - except the first such meeting - by a period of three
months.
Under S. 206 of the Act, when any document or information is not furnished or if on
furnishing of such information or explanation, the ROC is satisfied that an unsatisfactory
state of affairs exists in the company, he can call for further documents and explanation and
also carry out such inquiry as he deems fit, after providing the company a reasonable
opportunity of being heard in the matter.
If it is shown that the business of the company has been, or is being, carried on for a
fraudulent or unlawful purpose, every officer of the company who is in default is punishable
for fraud as provided in S. 447 of the Act
Under S. 77 of the Act, every company which creates a charge on its property or assets
(whether in or outside India) must register the particulars of such a charge with the ROC
within the prescribed period. On such details being furnished, the ROC issues a certificate of
registration of the charge. If such a charge is not duly registered and if no such certificate is
given by the ROC, the charge would not be taken into account by the liquidator or any
creditor of the company.
In order to ensure a degree of transparency, the ROC must keep, in respect of every company,
a register containing the particulars of the charges registered by the company in the
prescribed form and manner. This register is open to inspection by any person on payment of
the prescribed fees. [S. 81]
REGISTRATION OF A COMPANY: S. 3 of the Act, which lays down the procedure for
the formation of a company, can be set out briefly as follows:
Seven persons in the case of a public company, and two in the case of a private company, can
incorporate a company-with or without limited liability- by subscribing their names to the
memorandum and articles of association of the proposed company and submitting an
application to the ROC of the State in which the registered office of the company is to be
situated, along with -
(a) the memorandum and articles of the company duly signed by the subscribers in the
prescribed manner;
(b) an affidavit from each of the subscribers to the memorandum and from the persons named
in the articles as the first directors (if any) that he has not been convicted of any offence in
connection with the promotion, formation or management of any company and that he has
not been found guilty of any fraud or misfeasance or of any breach of duty relating to any
company under the Act or under any previous Companies Act during the last five years;
(c) an affidavit by each of the persons named above that all the documents filed with the
ROC for registration of the company contain information that is correct and complete and
true to the best of his knowledge and belief;
(d) a declaration signed by an advocate of the Supreme Court or of a High Court or an
attorney or pleader entitled to appear before a High Court or a practising secretary or
chartered accountant or a person named in the articles as a director, manager or secretary of
the company that all the requirements of the Act and the Rules made thereunder have been
complied with in respect of the registration of the company and all matters precedent and
incidental thereto;
(e) the address for correspondence, until the registered office of the company is established;
(f) the full name, residential address, nationality and other prescribed details of every
subscriber to the memorandum, along with proof of his identity:
g) the particulars of the persons mentioned in the articles as the first directors of the
company, including their full names, residential address, nationality. Director Identification
Number and other prescribed particulars; and
(h) the particulars of the interests of the persons named as the first directors of the company
in other firms or bodies corporate, along with their consent to act as directors of the company
Furthermore, the company must maintain and preserve (at its registered office) copies of all
documents and information filed with the ROC as above until the company is dissolved.
After going through the papers, if the ROC is satisfied that all the above requirements have
been complied with and that such a company is authorised to be registered under the said Act,
he registers the company and places the name of the company on the Register of Companies
maintained by him. He also issues a Certificate of Incorporation, certifying under his hand
that the company is incorporated and in the case of a limited company, that the company is
limited. A corporate identity number, which is unique to every company, is also allotted by
the ROC to the company, and this number is also reflected in the certificate. It is from the
date of incorporation mentioned in the Certificate of Incorporation that the subscribers to the
Memorandum (and other persons who later become members of the company) become a
body corporate under the name of the company, capable of exercising all the functions of an
incorporated company, with perpetual succession and a common seal [S. 9]. The requirement
of having a common seal has, however, been deleted by the Companies (Amendment) Act,
2015. Thus, the Certificate of Incorporation may be regarded as the Birth Certificate of the
company, because the company comes into existence on and from the date mentioned therein.
Formation of One Person Company: The Companies Act, 2013, has introduced a novel
concept, namely that of a company consisting of only one person. Such a company is called a
'One Person Company' (OPC).
The procedure for incorporating OPCs is the same as that for private companies. However,
some additional requirements have been prescribed by the Act as under:
Since such a company consists of only one member, the memorandum must state the name of
another person who will become the member of the company in case of the original member's
death or incapacity to contract. Prior written consent of such a person should be taken and
filed with the ROC at the time of the incorporation of the OPC.
The person nominated by the original member is also allowed to withdraw his consent in the
prescribed manner. All such changes are to be filed with the ROC in the prescribed manner.
When there is a change in the memorandum for the above purpose, it is not to be deemed to
be an alteration of the memorandum of the OPC.

7.) Define Pvt. Co. and Public Co.? merits, privileges and exemption of Pvt. Co.?
Section 2(68) of Companies Act, 2013 defines private companies. According to that, private
companies are those companies whose articles of association restrict the transferability of
shares and prevent the public at large from subscribing to them.
It prescribes that the following features must be included in the articles of every private
company, namely,
(a) The number of members of a private company cannot, except in the case of a OPC
(One Person Company) exceed 200, not counting employees and ex-employees of the
company (who are also members). Joint shareholders have to be counted as one member.
[Under the earlier (1956) Act, the number of members of a private company could not
exceed 50 (as calculated above). Now, this has been increased to 200.]
(b) A private company cannot invite members of the public to subscribe for its securities.
The term 'securities' covers shares, scrips, stocks, bonds debentures, debenture stock or
 other marketable securities of a like nature in or of any incorporated company or other
body corporate derivatives and such other instruments as may be declared by the Central
Government to be securities.
(c) There must be some restriction on the transfer of shares of the company. In other
words, the shares of a private company should not be freely transferable. Needless to say,
if the company has no share capital, this requirement is rendered redundant.
The above requirements are cumulative in nature, and even if one of them is missing, the
company is deemed to be a public company. A public company is defined by S. 2(71) of the
Act as a company which is not a private company. When enacted in 2013 the Act had
provided that a public company must have a minimum paid up capital of 5 lakhs or such
higher amount as may be prescribed. However, this provision was amended by the
Companies (Amendment) Act, 2015, and it is now provided that such companies must have a
minimum paid up capital of such amount as may be prescribed; in other words, the monetary
limit imposed earlier in the Act has been deleted. Section 2(71) of Companies Act, 2013
defines public companies “public company” means a company which is not a private
company and; has a minimum paid-up share capital, as may be prescribed.
Advantages, benefits and privileges of a private company
The following are some important features of, and the benefits and privileges enjoyed by, a
private company under the Act
1. It can be incorporated, and may thereafter continue, with only two members. An OPC
(which is regarded as a private company) has only one member.
2. There is a restriction on the maximum number of members of a private company, namely
200 members. A public company has no upper limit on the number of its members
3. When enacted, the Act provided that every private company must have a paid up share
capital of 1 lakh or such higher amount as may be prescribed. However, this provision was
amended by the Companies (Amendment) Act, 2015, and it is now provided that such
companies must have a minimum paid up capital of such amount as may be prescribed.
4. A private company must have at least two directors. An OPC can, however, have only one.
(The corresponding number for a public company is three.)
5. Since a private company cannot issue a prospectus, the stringent provisions of the Act
relating to the issue of a prospectus do not apply to it.
6.The restrictions contained in the Act as regards the appointment and remuneration of
managerial personnel do not apply to private companies.
7. The articles of a private company can provide additional disqualifications for the
appointment of directors - that is, disqualifications which are in addition to those contained in
the Act. A public company cannot do so.
8. Under the 2013 Act, a person cannot be a director in more than 20 companies. He also
cannot be a director in more than 10 public companies. (Under the 1956 Act, although there
was an upper limit on the number of directorships a person could accept in a public company,
there was no Ceiling on the number of private companies of which a person could be a
director.)
9. In a private company, if 2 members are personally present at a shareholders' meeting, there
is a sufficient quorum. In a public company, the corresponding number is 5 members if the
company has upto 1,000 shareholders, 15 members if the company has more than 1,000 and
upto 5,000 shareholders and 30 members in the case of a company with more than 5,000
shareholders.
10. A private company can provide financial assistance to a person for purchasing shares of
the company. A public company cannot do so.
11. If a public company is converted into a private company, the prior approval of the
Tribunal is necessary. However, if a private company becomes a public company, no such
approval is required.
12. Articles of a private company relating to entrenchment can be amended only if agreed to
by all its members. In a public company, such an amendment can be made by passing a
special resolution of its members.
13. A private company can accept deposits only from its members. Public companies having
the prescribed net worth or turnover can accept deposits from persons other than members,
subject to compliance with certain conditions.
14. Private companies need not prepare reports on each annual general meeting. However,
listed public companies are required to do so
15. A private company need not appoint independent directors. Listed public companies must
have independent directors constituting at least one- third of the total number of directors.
Public companies having the prescribed share capital or turnover or having loans, debentures
or deposits exceeding the prescribed limits, must have at least two independent directors.
16. Contracts of employment of managing or whole-time directors of a private company need
not be kept at the registered office. A public company is however, required to keep contracts
of employment with managing or whole-time directors at its registered office
17. The provisions of S. 43 of the Act (dealing with kinds of share capital) and S.47 (dealing
with voting rights of shareholders) will not apply to a private company if it inserts a clause to
that effect in its memorandum or its articles. In other words, private companies can now
structure their capital in the desired manner and also give differential voting rights to its
members.
18. Now, the restrictions on the purchase by a company of its own shares contained in S. 67
of the Act will not apply to private companies if certain conditions are fulfilled.
19. Under the 2015 Notification, certain restrictions imposed on companies by S. 73 of the
Act with regard to acceptance of deposits from its members will not apply to private
companies if certain conditions are fulfilled.
20. Now, the application of the provisions of S. 101 to 107 and S. 109, dealing with notice of
meetings, quorum, proxies and voting can be excluded by a private company, by so providing
in its articles.
21. S. 160 of the Act, which deals with the procedure to be followed if persons other than
retiring directors wish to stand for directorship of the company. is now not applicable to
private companies.
22. The requirement of S. 162 of the Act that appointment of directors should be voted on
individually (that is, by separate resolutions) will not apply to private companies under the
said Notification. 24. The restrictions on the powers of the Board of Directors, contained in S.
180 of the Act, now do not apply to private companies.
23. Relaxing the stringent provisions of S. 184, the Notification provides that, in a private
company, if an interested director discloses his interest, he can participate in a meeting of the
Board of Directors.
24. The restrictions on loans given by a company to its directors (under S.185 of the Act)
now do not apply to private companies if certain conditions are fulfilled. 27. S. 196(4) and S.
196(5), which make certain provisions regarding the appointment of managing directors,
whole-time directors and managers, now do not apply to private companies.

8.) Differences between private co. and public co.?

PRIVATE COMPANY PUBIC COMPANY
1. It can be incorporated with only two 1. It requires at least seven members for
members. If it is a one-person company incorporation.
(OPC), it has only one member.
2. The maximum number of members in a 2. There is no upper limit on the
private company is 200. membership of a public company.

3. A private company must have at least two 3. A public company must have at least
directors, and at least one director in case of three directors.
an OPC.
4. Since a private company cannot issue a
4. The stringent provisions of the Act
prospectus, the stringent provisions of the
relating to the issue of a prospectus apply to
Act relating to the issue of a prospectus do
public companies.
not apply to it.

5. The Act imposes restrictions on

5. The restrictions contained in the Act as
appointment and remuneration of
regards appointment and remuneration of
managerial personnel of public companies.
managerial personnel do not apply to private
companies.

6. Additional disqualifications can be 6. A public company cannot impose

imposed by the articles of a private additional disqualifications for the
company for the appointment of its appointment of its directors.
directors.
7. A person cannot be a director of more
7. It is possible for a person to be a director than 10 public companies.
in 20 private companies (as long as he has
no other directorships).

8. Quorum at a shareholders' meeting is 2 8. Quorum is 5 members, if the company

members. has upto 1,000 members; 15, if the company
has more than 1,000 members but upto
5,000; and 30, if the company has more than
5,000 members.

9. A private company can provide financial

9. A public company cannot do so.
assistance to a person for purchasing shares
of the company.

10. If a private company is converted into a 10. If a public company is converted into a
public company, no statutory approval is private company, the prior approval of the
necessary. Tribunal is required.

11. Articles of a private company relating to 11. Articles of a public company relating to
entrenchment can be amended only if entrenchment can be amended by a special
agreed to by all its members. resolution of its shareholders.

12. Private companies need not prepare 12. Listed public companies are required to
reports on each annual general meeting. prepare reports on each annual general
meeting.

13. Contracts of employment of man- aging

or whole-time directors need not be kept at 13. A public company must keep contracts
the registered office. of employment with managing or whole-
time directors at its registered office.
14. A public company cannot do so. The
14. A private company can insert a clause in
provisions of S.43 and S.47 apply to all
its memorandum or articles stipulating that
public companies.
the provisions of S. 43 of the Act (dealing
with kinds of share capital) and S. 47
(dealing with voting rights of shareholders)
will not apply to it.
15. A private company fulfilling the 15. A public company is subject to the
prescribed conditions is not subject to the restrictions contained in S. 67 regarding
restrictions (of S. 67) on purchase by a purchase by a company of its own shares.
company of its own shares.
16. A public company is required to comply
16. A private company is not required to with the conditions regarding acceptance of
comply with certain conditions regarding deposits from its members as prescribed
acceptance of deposits from its members if
 it fulfils the prescribed conditions. under S. 73 of the Act.

17. A private company may provide in its 17. A public company cannot do so. The
articles that the provisions of S. 101 to 107 provisions of S.101 to 107 and S.109 apply
and S.109, dealing with notice of meetings, to all public companies.
quorum, proxies and voting will not apply
to it.
18. A public company is required to adhere
18. A private company does not have to to the requirement of S. 162 of the Act and
adhere to the requirement of S. 162 of the ensure that the appointment of directors is
Act regarding voting on the appointment of voted on individually.
each director individually.
19. A private company is not subject to the
19. The restrictions on the powers of the
restrictions on the powers of the board of
board of directors, contained A in S.180 of
directors, contained in S. 180 of the Act.
the Act, apply to a public company.
20. A public company is subject to the
20. A private company is not subject to the restrictions on loans given by a company to
restrictions on loans given by a company to its directors
its directors if certain conditions are
fulfilled.
21. S. 196(4) and S. 196(5) apply to a public
21. S. 196(4) and S. 196(5), which make
company.
certain provisions regarding the
appointment of managing directors, whole-
time directors and managers, do not apply to
a private company

9. Note on Conversion of Public to private Company and vice versa?

Conversion of a public company into a private company: A public company can be
converted into a private company if its member passes a special resolution, amending the
articles of the company to include the requirements of a private company. However, no such
alteration of the articles has effect unless the same is approved by the Tribunal which may
pass such orders in the matter as it deems fit. However, such a conversion does not affect the
liabilities of the company or change its identity. (All India Reporter Ltd. v. Ramachandra,
AIR 1961 BoM 29.
conversion of Pvt co. to public co.: The conversion of a private company into a public
company can take place in the following three ways:
(1) Conversion by choice.: A private company can amend its articles by deleting one
or more of the statutory requirements for being a private company. Thus, for instance, if the
company deletes the clause in its articles restricting the transfer of its shares, it cannot remain
a private company and it becomes a public company from the date of the alteration of its
articles. Such a company must also take immediate steps to meet the other requirements
prescribed by the Act for public companies, as for instance, drop the word "Private" from its
name, increase the number of its members to seven, increase the number of its directors to
three, and so on.
(2) Conversion by default: The status of, and the privileges enjoyed by, a private
company are available to it only so long as it actually complies with the requirements of a
private company. Thus, for instance, despite having the necessary prohibition in its articles, if
a company invites members of the public to subscribe to its shares, the Act applies to such a
company as if it were not a private company, that is, all the provisions applicable to a public
company apply to it.
(3) Conversion by operation of law: Deemed public company (Deleted): Before 2000,
a private company would become a "deemed public company" under S. 43-A of the 1956 Act
in certain circumstances, as for instance, if its turnover exceeded the prescribed amount or if
it issued an advertisement inviting deposits from the public. However, the concept of a
deemed public company was abolished in 2000.
one-person Co.: the co. act 2013 has introduced a concept of one-person company OPC
which is defined in S 2(62) of the act as a co. which has one person as member.
Small Company S 2(85) means a company, other than a public company whose paid-up
share capital of which does not exceed Rs. 4 Crores or such higher amount as may be
prescribed which shall not be more than Rs. 10 Crores; and turnover of which as per its last
profit and loss account for the immediately preceding financial year does not exceed Rs. 40
Crores or such higher amount as may be prescribed which shall not be more than Rs. 100
Crores.
Associate company/joint venture S 2(6) is a business arrangement in which two or more
parties agree to pool their resources for the purpose of accomplishing a specific task. This
task can be a new project or any other business activity. Each of the participants in a JV is
responsible for profits, losses, and costs associated with it.
The term ‘foreign company’ is clearly laid down under Section 2 sub-section 42 of the
Companies Act, 2013 (New Act). A foreign company is any company or body corporate
incorporated outside India which,
1. has a place of business in India whether by itself or through an agent, physically or
through electronic mode; and
2. conducts any business activity in India in any other manner.
Section 2(45) Government company “Government company” means any company in which
not less than fifty-one per cent of the paid-up share capital is held by the Central
Government, or by any State Government or Governments, or partly by the Central
Government and partly by one or more State Governments, and includes a company which is
a subsidiary company of such a Government company.
NON-PROFIT COMPANIES: S. 8 of the Act deals with a company which is proposed to be
registered under the Act as a limited company, and which-
 (a) has, as its objects, the promotion of commerce, arts, science, sport education,
research, social welfare, religion, charity, protection of the environment or any such
other object; and
(b) intends to apply its profits, if any, or other income in promoting such objects
(c) intends to prohibit the payment of any dividend to its members.
10.) note on Holding and Subsidiary Company.?
In the corporate world, a subsidiary is a company that belongs to another company, which is
usually referred to as the parent company or holding company. The parent holds a
controlling interest in the subsidiary company, meaning it owns or controls more than half of
its stock. In cases where a subsidiary is 100% owned by another company, the subsidiary is
referred to as a wholly owned subsidiary.
Key Takeaways: A subsidiary is a company that is more than 50% owned by a parent
company or holding company. Subsidiaries are separate and distinct legal entities from their
parent companies. Companies buy or establish a subsidiary to obtain specific synergies or
assets, secure tax advantages, and contain or limit losses. Shareholder approval is not
required to turn a company into a subsidiary or to sell a subsidiary. A subsidiary's financials
are reported on the parent's consolidated financial statements.
If company A exercises control over company B in any of the two modes given below, A
becomes the holding company of B and B is referred to as the subsidiary company of A.
Firstly, a company can become a holding company of another company by controlling the
composition of the board of directors of the other. A company is said to "control the
composition of the board of directors" of another company if it has the power, exercisable by
it at its discretion, to appoint or remove all or a majority of the directors of such other
company. It is also clarified that a company shall be deemed to be a subsidiary of a holding
company even if such control is of another subsidiary of that holding company.
Secondly, a company can become the holding company of another via the route of
shareholding. If company A holds more than half of the total share capital of company B
(either by itself or together with one or more of its subsidiary companies), company A will be
regarded as the holding company of company B. Conversely, company B will be the
subsidiary company of company A.
Power is also given to the Central Government to make rules providing that certain classes of
holding companies shall not have subsidiaries beyond a prescribed number.
It should be remembered that holding and subsidiary companies are separate legal entities,
subject to all the provisions of the Act. However, the following provisions of the Act dealing
specifically with holding and subsidiary companies may be noted:
1. Under S. 19 of the Act, a subsidiary company cannot, either by itself or through its
nominees, hold any shares in its holding company. Likewise, no holding company is
allowed to allot or transfer any of its shares to any of its subsidiaries. It is expressly
provided that any such allotment or transfer, even if sought to be effected, would be
null and void.
This restriction does not, however, apply to a case-
 (a) where the subsidiary company holds such shares as the legal representative of a
deceased member of the holding company; or
(b) when the subsidiary company holds such shares as a trustee, or
(c)when the subsidiary company is a shareholder even before became a subsidiary of
the holding company.
In cases covered by clauses (a) or (b) above, the subsidiary company can vote at a
meeting of the holding company only in respect of the shares held by it as a legal
representative or as a trustee, a case may be.
2. Under S. 129 of the Act, if a company has one or more subsidiaries it must, in addition
to its own financial statement, prepare consolidated financial statement of itself and of all
its subsidiaries and lay it before its annual general meeting. Moreover, the holding
company must also attach to its own financial statement, a separate statement containing
the salient features of the financial statement of its subsidiaries in the prescribed form.
3. Under S. 186 of the Act, no company can make an investment through more than two
'layers' of investment companies. However, it i expressly provided that such a restriction
is not to affect a subsidiary company from having any investment subsidiaries for the
purpose meeting the requirements of any law or rule or regulation for the time being in
force.
4.Under S. 128 of the Act, the books of account and other books and papers maintained
by a company must be kept open for inspection at the registered office of the company
during business hours However, in case of a subsidiary of the company, such inspection
can be done only by a person authorised in this behalf by a resolution of the Board of
Directors.
PRODUCER COMPANIES: A "producer is defined as any person engaged in any activity
connected with, or relatable to, any "primary produce", namely, -
- produce of farmers arising from agriculture (including animal husbandry, horticulture,
floriculture, forest products, bee raising, etc.) or from other primary activity or service
which promotes the interests of farmers or consumers; produce of persons engaged in
handloom, handicraft and other cottage industries; any product resulting from any of
the above activities, including byproducts of such products;
- any activity which is intended to increase the production of anything referred to in the
above clauses or to improve the quality thereof.
"producer company is defined to be a body corporate having any of the specified objects or
activities as for instance,
- production, harvesting, procurement, grading, pooling, handling marketing, selling or export
of primary produce of the member’s or import of goods or services for their benefit;
- processing and packing of produce of its members;
- manufacture, sale or supply of machinery, equipment or consumables mainly to its
members;
- providing education on mutual assistance principles to its members and others;
- rendering technical services, consultancy services, training, research and development and
all other activities for the promotion of the interest of its members;
- insurance of producers or their primary produce;
- any other activity which is ancillary or incidental to any of the above activities or other
activities which may promote the principles of mutuality and mutual assistance amongst the
members in any other manner;
As regards the formation of such a company, S. 581C lays down that ten or more individuals,
each of them being a producer or any two or more producer institutions or a combination of
ten or more individuals and producer institutions may incorporate a producer company with
the above objects. Such a company must be a company limited by shares and the liability of
its members should be limited (by the memorandum) to the unpaid amount on the shares held
them.

10.) Promoters of a Company - Definition, Functions and Duties, position, liabilities?

Promoters play a crucial role in establishing a company right from its inception stage. An
individual or a group of people who come up with the concept of starting a business are
the promoters of a company. They carry out the required processes to establish the
firm. The company’s promoters shape the company and thus are moulding blocks of the
company. However, a promoter is not the owner of a company. The promoter helps to
establish and run the company, but the company shareholders are the actual owners of the
company.
"Before a company can be formed, there must be some person’s who have the
intention to form a company and who take the necessary steps carry that intention into
operation. Such persons are called promoters." a person who is involved in the
formation of a company only in his professional capacity, as for instance, a solicitor or a
chartered accountant, is not a promoter. Thus, a solicitor who drafts the Memorandum
and Articles of a company yet to be incorporated or an accountant or valuer who renders
assistance in a professional capacity is not a promoter of that company. Likewise, a
person does not become a promoter only on the ground that he has signed the
memorandum of association of the company for one or more shares.
Who Are the Promoters of a Company: As per Section 2(69) of the Companies Act,
2013, promoter means any of the following persons:
 A person named as a promoter in the prospectus or identified by the company in its
annual return in Section 92.
 A person who controls the company affairs, indirectly or directly, whether as a director,
shareholder or otherwise.
 A person in accordance with whose directions, advice or instructions the Board of
Directors of a company are accustomed to act.
In simple words, promoters perform the preliminary steps, like floating the securities in
the market, making the prospectus of the company, etc., for establishing the company’s
business. However, if a person is doing these things professionally, they will not be
 considered a promoter. A promoter is a person/entity who conceives the idea of company
formation. An individual, firm, association of person or company can be a promoter.
Liabilities of Promoter: The liabilities of a promoter include the following:
 They cannot make secret profits out of company profits or deals for personal promotion.
The promoters are liable to pay such profits to the company when they make such
profits.S. 35 of the Act imposes civil liability on certain persons, including promoters, for
misstatements in a Prospectus.
 They can be held liable for damages or losses suffered by a person who subscribes for
debentures or shares due to the false statements made in the company prospectus.
 They are criminally liable for mentioning untrue statements in the prospectus.
 They can be held liable for a public examination of private company documents when
there are reports alleging fraud in the company formation or promotion activities.
 They are also liable to the company where there is a breach of duty on their part,
misappropriated company property or guilty of breach of trust.
Liability of promoters under a Prospectus: S. 35 of the Act imposes civil liability on
certain persons, including promoters, for misstatements in a Prospectus. If a person
subscribes for the shares or debentures of a company on the faith of statements contained in t
Prospectus issued by the company, he can sue the persons mentioned in the said section
(including the promoters of the company) for any loss or damage sustained by him by reason
of any untrue or misleading statement in t Prospectus.
Liability of promoters in respect of allotment of shares: When a company issues a
Prospectus, all the money which is received by it from applicants for the shares is to be kept
deposited in a Scheduled Bank. If the entire amount payable on applications for shares in
respect of the minimum subscription amount (as stated in the Prospectus) has not be received
by the company within the prescribed period, all the money received by it from the applicants
is to be returned to such applicants within the stipulated period. If there is any contravention
of this provision by, inter alia, a promoter he becomes punishable with fine which may
extend to 1 lakh or 1,000 each day of default, whichever is less. [S. 39]
Liability of promoters at the time of winding-up: If the Tribunal has passed an order
for the winding up of a company, the Liquidator has made a report to the Tribunal that, in his
opinion, a fraud has been committed by an person, inter alia, in the promotion of the
company the Tribunal can order such a person (including a promoter) to be examined the
Tribunal. [S. 300]
Pre-incorporation contracts: Liability of promoters: Very often, promoters enter into
contracts with third parties, purporting act on behalf of the company which is yet to be
formed. Such a contract does not bind the company, as it was not in existence at the time of
the contract. As is well-established, two consenting parties must exist before a contract can be
entered into and since a company has no legal existence before it is incorporated, such a
contract cannot bind the company-although the promoter who signed the contract would be
bound by it.
Thus, one English case, a businessman intended to sell wine to a company yet to be formed.
He signed a contract with the proposed directors of the company who agreed to buy the wine
on behalf of the company. As the company was not in existence on the date of the delivery,
the directors personally accepted delivery of the wine. It was held that the directors were
liable to pay for the wine as they had contracted on behalf of a non-existing principal. As they
took delivery of the goods, they were, in law, bound to pay for them. (Kelner v. Baxter, 186
L. R. 174)
Likewise, a company is also not entitled to sue on a pre-incorporation contract. It can neither
adopt nor ratify such a contract, as it was not in existence when the contract was entered into.
(Natal Land & Colonisation Co. Ltd. v. Pauline Colliery Syndicate, 1904 A. C. 120)
However, in India, Ss. 15 and 19 of the Specific Relief Act, 1963, make departure from the
strict application of the above rule relating to enforceability of pre-incorporation contracts by
and against a company. It provides that such a contract was made by the promoters for the
purposes of the company and if the contract is warranted by the terms of its incorporation, the
company may adopt and enforce such a contract. Likewise, even the other party can enforce
such a contract if the company has adopted it after incorporation.
The Bombay High Court has held that a pre-incorporation contract allot shares when the co.
was incorporated cannot be said to be "fort purposes of the company". It was, therefore, not
enforceable. (Imperial Manufacturing Co. Ltd. v. Munchershaw, 1889 13 Bom 415)
Functions of a Promoter: A promoter plays many functions in the formation of a
company, from conceiving the business idea to taking all the required steps to make
the idea a reality. Below are some of the functions of a promoter:
 A promoter needs to comprehend/conceive the idea of company formation.
 A promoter looks into the feasibility and viability of the business idea. He/she assesses
whether the company formation will be practicable or profitable.
 Once the idea is conceived, the promoter organizes and collects the available resources to
convert the business idea into a reality.
 The promoter decides the company name and settles the contents of the
company’s Memorandum of Association and Articles of Association.
 The promoter decides the location of the company’s head office.
 The promoter nominates associations or people for vital company posts, such as
appointing the auditors, bankers and the company’s first directors.
 The promoter prepares all the necessary documents required to incorporate a company.
 The promoter decides the company’s funding sources and capital requirements.
A promoter cannot be considered a trustee, employee or agent of a company. The role of
the promoter ceases when the company is established and is handled by the board of
directors and the company management.
Duties of a Promoter: The promoters have certain duties towards the company,
which are as follows:
Disclose hidden profits: The first duty of the promoters is to be loyal to the business and not
involve in malpractice. They should not earn secret or hidden profits while carrying out
promoting activities such as buying a property and selling it for a profit without
disclosing it. They are not barred from making such profits, but the only condition is that
they must disclose it. They must share all the information regarding their profitability and
earnings with all the relevant company stakeholders.
Disclose all material facts: A promoter has a relationship of trust and confidence with the
company, i.e., a fiduciary relationship. Under this fiduciary relationship, the promoter has
the duty to disclose all material facts relating to the company’s business and formation
with the relevant stakeholders.
Act in the best interest of company: In all situations, promoters should prioritize the
company’s interest over their personal interests. They must give utmost consideration to
the company’s best interest in its formation and all business dealings.
Disclose all private arrangements: While forming and establishing a company, many
private transactions take place. However, such transactions must be disclosed by the
promoters to the stakeholders. It is the duty of the promoters to disclose all private
transactions and the profit earned from them to the stakeholders.
Rights of a Promoter: The rights of promoters include the following:
Right of indemnity: Promoters are jointly and severally accountable for any hidden profits
made by any of them and false statements made in the prospectus. All the promoters are
individually and equally responsible for the company’s affairs. Thus, one promoter can
claim the compensation or damages paid by him/her from the other promoters.
Right of preliminary expenses: A promoter is entitled to reimbursement for preliminary
expenditures incurred for the company’s establishment, such as solicitors’ fees,
advertising costs and surveyors’ fees.
Right of remuneration: A promoter has the right to receive remuneration from the company
unless a contract to the contrary. The company’s Articles of Association can also provide
that the directors can pay an amount to the promoters for their services. However, the
promoters cannot sue the company for remuneration unless there is a contract.

