CONTENTS

1. Introduction
2. Definition of Company 6
3. Doctrine of Lifting the
4. Public Corporate veil 11
Company, Private Co. & One Person Co. 14
5. Conversion of Companies 20
6. Companies Limited by Shares 24
7. Holding Company and
8. Government Company
Subsidiary Company 25

9. Foreign Company 26
10. llegal Association 28
11. Promoters 30
31
12. Incorporationof Companies 35
13. Memorandum of Association
14. 38
Articles of Association
15. 49
Constructive Notice of Memorandum and Articles 54
16. Doctrine of Indoor
Management 55
17. Prospectus
18. Private Placement
58
64
19. Shelf Prospectus
66
20. Red-herring Prospectus
67
21. Issuing Houses and Deemed Prospectus 67
22. Global Depository Receipts
68
23. Share Capital
69
24. Share
74
25. Sweat Equity Shares 76
26 Bonus Shares
77
27. Allotment of Shares
78
28. Share Certificate
LAW BoOKS AVENUE 80
29 Shares at a Premium (ADivision of Law Books
Centre)
High Court Jn., Lalan Towers 82
30 Shares at a Discount Banerjee Road, Ernakulam-682 031
TEL: (0484) 2384949, 4026226 83
31 Calls on Shares -mail: lawbooks.avere@gmalil.com
tAob. Nu:940U6 94006 83
32 Lien Shares
on
84
33 Forefeiture of Shares 84
 86
34 Surrender of Shares
of Shares 86
35 Transfer and Transmission
36 Pre-emptive Right of Shareholders 88

37 Debentures 89

38 Right to Nominate 91
39 Membership 92
40 Meeting of Shareholders 97
41 Board of Directors 105
42 Meeting of Board 114
43
43 Political Contributions
115
44. Auditors 116
45
Supremacy of Majority and Protection of Minority 119
46 Sick Companies
124
47.
47. Winding up of the Company 126
48 Contributories
145
49. Dormant Company
146
50. NationalCompany Law Tribunal 148
51 Removal of Name of
Company 151- 152
 Notes On
COMPANY LAw
(TheCompanies
Act,2013)

Prepared by:
Anil. K. Nair
Advocate
High Court of Kerala
2327390,2378489(0471)
2347135(0484)
9447500443 (Mob)

Topic 1

Introduction

The law
relating to Companies in India
is now contained the
Companies Act 2013. in

One who traces the history of

the first
Company law in India can see that
enactment on the subject of
known as Joint Stock company law was passed in 1850,
Companies Act, 1850. Thereafter, several
ments were made to the Act of 1850 amend-
and after India became
ent, the Government of India independ-
appointed in 1950, a committee of 12 mem-
bers to make recommendations for the
codification of
India. The Chairman Company law in
of the Committee was Mr. H.C. Bhabha. The
Committee submitted a comprehensive
report on all aspects of
law and it resulted in the most Company
comprehensive legislation, the Companies
Act, 1956.

The Companies Act of 1956 was a consolidation of existing laws,

statutory rules and certain principles laid down in decisions of the Courts
in India and England. The Act of 1956
substantially incorporated provi-
sions of the English Companies Act, 1948. In
England a new enactment,
namely the Companies Act of 1985 has come into force from 1-07-1985.
 Why the New Act 2
The Companies Act of 1956
had been in
years and had undergone force for
several about for
felt to' enact a amendments.
new forty-five
However, a need
legislation to meet
the was
was
international
economic enviornment and changed national
axpansion and to further and
growth
ofIndian
object the economy. In order to accelerate the
Companies Bil1,2009 was achieve the
Subsequent to its desired
introduced in the
introduction, the Parliament.
suggestions for Central
amendments in
Government received
Committee on the said several
to Finance also Bill. The
made numerous Parliament
Standing
incorporate the
the Bill of recommendations of the recommendations. In order
2009
he Central
required drastic
amendments.
Parliament
Standing Committe,
Government withdrew Under such a
Companies Bill 2012 in the the Bill of 2009 circumstance
and introduced the
Parliament.
The
Companies Bill
Parliament received having been passed by both
the assent of the Houses of
on the Statute President on 29th
Book as THE
COMPANIES ACT,2013August,2013. It came
(Act 18 of
By section 465 of the 2013).
was repealed. Companies Act,2013, the
CompaniesAct,1956
The
Companies Act,1956
Schedules. contained a total of 658 sections and
15
The new Act of 2013
contains only
Though the Act 470 sections
received the
assent of
and VIl
2013,only section 1 of the
the Act of President of India schedules.
2013 came into on 29-08-
remaining force on
sections were not
of the brought into force on 29-8-2-13. The
sections
were'broughtinto force on different dates.
sectionswere
brought into force 12-09-2013. Some
The'remaining
on 01 04- some other
Again some
thesecliôns sections were 2014, and on
of the brought into force
A t'of 2013 on 06-06-2014.
have been 29-05-2015. Now
brought into all
force.

2
The Companles
The Indian (Amendment) Act 2015
Government is actively
doing business in working to improve the ease of
India.
the amendments Key initiative in this
made to the respect can be seen from
Amendment)Act,2015. The Companies Act, 2013 by the
main object of the Companies(
the company law is to make
more business or amendments
investor friendly.
The Companies
on 17- 12- 2014 and it(Amendment) Bill 2015 was passed in Lok Sabha
was passed in the
The Companies
Amendment Bill got the President'sSabha on 13-05-2015.
Rajya
and was published in the assent on 25-05-2015
Official Gazette of India
Companies (Amendment) Act on 26-05-2015 as the
2015.

the sections
All
(except sections 13 and 14) of the Companies
(Amendment)Act, 2015 have come into force with
effect from 29-05-2015.

Salient features ofthe Amendment Act are

givenbelow
The Figure of Minimum
Paid-up Capital Deleted
The figure of minimum
company [
section
paid-up capital of rupees one lakh
2(68)] and of rupees five lakh for
a
for

public company
a private

[section 2(71] have been deleted. It is left to the

Central Governmentto
prescribe the same from time to time. Thus now a
private company or a
public company can be started without a minimum paid-up share capital.

2 The requirment of "Common Seal" is

made Optional
In Companies Act, 2013,a common
seal was required for a
Company
to provide various authorizations and
attestations on behalf of the
Company. The requirement for common seal has now been made optional
and the Directors signature is acceptable in lieu of the
common
of seal
the Company.

3 Section 11 of the Companies Act,2013 is Omitted, and the

requirement of filing of documents with Registrar before commencing
business is dispensed with.

3
 a company havine
As per section 11 of the Companies Act,2013, ng
exercise any borrowins
share capital could not start any business or

powers unless that

with the Registrar by a director every
() a declaration is filed