11.) Short note on MEMORANDUM OF ASSOCIATION?

Words of Palmer, it is "a document of great importance in relation to a proposed company". It
is like a charter, that is, a fundamental document, which incorporates the most basic features
of a company. S. 2(56) of the Act gives a not-too-helpful definition of the word
memorandum' in the following words: "Memorandum" means the memorandum of
association of a company as originally framed or as altered from time to time in pursuance of
any previous company law or of this Act."
The importance of the memorandum lies in the fact that it contains the six important clauses
that govern the company throughout its existence, namely, -
Name clause, Registered office clause, Objects clause, Liability clause, Capital clause,
Subscription clause.
In the case of a One Person Company (OPC), the memorandum must also state the name of
the person who, in the event of the death of the subscriber or his incapacity to contract, will
become the member of the company.
I. NAME CLAUSE: The name clause is the first clause in the memorandum of a
company and runs as under:
"1. The name of the company shall be ABC Limited."
The name of a company must end in the word "Limited" if it is a public company, and in the
words "Private Limited" if it is a private company- unless the company has been granted a
licence by the Central Government under s 8 of the Act to omit the use of these words from
its name.
The first step in the formation of a company, even before the necessary documents are
submitted to the ROC, is to apply to the ROC in the prescribed form (accompanied by the
prescribed fees) for the reservation of a particular name for the proposed company. If the
application is in order and such a name is available, the ROC reserves the name for a period
of sixty days from the date of the application.
After reserving a name, if it is found that the name was applied for by furnishing wrong or
incorrect information, the reserved name is to be cancelled and the person making such an
application is subject to a penalty of up to 1lakh.
Any appropriate name may be chosen for a proposed company, subject to the following
restrictions:
(a) The name of the company must not contain words, the use whereof is prohibited by law,
as for instance, "UNO", "WHO", "Gandhi" "Nehru", "Shivaji", "Ashoka Chakra" or any
name which may suggest the patronage of the Government of India or a State Government.
(b) A company cannot be registered with a name which:
(i) is identical with or too nearly resembling the name of an existing company; or
(ii) is such that the use of the name by the company- would constitute an offence under
any law; or is 'undesirable' in the opinion of the Central Government.
(c) The name of a company cannot also contain any word or expression das may be
prescribed by the Central Government under Rules made under the Act.
Vide a Circular issued by the Government of India in February 2014, the use of the word
national in the name of a company has been prohibited unless such a company is a
government company and the Central or a State Government has a stake in such a company.
Likewise, the word 'Bank' is no to be used in the name of a company, unless a No Objection
Certificate to that effect is issued by the Reserve Bank of India. Similarly, the words
'Exchange or 'Stock Exchange' cannot be used, unless a No Objection Certificate is issue by
the Securities Exchange Board of India.
As regards clause (b) above, it is to be remembered that the name of an existing company is a
valuable asset and part of its business reputation. The goodwill of such a company is likely to
be adversely affected if a new company is registered with a name that is either the same or
one which is so similar that it creates confusion that both companies may be part of the same
group and is calculated to deceive persons who deal with the company or the public in
general. So, if a small garment manufacturer wishes to incorporate a company with the name
"Tata Garments Private Limited", the name is likely to be disallowed as it would create an
impression in the minds of the general public that this company belongs to the reputed Tata
group.
Thus, it has been held that a new company could not be incorporated with the name, "MRJ
Contractors Ltd.", as this name would be deceptively similar to the name of an existing
company, "MPJ Construction Ltd." (Archer Structures Ltd. v. Griffiths, (2004) 1 BCLC Ch.
Div. 201)
Publication of name: The name of a company must be displayed outside every place
where the business of the company is being carried on. It is also mandatory for the name,
along with the address of the registered office, to be printed on all business letters, official
publications, orders, receipts, negotiable instruments, etc. issued or endorsed by the company.
Change of name: A company can change its name by passing a special resolution at
a meeting of its members and obtaining the approval of the Central Government in writing.
However, such approval is not required if a private company is dropping the word "Private"
from its name on becoming a public company. The new name must, of course, comply with
what is stated above regarding the use of names by companies. When a company changes its
name, the ROC enters its new name on the register and issues a fresh Certificate of
Incorporation with the new name. The change of name is complete and effective only when
such a certificate is issued by the ROC.
Rectification of name: Under S. 16 of the Act, if through inadvertence or otherwise,
a company is registered with a name -
(a) which, in the opinion of the Central Government, is identical with on too nearly resembles
the name of another existing company, it may direct the company to change its name, and the
company must do so within a period of three months, by passing an ordinary resolution
(b) which, in the opinion of the Central Government, is identical with or too nearly resembles
an existing registered trade mark, it may direct the company to change its name, and the
company must do so within a period of six months by passing an ordinary resolution.
Licence to omit the words 'Limited' or 'Public Limited' from the name A non-profit company
may be allowed by the Central Government to omit the words 'Limited' or 'Private Limited'
from its name if it fulfils certain conditions
II. REGISTERED OFFICE CLAUSE: The second clause of a memorandum sets out
the state (and not the city in which the registered office of the company is situated
and runs as follows
"2. The registered office of the company shall be situate in the State Maharashtra."
Under S. 12 of the Act, a company must have, within fifteen days of its incorporation, a
registered office which is capable of receiving an acknowledging all communications and
notices addressed to it. Within thirty days of its incorporation, the exact address of the
registered office is to be sent to the ROC, who must record the same in the register. [S 12] All
communications must be addressed to the company at its registered office. [S. 20]
Change of registered office: As far as a change of a company's registered office is
concerned, there are three possibilities which can be illustrated by taking an example of
company having its registered office at Churchgate in Mumbai, Maharashtra
A. The company may wish to change its registered office from Churchgate to Colaba,
that is, a different location in the same city. OR
B. It may want to change its registered office from Churchgate in Mumbai to a
location in Pune in Maharashtra, that is, a different city in the same State OR
C. It may want to change its registered office from Mumbai in Maharashtra to
Ahmedabad in Gujarat, that is, a city in a different State.
In the first case, that is, when the company shifts its registered office within the same city,
town or village, no formalities need be gone through- except informing the ROC about this
change of address within a period of fifteen days of the change. [S. 12]
In the second case, that is, when the registered office is proposed to be shifted to any city,
town or village in the same State, the company must apply in the prescribed form to the
Regional Director for his confirmation. However, such an application is to be made only if
the change is from the jurisdiction of one ROC to another ROC in the same state. The
confirmation of the Regional Director is then to be filed with the ROC within a period of
sixty days. [S. 12]
It will be seen that in both the above cases, there is no alteration of the company's
memorandum, as the registered office of the company continues to be in the same state.
However, in the third case, the memorandum of the company would have to be altered to
indicate that the registered office of the company is in another state. A special procedure has
been laid down for this purpose in S. 13 of the Act, which may be summarised as under:
1. The company must pass a special resolution of its shareholders to change the registered
office of the company from one state to another.
2. The company must submit an application in the prescribed form to the Central
Government.
3. The Central Government must dispose of such an application within a period of sixty days.
4. The special resolution of the shareholders and the approval of the Central Government
must be filed with the ROC's office of both the states within the prescribed period of time.
5. The ROC of the state to which the registered office of the company has been shifted will
then issue a fresh Certificate of Incorporation indicating the alteration.
Sometimes, a shift of the registered office of a company from one state to another is objected
to by the government of the state where such office is situated, on the ground that it would
lose revenue and employment opportunities if the office is allowed to be shifted. This line of
argument found favour with the High Court of Orissa, which held-in two cases that the
interest of a state is an important consideration when reviewing inter-state change of
registered office. The learned judges took the view that, in a federal set-up, every state has a
right to protect its revenue and the shift was not allowed in both the cases. (Orient Paper
Mills Ltd. v. State, AIR 1957 Ori 232; In Re Orissa Chemicals and Distilleries Ltd., AIR
1961 Ori 162)
III. OBJECTS CLAUSE
This clause is perhaps the most significant - and always the lengthiest clause in a company's
memorandum and it enumerates the business activities which can be undertaken by the
company. Under S. 4 of the Act, this Clause must contain the objects for which the company
is proposed to be incorporate and all matters considered necessary in furtherance thereof. Any
business falling within the four corners of this clause is intra vires, and a company cannot
engage in any trade or business not falling within this list, as that would be ultra vires. A
company may engage in any business it chooses to, as long as such business is listed in the
objects clause and the same is not prohibited by the law of the land. Thus, when a company
was incorporated for conducting lotteries (which was an activity prohibited by the law), the
company was ordered to be wound up. (Universal Mutual Aid & Poor Houses Assn. v. A. D.
Thoppa Naidu, AIR 1933 Mad 18)
The law insists, for good reasons, that a company should list all the lines of business it
proposes to engage in, as this is for the protection of its shareholders as well its creditors. A
person who invests money in the company (a shareholder) and one who extends credit to it or
gives it a loan (a creditor) must feel assured that his money cannot be diverted to other
businesses. This requirement is also in the public interest because it ensures that a company
does not diversify into fields which are not stated in its memorandum and are totally
unrelated to the activities for which it was incorporated.
The doctrine of ultra vires ensures that a company cannot engage in ultra vires activities or
transactions, that is, any activity or business not listed in its objects clause, without first
amending its memorandum which is possible only with the consent of a preponderant
majority of its shareholders.
Alteration of objects clause
The legal position prior to 2013: Under the Companies Act, 1956, a company could change
its objects clause only for one or more reasons enumerated in S. 17 of the said Act, as for
instance, to carry on its business more economically or more efficiently or to enlarge or
change the local area of its operations, and so on. Moreover, whether any alteration could be
said to fall within the ambit of the seven clauses enumerated in the said S. 17 was a question
of fact, to be decided by the courts, as will be clear from some cases decided under the said
Act.
1. A company originally formed to do business in jute was allowed to engage in rubber
business also. (Juggilal Kamlapat Jute Mills Ltd. vs. Registrar of Companies, (1966) 1 Co.
Law Journal, 292 All)
2. A company manufacturing cables was allowed to engage in the hotel industry. (Indus
Cables India Ltd. v. Registrar of Companies, (1973) 43 Co. Cases 353 P & H)
4. However, a company incorporated to protect cyclists was not allowed to amend its
memorandum to include protection of motorists, as cyclists have also to be protected against
motorists. (In Re Cyclists' Touring Club, (1907) 1 Ch. Div. 269)
The legal position after 2013: Under the Companies Act, 2013, the objects clause of a
company can be altered by passing a special resolution.
However, if a company has raised money from the public through, prospectus and still has
any unutilised amount out of the money so raised, it must, in addition to the special
resolution, comply with the following formalities. Such a company must publish the details
of this special resolution in on English and one vernacular newspaper which is in circulation
at the place where the company's registered office is situated. The same is also to be placed
on the website of the company, if any, indicating the justification for such a change. The
dissenting shareholders, that is, the shareholders of the company who did not vote in favour
of the special resolution, must be given an opportunity to exit the company.
As stated earlier, a copy of the special resolution passed by the company should be registered
with the ROC within thirty days. The ROC then certified such registration within thirty days
from the date of its filing. Such alteration takes effect, not when the special resolution is
passed, but when the same duly registered with the ROC as above. If, for some reason, the
company does not register the documents, the purported alteration and all proceeding
connected therewith become void and inoperative. The Central Government may, however,
extend the time in this regard on sufficient cause being show it.
IV. LIABILITY CLAUSE: The fourth clause of the memorandum states the nature of
the liability its members. In the case of a company with limited liability, this clause
runs follows:
4. The liability of a member of the company shall be limited to the amount unpaid, if any, on
the shares held by him. the effect of this clause is that a member the company is liable only to
the extent of the unpaid amount on the face value of the shares held by him. If he is the
holder of fully paid shares, his liability this regard will be nil. In the case of a company with
unlimited liability, this clause states that liability of its members shall be unlimited.
Amendment of the liability clause: Once a company is registered with limited liability, it
cannot alter this clause so as to make the liability of its members unlimited.
V. CAPITAL CLAUSE: This clause of the memorandum states the amount of the
nominal or authorised or registered capital of the company and the number and value
of the shares into which it is divided. A typical example of a capital clause in a
memorandum would be as under:
"V. The authorised capital of the company shall be ₹5,00,000 (Rupees five lakhs) divided
into 40,000 equity shares of 10 each and 10,000 preference shares of 10 each."
When enacted, the 2013 Act had stipulated that it was mandatory for a private company to
have a minimum paid up share capital of 1 lakh, the corresponding figure for a public
company being 5 lakhs. However, these monetary limits were deleted by the 2015
Amendment, and now, these companies must have a minimum paid up share capital of such
sum as may be prescribed from time to time.
Alteration of the capital clause: S. 61 of the Act allows a company to alter the capital clause
of its memorandum by passing an ordinary resolution in a general meeting, provided it is
authorised to do so by its articles. Thus, a company may alter its capital clause-
(a) to increase its share capital by such amount as it thinks expedient, by issuing new shares;
(b) to consolidate and divide all or any part of its share capital into shares of a larger amount
than its existing shares; (If, however, such consolidation or division results in a change in the
voting percentage of its shareholders, the prior approval of the Tribunal is mandatory.)
(c) to convert all or any of its fully paid up shares into stock and reconvert such stock into
fully paid up shares;
(d) to sub-divide its shares into shares of a smaller amount; or
(e) to cancel shares which have not been taken or agreed to be taken by any person.
No approval of any statutory authority is necessary for this purpose. except as stated above
with reference to clause (b). All that is required under S. 64 of the Act is that the company
must file a notice of such alteration with the ROC within thirty days. The ROC then records
such changes in the company's memorandum or articles or both. If no such notice is filed
with the ROC, the company, as well as every officer in default, is liable to pay a fine which
may extend to 1,000 for each day of the default or 5 lakhs, whichever is less.
VI. SUBSCRIPTION CLAUSE: The subscription clause is the last clause in the
memorandum of a company and is usually worded as follows:
"We, the several persons whose names and addresses are subscribed below, are desirous of
being formed into a company in pursuance of this memorandum of association and we
respectively agree to take the number of shares in the capital of the company set opposite our
respective names."
As seen earlier, the memorandum must be signed by at least two persons in the case of a
private company and by at least seven persons in the case of a public company. Each
subscriber must put his signature, along with his name address, description and occupation, if
any. Every subscriber must also write opposite his name, the number of shares taken by him,
which cannot be less than one.
Alteration of the subscription clause: Once a subscriber has affixed his signature and other
details on the memorandum and the documents are filed with the ROC, he cannot withdraw
his name for any reason whatsoever. As observed in an English case, "The subscriber to the
memorandum cannot have rescission on the ground that he was induced to become a
subscriber by the misrepresentation of an agent of the company." (In Re Metal Constituents
Ltd., (1902) 1 Ch. Div. 707)

12.) Note on THE DOCTRINE OF ULTRA VIRES? Exceptions?

A company must confine itself to business activities which are intra vires, namely, those
which it has power to do, that is, those which are listed in the objects clause of its
memorandum. All other activities would be ultra vires as they would fall outside the scope of
its permitted businesses. It was also seen that the rationale behind confining a company to
only those lines of businesses which are set out in its memorandum is three-fold, namely, -
-to protect its shareholders; - to protect its creditors; and -to protect public interest.
If a company were to be allowed to keep on changing its business without any restriction
whatsoever, as once remarked, a person who bought shares in a gold mining company may
find himself holding the shares of a fried fish shop.
As observed in an English case, it is the function of the memorandum to delimit and identify
the objects in such a plain and unambiguous manner that a person can identify the field of
industry within which the corporate activities Are to be confined by the company. (Cotman v.
Brougham, (1918) A. C. 514)
It is here that the courts come into the picture to declare whether a particular transaction or a
business activity undertaken by the company is beyond ("ultra") the powers ("vires") of the
company. The classic English case on the point is the decision of the House of Lords in
Ashbury Rly Carriage & Iron Co. Ltd. v. Riche [(1875) Law Reports 7 (House of Lords)
6531, the facts whereof may briefly be stated as under:
The memorandum of a company authorised it "to make and sell or lend on hire, railway
carriages and wagons and all kinds of railway plants and to carry on the business of
mechanical engineers and general contractors". The company entered into a contract with a
firm of railway contractors, Riche, to finance the construction of a railway line in Belgium.
This contract was also ratified by its shareholders. Later, however, the company sought to
repudiate the contract on the ground of its being ultra vires and Riche sued for damages. His
contentions were two-fold: Firstly, the transaction in question fell within the expression
"general contractors", and secondly, the contract in question was ratified by a majority of the
shareholders of the company.
Rejecting this argument, the House of Lords held that the contract lay outside the four corners
of the company's memorandum, and was, therefore, ultra vires. In the words of their
Lordships, "the term "general contractors" must be taken to indicate the making generally of
such contracts as are connected with the business of mechanical engineers". It was pointed
out that if the term "general contractors" was not to be so interpreted, it would cover and
authorise the making of contracts of any and every description, including for instance, marine
and fire insurance. Instead of confining the company activities to those listed therein, the
memorandum would become almost meaningless, as it would cover business of any kind
whatsoever. As the transaction was ultra vires the powers of the directors as well as those of
the shareholders, no majority of shareholders could ratify it. As observed by the court, the
shareholders could not, even by unanimous consent, do the very thing which by law they
were prohibited from doing.
the question to be answered by the court is whether a business activity undertaken by it is or
is not incidental to one of the objects listed in its memorandum. Naturally, this is always a
question of fact in every case. Thus it has been held that a railway company which had
authority to keep steam vessels for the purpose of a ferry could use them for excursion trips
when they were lying unused. (Forest v. The Manchester, Sheffield and Lincolnshire Rly Co.
(1861) 54 ER 803). However, a tramway company was held not entitled to run buses, because
such business was found to be, in no way, incidental to its business of running trams.
(London County Council v. Attorney-General, 1902 A. C. 165)
In the leading Indian case on the doctrine of ultra vires, the directors of a company were
authorised "to make payments towards any charitable or any benevolent object or for any
general public or useful object". After its business was taken over by the Life Insurance
Corporation of India (LIC), pursuant to a resolution passed by the shareholders, the directors
made a donation of 2 lakhs to a trust formed for promoting technical and business knowledge.
The Supreme Court held that such a payment was ultra vires. The court observed that despite
the wide power given to the directors in this respect, they could not spend the company's
money on any charity or general object. A donation would be justified only if it would be
useful for promoting any of the objects of the company. In the present case, since the
company's business had been taken over by the LIC, there was no business left to promote.
(A Lakshmanaswami Mudaliar v. LIC, AIR 1963 SC 1185) In the above case, the Supreme
Court also drew a distinction between the company's objects and its powers. The authority to
make a donation is a power and not an object. As observed by the court, the memorandum of
a company states the objects of the company, and not its powers, and even if a power is so
stated, it does not become an object by itself.
Consequences of an ultra vires transaction
The following consequences flowing from an ultra vires transaction will now be briefly
discussed: Injunction to restrain the company, Personal liability of directors, Liability of
directors for breach of warranty of authority, Effect on property acquired under an ultra
vires contract, Effect of ultra vires contracts, Effect of ultra vires torts.
1. Injunction to restrain the company: If a company has entered into, or is about to enter into,
an ultra vires transaction, any shareholder of the company can approach the court for an
injunction restraining the company from proceeding with such a transaction. (Attorney-Gen.
v. Great Eastern Rly Co. Ltd., (1880) 5 AC 473)
2. Personal liability of directors: It is the paramount duty of directors to ensure that the
shareholders’ funds are used only for the legitimate business of the company. Therefore, if
such funds are directed towards ultra vires activities, the directors become personally liable to
replace such funds. Thus, the Bombay High Court has held that a shareholder can file a suit
against the directors - without impleading the company-for an order from the court directing
them to restore to the company, funds employed by them in a transaction or activity which
was ultra vires. (Jehangir Modi v. Shamji Ladha, (1866) 4 Bom HCR 185)
3. Liability of directors for breach of warranty of authority: Under the law of agency, an
agent must act only within the scope of bis agency, and if he does not, he becomes liable to
third parties for breach of warranty of authority. As directors are agents of the company, if
they induce a third party, even innocently, to enter into a contract with the company in
respect of a matter in which the company itself has no authority to act, they become
personally liable to compensate such third party for any loss suffered by him.
Thus, in Weeks v. Propert [(1873) LR 8 CP 427), the directors of a company accepted a loan
of 500 Pounds from the plaintiff, although the company had exhausted the upper limit of their
borrowing powers. The loan transaction, being ultra vires, was void. When the plaintiff sued
the directors personally, it was held that by accepting the loan, they had warranted that the
company had not exhausted its borrowing powers, a representation that amounted to a false
warranty. The directors were, therefore, personally liable to compensate the plaintiff.
4. Effect on property acquired under an ultra vires contract: If a company spends money on
property, having no authority to do so such property still belongs to the company. Even
though such an asset may be wrongly acquired, it is nevertheless an asset bought from the
corporate funds As observed by Brice ("Doctrine of ultra vires"), property legally transferred
to a corporation is in law duly vested in such a corporation, even though the corporation was
not empowered to acquire such property. Thus, in one case, a company was allowed to
recover money lent on a mortgage, although such a transaction was beyond the powers of the
company. (Ahmed Sait & Ors. v Bank of Mysore, (1930) 59 MLJ 28)
5. Effect of ultra vires contracts: Any contract made by a company which falls outside its
objects (as defined in its memorandum) is wholly void and is a nullity in the eyes of the law.
The question in such cases is not the legality of the contract, but the competency of the
company to enter into it. To take a simple analogy, a minor's agreement is void under Indian
law, not because it is illegal, but because the minor is no competent to enter into a contract. In
such a case, questions of estoppel ratification or acquiescence also do not arise. Likewise, if a
company's contract falls outside the scope of its objects, the company lacks competency to
enter into it.
In one case, a company purchased and operated a rice mill, although it had no power to trade
in rice. The rice produced in the mill was consigned to certain persons who paid the full price
for it. However, since the rice was of an inferior quality, the consignees had to sell it at a
lower price and thus incurred losses. The company then issued drafts in their favour,
promising to compensate them for such losses. However, before any such drafts were
realised, the company went into winding up and the question arose whether such drafts were
enforceable. It was held that since trading in rice was an ultra vires transaction, the directors
could not bind the company and therefore, the consignees could not recover the money from
the company. (Re Port Canning & Land Investment Co. Ltd., (1871) Bengal Law Reports,
583)
6. Effect of ultra vires torts: It is not well-settled as to what is the exact extent of the liability
of a company if its employee commits a tort in the course of an activity undertake by the
company which is not warranted by its memorandum. From the observations made in decided
cases, it can be said that a company would be liable for the torts of its servants only if the
following two conditions are fulfilled namely, -
(a) the activity in the course of which the tort was committed falls within the scope of its
activities as defined in its memorandum; and
(b) the servant had committed the tort in the course of his employment with the company.

Difference between Memorandum and Articles?

Memorandum articles
1. It is the charter, the fundamental document of 1. It is subordinate to the memorandum.
a company.
 2. Alteration of some provisions of the 2. All the provisions of a company's articles
memorandum require the approval of statutory can be amended by a special resolution. No
authorities (In addition to a special resolution of statutory approval is necessary for altering
the members). any part of the articles.
3. If an act or transaction falls outside the
3. An act not allowed by the articles is
purview of the memorandum, it is ultra vires
merely irregular. It can be ratified by the
and void. It cannot be ratified by the
shareholders. shareholders.
4. If there is any inconsistency between the
provisions of the memorandum and those of the
articles, the provisions of the memorandum will
prevail.
5. If there is any ambiguity in the memorandum,
the articles which were registered at the same
time as the memorandum may be used to
explain such an ambiguity.
6. Articles cannot be altered in a way which is
inconsistent with what is stated in the
memorandum.

13.) note on Doctrine of Constructive Notice?

In companies law the doctrine of constructive notice is a doctrine where all persons
dealing with a company are deemed (or "construed") to have knowledge of the company's
articles of association and memorandum of association. The memorandum and articles of
every company are registered with ROC and are available for public inspection. Therefore, it
is the duty of the person dealing with a company to read the relevant parts of these document
and he cannot later argue or prove that he had, in fact, not read such provision. He could have
read them, he should have read them, and whether he actually read them or not, he is in the
same position as if he had knowledge of their contents. In other words, every person dealing
with a company is deemed to have constructive notice of the contents of the company's
memorandum and articles.
In Kotla Venkataswamy v. Rammurthy (AIR 1934 Mad 579), the articles of a company laid
down that all documents executed by a company required the signature of the managing
director, the secretary and one working director of the company. A deed of mortgage signed
on behalf of the company in favour of the plaintiff was executed by the secretary and one
working director. The Madras High Court held that the plaintiff could not claim under this
mortgage deed, as it was not duly executed as per the articles of the company. In such cases,
whether the plaintiff was or was not aware of the provision in the articles would not be
relevant. In the course of its judgment, the court observed as follows:
"If the plaintiff had consulted the articles, she would have discovered that a deed such as she
took required execution by three specified officers of the company and she would have
refrained from accepting a deed inadequately signed. Notwithstanding, therefore, she may
have acted in good faith and her money may have been applied to the purposes of the
company, the bond is nevertheless invalid."
The doctrine, however, goes a step further. Not only is an outsider deemed to have read the
documents which are "public documents", but he is also deemed to have understood them
according to their proper meaning. Thus, an outsider cannot contend that, although he had
read the articles of the company, he had understood them in a way different from their
ordinary meaning. The reason behind this is simple: The rule would lose much of its force if a
third party were allowed to argue that, although the articles meant one thing. he had
understood them to mean something else.
The doctrine of constructive notice is sometimes interpreted to go even one more step further.
An outsider is deemed to have notice, not only of the company's memorandum and articles,
but also of all other documents like special resolutions, particulars of charges, details as
regards the appointment and removal of directors and all documents which it is mandatory to
file with the ROC. If any such document is open to public inspection, the outsider is deemed
to have notice thereof, as he could have - and should have – taken inspection, the fact that he
did not actually do so being irrelevant. Thus, every company is required to file "particulars"
of its directors and this would show when a director was appointed, when he ceased to be a
director, etc. As these particulars are open for public inspection, every person who deals with
a company can easily find out who are its directors and if he neglects to do so, he does so at
his own risk. So, if a document is purported to have been signed by a director, but the name
of the person who signed it is not included in the particulars filed by the company, it would
not bind the company (K. L. Engineers Ltd. v. Arab Malayla Finance Ltd. (1995) 1 SCR 85)
The doctrine of constructive notice has sometimes resulted in hard ship and injustice to third
parties because it does not take into account the realities of business life. An outsider
generally deals with officers who represent the company and not with its directors. Likewise,
a lay person may not have sufficient legal knowledge to appreciate the intricacies of the
doctrine. Th courts have, therefore, relaxed the application of the doctrine in several case
particularly so when a company seeks to save its skin by taking shelter und the doctrine.
Thus, a security issued by a company, but not signed in accordance with its articles was held
binding on the company. (Charnock Collieries Ltd. Bhoolanath, (1912) 39 ILR Cal 810)
Likewise, when a company took an overdraft without the approval of the board of directors as
required under the articles, it was held that the doctrine constructive notice would not apply
and the transaction was binding on the company. (Dehra Dun Mussorie Electric Tramway
Company Ltd. Jagmandardas, AIR 1932 All 141)
Taking a practical view in the matter, the European Communities Ac 1972, and the English
Companies Act, 1985, have not followed the doctrine Thus, in one English case, every
document was required to be signed by director of the company. When the company issued a
debenture signed by the company's solicitor on behalf of the company's directors, the court
held the the document was binding on the company. (TCB Ltd. v. Gray)

14.) Note on Doctrine of Indoor Management?

The Doctrine of Indoor Management is a legal principle that is followed in India. This
doctrine stipulates that the internal affairs of a company are to be managed by its directors
and not by outsiders. This principle is based on the premise that the directors are the ones
who are most familiar with the company’s affairs and are in the best position to manage
them. The memorandum and articles of a company are public documents and can always be
inspected at the office of the ROC. However, details of the internal procedure - and the
observance or non-observance thereof - are no open to the public eye. The outsider has no
means of knowing what has actually taken place behind the closed doors of a company.
Therefore, the doctrine of indoor management was evolved so that an outsider could presume
the regularity of such management. Thus, if a particular act can, under the article of a
company, be done if a resolution has been passed by the board of directors the outsider can
only be presumed to know that such a resolution is necessary before that act is done. If the
company represents to him that a board resolution had been passed in the matter, he can
presume that it was so passed and ad accordingly-even if it turns out later that no such
resolution had, in fact, bee passed. It will be seen that the doctrine of indoor management lays
down a principle or assumption which is contrary to the assumption made under the doctrine
of constructive notice, seen above. Whereas the doctrine of constructive notice protects the
company against third parties, the doctrine of indoor management protects third parties
against the company.
The classic illustration of the application of the doctrine of indoor management is the English
case, Royal British Bank v. Turquand [(1856) 119 ER 886], where, under the articles, the
directors of the company were authorized to borrow only such sums of money as may, from
time to time, be authorized by a resolution of the shareholders passed at a general meeting of
the company. The directors took a loan from T. The shareholders claimed that since they had
not passed any resolution authorizing the directors to borrow this amount, the loan was not
binding on the company. Rejecting the argument, the court held that once it is shown that
directors could borrow money subject to the shareholders' resolution, the outsider is entitled
to infer that such a resolution had been passed. He could presume the regularity-rather than
the irregularity of the company's indoor management.
In another case (Premier Indus Bank Ltd. v. Carlton Manufacturing Co. Ltd., (1909) 1 KB
106), the court explained the position in the following words:
"If the directors have power and authority to bind the company, but certain preliminaries are
required to be gone through on the part of the company before that power can be duly
exercised, then the person contracting with the directors is not bound to see that all these
preliminaries have been observed. He is entitled to presume that the directors are acting
lawfully in what they do."
The doctrine of indoor management is broad-based on the ground of convenience. It is
possible for an outsider to examine documents filed by a company with the authorities, but it
is well-nigh impossible for him to find out what actually happened behind the closed doors of
the company. Business could come to a grinding halt and people would deal with a company
with hesitation- and even suspicion - if the rule were to be otherwise.
Exceptions to the doctrine of indoor management
The doctrine is more than one and a half centuries old and the courts have evolved several
exceptions to the doctrine, the most important being the following:
1. Knowledge of irregularity, 2. Suspicion of irregularity, 3. Forgery, 4. Acts falling
outside apparent authority, 5. Ignorance of the company's articles.
1. Knowledge of irregularity: If a person dealing with a company is, in fact, aware of an
irregularity, he cannot obviously take advantage of the doctrine. A person who knows, for
instance, that a particular resolution had not been passed, cannot be heard to say that he
presumed that this resolution must have been passed.
In one case, under the articles of the company, all transfers of shares had to be approved by
two directors of the company. A particular transfer of share was approved by two directors,
one of whom was, to the knowledge of the plaintiff, disqualified. The court held that such a
transfer was invalid and t plaintiff could not rely on the doctrine of indoor management. He
could not presume that an act was valid, when he knew that such an act was invalid (Devi
Mal v. Standard Bank of India, (1927) 101 IC 568)
This exception also applies to a person who was himself a party to the internal procedure
where the irregularity had occurred. Naturally, he cannot be allowed to say that he presumed
that the prescribed internal procedure has been followed when he knew that it was not.
2. Suspicion of irregularity: Not only actual knowledge, but even suspicion of irregularity
may be sufficient in a given case to negate the application of the doctrine of indoor
management. Suspicion should arise, for instance, when a third party see that an officer of a
company is clearly acting outside the scope of his authority Thus, where property of a
company was transferred by the accountant of the company, it was held that the fact of an
accountant transferring such property should have aroused suspicion in the transferee and he
could not, therefor get the protection of the doctrine. (Anand Behari Lal v. Dinshaw & Co., A
1942 Oudh 417)
3. Forgery: When a document is forged, it is a total nullity in the eyes of law and the doctrine
of indoor management cannot be availed of in such a case. Thus, in Ruben v. Great Fingall
Consolidated Ltd. [(1906) AC 439], a share certificate of the company was transferred to the
plaintiff under the sea of the company. It turned out that the certificate had been issued by the
secretary of the company, who had forged the signatures of two directors. The plaint argued
that the question whether such signatures were genuine or forged was a matter of the internal
management of the company, and therefore, he could rely on the doctrine of indoor
management. The court, however, held that the doctrine does not cover cases of forgery.
4. Acts falling outside apparent authority: The doctrine of indoor management will not cover
a situation where a act done by an officer of the company clearly falls outside his apparent
authority. In such cases also, the outsider cannot claim to protect himself under the rule in
Turquand's case. Thus, in one case, the articles empowered the directors of a company
determine who should sign bills of exchange on behalf of the company. T company was
doing the business of forwarding agents and had several branches, including one at
Manchester. The branch manager at Manchester without any authority from the company,
signed seven bills of exchange purporting to do so on behalf of the company. When the
company was sued on these bills, it was held that that the drawing of bills cannot be said to
fall within the ostensible authority of a person occupying the office of a branch manager and
the company was, therefore, not liable. (Kreditbank Cassel v. Schenkers Ltd. (1927) All ER
421)
5. Ignorance of the company's articles: This exception can be explained with a simple
illustration: Suppose the articles of a company authorize its directors to delegate a particular
power to one director of the company. Now, a person dealing with an individual director may
rely on the doctrine of indoor management and presume that the particular director was so
authorized. But what if such a person had not even seen the company's articles? Can he be
allowed to presume that a power had been delegated when he was not even aware of the
power to delegate? The answer is clearly in the negative.
Thus, in Hughton & Co. v. Nothard, Lowe and Wills Ltd. [(1927) 1 KB 246], where the facts
were similar to the above illustration, the court observed that the plaintiffs could not rely on
the supposed existence of a power when they were ignorant of its existence at the time of the
transaction.
In another case, the court pointed out that the doctrine of indoor management was based on
the principle of estoppel. In that case, the company's articles contained a representation that a
particular officer of the company could be vested with certain powers. An outsider who has
knowledge of such articles and is contracting with an officer of the company who is openly
exercising such powers is, therefore, entitled to the protection of the Turquand rule. However,
this protection is lost when he was not aware of the provisions of the company's articles.
(Rama Corp. v. Proved Tin & General Investment Co. Ltd., (1952) 2 QB 147)

15. Define PROSPECTUS? Note on public issue?

The term 'prospectus is defined in S. 2(70) of the Act. 'Prospectus' means any document
described or issued as a prospectus and includes a red herring prospectus referred to in S.
32 or a shelf prospectus referred to in S. 31. or any notice circular, advertisement or other
document inviting offers from the public for subscription or purchase of any securities of a
body corporate.
It is also clarified that in cases where a company allots, or agrees to allot, any securities of the
company with a view to any of such securities being offered for sale to the public, any
document by which the offer for sale to the public is made is deemed to be a prospectus
issued by the company.
Thus, a prospectus is an invitation to the members of the public, inviting them to take up and
pay for the securities (shares, debenture, etc.) of a company. Application forms for such
securities cannot be issued by a company unless they are accompanied by a prospectus.
However, since printing costs of a prospectus can be fairly heavy, a company may issue
application forms for its securities, which are accompanied by an abridged prospectus,
that is, a memorandum containing such salient features of a prospectus as may be specified
by SEBI (S. 2(1)]. However, in such cases, the complete prospectus has to be maintained in
the office of the company and a copy thereof must be given to any person who demands it
before the closing of the subscription list. If default is made in doing so, the company is liable
to pay a penalty of 50,000 for each such default.
However, this does not mean that, to come within the ambit of the Act, the prospectus must
be issued to the public generally. Thus, when 3,000 copies a prospectus were sent to members
of certain gas companies, it was held that the prospectus was issued to the public. (Re. South
England Natural Gas Petroleum Co. Ltd. (1911) 1 Ch. D. 573)
It may also be noted that, in the following cases, when shares are offered and application
forms are issued, a prospectus containing all the statutory details is not necessary.
(a) When the offer is made in connection with a bona fide invitation to person to enter into an
underwriting agreement in respect of share or debentures.
(b) When the shares and/or debentures are not issued to the public.
(c) When the company makes an offer only to its existing members debenture-holders.
(d) When the shares or debentures offered are, in all respects, uniform with shares or
debentures already issued and quoted on a recognize stock exchange.
Under S. 30 of the Act, if an advertisement of a prospectus is published in any manner, the
following matters must be specified therein, namely. - the contents of its memorandum as
regards its objects, the liability d its members and the amount of the share capital of the
company; the names of the signatories to the memorandum and the number of shares
subscribed for by them; and the capital structure of the company.
CONTENTS AND REQUIREMENTS OF A PROSPECTUS:

As is clear from the above, a prospectus serves as the best vehicle for raising capital required
by a company from members of the public. Ironically enough, it can also become the best
vehicle for playing a fraud on unsuspecting investors. The Act has therefore, made stringent
provisions as regards the matters which must be set out in a prospectus and has provided
deterrent punishments if such matters are not set out or are set out in a false or misleading
manner. As observed by the Calcutta High Court, the aim and object of the Parliament in
making such provisions is "to secure the fullest disclosure of al material and essential
particulars and lay the same in full view of the intending purchasers of shares". (Pramatha
Nath Sanyal v. Kali Kumar Dutt, AIR 192 Cal 714) Formerly, some companies sought to
evade the stringent provisions of the Act by allotting the entire share capital to an "Issuing
House", which would then offer these shares to the members of the public by its own
advertisement -which could not be regarded as a prospectus issued by the company. Today
however, it is provided that such an advertisement of the Issuing House would also amount to
a prospectus issued by the company itself, inviting all the provisions of the Act. Thus, this
route of evasion of the law in the matter of issuing a prospectus is no longer available in the
corporate world.
S. 26 of the Act lays down that the following matters are required to be stated in a
prospectus:
A. It should be dated and signed.
 B. It must give the information listed in S. 26(1)(a) of the Act, as for instance, the
following -
- the address of the registered office of the company:
- the names and addresses of the company secretary, Chief Financial Officer, auditors,
legal advisers, bankers, underwriters, trustees, if any, and other prescribed persons;
- the dates of opening and closing of the issue, and a declaration about the issue of the
allotment letters and refunds within the prescribed time;
- a statement by the Board of Directors about the separate bank account where all the
monies received out of the issue are to be transferred;
- details about the underwriting of the issue;
- consent of the directors, auditors, bankers to the issue, expert's opinion, if any, and
of such other persons as may be prescribed;
- the authority for the issue and the details of the resolution passed in the matter,
- the procedure and time schedule for allotment and issue of securities;
- the capital structure of the company (to be set out in the prescribed manner);
- main objects of the public offer, terms of the present issue and such other particulars
as may be prescribed;
- the main objects and present business of the company, its location and a schedule of
the implementation of the project:
- the minimum subscription, the amount payable by way of premium (if any) and
issue of shares otherwise than for cash.
C. It must set out the following reports:
- reports by the auditors of the company with respect to its profits and losses and
assets and liabilities and other prescribed matters;
- reports relating to profits and losses for each of the preceding five financial years,
including such reports of its subsidiaries as may be prescribed;
- reports made by the auditors in the prescribed manner as regards the profits and
losses of the business of the company for the last five preceding years, and the assets
and liabilities of the business of the company as on the last date on which the accounts
were made up, being a date not more than 180 days before the issue of the prospectus;
- reports regarding the business or transactions to which the proceeds of the securities
are to be applied directly or indirectly.
D. It must contain a declaration that the provisions of the Act have been complied
with and that nothing in the prospectus is contrary to the provisions of the SEBI Act,
1992 and the rules and regulations made thereunder.
E. It must contain such other matters and set out such other reports as may be
prescribed.
No prospectus can be issued by or on behalf of a company or an intended company
unless a copy thereof has been delivered to the ROC for registration on or before the
 date of its publication. Such a copy should be signed by every person who is named
therein as a director or proposed director of the company or by his duly authorised
attorney. The ROC can register the prospectus only if the requirements of S. 26 have
been complied with and the prospectus is accompanied by the written consent of all
the persons named in the prospectus. Every prospectus must, on the face of it, contain
a statement that a copy thereof has been delivered to the ROC, as required by law.

16. What is Shelf prospectus?

The concept of a 'shelf prospectus' was introduced into Indian corporate law in 2000. By the
2000 Amendment of the Companies Act, 1956, the filing of a shelf prospectus was made
mandatory for public financial institutions, public sector banks and scheduled banks whose
main object is financing. As such companies often make repeated offers of securities in the
same year, instead of filing a prospectus, they are required to file a shelf prospectus, which
has "shelf life" of one year. For any changes in-between, an information memorandum
containing such changes is required to be filed. Thus, there less paper work and the cost of
the issue is also reduced.
S. 31 of the Act defines a 'shelf prospectus' as a prospectus in respect of which the securities
(or class of securities) included therein are issued for subscription in one or more issues over
a certain period without the issue of further prospectus.
The advantage of a shelf prospectus is that the company filing such a prospectus is not
required to file a prospectus every time it issues securities within the period of validity of
such a prospectus. The word "shelf" is used to describe this prospectus as it is like an
information file which stays on a shelf and can be referred to from time to time,
S. 31 of the Act lays down that any class or classes of companies, as may be specified by
SEBI, may file a shelf prospectus with the ROC at the time of the first offer of its securities.
Such prospectus must mention the period not exceeding one year as the period of validity.

17. What is Red herring prospectus?

A "red herring prospectus" is an incomplete prospectus. It is one which does not contain
complete particulars on (i) the exact price of the shares which are offered and (ii) the
quantum of shares offered by the company.
S. 32 of the Act provides that any company which proposes to make an offer of its securities
may issue a red herring prospectus prior to the issue of its prospectus. Such a company must
file the red herring prospectus with the ROC at least three days prior to the opening of the
subscription list and the offer. A red herring prospectus is subject to the same obligations as
are applicable to a prospectus.

18. What are remedies for misstatements in prospectus?

An investor who has purchased shares of a company relying on the misstatements contained
in a prospectus has several remedies. The consequences of not making a true and full
disclosure in the prospectus as required by the law can be serious, and may be summed up as
under:
1. Damages under the law of torts for deceit
2. Rescission of the contract under the law of contracts
3. Fine payable under S. 26 of the Act
4. Civil liability for compensation under S. 35 of the Act
5. Criminal liability under Ss. 34 and 36 of the Act. The above consequences are discussed
below at length.
1. Damages under the law of torts for deceit: Under the law of torts, deceit or fraud is a tort
and damages can be recovered by an investor who has suffered loss or damage as a result of a
fraudulent statement contained in a prospectus. However, before damages can be awarded to
such a person, he would have to prove three things, namely:
- that there was a fraudulent statement;
- that such a statement related to matters of fact; and
- that, relying on such a statement, he had purchased the shares or debentures directly from
the company and not from the market.
Firstly, the investor has to prove "fraud", that is, that the false representation had been made
knowingly, or without belief in its truth or recklessly or carelessly. Therefore, if a false
statement has been made honestly, believing it to be true. the directors will not be liable,
irrespective of the magnitude of the loss suffered by the investors. The best illustration of this
principle is Derry v. Peek (1889) 14 AC 337], where a prospectus was issued by a company,
stating that it had a right to use steam power to run its trams (instead of using horse power, as
was commonly the case in those days). This was possible only if the Board of Trade gave its
consent in this regard. Since the company had applied for such consent and since such
consent had not, until then, been refused, the directors honestly believed that this permission
would be forthcoming. Unfortunately, this permission never came and the company had to be
wound up. The plaintiff, who had purchased shares of the company, sued the directors for the
loss sustained by him. The court held that the directors were not liable to compensate him. No
doubt the plaintiff had suffered a loss which was caused by the misrepresentation in the
prospectus. However, since the directors had not made a false statement knowing it to be
false (- in fact, they honestly believed in the truth of the statement-), the first requirement of
an action in tort was not satisfied
Secondly, the false representation must relate to existing facts which are material to the
contract of purchase of shares. In one case, the prospectus stated that the money to be raised
by the company would be used to complete repairs and alterations to its buildings and to
purchase horses and vans. In fact, the company wanted this money to pay off its creditors.
The company subsequently became insolvent and went into liquidation. The plaintiff, who
had purchased shares relying on the statements in the prospectus, sued to recover the loss
sustained by him. It was held that he was entitled to do so Rejecting the argument on behalf
of the directors that it was not possible for a court to arrive at an accurate conclusion of the
intention of the directors, Lord Justice Bowen made the now-famous remark that "the state of
a man's mind as much a fact as the state of his digestion". (Edginton v. Fitzmaurice, (1885 29
Ch. D. 459)
Thirdly, relying on such representation, the plaintiff should have purchased shares or
debentures directly from the company and not from the open market Thus, in Peek v. Gumey
[(1873) 43 LJ Ch. 19], the plaintiff had read a copy the company's prospectus, but had not
applied to the company for any shares After the public issue closed, he bought 200 shares of
the company from the market, and on discovering that some statements in the prospectus
were deceitful, he sued the directors for the loss suffered by him. Dismissing the suit, the
court observed that "Directors cannot be made liable ad infinitum for all the subsequent
dealings which may take place with regard to those shares upon the stock exchange”.
However, if the intention of the company in making false statements in a prospectus was not
only to induce persons to apply for its shares, but also to induce persons to buy these shares
from the market, the directors can become liable to compensate direct allottees as well as
persons who purchased shares from the market after having read the prospectus.
2. Rescission of the contract under the law of contracts: The second remedy of the investor
in such cases is to rescind the contract under the law of contracts, as such a contract is
voidable at his option. In order to succeed in such a suit, he would have to prove:
firstly, that there was a false representation in the prospectus;
secondly, that such a representation was made by or on behalf of the company,
thirdly, that such a representation was of fact- and not of law;
and lastly, that he acted on the faith of such a statement and had no means of discovering the
truth with ordinary diligence.
In the first place, there must be a false representation in the prospectus. Thus, if a prospectus
mentions the names of several persons as its directors, but later, there is a major change in the
directorships, a person who had applied for the shares of the company on the faith of this
statement would be allowed to rescind the contract. (Rajagupala lyer v. South Indian Rubber
Works Ltd., (1942) 2 MLJ 228)
The false representation in a prospectus may even be in the shape of non-disclosure of a
material fact. It is well-established that "half a truth is no better than downright falsehood".
Thus, if a prospectus issued in 2015 contains a statement that the company had paid good
dividends in the years 2009, 2010 and 2011 (which is factually correct), intentionally not
mentioning anything about the subsequent years (2012 to 2015), when it incurred heavy
losses and could not pay any dividend, it could create an impression in the mind of an
unsuspecting investor that the company is in a sound financial condition, and would,
therefore, amount to an untrue statement. (See R v. Lord Kylsant, (1932) 1 KB 442.)
Secondly, the statement in question should have been made by or on behalf of the company.
Thus, where the prospectus did not contain any misleading or untrue statement, but the
company's secretary made some false representations to an investor, it was held that such an
investor could not succeed, as the secretary had no authority to make such representations.
(Diwan Chand v. Gujranwala Sugar Mills Ltd., AIR 1937 644)
Thirdly, such a representation must be of fact and not of law. Thus, if the prospectus of a
company states that its shares of the face value of 100 each will be allotted for a total amount
of 50 per share, this would be a misrepresentation of law, as the Act prohibits any such issue.
Lastly, the plaintiff should have relied on the statement in the prospectus and applied to the
company for such shares. Thus, if after the allotment under the prospectus is over, a person
purchases the shares of the company from the open market, it cannot be said- as seen earlier -
that the statements the prospectus had influenced his decision to purchase the shares. (See
Peek v. Gumney, above.)
When rescission is not possible Even if the above conditions are satisfied, an investor cannot
rescind the contract of allotment in the following three cases:
(a) If the investor affirms the allotment: If the shareholder has affirmed the contract of
allotment by his conduct as for instance, by paying the call money due on his shares or by
receiving and keeping dividend declared on his shares or by attending shareholders' meetings
he cannot rescind the contract.
(b) If the investor is guilty of unreasonable delay: Rescission of a contract must be made
within a reasonable period of time. Thus, if shares are allotted in July and the shareholder
seeks to rescind the allotment in December of the same year, such a delay would deprive him
of the right of rescission. (Re. Christineville Rubber Estates Ltd., (1911) 81 L 63)
(c) If winding up of the company has commenced: Once winding up of a company
commences, it is too late to rescind any contract of allotment.
3. Fine payable under S. 26 of the Act: As seen earlier, under S. 26 of the Act, it is
mandatory to mention certain matters in a prospectus. The said section also provides for prior
registration of the prospectus with the ROC, the maximum period within which the
prospectus is to be issued after it is registered, provisions regarding statements of experts
contained in the prospectus, etc. Now, if any prospectus is issued in contravention of the
provisions of S. 26 of the Act, the company is liable to pay a fine ranging between 50,000
and 3 lakhs. Additionally, every person who is knowingly a party to the issue of such a
prospectus become punishable with imprisonment upto three years or with fine ranging
between 50,000 and lakhs, or both.
4. Civil liability for compensation under S. 35 of the Act: today, the directors would become
liable in a comparable situation. S. 35 of the Act makes five categories of persons (listed
below) liable to pay compensation to an investor for omissions or misleading statements in a
prospectus. It lays down that if a person has subscribed for the securities of a company, acting
on any statement which is included in the prospectus, or if the inclusion or omission of any
matter in the prospectus is misleading, and such a person has suffered any loss or damage in
consequence thereof, every person who is covered under any of the five categories of persons
listed below is liable to pay compensation to the person who has suffered such loss or
damage. The payment of compensation is in addition to any punishment which such a person
may incur under S. 36 (below).
The five categories of persons who become liable as above are:
1. Every person who is a director of the company at the time of the issue of the prospectus.
2. Every person who has authorized himself to be named, and is named in the prospectus as a
director of the company, or has agreed to become such a director, either immediately or after
an interval of time.
3. Every promoter of the company.
4. Every person who has authorized the issue of the prospectus.
5. Every person who is an 'expert' referred to in S. 26 of the Act.
However, the person sued under S. 35 of the Act can escape liability if he can prove any of
the following defenses. In other words, the burden of proof is on him to prove
- that, having consented to become a director of the company, he withdrew his consent
before the prospectus was issued and that it was issued without his authority or consent; or
-that the prospectus was issued without his knowledge or consent and that, on becoming
aware of its issue, he forthwith gave a reasonable public notice that it was issued without his
knowledge or consent.
S. 35 also clarifies that if it is proved that a PROSPECTIVE WAS ISSUED persons named
above become personally liable without any limitation defraud the applicants or any other
persons or for any fraudulent purpose liability-for all the loss or damage incurred by persons
who subscribed to securities of the company on the basis of such a prospectus.
5. Criminal liability under S. 34 and S. 36 of the Act: Under S. 34 of the Act, if a prospectus
which is issued, circulated distributed, includes any statement which is untrue or misleading
in the form or the context in which it is included or where any inclusion or omission of an
matter is likely to mislead, every person who has authorized the issue of such a prospectus
becomes punishable: with imprisonment for a term ranging from six months to ten years and
with fine which cannot be less than the amount involved such fraud, but which may extend to
three times such an amount S. 36 of the Act also provides for the same punishment as above
for an person who fraudulently induces any person to invest money in a company lays down
that any person who either knowingly or recklessly makes a statement, promise or forecast
which is false, deceptive or misleading or when deliberately conceals any material facts, to
induce another person to enter into, or to offer to enter into: any agreement for acquiring,
disposing of, subscribing for underwriting securities; or any agreement, the purpose or
pretended purpose of which is secure a profit to any of the parties from the yield of securities
or reference to fluctuations in the value of the securities; or any agreement for, or with a view
to obtaining credit facilities from any bank or financial institution- he shall be subject to the
same punishment seen above with reference to S. 34 of the Act.
Suits by affected persons: A suit can be filed-or other action taken-under Ss. 34. 35 and 36 of
the Act by any person, group of persons or any association of persons affected by any
misleading statement or the inclusion or omission of any matter in a prospectus. [S. 371]
Global Depository Receipts: A global depository receipt' means an instrument in the form of
a depository receipt (by whatever name called) created by a foreign depository outside India
and authorized by a company making an issue of such depository receipts. [S. 2(44)]
The term private placement is defined in the said section mean offer of securities or
invitation to subscribe securities, to a select group of persons by a company, other than by
way of a public offer, by issuing private placement offer letters and complying with the
provisions of S. 42 group of the Act: The following are the salient features of a private
placement under the act:
- It is an offer of securities to a select group of persons. The number of such persons cannot
exceed 50 or such high number as may be prescribed.
- When calculating this number, the following are to be exclude namely, -
(a) qualified institutional buyers and (b) employees of the company who are offered
securities under: scheme of employees' stock option as per the provisions of 62 of the Act.
- If a company makes an offer to more than the number of persons referred to above, the
same is to be regarded as an offer to the public, and all the stringent provisions of the Act
become applicable to that offer.
- The private placement is subject to such conditions as may be prescribed.
- All amounts payable for securities under private placements are to be paid by cheque or
demand draft or other banking channels, but not by cash.
- After the application money is received, the company must allot the securities within a
period of sixty days. If the company is unable to do so, it must repay the application money to
the subscribers without interest within fifteen days from the expiry of the said period of sixty
days. If it fails to do, it must repay the amount with interest at 12% p.a. from the expiry of the
sixtieth day.
- A company which makes a private placement cannot release any public advertisement or
utilize any media, marketing or distribution channels or agents to inform the public at large
about such an offer
- Complete information about such an offer is to be filed with the ROC within thirty days
from the date of circulation of the offer letter.
- When the allotment is made, a return of allotment, containing complete list of the allotees,
their full names and addresses, number of securities allotted and other prescribed information
is to be filed with the ROC within the prescribed period.
- If a company makes an offer in violation of S. 42 of the Act, the company, its promoters and
its directors become liable to pay a penalty which may extend to the total amount involved in
the offer or 2 crores, whichever is higher. Additionally, the company is also bound to refund
all the amounts to the subscribers within a period of thirty days from the date of the order
imposing the penalty.

19. Define Share? Stock? And give differences between them?

A 'share' is defined to mean a share in the share capital of a company and it includes stock.
[S.2(84)] All shares of a company must have a distinctive number. Under S. 44 of the Act,
shares are to be regarded as movable property transferable in the manner provided by the
articles of the company.
Thus, a share is a right to a specified amount of the share capital of a company, carrying with
it certain rights and liabilities, both when the company is a going concern and also when it is
wound up. It represents the interest of the holder measured for purposes of liability and
dividend by a sum of money (Borland's Trustee v. Steel Brothers Co. Ltd., (1901) 1 Ch. D.
279)
Black's Law Dictionary defines a share as 'the unit into which the proprietary interests in a
corporation are divided.' A share can also be defined as a proportional part of certain rights in
a company during its existence and in its assets upon its dissolution.'
Every share carries with it certain rights and liabilities in respect of the company. It is
recognized as movable property which can be freely transferred in the manner provided for,
and subject to any restrictions, if any, under the articles of the company. It is however to be
noted, that the attribute of transferability being statutorily conferred on shares, in no event
can a company whether public or private, absolutely restrict transfer of shares either
expressly or impliedly. (T.A.K. Mohideen Pichai Taroganau v. Tinnevelly Mills Co. Ltd.,
AIR 1928 Mad 571). A private company must, however, have some restriction in its articles
on the right to transfer its shares. [S. 2(68)]
Accordingly, to Halsbury, "stock" is the aggregate of fully-paid shares, legally consolidated,
portions whereof may be transferred and split into fractions of any amount without regard to
the original amount of the shares. The holder of stock is called a stockholder and is given a
stock certificate. Shares have distinctive numbers; stock does not.
In Dillon v. Arkins, it was observed: "Stock, when formed, is nothing but an aggregation of
shares, carrying with it the peculiarity of being capable of minute division."
Shares may or may not be fully paid. However, stock always represents fully paid up shares
of the company. It is also to be noted that a company cannot directly issue stock; it must first
issue shares and then convert them into stock. The points of distinction between share and
stock may be set out as under:

SHARE STOCK
1. A share is a share in the share capital of a 1. Stock is an aggregate of fully- paid up
company. shares.
2. In case of shares, a share certificate is 2. In case of stock, a stock certificate is
issued. issued.
3. Shares may or may not be fully paid. 3. Stock is always fully paid.
4. Shares have distinctive numbers. 4. Stock need not be numbered.
5. Shares are divided into equal parts. 5. Stocks need not be divided into equal
6. A company cannot directly issue stock. It parts.
must first issues shares and then convert the
shares into stock

20. Rights and duties of shareholders?

The following are the main rights of shareholders:
(1) To elect directors, thus participating in the management of th company through them.
(2) To vote on resolutions at meetings of the company.
(3) To receive dividends.
(4) To seek relief from the appropriate authorities in case of oppression or mismanagement.
(5) To vote at meetings of the company.
(6) To requisition an extraordinary general meeting of the company.
(7) To receive the notice of general meetings of the company.
(8) To appoint a proxy and inspect proxy registers.
(9) To appoint a representative to attend the company's general meeting on behalf of a body
corporate, in the event of a body corporate being a member.
(10) To require the company to circulate a resolution proposed to be passed at a forthcoming
meeting of the company.
(11) To apply to the Tribunal for winding up the company.
(12) To share the surplus assets at the time of winding up of the company
The Main liability of the shareholder is to pay the unpaid amount of the face value of the
shares held by him. Once his shares are fully paid up his liability in respect of his shares is
reduced to nil.

21. what is meant by ALLOTMENT OF SHARES?

When an applicant applies for shares of a company, he is making an offer to purchase such
shares. Acceptance of this offer by the company called allotment. Thus, allotment "is an
appropriation out of the previously unappropriated capital of a company". (Sri Gopal Jalan &
Co. v. Calcutta Stock Exchange Association, AIR 1964 SC 250). To be valid, an allotment
must satisfy:
A. The statutory requirements of the Act, and
B. The general principles of the law of contracts.

22. What is share warrant?

It is document issued by company indicating that the bearer thereof is the holder of the
particular number of shares mentioned therein. Only public company with share capital can
issue share warrants. Companies act 2013 does not provide for issue of share warrants by a
private company. Only public companies are permitted to issue share warrants. The Articles
of Association must authorize the issuing of share warrants. The shares must be completely
paid-up. The Central Government must approve the issuing of share warrants.

22. Difference between share certificate and share warrant?

 1. A share warrant can be issued only with respect to any fully paid up shares BUT share
certificate can be issued at any stage without the shares being fully paid up.
2. A share warrant is by mercantile usage a negotiable instrument BUT share certificate
is not.

23. Short note on TRANSFER and transmission OF SHARES?

Transfer of shares: S. 44 of the Act expressly provides that shares of a company shall be
moveable property capable of being transferred in the manner provided by the articles of the
company. So long as a transfer complies with the requirements of the articles of the company,
it is a valid transaction. It follows that if there is no restriction in the articles on the transfer of
shares of the company, the shares can be validly transferred to any person whatsoever - even
if such a person is a man of straw.
Procedure for transfer: The procedure for effecting a valid transfer of shares are as follows:
1. A share transfer form must be executed by the transferor and the transferee. The same
should comply with the articles of the company and must specify the full name, address and
occupation, if any, of the transferee. It must also contain other details like the full name of the
company, the number of shares transferred, the distinctive number of the shares, and so on.
2. The instrument of transfer, that is, the share transfer form, must be duly stamped.
3. The said instrument must be lodged with the company along with the original share
certificate within a period of sixty days from the date of its execution. If the share certificate
has not been received by the transferor, the Letter of Allotment is to be substituted in its
place.
4. If the board of directors approves the transfer, the name of the transferee is entered on the
register of members of the company and the share certificate is returned to the transferee with
his name endorsed thereon.
Every instrument of transfer must bear a date stamp on it. This stamp is to be put on the form
by the prescribed authority before the form is filled up and signed. In the case of a company
whose shares are listed on a recognized stock exchange, all the documents must be presented
to the company-
- before the company closes its register of members in accordance with the law, or
- within twelve months from the date stamped on the form (as above), whichever is later.
In case of companies whose shares are not listed on a recognized stock exchange, the
documents must be lodged with the company within a period of two months from the date
stamped on the instrument. This period of time may, however, be extended by the Central
Government in a fit case.
The above provisions have been imposed by law to mitigate the problems created by blank
transfers. A blank transfer is one where the transfer form is signed only by the transferor and
handed over to the transferee along with the share certificate. These documents then pass
from one person to another, until the last transferee fills up his name, signs the form and
lodges the documents with the company. Earlier, blank transfer forms could remain
circulation for years together as there was no limitation period for their use. Today, because
of the above provisions, such a form can circulate in the r for a maximum period of twelve
months.
Transfer of shares of private companies.: Although S. 44 of the Act applies to all
companies, a private company must have some restriction on the transfer of its shares. The
reason behind this is that although from the legal angle, such companies are separate
corporate entities, from the practical or business angle, most of them resemble incorporated
partnership more than they resemble public corporations. Accordingly, it is expected that the
directors of such companies be given a higher degree of control over transfer of shares by its
members.
Some instances of restrictions in the articles of a private company which have been held to be
valid are:
- A clause in the articles stating that, on the insolvency of a member his shares will be
transferred at a fair value to a nominee of the directors of the company.
- A clause in the articles laying down that, on the death of a member his shares must be
offered to the other members of the company
- A clause in the articles providing that a member must first offer his shares to existing
members before he can sell them to an outsider that is, a pre-emption clause in respect of
transfer of shares.
S. 58 provides that if a private company limited by shares refuses register a transfer of shares,
it must send a notice of refusal to the transferor and the transferee within thirty days from the
date on which the instrument transfer was delivered to the company. The notice must also
convey the reasons for such refusal.
Transfer of shares of public companies: S.58 of the Act declares that shares and other
securities of a public company are freely transferable. It is, however, also clarified that if
there is any contract or arrangement between two or more persons in respect of such transfer,
it will be enforceable as a contract.
If all the required documents are properly filed, and a public company. without any sufficient
cause, refuses to register the transfer within thirty days from the date on which the instrument
of transfer was delivered to the company, the transferee can file an appeal before the Tribunal
within sixty days from the date of such refusal. If no intimation is received from the
company, the appeal can be filed within ninety days from the date on which the instrument of
transfer was delivered to the company. The Tribunal then gives a hearing to both the parties
and after such a hearing- -it may dismiss the appeal. Or -it may direct the transfer to be
registered by the company, and s company must comply with such order within ten days; Or -
it may direct rectification of the register and also direct the c to pay damages for the loss, if
any, sustained by the aggrieved party.
As shares are transferable subject to the provisions contained in the articles of a company, a
public company may confer a power on the director to refuse to register a transfer, sometimes
"in their absolute and uncontrolled discretion". In such cases, as long as the directors use such
discretion in; bona fide manner the courts do not interfere with the exercise of such discretion
However, even the "absolute and uncontrolled discretion" of the director , in this matter can
come under judicial scrutiny - if the discretion is shown to have been exercised in a Malafide
manner, Or if reasons given for the refusal are inadequate; Or if the board of directors appear
to have taken irrelevant consideration into account when rejecting a given transfer.
Thus, if it is proved that the directors did not exercise their power of refusal in good faith and
in the best interests of the company, their refusal can be struck down. As observed by the
Supreme Court, if it is shown that, in exercising this power, the directors have acted
capriciously, corruptly or oppressively their refusal will be set aside. (Harinagar Sugar Mills
v. S. S. Jhunjhunwala AIR 1961 SC 1669)
It is now well-established that courts do not interfere in cases where the directors of the
company have exercised their discretion in a bona fide manner as happened in Re Smith and
Fawcett. Although this case involved a private company, the legal principle laid down in the
case applies to all companies.
Likewise, it has been held that a public company could not refuse to transfer shares on the
ground that the transferee was an ex-employee of the company who had been dismissed by
the company and that his admission as a shareholder of the company would be against the
company's interests. (P. R. Gokhale v. T. N. Mercantile Bank Ltd., (2002) 110 Co. Cases
866)
Transfer of partly paid shares: When shares which are being transferred are partly paid and
the application for transfer has been filed only by the transferor, such a transfer cannot be
registered, unless the company gives notice of such application to the transferee and the latter
conveys that he has no objection to the transfer, within two weeks from the receipt of such a
notice. [S. 56(3)]
Transfer of demat shares
With e-technology catching up with the corporate world, a welcome change was ushered in
on 20th September, 1995, when the Depositories Ordinance. 1995, was promulgated by the
President of India. The said Ordinance was later replaced by the Depositories Act, 1996. The
new legislation gives an option to shareholders to hold their shares in a dematerialized
(demat) or electronic format and provides for a simple mode of effecting a transfer of such
shares. The law has provided for the establishment of one or more depositories which are
required to register themselves with SEBI. The shareholder must register himself with one or
more of the participants which are custodial agencies like banks and financial institutions. A
shareholder who wishes to hold his shares in a demat - and not a physical form is issued a
Pass Book reflecting the shares held by him in different companies. Such shares cease to have
distinctive numbers as they are held in an electronic form. So, when A transfers 100 demat
shares in X Ltd. to B (who has also registered himself with the same any other participant),
A's account is debited with these shares and B's account is credited with the same number of
shares, the transfer being comparable to a familiar situation where A issues a cheque to B,
where the former's bar account is debited and that of the latter is credited.
Needless to say, the provisions applicable to transfer of shares existing a physical form
(considered above) do not, and cannot, apply to a transfer shares in a demat form.
As observed in recent cases, the provisions of the Act dealing with the lodging of the share
transfer form, along with the original share certificate, with the company do not apply to
transfer of shares in a demat form. Likewise, the discretion of the board of directors of the
company whose demat shares are transferred does not come into the picture at all.
It may be noted that investors holding demat shares continue to enjoy a the rights and benefits
of membership conferred on them by law, as for instance the right to receive dividend, the
right to attend and vote at meetings, etc.
Provision has also been made to give an option to the investor to opt ou of the electronic
mode of holding shares and call upon the company to issue share certificate to him in respect
of his shareholding.
Forged transfer
It may be noted that if the signature of the transferor is forged on the transfer instrument, the
transferee gets no title to the shares, as forgery is a nullity in the eyes of law. So, if the
company registers such a transferee, the transferor can apply to the company for a
rectification of the register and for his name to be reinstated as the holder of the shares in
question.
In order to prevent - or at least minimise - forged transfers, it is now customary for the
company to write to the transferor at his registered address and inform him that a request for
transfer has been received by the company and that if no objection is lodged with the
company within two weeks, the company would go ahead with the transfer.
if, however, in such a case, the company has issued the share certificate with the name of the
transferee, who in turn, then sells the shares to an innocent purchaser, the company cannot
deny the title on the certificate - as the doctrine of estoppel operates against it. Therefore, if it
refuses to recognise the innocent purchaser as the owner of the shares, it would have to
compensate him for the loss suffered by him. (Balkis Consolidated Co. Ltd. v. Fredrick
Tomkinson (1893) AC 396)
TRANSMISSION OF SHARES: The word “transmission” means devolution of title to
Shares otherwise than by transfer. On transmission of Shares, the person to whom the
Shares are transmitted becomes the registered shareholder of the company and is entitled to
all rights and subject to all liabilities attached to the Shares. Whereas transfer of shares takes
place by an act inter vivos (that between two living persons), transmission of shares takes
place by operation of law, as for instance, when a sole shareholder dies and his shares
devolve on his heir. The heir can, in such cases, get his name entered in the company register
of members by virtue of the transmission. The formalities relating transfer would naturally be
inapplicable to transmission of shares. This implies that in case of transmission of shares, an
instrument of transfer, along with other formalities such as execution, attestation, etc. and so
on are no necessary. The manner in which transmission of shares is to take place generally
provided for in the articles of the company.
If the company refuses to transmit the shares of a deceased shareholder the aggrieved parties
(as for instance, the legal heirs) have the same remedies as are available against a company if
it refuses to transfer shares
If a succession certificate is obtained by the heirs in respect of the shares of the deceased,
such a certificate would be valid, not only in respect of the original shares held by the
deceased, but also in respect of bonus shares, dividend, etc., accruing to such shares. (Arjun
Kumar Israni v. Cipla Ltd., (2000) 99 Co. Cases 237)
NOMINATION OF SHARES
S. 72 of the Act provides the facility of nomination to shareholders and depositors. A
shareholder can file a nomination in the prescribed form at any time, specifying the name of a
person in whom his shares are to vest in the event of his death. Even joint holders may so
nominate a person, who will be entitled to the shares in the case of the death of all such joint
holders.
Such a nomination supersedes the law of succession and any will or other testamentary
disposition made by the shareholder. It is, of course, open to the shareholder to change his
nomination at any time by a fresh nomination made by him and registered with the company.
On the death of the shareholder, the nominee gets the right to have himself registered as the
shareholder in respect of the shares for which he is nominated on production of the death
certificate of the original holder of the shares. However, this right of the nominee is subject to
the same restrictions as the right of the deceased shareholder. Therefore, the board of
directors also have the same right of refusal as they would have had if the deceased
shareholder had applied for a transfer of shares. However, even before the nominee thus
registers himself, he is entitled to all the advantages of membership, including dividend.
In cases where the nominee is a minor, the shareholder can appoint any person as the person
who would become entitled to the shares in case of the death of the nominee during his
minority. [S. 72(4)] In case of a OPC, the member must nominate another person (with such
person's written consent) who will become the member of the company in case of the death
or incapacity to contract of the original member. [S. 3]

24 . Note on ISSUE OF SHARES AT A PREMIUM?

Issue of shares at a premium means issue of shares at a value above their nominal value, as
for instance, when a share of the face value of 100 is issued for * 120. The difference
between the price at which shares are actually offered and the face value of shares (20 in the
above example) is called the premium, which may be received by the company in cash or in
kind. Though companies are free to issue shares at a premium, S. 52 of the Act regulates the
manner in which the amount collected as premium can be utilized by the company.
Moreover, SEBI Guidelines have also to be followed in this regard as these Guidelines lay
down when a company must issue shares at a par and when it may issue shares at a premium.
S. 52 of the Act lays down that a sum equal to the aggregate amount of the premium must be
transferred to an account called the Securities Premium Account. The provisions of the Act
relating to reduction of capital apply to this Account, as if the Securities Premium Account
was the paid up share capital of the company. The Securities Premium Account may,
however, be applied by the company:
(a) to issue fully paid up bonus shares to existing shareholders:
(b) to write off preliminary expenses of the company;
(c) to write off expenses, commission paid or discount allowed on issue of shares or
debentures of the company;
(d) to pay premium on redemption of redeemable preference shares or of any debentures of
the company; and
(e) to buy back its own shares.

25. Note on ISSUE OF SHARES AT A DISCOUNT?

The issue of shares at a discount means the issue of the shares at a price less than the face
value of the share. For example, if a company issues share of Rs. 100 at Rs. 90, then Rs. 10
(i.e. Rs 100—90) is the amount of discount. Issue of shares at a discount is discouraged by
corporate law. Shares are said to be issued at a discount if they are issued at a price lower
than their face value, as for instance, when a share of the face value of 100 is offered for a
total price of 80. The difference between the face value of the share and the price at which it
is offered (20, in the above example) is referred to as the "discount".
Under the Companies Act, 1956, shares could be issued at a discount if specified conditions
were fulfilled. However, the Companies Act, 2013 prohibits a company from doing so. S. 53
states, in clear terms, that a company cannot issue shares at a discount - unless such shares
are 'sweat equity shares' referred to in S. 54 of the Act.
If a company purports to issue shares at a discounted price, such a transaction would be void
in the eyes of law. Additionally, such a company would be punishable with a fine ranging
between 1 lakh and 5 lakhs. Every officer of the company who is in default is also punishable
with imprisonment for a term upto six months or with a fine ranging between 1 lakh and 5
lakhs, or both.
It has been held that if under a scheme of compromise and arrangement, shares are issued to
creditors in consideration of surrender of their claims, the same cannot be treated as an issue
of shares at a discount, the reason being that the claims would have been of no worth if the
company had gone into liquidation. (Re. Maneckchowk & Ahmedabad Mfg. Co. Ltd., (1970)
40 Co Cases 819)
In one case, a company issued debentures at a discount and gave the debenture-holders the
right to convert such debentures into shares. The court held that this was a colorable scheme
to issue shares at a discount without complying with the statutory requirements and was,
therefore, illegal. (Mosley v. Koffyfontein Mines Ltd., (1904) 2 Ch. D. 108)

26. What is LIEN ON SHARES?

Lien is the right of the lender to retain some property of the borrower until his debt is paid. In
the case of a company, if a member owes a debt to the company, he may be restrained from
transferring his shares until the debt to the company is repaid, provided the company's articles
allow it to do so. This right of the company in respect of its shares is referred to as its lien on
shares. A company entitled to a lien on its shares also has the power to sell the shares to
recover the money due to it.

27. Note on FORFEITURE AND SURRENDER OF SHARES?

Forfeiture of shares: When shares are allotted by the company to an applicant, an
obligation is cast on the shareholder to pay the allotment money and the call amount as and
when the company calls upon him to make such payment. If a member fails to pay such
amount when called upon to do so, the company may take its shares back, if an express
provision in that regard is contained in its articles. This power of the company is called
forfeiture of shares.
As forfeiture deprives a shareholder of his shares, the right to forfeit shares must be exercised
with great caution and in a bona fide manner for the purpose for which it is conferred by law.
As it virtually amounts to an expulsion of the shareholder, the courts will carefully scrutinize
the act of forfeiture to ensure that it meets with all the following requirements of a valid
forfeiture, namely, -
1.The forfeiture should be in accordance with the articles of the COMPANY.
2. A proper notice should be sent to the shareholder, calling upon him to pay the amount due.
3. The shareholder should default in paying the amount within the period specified in the
notice.
4.The directors must pass a resolution declaring that his shares have been forfeited.
5. The right of forfeiture should have been exercised in good faith.
The above requirements of a valid forfeiture are briefly discussed below.
1. The forfeiture should be in accordance with the articles of the company: First of all,
the articles of the company must allow the company to forfeit the share. To be valid, the
forfeiture must be made in accordance with the provisions relating to forfeiture laid down in
the company's articles.
It is a general principle of English law that shares can be forfeited only for non-payment of
calls.
2. A proper notice should be sent to the shareholder, calling upon him to pay the
amount due.: The defaulting shareholder must be given at least fourteen days' notice,
requiring him to pay the amount due on or before a day specified in the notice. The notice,
which must be issued under the authority of the board of directors, must state the exact
amount due and the consequence of non-payment, that is, forfeiture of the shares. It is
necessary that the notice be served in the proper manner, failing which the forfeiture would
be invalid. The notice must disclose sufficient information enabling the shareholder to know
with certainty the amount to be paid.
3. The shareholder should default in paying the amount within the period specified in
the notice.: It must be shown that the shareholder did not pay the call amount within the time
specified in the notice. If such payment has been made, the question of forfeiture cannot
arise.
4. The directors must pass a resolution declaring that his shares have been forfeited.: If
the shareholder defaults in making the payment, the directors must pass a resolution to the
effect that the shares have been forfeited by the company. It was observed in Travancore
Electro Chemical Industries Ltd. v. Alagappa Textiles (Cochin) Ltd. [(1972) 42 Co. Cases
569] that such a resolution must be passed after the shareholder fails to comply with the
notice of forfeiture and not in anticipation thereof.
In other words, the sending of a proper notice followed by non-payment by the shareholder
on time do not automatically operate as forfeiture. As observed by Lord Lindley, "a declared
intention to forfeit not carried into effect is no forfeiture at all".
5.the right of forfeiture should have been exercised in good faith: lastly the company must
exercise its power in good faith and in the interest of the company. Thus a company cannot
forfeit shares at request of the shareholders to relieve him from his future liabilities.
Surrender of shares: refers to the voluntary return of shares by the shareholder to the
company. It has same effect as forfeiture and is subject to same conditions as forfeiture. A
company can however accept surrender only in those circumstances in which it could have
forfeited the shares. In other words, there must be a valid call on which a default has been
made. Only as far as last step is concerned the directors instead of forfeiting the shares allow
the shareholder to surrender the share to company. thus a surrender will not be valid if its
purpose is to relieve the shareholder from his liability to pay calls on share held by him.

28. Define “MEMBER"?

The term 'member' is defined in S. 2(55) of the Act to mean:
(a) the subscriber to the memorandum of a company, who shall be deemed to have agreed to
become a member of the company, and on its registration, shall be entered as a member in the
register of members of the company;
(b) every other person who agrees in writing to become a member of the company, and
whose name is entered in the register of members of the company;
(c) every person holding shares of the company, and whose name is entered as a beneficial
owner in the records of a depository.
The subscribers of the memorandum of a company are deemed to have agreed to become
members of the company, and when the company is registered, their names are to be entered
in the register of members of the company. Thus, they become the first members of the
company. Thereafter, every other person who agrees in writing to become a member of a
company, and whose name is entered in its register of members, becomes a member of the
company.

29. Difference between "member" and "shareholder"?

In the case of companies limited by shares, the persons whose names appear on the
company's register of members are members of the company. Since they have been allotted
shares of the company and hold such shares in their own right, they are also called
shareholders of the company.
Thus, the words "member" and "shareholder" often refer to the same person and are therefore
used synonymously in company law. Generally speaking, every member is also a shareholder
and vice versa. Thus, if X holds 100 shares of a company limited by shares, is both a
shareholder and a member.
However, in the case of a company with no share capital, as for instance a company limited
by guarantee, one can refer only to "members", as there are no shareholders. One more
exception is also to be kept in mind, and the is the case of the holder of a bearer share warrant
(which could be issue under the 1956 Act). In those cases, since the name of the shareholder
did not appear on the register of members, he would be a shareholder but not a member of the
company. (This distinction is only of academic interest today in view d the fact that the
concept of a bearer share warrant does not find a place in the 2013 Act.)
Again, when a person subscribes to the memorandum of association of company, he
immediately becomes a member of the company even if no shares are allotted to him. Later
when the company allots shares to him, he also becomes a shareholder of the company.

30. WHO CAN BE A MEMBER? Explain when a person may cease to be a member?
How can membership be acquired and how is it terminated?
Membership of a company implies a contract with the company. Therefore, every person who
is competent to contract can be a member of a company. Minors and persons of unsound
mind are not competent to contract under the Indian Contract Act, and cannot, therefore,
become members of a company
In England, the contract of a minor is voidable and not void ab initio Therefore, a minor may
become a member under English law, but he can "avoid the contract at his option during the
period of his minority and for reasonable time after he becomes a major. In India, however, a
minor cannot incur any personal liability under contract. Therefore, even if he is allotted
shares of a company and his name appears on the company's register of members, he cannot
be made liable to pay any money which is unpaid on his shares. In one case, shares were
allotted to a minor on an application signed on her behalf by a guardian. When the company
went into winding up, it was held that neither the minor nor the guardian was liable in respect
of these shares. (Palaniappa v. Official Liquidator, A 1942 Mad 470)
In another case, a minor was allotted some shares of a company. After attaining majority, he
continued to receive dividend on such shares. When the company went into winding up, the
Bombay High Court held that he was liable in respect of the unpaid amount on his shares, as
he intentionally permitted f company to believe him to a shareholder and to pay him
dividends. He was therefore, estopped by his conduct from denying that he was a shareholder
the company. (Fazulbhoy Jaffar v. Credit Bank of India Ltd., AIR 1914 Bom 128
Several courts have taken the view that if shares are fully paid up, it is possible for a minor to
be a shareholder of a company - as he has no liability to incur in respect of such shares.
However, generally speaking, the articles of a company prohibit minors from becoming
shareholders of the company.
A company can become a member of another company, as it is a separate legal entity in the
eyes of law. However, a company cannot purchase shares of another company unless its
memorandum authorizes it to do so. This is also subject to other provisions of the Act in this
regard.
A partnership firm does not have a separate legal existence in the eyes of law, and therefore,
it cannot be a member or shareholder of a company. However, a firm may hold shares of a
company as its assets - provided such shares are held in the individual names of one or more
partners of the firm.
The Bombay High Court was recently faced with an interesting question: Can a demat
account be opened in the name of a deity? Answering the point in the negative, the court held
that since personal skills, judgment and supervision are involved in the operation of such an
account, a deity could not be allowed to open such an account. (Shri Ganpati Panchayatan
Trust v. Union of India, (2011) 163 Co. Cases 253)
MODES OF BECOMING A MEMBER
A person can become a member of a company in the following seven ways:
1. By subscribing to the memorandum of the company, 2. By transfer of shares, 3. By
transmission of shares, 4. By purchase of qualification shares, 5. By allotment of shares, 6.
By amalgamation of companies, 7. By estoppel or holding out.
1. By subscribing to the memorandum of the company: all persons who put their signatures
on the memorandum of a proposed company are deemed to have become members of that
company and when the company is registered, their names are to be entered on the register of
members of that company. Thus, a subscriber to a memorandum becomes a member of the
company by the mere fact of his subscription. He continues to be a member of the company
even if, for some reason, his name is not entered in the register of members.
2. By transfer of shares: This is perhaps the commonest method of becoming a shareholder
of company. When a person buys shares from "the market", it is nothing but simple transfer
of shares. The name of the earlier holder, the transferor of the shares, is removed from the
register of members of the company and the name of the purchaser, that is, the transferee, is
entered in the register.
3. By transmission of shares: Whereas a transfer of shares is between persons inter vivos,
transmission of shares takes place on the death of a shareholder. When sole holder of shares
dies, his executor, administrator, heir or any other person entitled to such shares may apply to
the company for a transmission of shares Needless to say, the company would be justified in
demanding sufficient proc of the death of the shareholder as well as the legal status of the
applicant and may ask for a copy of the will or the Probate or the Letters of Administration of
the Succession Certificate before transmitting the shares of a decease shareholder. If,
however, a company wrongly refuses a transmission of shares the parties have the same
remedies against the company as in the case of transfer of shares.
4. By purchase of qualification shares: Under the 1956 Act, it was possible for the articles
of a company to provide that a person must hold a certain number of shares of the company
to qualify him for appointment as a director of the company. Such shares were, therefore
referred to as 'qualification shares', as they qualified a person to become a director of a
company. If a company had adopted Table A of the 1956 Act as its articles, a person would
have to hold at least one share in the company become a director of that company. However,
the concept of qualification shares finds no place in the 2013 Act.
5. By allotment of shares: When a company makes a public offer of its shares by issuing a
prospectus, members of the public are invited to apply for such shares. Pursuant to such an
application, if a person is allotted shares of the company, he becomes a member of that
company.
6. By amalgamation of companies: If X is a member of A Ltd., and this company is merged
into B Ltd., with the result that A Ltd. ceases to exist, X becomes a member of B Ltd.,
subject, of course, to the terms of the merger.
7. By estoppel or holding out: If a person holds himself out as a member or knowingly
allows his name to continue being on the register of members of a company though he has, in
fact, parted with his shares, he can be made liable as a contributory at the time of winding up.
In such cases, the proper course of corrective action is that he should apply for a rectification
of the register of the company.
In one case, the plaintiff had applied for 4,000 shares of a company. Although no shares were
actually allotted to him, his name was placed on the register of members as the owner of
4,000 shares. Despite knowing this fact, he took no steps to have the register rectified by
having his name struck off. When the company went into winding up, it was held that he
would be liable as a contributory in respect of these shares. As observed by the court, "When
a person knows that his name is included in the register of shareholders and he stands by and
allows his name to remain, he is holding out to the public that he is a shareholder and thereby
he loses his right to have his name removed." (Re. M. F. R. D'Cruz, AIR 1939 Mad 803)
MODES OF CEASING TO BE A MEMBER
A person ceases to be a member of a company in the following six ways
1. By transfer of shares, 2. By death of the member, 3. By forfeiture of shares, 4. By
surrender of shares, 5. By winding up and dissolution of the company, 6. By amalgamation of
companies.
1. By transfer of shares: When a person sells his shares in "the market", he ceases to be a
member of the company-unless, of course, he continues to hold some more shares in the same
company.
2. By death of the member: Death is indeed the ultimate terminator. It puts an end to
everything J including membership of a company.
3. By forfeiture of shares: When a company validly forfeits the shares held by a member, he
ceases to be a member of the company. However, if the forfeiture itself is not valid such a
person continues to be a member of the company.
4. By surrender of shares: If a person surrenders all his shares to the company and such
surrender is valid, he ceases to be a member of the company. Here too, if such surrender in
not valid in the eyes of law, he continues to be a member.
5.By winding up and dissolution of the company: When winding up of a company
commences, shareholders of the company cease to be "shareholders" and are henceforth
treated by law as "contributories When the company is ultimately dissolved, the company
ceases to exist and thereafter, there are no members or shareholders or contributories.
6. By amalgamation of companies: If X is a member of A Ltd., and A Ltd. is merged into B
Ltd., A ceases to be a member of A Ltd. - although he may have become a member of B Ltd.
subject to the terms of the merger.

31. Note on TYPES OF SHARES AND SHARE CAPITAL?

Different types of share capital of a company: Although most companies are incorporated
with a share capital, every company need not have a share capital, as this is not a necessary
ingredient of incorporation. A company may be registered without share capital, as for
instance, a company limited by guarantee.
The share capital of a company must be divided into shares of equal amounts. The maximum
amount of share capital that a company can raise is mentioned in the memorandum of the
company. This is called the authorized or registered or nominal share capital of the company
and the company cannot raise any capital exceeding this amount without first amending the
memorandum to show the increased amount in the memorandum.
However, on incorporation, and even for a long time thereafter, the company may not require
the entire amount of the authorized share capital. It may issue shares of a lesser amount, and
this constitutes the issued share capital of the company. Thus, the issued share capital is that
part of the authorized share capital which is issued by the company from time to time for
subscription. However, all the shares thus issued may not be taken up, and therefore, that part
of the issued share capital which is for the time being, subscribed by members of the
company is called the subscribed capital of the company. Even from this amount of the
subscribed share capital, the company may not require the entire amount for its immediate
needs. So, it may call only a part thereof, and this is known as the called up share capital of
the company. In other words, called up capital is that part of the subscribed share capital
which is actually called up by the company for payment. The rest of the known as the
uncalled capital. All the shareholders may not pay up this call up capital and that part which
is actually paid by them is known as the paid up capital of the company the rest being its
unpaid capital.
It is clarified (by S. 2(64) of the Act) that the term 'paid-up share capita includes any amount
credited as paid up in respect of shares of the company but does not include any other amount
received in respect of shares, by whatever name called.
What is stated above may be summarized as follows:
> The share capital mentioned in the memorandum of a company is its authorized or nominal
or registered share capital.
> The issued share capital is that part of the authorized share capital which is actually issued
by the company.
> The subscribed share capital is that part of the issued share capital which is actually
subscribed.
> The called up share capital is that part of the subscribed share capital which the company
has called up. The balance is known as the uncalled capital of the company.
> The paid up share capital is that part of the called up capital which is actually paid up by
the shareholders. The rest is referred to as the unpaid capital of the company.
It is interesting to note that the 1956 Act did not define the above terms However, all of them
are now defined in S. 2 of the 2013 Act.
The uncalled capital of a company may be converted into reserve share capital by passing a
special resolution of the shareholders to that effect. Once this is done, the reserve share
capital cannot be called up by the company except at the time of winding up. No charge can
be created on such capital. Reserve share capital cannot also be re-converted into uncalled
share capital except with the sanction of the appropriate authorities.
Different types of shares: Equity shares, sweat equity shares, bonus shares and preference
shares
Preference shares: S. 43 of the Act allows a company to issue only two types of shares
namely,
 equity or ordinary shares and
 preference shares.
It may be noted that whereas equity shareholders are entitled to vote on all matters affecting
the company, preference shareholders have a right vote only on resolutions which directly
affect the rights attached to preference shares or any resolution for the winding-up of the
company, or for the repayment or reduction of the equity or preference share capital of the
company.
However, even a preference shareholder gets a right to vote on every resolution at a
shareholders' meeting if the company has not paid dividend for period of two years or more.
Preference shares are those shares that give the following two "preferences" to its holders:
1. Until the company goes into winding up, preference shareholders are assured of a fixed
dividend, that is, a fixed amount (as for instance, 1,000 every year) or a fixed percentage (as
for instance, 10% of the nominal value of the share), which may be either free of, or subject
to, income-tax, to be paid to them every year from the profits of the company. This dividend
is paid on a preferential basis, because it is to be paid before any dividend is paid to the
equity shareholders.
2. When the company goes into winding up, the preference shareholders are paid back their
capital amounts before the equity shareholders are paid their amounts.
Preference shares are of different types, namely,
(a) cumulative preference shares and non-cumulative preference shares;
(b) participating preference shares and non-participating preference shares;
(c) redeemable preference shares and irredeemable preference shares.
The basic features of these types of preference shares are as under.
(a) Cumulative preference shares and non-cumulative preference shares
When preference shares are cumulative in nature, if the company does not make profits in a
given year and therefore, no dividend is paid on these shares in that year, the arrears of such
dividend are to be paid out of the profits made by the company in subsequent years. Thus, a
company issues 10% Cumulative Preference Shares. In 2014, the company does not make
any profit, and therefore, no dividend is paid. In 2015, however, the company makes
considerable profits. In such a case, in 2015, the preference shareholders will be paid 20%
dividend, that is, 10% for 2014 plus 10% for 2015. If such unpaid dividend lapses, that is, it
is not to be carried forward and be paid in the following year or years, the preference shares
are referred to as non-cumulative preference shares.
If nothing is mentioned in the nomenclature of the preference shares, that is, they are neither
called "cumulative" nor "non-cumulative", then it is to be presumed that they are cumulative.
(b) Participating preference shares and non-participating preference shares
After the preference shareholders receive their fixed dividend and the equity shareholders
have also been paid, there may be some surplus profit left for distribution. Similarly, when a
company is wound up, after paying both the equity and preference shareholders, there may be
a surplus. Now, if the preference shareholders are entitled to a share in such surplus profits or
surplus assets, the preference shares are called participating preference shares, and if they are
not so entitled, the shares are referred to as non-participating preference shares.
It has also been held that, just because the articles of a company provide that preference
shareholders are entitled to participate in the surplus profits of the company, it does not give
them a right to participate in the surplus assets of the company at the time of winding up.
(c) Redeemable and non-redeemable preference shares
Equity shares of a company are not redeemable, that is, the shareholder cannot hand over his
shares to the company and get his money back. However, as far as preference shares are
concerned, S.55 of the Act authorizes a company to issue redeemable preference shares, that
is, preference shares which entitle their holders to be repaid after a stipulated period of time.
Such repayment is called redemption of the preference shares. Thus, if a company issues
preference shares which are redeemable after five years, the preference shareholders will get
back the capital amounts paid by them after this period has expired.
S. 55 of the Act lays down that no company limited by shares can issue preference shares
which are irredeemable. Such a company can, however, issue preference shares which are
liable to be redeemed within a maximum period of 20 years from the date of their issue,
provided such an issue is authorized by the articles of the company. Such an issue would be
subject to such conditions as may be prescribed from time to time. However, companies can
issue preference shares for a period exceeding 20 years for infrastructure projects, subject to
certain conditions.
However, when redeeming such shares, the company must satisfy the following conditions
stipulated by S. 55 of the Act:
(a) Only fully paid up preference shares can be redeemed.
(b) Such shares are to be redeemed only out of the profits of the company which would
otherwise be available for payment of dividend. If there are no such profits, they may be
redeemed out of the proceeds of a fresh issue of shares made to redeem the preference shares.
(c) If any premium is to be paid on such shares at the time of redemption, such amount must
have been provided for either out of the profits of the company or out of the Securities
Premium Account of the company.
(d) If the redemption is made out of the profits of the company, a sum equivalent to the
amount paid on redemption should be transferred to a reserve account called the Capital
Redemption Reserve Account. The amount in this account is like the paid-up share capital of
the company and can be utilized only if the company follows the procedure for reduction of
share capital laid down in S. 66 of the Act. However, the company can use this account to
issue fully paid-up bonus share to its members.
If the company is not in a position to redeem its preference shares or pay dividends on such
shares in accordance with the terms of their issue may issue further redeemable preference
shares equal to the amount due three-fourths in value of such preference shareholders give
their consent and if such an issue is approved by the Tribunal. When preference shares of a
company are redeemed, this does n amount to a reduction of the share capital of the company,
and therefore, the procedure prescribed by S. 66 of the Act need not be followed.
Equity shares: Equity share capital is negatively defined by S. 43 of the Act as being a that
share capital which is not preference share capital. Equity shareholder are not assured of any
fixed amount or rate of dividend-or any dividend at a Their dividend is to be paid from the
profits of the company, and if the company does not make a profit, they would get no
dividend at all. Even when the company makes profits, the directors may resolve not to
distribute any or such profits as dividend to the equity shareholders.
dividend can be paid by shareholders of the company only from following 3 sources namely,
-
(i) profits of the company for the year for which dividends are to be paid or
(ii) undistributed profits of the company of the previous financial years or
(iii) money provided by the Central or a State Government for the payment of dividend in
pursuance of a guarantee given by such Government. [S.123]
Exemption in favour of private companies
under S. 43 of the Act, a company can issue only two types of shares: equity shares and
preference shares. Now, vide a Notification issued by the Government of India on June 5,
2015, S. 43 will have no application to a private company if the memorandum or articles of
that company so provide Thus, a private company now has the flexibility to structure its
capital in any manner, by inserting a suitable provision in its memorandum or articles.
Likewise, S. 47 of the Act lays down that every shareholder of a company has a right to vote
on every resolution at a shareholders' meeting, and if a poll is taken, his voting right is to be
proportional to his share in the equity share capital of the company. In other words,
differential voting rights cannot be giver to equity shareholders. Now, the said (2015)
Notification has exempted private companies from the application of S. 47, if it is so
provided in the memorandum or articles of the company. This enables a private company to
provide differential voting rights to is equity shareholders.
Sweat equity shares
S. 54 of the Act allows a company to issue 'sweat equity shares'. These are equity shares
issued by a company to its employees or directors at a discount or for consideration other
than cash, as for instance, for providing know-how or making available rights in the nature
of intellectual property rights or value additions, by whatever name called. Subject to what is
stated below, sweat equity shares are to be treated for all purposes like all the other equity
shares of the company, and therefore, all the limitations, restrictions and other provisions that
apply to equity shares also apply to sweat equity shares. The holders of the sweat equity
shares rank pari passu with other equity shareholders. [S. 54(2)]
The following further points about sweat equity shares need to be noted:
1. Sweat equity shares should be of a class of equity shares that have already been issued by
the company.
2. A special resolution should be passed by the members of the company authorizing the
issue of such shares.
3. Such a resolution must specify-
(a) the number of sweat equity shares to be issued;
(b) the class or classes of directors or employees to whom they are to be issued;
(c) the consideration for the issue of the shares; and
(d) the current market price of such shares.
4. Such shares can be issued only if at least one year has elapsed after the commencement of
business of the company.
5. If the equity shares of the company are listed on a recognized Stock Exchange, the sweat
equity shares should comply with the guidelines issued by the Securities Exchange Board of
India (SEBI) in the matter of issue of sweat equity shares.
6. If the equity shares of the company are not so listed, they must be issued in accordance
with such guidelines as may be prescribed in the matter.
Bonus shares
S. 63 of the Act allows a company to issue fully paid-up bonus shares to its members in any
manner (but not in lieu of dividend) out of the following three funds, namely, -
(a) it free reserves;
(b) its Securities Premium Account;
(c) its Capital Redemption Reserve Account.
However, the Act expressly provides that bonus shares cannot be issued by capitalizing
reserves created by a revaluation of the company's assets. provision seems to have been made
to overcome a ruling of the SC, where the issue of bonus shares after such a revaluation was
up (Bhagwati Developers v. Peerless General Finance & Investment Comp Ltd., (2013) 5
SCC 455)
It is also provided that before a company can capitalize its profit reserves, the following
conditions must be fulfilled.
- The issue of such shares must be authorized by the articles of the company.
- The board of directors must recommend the issue of such shares.
- The shareholders must also authorize the issue of such shares general meeting of the
company.
- The company should not have defaulted in payment of interest a principal amount in respect
of fixed deposits or debt securities issued by it.
- The company should not have defaulted in respect of payment any statutory dues of its
employees, such as contribution to prov fund or gratuity or bonus payable to the employees.
- Partly paid-up shares of the company, if any, should first be made fully paid-up.
- Bonus shares cannot be issued in lieu of dividend.
- The issue of bonus shares must also comply with other conditions as may be prescribed.
- If the company has once announced the decision of the board directors recommending a
bonus issue, the same cannot subsequently withdrawn by the company.
The issue of bonus shares is a boon to the shareholder as he gets more shares of the company
without having to pay for them. Such shares would also fetch him dividend in the future, and
like other shares of the company which belong to him, he can sell the bonus shares in the
market. The issue also benefits the company as it amounts to self-financing and enables it to
pump more funds to carry on- and perhaps extend - its business.
The Supreme Court has held that a shareholder becomes the owner of bonus shares from the
date of the shareholders' resolution and not from the date on which such shares are issued.
(Shri Gopal Paper Mills v. C. I. T. (1970) 2 SCC 80)

32. Note on BUY BACK OF SHARES?

S. 67 prohibits a company from buying back its own shares. However, with changing times
and changing business philosophy, it was thought expedient to allow a company to buy back
its own shares in certain circumstances. S. 68 now allows a company to purchase its own
shares (referred to as 'buy-back') if the following conditions are fulfilled:
1. The articles of the company should authorize buy-back of shares by the company.
2. A special resolution of the shareholders should be passed to authorize the buy-back of
shares. The notice of the meeting were such a resolution is passed must be accompanied by
an explanatory statement setting out the details listed in S. 68(3) of the Act. If, however, such
amount is less than 10% of the paid-up equity capital and free reserves of the company, a
special resolution of the company is not necessary and the buy-back can be accomplished by
a resolution passed by the directors at a board meeting.
3. The sources of the funds for buy-back of shares can only be the company's free reserves or
its Securities Premium Account or the proceeds of the issue of any shares or other specified
securities.
4. No offer of buy-back can be made within one year of the last offer of buy back, if any.
5. The amount of buy-back should be 25% or less of the aggregate of the paid up capital of
the company and its free reserves.
6. The buy-back should be effected directly by the company - and not through other
companies like a subsidiary or an investment company. [S. 70]
7. After the buy-back, the ratio of debt (secured and unsecured) owed by the company cannot
be more than twice the capital of the company and its free reserves.
8. All the shares involved in the buy-back should be fully paid shares.
9. The buy-back of shares listed on any recognized Stock Exchange should be in accordance
with the regulations made in this behalf by the Securities and Exchange Board of India
(SEBI).
10. If the shares are not listed on a recognized Stock Exchange, the buy-back should be in
accordance with the prescribed guidelines.
11. The buy-back may be:
- from the existing shareholders on a proportionate basis, or
- from the open market, or
- by purchasing the shares issued to the employees of the company pursuant to a
scheme of stock option or sweat equity.
12. The buy-back process should be completed within one year from the date of the
shareholders' resolution or the board resolution, as the case may be.
13. A declaration of solvency must be filed with the ROC and the s before the resolution for
buy-back is implemented.
14. The company must physically destroy the shares bought back by within seven days from
the date on which the process of buy back completed.
15. The company must maintain a register containing all the prescribed details of the shares
bought back by it.
16. After completing the process of buy-back, the company must file s return in the
prescribed form with the ROC and the SEBI within thirty days of the completion of the buy
back.
17. When a company has bought back its shares, it cannot make a issue of the same kind of
shares for the next six months. However the company is allowed to issue bonus shares and
discharge i existing obligations, like issue of sweat equity shares, stock option schemes and
conversion of preference shares or debentures into equity shares. further its
18. No buy-back is allowed if the company has defaulted in the repayment of its deposits or
interest or the redemption of its debentures of preference shares or the payment of dividend
or the repayment of any term loan or interest payable to any financial company or bank
However, if such a default is remedied and a period of three years has elapsed after the
default has been remedied, the company can buy back it shares.
19. The provisions of the Companies (Share Capital & Debentures) Rules, 2014, must also be
complied with.
Any default in complying with the above or with the regulations made by SEBI in this regard
makes the company punishable with fine ranging between 1 lakh and 3 lakhs. Additionally,
every officer of the company in default is also punishable with imprisonment upto three years
or with fine between 1 lakh and 3 lakhs, or both.

33. Who is a director? company director?

Under companies act the term director was defined to include any person occupying the
position of a director by whatever name called. English law also recognizes the concept of
shadow director a person on whose instructions the board of directors of company generally
act. However, this person is treated as a director only from the angle of imposing liabilities
or restrictions on him he is not deemed to have the rights or powers of director.
A company director is a professional person hired by the company to manage and run its
business. A director is defined under Section 2(34) of the Companies Act, 2013 as a person
(director) appointed to the Board of a company. No artificial person or entity can be selected
for the position of director in a company. Only an individual person can be appointed as a
director of a company.
If we think of a company as a separate legal entity, then we can see that the directors are
basically termed as the mind and will of the company. This is because they control the
actions and behavior of the company in the business environment. To work in an efficient and
effective manner, directors have to work in different capacities many times.
Legal position of directors
It is really difficult to explain as to what is the exact legal position of directors in a company.
There are certain explanations given by the judges for defining directors, sometimes as
agents, sometimes as trustees, and sometimes as managing partners. They are the persons
who are duly appointed by the company for the purpose of directing and managing the
company’s affairs. All the expressions to which directors are referred, like agents, trustees,
etc., are not exhaustive of their powers and responsibilities. It was observed in the case of
Ram Chand & Sons Sugar Mills Pvt. Ltd. v. Kanhayalal Bhargava(1966), that it is really
difficult to exactly explain the legal position of directors in a company. Judges have
summarized it as a multi-dimensional position which is held in the capacities of an agent,
trustee, or manager, even though these terms don’t hold the same meaning in a true legal
sense.
Directors as an agent: a company cannot act by itself in its own capacity. It would always
need someone to act on its behalf. A company can only act through directors, and this hence
makes it a principal and agent relationship. This relationship gives the directors the power to
act and make decisions on behalf of the company. Any contract or transaction made on behalf
of the company makes the company liable and not the directors. No liability occurs upon the
directors, they only sign and make contracts on the company’s behalf.
In the case of Ferguson v. Wilson (1904), it was established that the directors are the agents
of the company. This was established in the eyes of the law that a company cannot work as
an artificial person in its own capacity that’s why it needs an agent to operate. In the case of
Kirlampudi Sugar Mills Ltd. v. G. Venkata Rao [2003], it was noticed that if the CEO of the
company executes a promissory note and borrows money from outside for the company’s
use, it cannot be said that he has borrowed money for himself. Even if the company fails to
pay the amount promised, there shall incur no liability on the one who borrowed money as an
agent of the company. There were some circumstances that were pointed out in the case of
Vineet Kumar Mathur v. Union of India [1996] in which the directors incurred liability on
themselves-
1. In cases where directors contract in their own names rather than the company.
2. In cases where directors omit or use the company’s name incorrectly.
3. In cases where directors sign the contracts or agreements in such a manner that it is not
evident whether it is the company (principal) or the director (agent) who is signing and
who shall be liable for future circumstances.
4. In cases where directors exceed the allowed limit and borrow in excess of funds.
There are ways in which unauthorised actions can be ratified. In Bhajekar v. Shinkar [1933],
it was mentioned that if a transaction made by the director exceeds the power given to him
but falls within the ambit of the power held by the company, then it can be ratified by passing
a resolution of the company. However, if the company has been struck off by the registrar
and dissolved, then it cannot ratify its actions. This is because a non-existent entity cannot
initiate action in the first place.
Director as a trustee: In a company, a director is regarded as a trustee as well. A director is
known as a trustee because he administers the assets and works toward the interests of the
company. A trustee is someone who can be entrusted with the company’s assets and performs
towards achieving the company’s goals rather than for their personal advantage. Besides
these, a trustee is given powers like allotment of shares, making calls, accepting or rejecting
transfers, etc., which are known as powers in trust. it was noticed that the directors have to
act within their fiduciary capacity, which means that they have a duty to act on behalf of the
company with the utmost care, skill, good faith, and due diligence, most importantly towards
the interests of the company that they are representing. As observed by the Madras High
Court in the landmark case of V.S. Ramaswami Iyer v. Brahmayya and Co. (1966), the
directors can be rendered liable as trustees with reference to their power to apply funds of the
company. A director may misuse these in many ways. Due to this, if legal action is taken
against a director with reference to the mentioned offence, then the cause of action will
survive even after the death of the director against his legal representative. it was also held
that the directors of a company owe their duty to the company as a whole, and are not trustees
for individual shareholders or owe them a fiduciary duty merely by virtue of their offices.
They may purchase their shares without disclosing pending negotiations for the sale of the
company’s undertaking.
Director as a managing partner: The directors of a company represent the shareholders’
will and wants. They tend to act on behalf of the shareholders and their goals. Due to this,
they enjoy vast powers and can perform many functions that are proprietary in nature. Due to
the provisions mentioned in the MOA and AOA of the companies, the board of directors acts
as the supreme policy and decision-making authority. Some writers consider a company to be
a large partnership and its directors as being entrusted with the function and responsibility of
managing its affairs. They are thus looked upon as "managing partners", whereas the
shareholders are regarded as "dormant partners".
Director as an employee/officer
Shareholders elect directors in a general meeting held by the company. Once the director is
elected, he then enjoys the rights and powers that are given to him as per the Act. These
powers and rights cannot be taken away by the shareholders and they cannot interfere in the
decision-making of the directors as such. Since directors possess such powers and rights, they
cannot be termed employees of the company. This is because employees have limited
authority vested in them and always work under the directions of the employer and cannot
interfere in the employer’s decision-making.
In the case of Lee Behrens & Co., Re [1932], it was seen that it is the shareholders who elect
their representatives who shall engage in directing the affairs of the company on their behalf.
This means that they are acting in the capacity of an agent in this scenario. It can also be seen
that they are not the employees or servants of the company.
Director as an organ: Directors have also been considered, in judicial decisions, as the
organs of the company, for whose actions the company shall be held liable similar to how a
natural person is liable for the actions of their limbs.
Directors are organs of the corporate body as the company acts through them. In the
landmark case of Bath v Standard Land Co Ltd, it was held that the Board of directors are the
brains of the company and the company acts through it. The brain functions and the
corporation is said to function (state trading corp of India v. cto, AIR 1963 SC 1811).

34. APPOINTMENT OF DIRECTORS? Power? Duties?

The management of the company should be in proper hands as the success of a company
depends largely on the competence and integrity of the directors. The appointment of the
directors is strictly regulated by the provisions of the Companies Act, 2013. One evil that was
removed by the act is that a company cannot act as a director of another company. No
company or firm should be appointed as the director of another company.
No company can appoint any individual as the director unless that individual has received his
Director Identification Number under section 154 of the Act. if a person is not a director of a
company he cannot be its Managing director.
Company to have Board of Directors- According to section 149 of the Act, every company
should have a board of directors. These directors should not be artificial person but should
consist of individuals. Section 149 also lays down the minimum number of directors required
by a company:
1. Public Company – At least three directors
2. Private Company – At least two directors
3. One Person Company – At least one director
The maximum number of directors that can be appointed to the board can be 15. A special
resolution has to be passed in order to have more than 15 members. The director appointed to
the board should have stayed in India in the previous year for a period of 182 days or more.
Independent Directors- Section 149(4) According to Section 149(4) of the Act, at least one
third of the total number of directors should be independent directors. Any fraction contained
in the one third number is to be rounded of Reappointment The vacancies caused due to
retirement or resignations have to be filled in the general annual meeting. Adjournment can
be provided in the general meeting and the reappointment can be postponed by a week.
The retiring directors are reappointed if there is no fresh appointment made by the company
in the general annual meeting. The retired directors will not be taken into consideration for
reappointment, with the following exceptions:
1. The vote to approve the appointment of the director was unsuccessful.
2. If the departing director has communicated in writing his desire to step down to the
company’s board and management.
3. If he is rejected.
4. When his appointment requires an ordinary or extraordinary resolution.
5. When a move to appoint more than two directors in a single resolution is invalid because it
was passed without unanimous consent in accordance with section 162.
Appointment by Nomination Directors can be appointed by the articles of the company as
well. They can be nominated as a director if an agreement amongst the shareholders has been
included into the articles of incorporation and grants every shareholder with more than 10%
share the right to be selected as a director.
Appointment by voting on an individual basis According to section 162 of the Companies
Act, 2013 the directors shall be appointed by voting in the general meeting. The individual
votes and the wishes of the shareholders will be taken into consideration for appointment of
the directors. In the case named Raghunath Swarup Thakur v. Raghuraj Bahadur Mathur,
when two or more directors are appointed on the basis of single resolution and voting then it
is considered to be void in the eyes of law.
Appointment by Directors of Board The board can appoint the director under two
circumstances:
1. If the board is empowered by the articles of association of the company.
2. Section 1611 of the Act authorises the Board to fill in certain vacancies caused due to
Appointment by Tribunal Company law has empowered the tribunal to appoint the
directors under section 242(j) of the companies act, 2013.
POWERS OF THE DIRECTORS
General powers are vested in the directors. Directors are empowered under Section 149 of the
Act. A director is authorized to exercise general powers that a company is authorized to
exercise. The powers of the directors are co-extensive with that of the company and an
appointed director has almost every power within authority to exercise. These powers are also
restricted by certain regulations and restrictions. There are two important limitations on the
powers of the directors:
1. The Board is not competent to do what the act, memorandum of association or articles of
association requires the shareholders to do in the general meeting.
2. The powers of the directors have to be in compliance with the Memorandum and Articles
of the company. In the case named Automatic Self-Cleansing Filter Syndicate Co Ltd v
Cuningham, it was held that directors are agents of the company and not of the majority
shareholders. If the powers of the management are vested in the directors of the company,
then they can alone exercise these powers.

35. note on Director identification number?

As seen earlier, no person can be appointed as a director in a company unless he has been
allotted a Director Identification Number (DIN). Ss. 153 - 159 of the Act contain detailed
provisions relating to DIN, which may be summarized as follows:
(a) Every individual who intends to be appointed as a director of company must make an
application to the Central Government the prescribed form and manner.
(b) Within one month of the receipt of such an application, the Centre Government must allot
a DIN to the applicant in the prescribe manner.
(c) If a person is already allotted a DIN, he cannot apply for or obtain possess another DIN.
(d) Within one month of the receipt of the DIN, the director must intimate such number to all
the companies wherein he is a director.
(e) Within fifteen days of receiving the DIN, every company must furnish the DINS of all its
directors to the ROC in the prescribed form.
(f) When any return, information or particulars are furnished by the company or any person
under the Act, the DIN is to be mentioned i case such a return, information or particulars
relate to a director.
(g) If any individual or director contravenes the above provisions, he become punishable with
imprisonment upto six months or with fine 50,000. In case of a continuing offence, a further
fine of upto 500 for every day of the contravention can be levied on such a person. Detailed
provisions have been made in the Companies (Appointment and Qualification of Directors)
Rules, 2014, for the application and allotment of a DIN
Nominee Director: is defined by S.149 of act as a director nominated by the financial
institution in pursuance of the provisions of any law or of any agreement or appointed by any
government or the other person to represent its interest.
Alternate director is a person who is appointed by the Board of Directors if authorized by
articles or by resolution as a substitute to a director who may be absent from India, for a
period which isn't less than three months. such person holds the position only for the period
during which the original director would have held. He also vacates when original director
returns to office.
Resident directors: The Companies Act, 2013 has introduced the concept of a resident
director. S. 149 of the Act lays down that every company must have at least one director who
has stayed in India for a total period of at least 182 days in the previous calendar year.

Appointment of managing or whole-time director: The provisions relating to the

appointment of a managing director, whole- time director or manager are contained in S. 196
and S. 203 of the Act, and may be summarized as under:
1. The prescribed classes of companies must have the following whole- time key managerial
personnel, namely, -
(a) a Managing Director or a Chief Executive Officer (CEO) or a Manager, and in
their absence, a whole-time director;
(b) a company secretary; and
(c) a Chief Financial Officer.
2. The same person cannot be appointed or re-appointed as the chairperson of the company as
well as the Managing Director or CEO of the company at the same time, unless the articles of
the company so provide; or the company does not carry on multiple businesses.
3. Every whole-time key managerial personnel of the company is to be appointed by a
resolution of the Board of Directors, containing the terms and conditions of this appointment,
including his remuneration
4. A whole-time key managerial personnel cannot hold office in more than one company at
the same time- unless such other company is a subsidiary of that company. However, with the
permission of the Board of Directors, such a person can become a director of any company.
5. Notwithstanding what is stated above, a company can appoint a person as its Managing
Director if he is the Managing Director or Manager of one and only one - other company,
provided a unanimous resolution is passed by the Board of Directors at a meeting
6. If the office of any whole-time key managerial personnel is vacated it must be filled up in a
Board meeting within six months of the vacancy
7. No company can have a Managing Director and a manager at the same time.
8. A company cannot appoint any person as its Managing Director whole-time director or
manager for more than five years at a time. L such a person is to be re-appointed, the re-
appointment cannot be made earlier than one year before the expiry of his term.
9. A company cannot appoint, or continue the appointment of, any person as its Managing
Director, whole-time director or manager, if such a person-
> is below the age of 21 years or his completed the age of 70 years; [The appointment of a
person over 70 years is, however, possible if a special resolution is passed by the company
for his appointment. In such cases, the explanatory statement annexed to the notice for such a
resolution must indicate the justification for appointing such a person.]
> is an undischarged insolvent or has, at any time, been adjudged as an insolvent;
> has, at any time, suspended payment to his creditors or makes, or had made, a composition
with his creditors; or
> has, at any time, been convicted by a court for an offence and has been sentenced for a
period of more than six months.
10. If the appointment of any Managing Director, whole-time director or Manager is in
conformity with the provisions of the Act and Schedule V to the Act, it must be approved by
the Board of Directors and a resolution of the shareholders at the next meeting of the
company. In case such an appointment is at variance with the conditions specified in the said
Schedule V, the approval of the Central Government is also required.
Schedule V of the Act contains certain conditions to be fulfilled, as for instance, that the
concerned person –
-should be a resident of India;
-should not have been sentenced to imprisonment for any period or a fine exceeding 1,000 for
conviction of an offence under sixteen specified Acts, as for instance, the Stamp Act, the
Central Excise Act, the Income-tax Act, the Prevention of Money- laundering Act, etc.;
-should not have been detained for any period under the Conservation of Foreign Exchange
and Prevention of Smuggling Activities Act.
Under a Notification issued by the Government of India on June 5, 2015, private companies
have been exempted from condition No. 10 above.
QUALIFICATIONS AND DISQUALIFICATIONS OF DIRECTORS
Qualifications of Directors: The Act does not prescribe any specific qualifications for
becoming a director of a company. It does not even require that a director should be a
shareholder of the company. However, the articles may lay down the qualifications for being
appointed as a director. Usually, the articles of a Company provide for a certain number of
shares to be held by each director. Such shares are called qualification shares.
The Madras High Court has held that there is nothing in the Act to prevent shareholders of a
company from requiring some other qualifications for being appointed as a director. Thus, if
a special resolution is passed by the shareholders laying down that a director must hold a
fixed deposit of 1,000 in the company, the same is legal and valid, as it provides an additional
qualification for being appointed as a director of the company. (S. V. S. Nidhi v
Daivasigamani, AIR 1951 Mad 520)
Disqualifications of Directors: S. 164 provides that the following persons shall not be eligible
for appointment as a director of any company:
(a) a person certified to be of unsound mind by a competent Court;
(b) an undischarged insolvent
(c) a person who has applied to be adjudicated as an insolvent;
(d) a person who has been convicted by a court of an offence and sentenced to imprisonment
for not less than six months and a period of five years has not elapsed from the date of expiry
of the sentence;
(e) a person who has not paid, for six months, a call made on him in respect of shares of the
company held by him, whether alone or jointly with others;
(f) if an order disqualifying him from appointment as a director has been passed by a court or
the Tribunal and such an order is in force;
(g) a person who is, or has been, a director of a company which-
(i) has not filed the financial statements or annual returns for any three continuous
financial years;
(ii) has failed to repay its deposit or interest thereon on the due date or redeem its
debentures on the date of maturity or pay dividend thereon, provided such failure has
continued for one year of more, is not eligible to be re-appointed as a director of that
company or be appointed in any other company for a period of five years from the
date on which the said company fails to do SO.
(h) a person who has been convicted of the offence of dealing with related party transactions
under S. 188 of the Act at any time during the last five years;
(i) a person who has not obtained a DIN.
Additional disqualifications: A private company may, by its articles, provide that a person
shall be disqualified for appointment as a director on any grounds in addition to those
specified above. [S. 164(3)]
Maximum number of directorships: Under S. 165 of the Act, a person cannot be a director
(including an alternate director) in more than twenty companies at the same time.
Additionally, the maximum number of public companies in which he is a director cannot
exceed ten. When calculating the number of public companies, his directorship in private
companies which are either holding or subsidiary companies of public companies are to be
included. Subject to this, the members of a company can, by passing a resolution, specify any
lesser number of companies in which a director of a company may act as a director.
The quorum for board meeting is one third of the total number of directors of the company or
two directors whichever the number is higher.

STATUTORY MEETING: Under the Companies Act, 1956, the first meeting of a public
company with share capital was known as the statutory meeting - a concept now done away
with by the Companies Act, 2013.
This meeting was one which was held once in the lifetime of such companies and was to be
held after one month, but before six months, from e date of which the public company was
entitled to commence business. Not holding such a meeting was not only punishable, but was
also a ground for winding up the company.

36. Note on AGM?

Under S. 96 of the Act, every company (other than an OPC) must in addition to other
meetings, hold an annual general meeting (AGM) every year specifying such a meeting to be
an AGM in the notice of the meeting. The first AGM of a company must be held within nine
months from the close of the first financial year of the company, and subsequent meetings
within a period of months from the close of every financial year. The time gap between two
AGM cannot be more than fifteen months. If, for any special reason, a company cannot hold
its AGM within fifteen months from the date of its last AGM. application may be made to the
ROC, who may extend this period by 3 months. There is, however, no provision for
extending the time for holding first AGM of a company. (T. V. Mathew v. Nadukara Agro
Processing Co. L (2002) 108 Co. Cases 130)
It has been clarified by the Ministry that, keeping the above requirement of law in mind, the
AGM should be held within the earliest of the following 3 dates, namely, -
- six months after the close of the financial year,
- fifteen months from the date of the previous AGM;
- the last day of the calendar year.
If the first AGM of a company is held within the time specified above, the need not hold any
AGM in the year of its incorporation. company Every AGM should be held during business
hours, that is, between 9 a.m. and 6 p.m. on a day that is not declared to be a national holiday
by the Central Government. The AGM should be held at the registered office of the company
or at any place within the city, town or village where such registered office is situated. The
Central Government may, however, exempt any class of companies from this requirement,
subject to such conditions as it may impose.
A failure to call an AGM within the statutory period (as above) entails two consequences.
Firstly, any member can apply to the Tribunal, which can call or direct the calling of the
AGM. When doing so, the Tribunal can also give ancillary or consequential directions
regarding the calling, holding and conducting of the meeting. Such directions may include a
direction that even one member of the company present in person or by proxy shall be
deemed to constitute a valid meeting. An AGM called in pursuance of such a direction is
deemed to be an AGM of the company.
Secondly, if there is a default in holding an AGM within the above period (whether in the
normal course or under the order of the Tribunal), the company as well as every officer in
default is punishable with a fine upto 1 lakh. In case of a continuing offence, they are also
liable to pay upto 5,000 for every day during which the default continues. [S. 99] When a
managing director of a company had repeatedly called upon other directors of the company to
hold the AGM- but in vain - it was held that he could not be considered to be an "officer in
default". (S. S. Jhunjhunwala v. State (1970) All WR 814) It is no defence for a company to
plead that it could not hold the AGM because a criminal case had been filed against the
secretary of the company and important books of the company had been exhibited in the
court in those proceedings. (In Re. Brahmanberia Loan Co. Ltd., AIR 1934 Cal. 624)
However, a lenient view was taken in another case where a company had only two members
who were brothers. During the period when the meeting ought to have been held, one brother
was seriously ill. The court conceded that failure to hold the AGM was not a wilful default in
these circumstances. (Kastoor Mal Banthiya v. State, AIR 1951 Ajm 39).
At an AGM, the following items are considered to be "ordinary business namely, -
(i) the consideration of the Accounts, Balance Sheet, Directors' Report and Auditors' Report;
(ii) the declaration of dividend;
(iii) the appointment of directors in place of those retiring; and
(iv) the appointment of auditors and the fixing of their remuneration.
All other business at an AGM is deemed to be "special business", in respect whereof an
Explanatory Statement is required to be annexed to the notice sent to the members informing
them about the meeting. [S. 102]
Importance of an AGM: Corporate law generally considers the AGM to be an important
institution for the protection of the members of a company. It is at this meeting - though only
once in every year-that members can question the management regarding the affairs, business
and accounts of the company. It is at this meeting that members have an opportunity not to
re-elect directors in whom they have lost faith or confidence. As auditors also retire at this
meeting, members have yet another opportunity to decide whether or not to re-elect them.
Last, but not the least, it is at the AGM that members declare the dividend payable by the
company.
As regards dividend, it may be noted that it is the board of directors that recommends the
dividend and it is the members at the AGM who declare the dividend-which however cannot
exceed what is recommended by the board.
Requisites for valid meeting are: Notice, Quorum, Chairman, Voting, Proxy, Resolution,
Minutes.
Proxy: is a person who represents a member of a company at a meeting. He is a person
who representative of the shareholder at meeting of company who may be described as
agent to carry out what the shareholder has himself decided. He is an agent of member
who attends meeting and votes thereat on behalf of member.
Quorum
The word "quorum" refers to the minimum number of members who must be present in order
to constitute a valid meeting. The articles of a company normally provide the number which
constitutes a quorum for its meetings. Unless the articles of a company provide for a larger
number, the quorum for a meeting of the members of a company is as follows:
(a) in the case of a public company.
- 5 members personally present if the company has not more than 1,000 members;
- 15 members personally present if the company has more than 1,000 and upto 5,000
members; and
- 30 members personally present - if the company has more than 5,000 members.
(b) in the case of a private company - 2 members personally present. Under S. 103 of the Act,
if within half an hour from the time fixed for the meeting, a quorum is not present, the
meeting stands dissolved if it was a meeting called upon a requisition of members. In other
cases, the meeting stands adjourned to the same day in the next week at the same time and
place. If, at such adjourned meeting also, a quorum is not present within half an hour, the
members who are actually present constitute the quorum, even if such a number is less than
the prescribed quorum. However, this raises an interesting question: What if only one
member turns up at the adjourned meeting? Would he constitute a quorum in view of the
above provision? The answer is: No. Significantly, S. 103 uses the word "members", and the
use of the noun in the plural clearly suggests that more than one member should be present at
the adjourned meeting. This view also finds support in Sharp v. Dawes, below.
In the case of an adjourned meeting and also in case of a change of day. time or venue of a
meeting of public company, the company must give at least three days' notice to all its
members, either individually or by publishing an advertisement in two newspapers (one in
English and one in the vernacular language) circulating at the place where the registered
office of the company is situated.
In Sharp v. Dawes (1876 2 QBD 26), a company having several members called a meeting
for the purpose of making a call on the members. Only one member, holding proxies for other
members, was present at the venue. He took the chair and passed the necessary resolution for
making the call. Thereafter, he even proposed a vote of thanks. The court, however, held that
the meeting was not valid. In the words of Lord Coleridge. "The word 'meeting prima facie
means a coming together of more than one person."
However logical the above rule is, it does admit of some exceptions. What if only one
member holds all the preference shares of a company and a meeting is called of the
preference shareholders of the company? In such a situation, a meeting attended by such a
sole member would be a valid meeting. (East v. Bennett Bros. Ltd., (1911) 1 Ch. 163)
In one case, the articles of a company provided for a quorum to be present "when the meeting
proceeds to business". When the meeting began, there was a quorum, but later, one member
left the meeting, reducing the number of members to a number less than the number required
for a quorum. The court held that the subsequent departure of a member did not invalidate the
meeting. (In Re. Hartley Baird Ltd., (1954) 3 WLR 964)

37. Note on DIVIDEND?

Every business is done with a view to make profits and a company is no exception to this
rule. The profits of a company are distributed amongst its shareholders in the form of
dividends. A person who lends money or invests it in a fixed deposit gets interest, on the
other hand, an investor in the shares of a company is rewarded with dividend,
However, the entire profit of a company need not- and cannot be distributed to its
shareholders as dividend. The board of directors first recommend the dividend and the
shareholders in general meeting declare the dividend. However, the shareholders cannot
declare dividend greater than what is recommended by the directors.
S. 123 of the Act lays down that dividend can be declared and paid by a company only out of
the profits of the company. In other words, dividend cannot be paid out of capital. Under the
Act, there are only three sources out of which dividend can be paid, namely,
(a) profits of the company for the year for which dividends are to be paid;
(b) undistributed profits of the company of the previous financial years; and
(c) money provided by the Central or a State Government for the payment of dividend in
pursuance of a guarantee given by such Government.
Once a dividend is declared, it becomes a statutory debt owed by the company to its
shareholders and such dividend must be paid to them within a period of thirty days. As
observed by the Supreme Court in Bacha Guzdar v. C. 1. T. (AIR 1955 SC 74), "Once a
declaration of dividend is made and it becomes payable, it partakes of the nature of a debt due
from the company to the shareholder."
The company must send the dividend warrant to the registered holder of the shares or to his
order or to his bank within thirty days. If a declared dividend is not paid within the said
period, every director of the company who is knowingly in default is exposed to a penalty by
way of imprisonment which may extend to two years and a fine which may extend to 1,000
for every day of default. Additionally, the company becomes liable to pay interest on the
amount at period of default. However, S. 127 of the Act clarifies that no offence shall be
deemed to have been committed in the following five cases, namely,
(a) where the dividend cannot be paid by reason of the operation of any law;
(b) where a shareholder has given directions to the company regarding the payment of the
dividend and such directions cannot be complied with, and the same has been communicated
to him;
(c) where there is a dispute regarding the right to receive the dividend:
(d) where the dividend has been lawfully adjusted by the company against any sum due to it
from the shareholder; or
(e) where, for any other reason, the failure to pay the dividend or to post the dividend warrant
within the said period is not due to any default on the part of the company.
If dividend which has been declared is not paid within thirty days or the dividend warrant is
not claimed by the shareholder within this period, the company is obliged to transfer the total
amount of dividend which remains road or unclaimed within seven days into an account to be
opened by it in a scheduled bank, called the "Unpaid Dividend Account". Such unpaid
dividend remains in this account for seven years, during which period the person entitled the
amount is allowed to claim it. After seven years, the money is to be transferred to a fund
established by the Central Government called the "Investor Education and Protection Fund".
This fund is to be utilized, as its name suggests. promoting investor awareness and for
protecting the interest of investors in This fund can also be utilized for refunding unclaimed
dividend, matured deposits, matured debentures and for making other payments listed in S.
125(3) of the Act.
Interim dividend: As seen above, it is the shareholders who declare dividend at a general
meeting of the company. However, S. 123 of the Act empowers the board of directors to
declare interim dividend to be paid to the shareholders of the company. The total amount of
dividend, including interim dividend, is to be deposited in a separate bank account within five
days from the declaration of such dividend. The amount so deposited is to used for payment
of dividend, including interim dividend. The provisions of the Act as regards dividend also
apply to interim dividend.
If a company intending to pay interim dividend has incurred a loss during the current
financial year upto the end of the quarter immediately preceding the date of declaration of
such interim dividend, the rate of such interim dividend cannot be higher than the average
dividends declared by the company in the last three financial years.
Capitalization of dividend: Issue of bonus shares Although S. 123 of the Act provides that
dividend is to be paid in cash or by cheque or by warrant or in any electronic mode, if
authorized by its Articles, a company can, in general meeting, resolve to capitalize its profits
and convert its accumulated undivided profits into bonus shares to shareholders.
38. DEBENTURES?
The definition of a "debenture" in S. 2(30) of the Act is not very helpful. The term is defined
therein as under: 'Debenture' includes debenture stock, bonds or any other instrument of a
company evidencing a debt, whether constituting a charge on the assets of the company or
not.
Chitty's definition of the term is better: "Debenture means a document which either creates a
debt or acknowledges it, and any document which fulfils either of these conditions is a
debenture."
Thus, a debenture is a document issued by a company, indicating that it owes a particular
amount of money lent to it by the debenture-holder. This loan taken by a company may be
secured (as for instance, when a mortgage on the company's assets is created in favour of the
debenture-holders) or it may be unsecured (this is, when no security is created in favour of
the debenture- holder).
Topham defines a debenture as "a document given by a company as evidence of a debt to the
holder, usually arising out of a loan and most commonly secured by a charge".
A company requiring funds for its operation (over and above its share capital) may obtain
them either from a bank or a lending institution (such as ICICI, IDBI, etc) or from the public.
Generally speaking, if a loan of a large amount is to be obtained from a large number of
members of the public, issuing debentures is the best option. Small amounts can be gathered
from several persons by this method. Thus, for instance, if a company issues ten lakhs
debentures of 100 each to the public, it can raise an amount of 10 crores. The greatest
advantage flowing from this source of funds is that individual members of the public can
decide how much to lend to the company. Thus, if X purchases ten debentures of 100 each,
his loan to the company would amount to 1,000; if Y purchases fifty such debentures, the
company would owe him 5,000, and so on.
A debenture is thus a method by which public money is made available to a company, similar
to funds raised by a company by issuing shares to the public. Both shareholders and
debenture-holders get a return on their investment, the former by way of dividend (at a
varying rate) and the latter by way of interest (at a fixed rate). The amount collected by a
company by issue of debentures is not, strictly speaking, its "capital" (in the same way as its
share capital), although it is sometimes loosely referred to as its "borrowed capital. A
debenture-holder is also not a shareholder of the company; he cannot attend shareholders'
meetings and enjoy other rights conferred by the Act on a shareholder. In fact, S. 71 of the
Act expressly prohibits a company from issuing any debenture carrying voting rights at
meetings of the company.
No doubt, a debenture-holder is not a member of the company. Since he has advanced a loan
to the company, he is a creditor of the company. Therefore, at the time of the winding-up of
the company, he will be paid his dues before the shareholders are paid back their share
capital.
The following ten points relating to debentures may be noted:
1. A debenture is - as stated above - an acknowledgment of the indebtedness of the company.
Thus, if a debenture is of the face value of 100, it signifies that the company owes 100 to the
debenture-holder.
2. It is in the form of a certificate issued by the company generally under its common seal.
3. It specifies the rate of interest payable to the debenture-holder, the interval at which the
same is payable and the other terms and conditions on which the debenture is issued.
4. It mentions the date of redemption of the debenture - that is, the date on which the holder
will get back the amount mentioned in the debenture.
5. If it is a secured debenture it creates a charge on the assets or a part of the assets of the
company.
6. A register of debenture-holders is to be maintained by the company containing all the
prescribed particulars of the persons to whom the debentures have been allotted.
7. When a company issues debentures, it must create a Debenture Redemption Reserve
Account, to which adequate amounts of money are to be credited from out of the profits of
the company every year until the debentures are redeemed.
8. A company cannot issue a prospectus or make an offer or invitation to the public or to
more than 500 of its members, for the subscription of its debentures, unless the company has,
before such issue o offer, appointed one or more debenture trustees. (See 'Debenture trust
deed', below.)
9. A contract with a company to purchase its debentures can be enforced by a decree of
specific performance.
10. A company must pay interest and redeem the debentures in accordance with the terms and
conditions of its issue. If it does not any or all of the debenture-holders or the debenture-
trustee ca approach the Tribunal, which can, after a hearing, direct the company to do so
forthwith. Non-compliance with the orders of the Tribunal entails stringent punishment under
S. 71(11) of the Act.
Kinds of debentures: Debentures can be classified as under:
1. Redeemable and irredeemable debentures: A redeemable debenture is one which entitles
the holder to redeem it, that is, to receive the amount mentioned therein at the end of a
specified period Thus, if debentures are issued by a company for five years, at the end of such
period, the debenture-holders are entitled to get back their respective amounts.
In the case of irredeemable or perpetual debentures, the holders have no right to redeem such
debentures at the expiry of any specific period. However, such debentures naturally become
redeemable when the company goes into winding-up.
2. Secured and unsecured debentures: An unsecured debenture is one where no charge or
security is created on the assets of the company in favour of the debenture-holders. It is
sometimes also referred to as a simple or a naked debenture.
A secured debenture, on the other hand, is one where the company's assets-or a part thereof-
are charged or mortgaged in favour of the debenture- holders. These debentures are obviously
more popular because if there is a failure to repay the debenture-holders, the company's assets
can be sold to repay them. Secured debentures can further be classified into:
(a) Debentures with fixed charge
(b) Debentures with floating charge.
Debentures with fixed charge: When debentures with a fixed charge are issued, some specific
or definite part of the assets of the company (e.g., its factory) is mortgaged in favour of the
debenture-holders. The result is that the company cannot sell, gift, exchange or otherwise
dispose of such assets to the detriment of the debenture-holders
Debentures with floating charge: A company may wish to create a charge in favour of its
debenture-holders not on its fixed assets like its factory or office building, but on the goods
IN THE warehouse, its stock-in-trade, inventory of raw materials, etc. Such assets are liquid
or circulating in nature and it would paralyze the business of the company if it were not
allowed to use such assets in the normal course of its business. It is in such cases that a
company creates a floating charge on such assets, that is, a charge which is ambulatory in
nature and which "floats" like a cloud over the assets covered by it, both present and future.
The company can, in the course of its business, use and change such assets from time to time.
The charge does not get attached to any specific part of such assets, until the company
commits a default and the debenture-holders take action for such default, at which time, the
floating charge "descends" on the assets covered by it-after which the company cannot deal
with such assets and they become a security in favour of the debenture-holders. This is
known as "crystallization" of the floating charge.
3. Debentures in favour of registered holders and debentures payable to bearer: In the case
of a debenture in favour of a registered holder, the name of the debenture-holder (and
thereafter, his transferees, if any) appears on the debenture document and also on the register
of debentures maintained by the company. The holder of such a debenture can sell the
debenture in the open market and the transferee then applies to have his name registered as
the holder - just as in the case of a share certificate. But when a debenture is made payable to
bearer, it can be transferred by mere delivery, just like a bearer cheque or a bearer share
warrant. In such cases, there is no question of registering the transfer with the company. The
periodical interest-and ultimately, the principal amount - is paid to the bearer of the
debenture.
4. Convertible and non-convertible debentures: If debentures issued by a company can, at a
later date, be converted into shares of the company, they are called convertible debentures.
Debentures which cannot be so converted are known as non-convertible debentures. 5.71 of
the Act expressly authorises a company to issue partly or wholly convertible debentures.
However, the issue of such debentures requires the prior approval of the members by way of
a special resolution passed at a general meeting of the company. Thus, a company may issue
debentures of 1,000 each, with a condition that, at the end of five years, the debenture holder
shall have an option to convert the debenture into ten equity shares of the company of the
face value of 100 each. This would be an instance of convertible debentures. In the case of
non-convertible debentures, the debentures maintain their character until redemption.

39. Difference between a share and a debenture?

A share is a part of the capital of a company, whereas a debenture reflects a loan taken by the
company, the debenture-holder being a creditor of the company. Thus, the aggregation of the
shares constitutes the share capital of the company, but debentures do not constitute the
capital of the company. although they are sometimes loosely referred to as the company's
"borrowed capital". It follows that a shareholder gets dividend, that is, a share of the profits
of the company, whereas the debenture-holder gets interest on the money advanced by him.
Equity shareholders are entitled to receive dividends only when the company has made
profits, the directors have recommended dividend and the shareholders have declared such
dividend. Debenture-holders are creditors of the company and are not concerned with
whether there were profits in a given year or not. Irrespective of such profits, they are entitled
to get interest on the debentures as a matter of right and are not at the mercy of the directors
or shareholders in this connection.
Debenture-holders are entitled to a fixed rate of interest, irrespective of the profits made by
the company in a given year. There is, however, no fixed rate of dividend for equity
shareholders and this can vary from year to year, depending on the profits made by the
company in a given year.
A shareholder is a member of the company, whereas a debenture-holder is not. Shareholders
have voting rights at meetings of the company, but the debenture-holders do not. As seen
earlier, S. 71 of the Act expressly prohibits a company from issuing debentures with voting
rights.
A company can issue redeemable debentures, whereas it cannot issue equity shares which can
be redeemed.
When a company goes into winding up, the debenture-holder (who is actually a creditor of
the company) will be repaid before a shareholder gets back the amount paid by him on his
shares. In other words, debenture-holders have priority over shareholders at the time of
liquidation of the company.

40. Rule of Majority Foss vs Harbottle

Foss v. Harbottle is a landmark English case in the company law, which is known for the
propounding of ‘proper plaintiff rule’ and ‘majority rule’. While the rule in Foss v. Harbottle
is well laid, there exist certain exceptions to it of which personal rights enjoy a rather strong
immunity to its application.
the Foss v. Harbottle and highlight the relevance of personal rights of members outside the
former’s purview. Foss v. Harbottle.
In the case, a legal action was pursued by two minority shareholders (Richards Foss and
Edward Starkie Turton) on their own, against the directors of a company alleging conduct of
concerted and illegal transactions resulting in the loss of the company’s property. It was
alleged that the directors had misappropriated the company assets and had falsely mortgaged
the company property thereby adversely affecting the company and its original purpose of
“laying and maintaining an ornamental park” as laid down in the Act for its incorporation by
the parliament (“Act”).
The main issue in the case thus was whether a company’s right to sue can be exercised by its
shareholders on their own, that is, whether the shareholders could file an action for a wrong
done to the company. Rule in Foss Vs. Harbottle and Personal Rights of Members Herein, it
was contended by the petitioners that the company was not an ordinary company as its
genesis was in the Act which conferred right on the members or outsiders to file an action
against the directors. It was submitted that certain illegal transactions were being conducted
by the directors of the company by way of misappropriation of funds and improper mortgages
on the company property, thereby causing property wastage and loss to the company. It was
further prayed for the court to direct the directors to make good the losses suffered by the
company. To this, it was contended by the defendants that the petitioners did not have any
locus standi to file any legal action against the directors on behalf of the company. It was
submitted that the Act did not confer any rights on the petitioners to institute any legal
proceedings for the loss suffered by the company.
Judgment
The Court of Chancery rejected the claim of the petitioners and held that since the impugned
actions had caused loss to the company, only the company had the right to sue, that is to say
that, the company was the ‘proper plaintiff’ in the given case and not the shareholders.
It was further held that the minority shareholders could not bring action for a wrong which
could be ratified by the majority shareholders. In the process, two rules were propounded –
(1) ‘proper plaintiff rule’ which provides that in case of any wrong done to a company, only
the company has the right to sue for it, that is, only the company is the proper plaintiff;
and
(2) ‘majority rule’ which provides that decisions of the majority shareholders are binding on
the company and the court would not interfere in case of a wrong which could be ratified
by the majority shareholders.
The ‘proper plaintiff rule’ is also known as ‘the rule in Foss v. Harbottle’. It was held in the
case that shareholders cannot bring an action for loss suffered by the company. It was
observed that a company has a separate entity distinct from its members and has the right to
sue under its own name. Thus, in case of any wrong done to it, it is only the company which
can institute a suit, shareholders do not have that the right. It was further observed that a
company’s decisions are mainly based on the principles of democracy, and thus the majority
rule prevails. All the decisions made by the majority, whether simple majority or special
majority as required by the law, are binding on the company. Courts do not interfere in a
matter of irregularity which can be ratified by the majority. The court in the case thus pursued
the shareholders to exhaust options for redressal within the company first before coming to
the courts.
Exceptions to the Rule
The operative field of said rule extends to cases in which corporations are competent to ratify
managerial sins. But there are certain acts which no majority of shareholders can approve or
affirm and each and every shareholder may sue to enforce an obligation owed to the
company. In American literature, a representative action of this kind is called the ‘derivative
action’.
Ultra Vires : A shareholder is entitled to bring an action against the company and its officers
in respect of matters which are ultra vires and that no majority of shareholders can sanction.
In Bharat Insurance Company Case
“There does not appear to be any case where the necessity of the corporation being a party
has been expressly decided; but with respect to the first class of action, the question can
admit of no doubt – the relief therein claimed against the corporation itself.”
Fraud on Minority: Where the majority of a company’s members use their power to defraud
or oppress the minority, their conduct is liable to be impeached even by a single shareholder.
It can be best understood in the landmark Menier Case[13] It was held that Hooper’s
machinations for profits derived from the improper arrangements it had made amounted to an
oppressive expropriation of the minority shareholders and that a derivative action would
therefore lie against it.
Wrongdoers in Control: To safeguard the interest of the company, any member or members
may bring an action in the name of the company as it would be futile because the wrongdoers
would directly or indirectly exercise a decisive influence over the result. The same was held
in Glass v. Atkin[14]
Acts Requiring Special Majority: There are certain acts that required special resolutions at
a general meeting of shareholders. Accordingly, if the majority purport to do any such act by
passing only an ordinary resolution or without passing a special resolution in the manner
required by law, any member can bring an action to restrain the majority. Such actions were
allowed in Dhakeswari Cotton Mills Case[15] and Nagappa Chettiar Case[16].
Individual Membership Rights: Every shareholder has vested in him certain personal rights
against the company and his shareholders. A large number of such rights have been conferred
upon shareholders by the acts itself, but they may also arise out of articles of association.
Such rights are commonly known as individual membership rights and respecting them the
rule of the majority simply does not operate.
Class Action: A class action allows a number of claimants with a common grievance against
a company to file a lawsuit against it. The scale of economies associated with class actions
seems especially critical to those individuals who have limited resources or small claims that
render individual lawsuits expensive and unfeasible. Shareholders or depositors may file an
application with the National Company Law Tribunal (NCLT) alleging that the management
or conduct of the affairs of any company is being conducted in a manner prejudicial to the
interests of the company, its members or depositors.[17]
Oppression and Mismanagement: Calcutta High Court in Kanika Mukherjee Case[18]
held that the principle embodied in S. 397 and 398 of the Indian Companies Act which
provides for the prevention of oppression and mismanagement, is an exception to the rule in
Foss v. Harbottle which lays down the Sanctity of the majority rule.
Conclusion: Foss v. Harbottle: It can be articulated that the prominent case law of Foss v.
Harbottle, is marked with a place of exceptional importance in English Jurisprudence. Its
implications have been the sources of many Statutes dealing with corporate law in many
countries. However, the application of the rule of majority laid down in the said case has
become subject to many exceptions, keeping in view the minority rights and oppressive
approach of majority stakeholders. The majority leadership does not prevail in all decision
making processes. Therefore, the principles laid down, in this case, do not have mechanical
application in India.
41. Remedies/provisions to minority shareholders against oppression and
mismanagement?
Oppression and mismanagement: Oppression can be defined as the unjust or unfair use of
authority. Oppression is done when the matters of the company are decided unfairly or in
a manner unfair to any member. Mismanagement can be defined when the matter of the
company is done in a manner prejudicial to the interests of any member. The term
oppression has been defined under Section 397(1) of the Companies Act, 1956 and the
term mismanagement has been defined under Section 398(1) of the Companies Act, 1956.
Acts like depriving a member of the dividends, issue of further shares only benefitting a
section of shareholders, not maintaining the statutory record of the company to not calling the
general meeting, and keeping the shareholders in the dark, would amount to oppression.
Activities like handling of the company’s bank account by the unauthorized person, violation
of the memorandum, serious issues going between the directors and the directors not taking
action against the illegal activities, would amount to mismanagement.
Rights and remedies to protect the interest of minority shareholders
National Company Law Tribunal (NCLT), a special tribunal has been formed by the
Companies Act 2013, which deals specifically in the protection of the rights of the minority
shareholders. This tribunal was formed by the Supreme Court to handle the cases regarding
the company. Section 241 to Section 246 deals with the matters regarding unfair prejudice,
oppression, and mismanagement of the company.
The term prejudice was added by the Companies Act, 2013, which means that if the matters
of the company are prejudiced against any shareholders or members of the company, then
legal action can be taken. This is a new concept which needs to be dealt with carefully. In
these cases, the courts first investigate whether the conduct of the shareholders against whom
the petition has been filed comes under the concept of unfair prejudice or not. Due to the lack
of guidelines on this topic, the judgment varies from case to case.
Application against unfair prejudice, oppression, and mismanagement under Companies Act,
2013.The remedy to deal with the problems of oppression and mismanagement was first
introduced in the companies act 1956. The Companies Act, 2013 deals with prejudice,
oppression, and mismanagement under Section 241 to Section 246.
Section 241 application to the tribunal for relief in cases of oppression, etc, this section of the
act gives the power to any member of the company to file a case against the company if it
found that:
 The affairs of the company are conducted in a prejudicial manner to the interest of any
member of the company.
 If there are changes regarding the interests of any creditors, debenture holders, or
shareholders or in the company’s management, prejudicial to only a certain class of
members means providing profits to only certain groups of people.
 If the central government thinks that a company is conducting its internal affairs in a
prejudicial manner thereby affecting the interests of the members of the company, then it
can itself apply to the tribunal.
Section 242 talks about the power of the tribunal if a petition has been filed under section
241. The tribunal has the following power:
 If the court finds out that the matters or affairs of the company are conducted in an
unfairly prejudiced manner or oppressive to any member of the company, then the court
can order the company to stop such prejudice and oppression, and winding up is not
ordered as it would be unfair to other members.
 The tribunal without any prejudice can provide or amend the regulations of the company.
They can also order shareholders to purchase the shares of the other shareholders.
 It can reduce the share capital of the company and put restrictions on the process of
allotment and transfer to curb the problem of oppression and mismanagement.
 The tribunal can remove the directors, managing directors if it found that they were
having unfair gains.

42. Winding up of Companies?

The process of winding up a company is a significant event that marks the closure and
dissolution of a company’s operations. This could occur due to various reasons, such as
insolvency, failure to meet financial obligations, or when it is just and equitable to wind up
the company in the interest of its members and creditors. Once winding up commences, the
Board of Directors go out of the picture and a liquidator takes charge. It is he who recovers
the money and other assets belonging to the company, pays the debts and liabilities of the
company and distributes the surplus assets, if any, amongst the members of the company in
accordance with their rights. The life of the company does not, however, come to an end
when winding up begins, because winding up is merely a process, and it is only at the end of
the process that the company is dissolved, that is, it loses its corporate status and existence.
Winding up is often a long drawn-out process which ends in the dissolution of the company.
Winding up assumes 3 forms:
1. Compulsory winding up, i.e. winding up by Tribunal
2. Voluntary winding up.
3. Winding up subject to supervision of court.
Compulsory Winding Up of a Company by the Tribunal
The compulsory winding up is initiated by filing an application with the Tribunal, supported
by valid grounds for winding up. The grounds for compulsory winding up may include the
inability to pay debts, just and equitable grounds, or any other substantial default.
Situations for Winding Up by the Tribunal (Section 271)
A company may be wound up by a Tribunal on the following grounds–
 If the company has unpaid debts;
 If the company has decided by special resolution that the company will be wound up by
the Tribunal;
 If the company’s actions are detrimental to the integrity and sovereignty of India, its
national security, friendly relations with foreign states, public order, decency, or morals;
 If the Tribunal has ordered the winding up of the company if it’s a sick company
 If the Tribunal, on the application of the Secretary or the Government, believes that the
affairs of the company have been fraudulently conducted, or that the company has been
formed for a fraudulent and unlawful purpose, or that the persons concerned in the
formation or management of the company’s affairs have been guilty of fraud, misconduct
or wrongdoing in connection whereas, and that it is proper that the company should be
dissolved;
 If the company has defaulted in filing its accounts or annual statements with the registrar
for the immediately preceding five consecutive financial years; or
 If tribunal is of opinion that it is just and equitable that company to be wound up.
1. Passing of a special resolution by the members: The Tribunal may wind up a company if
the members of the company have passed a special resolution resolving that the company be
wound up by the Tribunal. This is, however, not a very common ground on which a petition
is filed for the winding up of a company. Most companies would rather pass a resolution to
go into voluntary winding up rather than be wound up by the Tribunal. It may be noted that
the Tribunal may refuse to wind up a company even if a special resolution as above has been
passed. The use of the word "may" in S. 271 (above) is significant, and the Tribunal has
ample discretion in the matter.
2. Inability to pay debts: A company may also be wound up on the ground that it is unable to
pay its debts. This is perhaps the ground which is most often resorted to, and the courts have,
in several cases, drawn attention to the word "unable" used by the legislature. Just because a
company has not actually paid its debts, it does not necessarily mean that it is unable to do so.
S. 271 of the Act lays down three cases in which a company shall be deemed to be unable to
pay its debts, namely, -
 (a) Statutory notice;
(b) Execution against the company returned unsatisfied; and
(c) Commercial insolvency.
(a) Statutory notice: If a creditor to whom the company owes one lakh or more has served a
notice to the company at its registered office (by registered post or otherwise). demanding
payment of such sum, and if the company has, for a period of three weeks thereafter, failed to
pay the amount or to secure or compound for it to the reasonable satisfaction of the creditor,
it can be said that the company is unable to pay its debts.
(b) Execution against the company returned unsatisfied: If execution or any other process
issued on a decree or order of any court or tribunal in favour of a creditor of the company is
returned unsatisfied - in whole or in part - it can be said that the company is unable to pay its
debts. Under this clause, there is no requirement that the debt of the company should be of
any minimum amount
(c) Commercial insolvency: Lastly, a company can be wound up if it is proved to the
satisfaction of the Tribunal that the company is unable to pay its debts. In determining this
question, the Tribunal must take into account the contingent and prospective liabilities of the
company. This is sometimes referred to as "commercial insolvency". because what has to be
ascertained in such a case is not whether the company would be able to meet all its liabilities
if its assets were to be converted into cash, but whether the company is insolvent in the
commercial sense.
Even if the assets of a company are greater than its liabilities, it does not necessarily mean
that the company is solvent. Conversely, even if the liabilities of a company are greater than
its assets, it does not necessarily mean that the company is insolvent. Thus, in one case where
it was shown that the company was able to meet its liabilities as and when they arose, a
winding up petition was rejected, although the assets of the company were only 6 lakhs and
its liabilities exceeded 8 lakhs. (ROC v. Ajanta Lucky Scheme & Investment Co. Pvt. Ltd.,
(1973) 43 Co. Cases 314)
3. Company acting against the interests of sovereignty and integrity of India, etc.: Under a
new ground introduced by the Act, the Tribunal is empowered to wind up a company if it has
acted against: -the interests of the sovereignty and integrity of India; or - the security of the
state; or -friendly relations with foreign states; or -public order, decency or morality. In such
cases, the petition for winding up can be filed only by the Central Government or a State
Government.
4. Winding up on the ground that the company is a sick company: Under S. 258 of the Act, if
the Tribunal is satisfied that the creditors representing three-fourths of the amount
outstanding against a sick company have resolved that it is not possible to revive and
rehabilitate such a company, the Tribunal can pass an order that winding up proceedings
against the company be initiated. So also, if a scheme of revival and rehabilitation of a sick
company is not passed by the creditors in the manner prescribed by S. 262(2) of the Act, the
company administrator must file a report with the Tribunal, which can then order the winding
up of the sick company. [S. 265]
5. Winding up on the ground of fraudulent conduct: A company can also be wound up, if on
an application filed by the ROC or any other person authorised by the Central Government,
the Tribunal is of the opinion that: (a) the affairs of the company have been conducted in a
fraudulent manner; or (b) the company was formed for a fraudulent or unlawful purpose; or
(c) the persons concerned in the formation or management of the affairs of the company have
been guilty of fraud, misfeasance or misconduct in connection therewith; and that it is proper
that the company be wound up by the Tribunal.
6. Default in filing financial statements: If a company defaults in filing (with the ROC) its
financial statements or annual returns for the last five consecutive financial years, it can be
wound up by the Tribunal.
7. Just and equitable ground: A company can also be wound up on the ground that the
Tribunal is of the opinion that it is just and equitable to wind up the company. This is an
omnibus clause which gives ample discretion to the Tribunal to wind up a company in a fit
case where the other criteria for winding up do not exist. However, there must be a really
strong ground to wind up the company and an order will not be granted if it is seen that the
petitioner has not pursued other effective remedies and seeks unreasonably to bring the
company into liquidation.
Although, as stated above, the Tribunal has a very wide discretion in the matter, courts have
observed that such discretion should be exercised after giving due weight to all relevant
factors. The interests of not only the creditors. but also its employees, its shareholders and the
general public should be taken into account before passing any order. It is neither possible
nor even desirable, to lay down a complete list of all the circumstances in which winding up
of a company is justified on the just and equitable ground. However, the following are some
common instances in which the courts have held that it would be justified to wind up a
company on the just and equitable ground.
(a) Loss of substratum: If a company's main object has failed that is, its substratum is lost, it
would be just and equitable to wind it up. Thus, it can be said that the substratum of a
company has been lost when the object for which it was incorporated has substantially failed,
as when a company was formed to work gold mines, but it failed to acquire the mines. (In Re
Haven Gold Mining Co. Ltd., (1882) 20 Ch. D. 151)
(b) No possibility of doing business except at a loss: Every company expects to achieve its
object of trading at a profit. If, therefore, it is clear that a company cannot continue to do
business save at a loss, it would be just and equitable to wind it up. However, just because
some losses have been incurred in the past or just because some shareholders apprehend that
the assets of the company are being frittered away and that therefore, huge losses are
imminent, it does not necessarily mean that the company deserves to be wound up on the just
and equitable ground.
(c) Deadlock in management: If there is a deadlock in the management of a company and
there seems to be no possibility of resolving such a deadlock, the company may be wound up
on the just and equitable ground. The classic example of a deadlock is where a company had
only 2 shareholders who were also its only directors. The relationship between them became
so sour that it reached a point where the two refused even to talk to each other, and all
communication between them was only through the secretary. The court held that this was a
case of complete deadlock and that it would be just and equitable to wind up the company.
However, this clause cannot be invoked where there is only a sharp difference of view
between the majority and the minority. Thus, where nine directors were strongly of one view
and the other three were (equally strongly) of the opposite view, the Madras High Court
refused to wind up the company on this ground, pointing out that the company was earning
good profits and had made a good name for itself in the market.
(d) Oppression: If the principal shareholders of a company adopt an aggressive and
oppressive policy towards the minority shareholders in an attempt to "squeeze" them out by
purchasing their shares at an under-value, it can be said that it would be just and equitable to
wind up the company. However, mere oppression of the minority is not enough. If the
circumstances do not justify liquidation of the company, the minority can be given relief
against the oppression by the majority under the other provisions of the Act.
(f) Public interest: Some judicial decisions suggest that a company may be wound up under
the just and equitable clause if it is in the public interest to do so, that is, if its conduct comes
into conflict with public interest. The converse is equally true. Winding up may be refused
when an order of winding up would be against public interest.
As seen earlier, if a company has acted against public order, decency or morality, it can be
wound up under Clause 3, above.
It may be noted that the 1956 Act had three other grounds for compulsory winding up, which
do not find a place in the 2013 Act. Under the 1956 Act, a company could be wound up
compulsorily. -
(a) if there was a default in filing the Statutory Report or in holding the Statutory Meeting
(b) if the company did not commence business within one year of its incorporation or if it
suspended its business for one whole year
(c) if the number of members of the company had fallen below the statutory minimum.
Voluntary winding up:
A voluntary liquidation is a self-imposed windup and dissolution of a company that has been
approved by its shareholders. Such a decision will happen once an organization's leadership
decides that the company has no reason to continue operating. It is not a compulsory order by
a court. The Companies Act, 2013, has provided for just one form of voluntary winding up in
Ss. 304 to 323 of the Act. A company can be wound up voluntary in the following three
circumstances:
1. If the company passes a special resolution that the company be wound up voluntary.
2. If the duration of the company is fixed by its articles, such a period of time has expired,
and the company in general meeting passes a resolution that it be wound up voluntary.
3. If the articles of the company provide that the company shall be dissolved on the
occurrence of a specified event, such an event has occurred, and the company in general
meeting passes a resolution that it be wound up voluntary.
When it is proposed to wind up a company voluntarily, the directors of the company, or
where there are more than two directors, the majority of the directors must make a declaration
at a Board meeting, that they have made a full inquiry into the affairs of the company and
have formed an opinion that the company has no debts at all or whether the company will be
able to pay its debts in full from the proceeds of the assets sold in the voluntary winding up.
Such a declaration has no effect unless:
(a) the declaration is verified by an affidavit;
(b) it is made within five weeks immediately preceding the date of the winding up resolution
passed by the shareholders and is delivered to the ROC for registration before the said date;
(c) it contains a declaration that the company is not being would up to defraud any person or
persons;
(d) it is accompanied by a copy of the report of the company's auditors. prepared in
accordance with the provisions of the Act, (i) on the profit and loss account of the company
for the period commencing from the date on which the last account was prepared and ending
on the last practicable date immediately before making the declaration, and (ii) the balance
sheet of the company as on that date, reflecting the assets and liabilities of the company:
(e) where the company has any assets, the declaration has to be accompanied by a report of
the valuation of the assets of the company by a registered valuer.
The following further points relating to voluntary winding up may also be noted:
1. Voluntary winding up is deemed to commence when the shareholders of the company pass
a resolution to voluntarily winding up the company. [S. 308]
2. From the commencement of voluntary winding up, the company must cease to carry on
business, except as far as is required for the beneficial winding up of its business. However,
the corporate state and powers of the company continue until the company is dissolved. [S.
309]
3. Whilst the company is being wound up, the Company Liquidator or any contributory or
creditor can apply to the Tribunal:
- to determine any question arising in the course of winding up:
- to exercise any power which the Tribunal might have exercised if the winding up was a
winding up by the Tribunal in matters relating to enforcement of calls, the staying of
proceedings or any other matter.
- For an order setting aside any attachment, distress or execution against the estate or effects
of the company after the commencement of the winding up.
4. All costs and expenses properly incurred in the voluntary winding up including the fees of
the Company Liquidator, are payable out of the assets of the company in priority to all other
claims. However, this is subject to the rights of the secured creditors of the company. [S.323
Procedure for Voluntary winding up of a Company:
 Convene a board meeting with the Directors in which a resolution should be passed with
a declaration by the directors that they have made an enquiry in the affairs of the
 Company and the company no debts or the Company will pay from the precedes of the
assets sold in the voluntary wind up of the company.
 Notices should be issued in writing to call for the general meeting of the Company
proposing the resolutions, with a suitable explanatory statement.
 Pass the ordinary resolution for winding up of the Company in the generally meeting by
ordinary majority or special resolution by 3/4 majority. The Winding up of the Company
shall commence from the date of passing the resolution.
 A meeting of the creditors should be conducted on the same day or the next day of
passing the resolution regarding winding up. If the 2/3rd value of the creditors are of the
opinion that it is in interest of all parties to windup the Company, the the Company can
wound up voluntarily.
 Within 10 days of passing the resolution for company winding up , a notice for
appointment of liquidator must be filed with the registrar.
 Within 30 days of the general meeting for the winding up the certified copies of the
ordinary or special resolution passed in the general meeting for the winding up of the
Company.
 The affairs of the company need to be wind up and prepare the liquidators account of the
Winding up account and to get it audited.
 Call for the final General meeting of the Company.
 A special resolution should be passed for the disposal of the books and the papers of the
company when the affairs of the company are completely wound up and it is about to be
dissolved.
 Within two weeks of the general meeting of the Company, file a copy of the accounts and
file and the application to the tribunal for passing an order for the dissolution of the
company.
 The tribunal shall pass an order dissolving the company within 60 days of receiving the
application.
 The company liquidator is required to file a copy of the order with the registrar.
 The registrar will then on receiving the copy of the order passed by the Tribunal then
publish a notice in the official gazette that the Company is dissolved.
winding up subject to the supervision of the court: The Companies Act, 1956, provided
for a third kind of winding up, namely winding up subject to the supervision of the court. It
was provided that after a company had passed a resolution for voluntary winding up, the
court could, in specified circumstances, pass an order that the voluntary winding up was to
continue under the supervision of the court, with liberty given to the creditors. contributories
and other persons to apply to the court for appropriate directions. In such cases, the court was
also empowered to appoint additional liquidators or to appoint the Official Liquidator as the
liquidator of such a company. The concept of a winding up subject to the supervision of the
court does not find a place in the Companies Act, 2013.
Winding up an Unregistered Company
According to the Companies Act, an unregistered company includes any partnership,
association, or company consisting of more than seven persons at the time when petition for
winding up is presented. S.375 to 378 of the act make provisions for winding up of the
unregistered company. however, following 3 companies are not considered as unregistered
companies,
a) A railway company incorporated by an 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 laws.
An unregistered company cannot opt for voluntary winding up. A company can be wound up
by the tribunal only on following 3 circumstances:
 If the company is dissolved or if it carrying on business only for purpose of winding up
its affairs;
 If company is unable to pay debts;
 If the tribunal is of opinion that it should be wound up.
If a foreign company carrying on business in India, it can be wound up as an unregistered
company under provisions of sec 376.
Conclusion
By winding up, a company comes to an end, and this process of winding up is well
recognized under the Companies Act, 2013. The Company comes to an end legally and all
the rights and liabilities of that company cease to exist once an order for dissolution is passed
by the Company Law Tribunal.

43. Note on Persons who can file a winding petition?

Under S.272 a petition for winding up can be filed by the following persons:
 The Company;
 Any creditor or creditors,
 Any Contributors to that company;
 The Registrar;
 Any person authorized by the Central Government to do so.
1. The company: A winding up petition can be filed by the company itself. This is not very
common, and most petitions for winding up are filed by creditors of the company. If,
however, a petition is filed by the managing director of the company or by a person who has
not been authorized by the board of directors, the petition is liable to be dismissed. It is the
company which should file such a petition in its own name. When a company files a petition
for compulsory winding up, the same is to be admitted only if it is accompanied by a
statement of affairs of the in the prescribed form.
2. Creditors: Any creditor or creditors can file a winding up petition against the company.
The term "creditor" includes a contingent or prospective creditor. The expression also covers
a secured creditor, an unsecured creditor, a debenture-holder and a trustee for debenture-
holders. Moreover, a secured creditor need not give up his security before he can file a
winding up petition. When a petition is filed by a contingent or prospective creditor, leave of
the Tribunal is to be obtained before such a petition is admitted and such leave is not to be
granted unless, in the opinion of the Tribunal, there is a prima facie case for winding up the
company and security for costs has been given by such a creditor. Sometimes, a creditor's
petition is opposed by other creditors of the company. Normally in such cases, the Tribunal
would ascertain the wishes of the majority of the creditors. However, their opinion is not
conclusive on the point and the ultimate question in a given case may hinge on the solvency
or insolvency of the company.
A foreign creditor is not disqualified from filing a winding up petition and it is no defence to
argue that he is not a "creditor" because permission of the Reserve Bank of India is required
before any payment can be made to him. (Eurometal Ltd. v. Aluminum Cables & Contractors
Pvt. Ltd., (1983) 53 Co. Cases 744 Cal)
3. Contributories: Any contributory or contributories can also file a winding up petition. It is
specifically provided that a contributory is entitled to file a winding up petition even if-
(a) he is the holder of fully paid-up shares, or
(b) the company has no assets at all, or
(c) the company has no surplus assets.
However, a contributory is entitled to file a winding up petition only if the shares (or some of
the shares) in respect of which he is a contributory -
-were originally allotted to him, or
-have been held by him and are registered in his name for at least six months during the
eighteen months immediately before the commencement of winding up, or
- have devolved upon him on the death of a former shareholder.
4. The Registrar of Companies (ROC): The ROC can file a winding up petition on any of the
grounds listed in S. 271, except the following three grounds, namely, -
(a) that the company has passed a special resolution to be wound up
(b) that the Tribunal has ordered the winding up of a sick company, and (c) that it is just and
equitable that the company be wound up.
However, if a petition is filed by the ROC on the ground that the company is unable to pay its
debts, he must satisfy the Tribunal that it appears to him, either from the financial condition
of the company as disclosed in its Balance Sheet or from the report of an inspector appointed
under the Act, that the company is unable to pay its debts. The ROC must also obtain the
previous consent of the Central Government before any such petition is filed by him. Before
such consent is given, the Central Government must give an opportunity to the company to
make its representations, if any.
The Central Government or a State Government or any person authorized by the Central
Government: The Government (Central or State) or any person who is authorized by the
Central Government in that behalf can also file a winding up petition before the Tribunal.
where winding up is applied for on the ground that the company has acted against the
interests of the sovereignty and integrity of India, the security of the State, friendly relations
with foreign States, public order, decency or morality, the petition can be filed only by the
Central Government or a State Government.

44. Note on CONTRIBUTORIES?

The word "contributory", as used in corporate law, has two different connotations. In the first
sense, it refers to a person who is liable "to contribute to the assets of a company at the time
of its winding up (upto the unpaid amount on the shares held by him). In this sense, all the
members of the company who have not paid the full amount on their shares become
"contributories". In the second sense, however, the term is used to cover all members of the
company, including the holders of fully paid-up shares. In this sense, a contributory is a
person who would be entitled to a share in the surplus assets, if any, of the company at the
time of winding up.
The Act uses the term "contributory" in both the connotations. Whilst S. 2(26) lays down that
a contributory is a person who is liable to contribute towards the assets of the company in
winding up, it also clarifies that even the holder fully paid up shares is also considered to be a
contributory, but he would have no liabilities of a contributory. Under S. 285 of the Act,
every past and present member is liable to contribute to the assets of the company for
payment of its debts and liabilities. and for the costs, charges and expenses of winding up.
This liability is, however, subject to the following five qualifications:
1. Past members are liable to contribute only if the present members are unable to contribute
to the assets of the company for the aforesaid purposes.
2. If a person had ceased to be a member of the company one year or more before the
commencement of the winding up of the company he is not liable as a contributory.
3. A past member is not liable as a contributory in respect of any debt or liability of the
company incurred after he ceased to a member of the company.
4. In the case of a company limited by shares, any past or present member cannot be made to
contribute any amount exceeding the amount, if any, unpaid on his shares.
5. In the case of a company limited by guarantee, no past or present member can be made to
contribute any amount exceeding the amount undertaken to be contributed by him at the time
of winding up of the company.
Keeping the above in mind, the liquidator prepares two lists of contributories: List A and List
B. The names of all the members of the company appearing on the register of members at the
commencement of the winding up are placed on List A, whereas List B contains the names of
all persons who were members of the company during a period of one year before the
commencement of winding up.
The liability of the contributories in List A is primary liability and of those in List B,
secondary liability. Contributories in List B can be called upon to contribute only if the
contributories in List A are unable to make their contributions.
As stated above, in case of a company limited by shares, a contributory's liability is limited to
the unpaid amount on the shares held by him. Thus, if X is the holder of five shares of a
company of the face value of 100 each and has paid 80 on each of these shares, when the
company goes into winding up, his liability as a contributory will be to a maximum extent of
100 ( 20 x 5). Thus, the holder of fully paid shares cannot be considered to be a contributory
in the first sense of the term.
Likewise, in the case of a company limited by guarantee, the contributory's liability cannot
exceed the amount mentioned in the memorandum of the company, being the amount
undertaken to be contributed by every member at the time of winding up of the company.
If a contributory dies, his legal representative will be treated as a contributory, If the legal
representative dies, his legal representative will, in turn, become the contributory. If a
contributory becomes insolvent, his assignees in insolvency can be treated as contributories.
If a contributory is itself a company which has been ordered to be wound up, the liquidator of
that company can be treated as a contributory.

44. note on POWERS OF THE TRIBUNAL?

The following is a summary of the Tribunal's powers when winding up a company:
1. When a petition for winding up a company is filed before the Tribunal, the Tribunal is
empowered to pass any of the following orders, namely, -
(a) It may dismiss the petition, with or without costs.
(b) It may pass such interim order as it thinks fit.
(c) It may appoint a provisional liquidator for the company till the winding up order is passed
by it.
(d) It may pass an order for the winding up of the company, with or without costs.
(e) It may pass any other order as it thinks fit.
2. An order as above must be passed by the Tribunal within ninety days from the date of the
presentation of the petition.
3. Before appointing a provisional liquidator, the company must be given a notice to appear
and make its representations - unless the Tribunal thinks it fit to dispense with such notice for
special reasons recorded by it in writing.
4. The Tribunal cannot refuse to pass a winding up only on the ground that the assets of the
company have been mortgaged for an amount which is equal to, or in excess of, those assets
or on the ground that the company has no assets.
5. When the petition is filed on the just and equitable ground, the Tribunal may refuse to pass
an order if it is of the opinion that: some other remedy is available to the petitioners
-the petitioners are acting unreasonably in seeking a winding up of the company, rather than
pursuing such other remedy.
6. When a petition is filed by any person other than the company, if the Tribunal is satisfied
that a prima facie case is made out for winding up the company, it must direct the company to
file its objections, along with a statement of its affairs within thirty days, which period can be
extended by a further period of thirty days. If a company fails to file its statement of affairs, it
forfeits its right to oppose the petition, and the directors and other officers of the company
responsible for such non-compliance are liable to be punished as provided in S. 274 of the
Act.
7. The Tribunal also has the power to direct the petitioner to deposit such security for costs as
it may consider reasonable, as a pre-condition to issuing any directions to the company.
8. After the winding up order is passed, the Tribunal can, at any time, stay the winding up
proceedings for a maximum period of 180 days, if it is satisfied that it is just and fair that an
opportunity be given to revive and rehabilitate the company. Such an application for stay can
be filed by any promoter or shareholder or the company or by any other interested person.
9. Notwithstanding anything contained in any other law, the Tribunal also has the power to
entertain and dispose of:
(a) any suit or proceedings by or against the company:
(b) any claim made by or against the company;
(c) any application made for compromise or arrangement with the company's creditors or
members;
(d) any scheme submitted for the revival or rehabilitation of the company;
(e) any question of priorities - or any question whatsoever, whether of law or fact, in any
matter arising out of or relating to, the winding up of the company.
10. While passing a winding up order, the Tribunal can also appoint an advisory committee
of not more than twelve members (being contributories or creditors of the company) to advise
the Company Liquidator, and also to report to the Tribunal on such matters as the Tribunal
may direct. [S.287]
11. The Tribunal can, on an application by the Company Liquidator, review any order passed
by it and make such modifications therein as it thinks fit.
12. After passing the winding up order, the Tribunal can make calls on any or all of the
contributories and pass orders for the payment of such calls.
13. After passing a winding up order, the Tribunal can order any contributory to pay any
money due to him or from the estate of the person whom he represents, exclusive of any
money payable by way of a call.
14. The Tribunal is also empowered to adjust the rights of contributories inter se, and to
distribute the surplus assets of the company (if any) amongst the persons entitled thereto.
15. If the assets of a company are insufficient to satisfy its liabilities, the Tribunal can pass an
order for payment out of the assets, of the costs, charges and expenses of winding up in such
order of priority as it thinks just and proper.
16. At any time after the appointment of a provisional liquidator or the passing of a winding
up order, the Tribunal can summon before it, any officer of the company or any person
known or suspected to have in his possession, any property or books or papers of the
company, examine him on oath, and order such a person to pay the amount due to the
company or to deliver any property belonging to the company.
17. After a winding up order has been passed, if the Company Liquidator has filed a report
stating that, in his opinion, a fraud has been committed by any person in the promotion,
formation, business or conduct of the affairs of the company, the Tribunal can pass an order
for the examination of such a person.
18. If the Tribunal is satisfied that a contributory or any person having property. accounts or
papers of the company in his possession, is about to abscond or leave India, the Tribunal can
cause such a person to be detained, and the books, papers and other immovable property be
seized, until such time as the Tribunal may order.
19. Lastly, (i) when the affairs of the company have been completely wound up and (ii) the
Company Liquidator has made an application for the dissolution of the company or if the
Tribunal itself is of the opinion that it is just and reasonable in the circumstances of the case,
to dissolve the company, it may pass an order that the company be dissolved from the date of
its order, in which case, the company stands dissolved accordingly.
Within thirty days from the date of the order, the Company Liquidator must forward the
dissolution order to the ROC, who must record the same in his register. If the Company
Liquidator defaults in doing so, he is liable to be punished with a fine of upto 5,000 for every
day of such default. [S. 302]

45. note on POWERS AND DUTIES OF THE COMPANY LIQUIDATOR?

S. 290 of the Act lays down the powers and duties of a Company Liquidator, which may be
summarised as under. Subject to the directions, if any, which may be given by the Tribunal,
the Company Liquidator has the following powers:
-He can carry on the business of the company, so far as may be necessary for the beneficial
winding up of the company.
-He can do all acts and execute all deeds, receipts and other documents in the name of the
company and on its behalf, and for that purpose, he may also, when necessary, use the
company's seal.
-He can sell the movable and immovable property of the company by public auction or by
private contract.
-He can sell the whole undertaking of the company as a going concern.
-He can raise any money required on the security of the assets of the company.
-He can institute or defend any suit or other legal proceeding (civil or criminal) in the name
and on behalf of the company.
-He can invite and settle claims of creditors, employees or any other claimants and distribute
the sale proceeds in accordance with the provisions of the Act.
-He can inspect all the records and returns of the company on the files of the ROC or any
other authority.
-He can prove, rank and claim in the insolvency of any contributory for any balance against
his estate.
-He can draw, accept, make and endorse negotiable instruments (including cheques, bills of
exchange, hundis or promissory notes) in the name and on behalf of the company.
-He can take out, in his official name, letters of administration in respect of any deceased
contributory.
-He can obtain professional assistance from any person or appoint any professional, whilst
discharging his duties, obligations and responsibilities. He can appoint an agent to do any
business which the Company Liquidator is unable to do himself.
-He can take all such actions, steps, and can sign, execute and verify any paper, deed,
document, application, petition, affidavit, bond or other instrument as may be necessary -
for winding up the company;
for distribution of its assets; and
for discharge of his duties, obligations and functions as Company Liquidator.
-He can apply to the Tribunal for such orders or directions as may be necessary for the
winding up of the company.
All the above powers of the Company Liquidator are, however, subject to the overall control
of the Tribunal. The Company Liquidator must keep proper books in the prescribed manner,
in which he must cause entries or minutes to be made of proceedings at meetings and other
prescribed matters. Subject to the control of the Tribunal, such books can be inspected by an
creditor or contributory, either personally or through his agent. [S. 293]
The Company Liquidator must also make periodical reports to the Tribunal. In any case, he
must a report at the end of each quarter with respect to the progress of the winding up of the
company in the prescribed form and manner.
It is also provided that, when administering the assets of the company and distributing them
amongst the creditors, the Company Liquidator must have regard to the directions which may
be given in the form of resolutions by the creditors or the contributories or by the advisory
committee. In case of any conflict, the directions given by the creditors or the contributories
would override the directions given by the advisory committee. [S. 292] As regards other
duties, S. 290 of the Act merely lays down that he shall perform such duties as the Tribunal
may specify in this behalf.

46. note on THE OFFICIAL LIQUIDATOR AND SUMMARY PROCEDURE FOR

WINDING UP?
Ss. 359 to 365 of the Act deal with provisions relating to Official Liquidators and the
procedure to be followed when a company is ordered to be wound up following a summary
procedure prescribed by the Act.
S. 359 authorises the Central Government to appoint as many Official Liquidators, Joint
Liquidators, Deputy Liquidators and Assistant Liquidators as it may consider necessary to
discharge certain functions when companies are being wound up by the Tribunal. Such
liquidators are whole-time officers of the Central Government and their salaries and
allowances are paid by the said Government. The Official Liquidator (OL) is to exercise such
powers and to perform such duties as may be prescribed by the Central Government. It is
provided hat, in particular, the OL may-
(a) exercise all or any of the powers which can be exercised by a Company Liquidator under
the Act; and
(b) conduct inquiries or investigations, if so directed, either by the Tribunal or by the Central
Government in respect of matters arising out of the winding up proceedings.
S. 361 of the Act provides that the Central Government can order a ompany which is being
wound up by the Tribunal to be wound up by a summary ocedure if the company has assets
of the book value not exceeding 1 crore; and the company belongs to a class of companies as
may be prescribed by the Central Government.
Once an order is passed to wind up a company under the summary rocedure, the following
provisions apply:
-The Central Government appoints the OL as the liquidator of the company.
-The OL takes into his custody or control, all assets and effects of the company, as also all
actionable claims to which the company is, or appears to be, entitled.
-Within thirty days of his appointment, the OL must submit a report to the Central
Government in the prescribed form. The report must also mention whether, in his opinion,
any fraud has been committed in the promotion, formation or management of the company.
-On receipt of the report of the OL, if the Central Government is satisfied that any such fraud
has been committed, it may direct further investigation and call for a further report.
-After considering the investigation report of the OL, the Central Government may order
either that the Tribunal should go ahead with the winding up of the company (as per the
provisions seen earlier) or that the company should be wound up under the summary
procedure.
-When a company is wound up under the summary procedure, the OL must expeditiously
dispose of all the assets of the company, whether movable or immovable, within sixty days of
his appointment.
-Within thirty days from his appointment, the OL must call upon the debtors of the company
and its contributories to deposit the amounts payable to the company within thirty days. Such
amounts are to be deposited by the OL as provided in S. 349 of the Act.
-Within thirty days from his appointment, the OL must also call upon the creditors of the
company to prove their claims within a period of thirty days. He must then prepare a list of
creditors, and each creditor must be informed whether his claim is accepted or rejected, with
reasons to be recorded in writing.
-If any creditor is aggrieved by the decision of the OL, he can file an appeal before the
Central Government, which can either modify the OL's order or dismiss the appeal.
- If the OL is satisfied that the company is finally wound up, he must submit a final report to
the Central Government in cases where no reference was made to the Tribunal, and in any
other case, to the Central Government and the Tribunal. On receipt of this report, the Central
Government or the Tribunal, as the case may be, passes an order that the company may
dissolved.
-When an order is passed to dissolve the company, the ROC must strike off the name of the
company from the register of companies and publish a notification to that effect.

46. Note on CONSEQUENCES OF WINDING UP?

The following are the main consequences of winding up:
1. The corporate existence of a company does not come to an end when winding up
commences. The company continues to exist in the eyes of law until it is dissolved.
2. The company must cease to carry on business - except so far as may be necessary for the
beneficial winding up of the company.
3. The liquidator or the provisional liquidator, if any, must take into his custody or control,
the property, effects and actionable claims to which the company is, or appears to be, entitled.
4. When a winding up order is passed by the Tribunal, the Official Liquidator can exercise all
the powers and must discharge all his duties in relation of the winding up. (The powers and
duties of a liquidator have been discussed earlier.)
5. The winding up order operates in favour of all the creditors and all the contributories of the
company as if it had been made on a joint petition of a creditor and a contributory. [S. 278]
6. The directors and all other officers of the company must ensure that books of account of
the company are completed and audited upto the date of the winding up order and submitted
to the Tribunal at the cost of the company.
7. When the Tribunal passes an order for the winding up of a company, it must within seven
days of such an order, send an intimation thereof to the ROC.
8. When the ROC receives an intimation as above, he must make an endorsement to that
effect in his records and also notify the same in the Official Gazette. In case of a listed
company, he must also send the necessary intimation to the stock exchanges where the
securities of the company are listed.
9. The winding up order operates as a notice of discharge to all the employees of the
company - except when the business of the company is continued for a beneficial winding up.
[S. 277]
10. Once a winding up order is passed or the Provisional Liquidator is appointed as the
liquidator of the company, no suit or other legal proceedings-
(a) can be commenced against the company, or
(b) if pending at such date, can be continued against the company, - without the leave of the
Tribunal and subject to such terms and conditions as it may impose. [S. 279]
11. Under S. 280 of the Act, notwithstanding any other law in force, the Tribunal is vested
with the jurisdiction to entertain and dispose of:
(a) any suit or proceedings by or against the company:
(b) any claim made by or against the company:
(c) any application made for compromise or arrangement with the company's creditors or
members;
(d) any scheme submitted for the revival or rehabilitation of the company:
(e) any question of priorities - or any question whatsoever, whether of law or fact, in any
matter arising out of or relating to, the winding up of the company.
It is immaterial for the purposes of the above clause whether the suit or proceeding has been
instituted or such claim or the question has arisen, before or after the order of winding up.
The object of giving jurisdiction to the Tribunal over all legal proceedings concerning the
company is to protect and preserve the property and assets of the company and make them
available to the persons who have rightful claims on them. After all, the ultimate object of
winding up is to put all unsecured creditors on an equal footing and pay them pari passu and
to prevent the assets of the company from being frittered away in vexatious litigation. (H. Lal
Sharma v. Chemical Vessels Fabricators Ltd., (1989) 65 Co. Cases 506)

47. DISSOLUTION?
"Winding up" and "dissolution" of a company are two different things. Compulsory winding
up commences when a petition for winding up is filed against the company and voluntary
winding up is deemed to commence when a resolution is passed to wind up the company. The
winding up process then begins, and can continue for years on end. All this while, the
company does not lose its corporate existence. It continues to be a separate legal entity in the
eyes of law and can exercise its corporate powers, subject to the various provisions and
restrictions contained in the law. When winding up comes to an end, the company is ordered
to be dissolved, and it is then that the life of the company comes to an end. The order of
dissolution is like the Death Certificate of the company.
The steps to be taken before a company is finally dissolved have already been discussed
above, both with reference to compulsory and voluntary winding up.
As seen earlier in this Chapter, under S. 356, even after a company has been dissolved, the
Tribunal can pass an order declaring such a dissolution to be void on an application filed by
the Company Liquidator or any other interested person - provided such an application has
been filed within two years from the date of dissolution of the company.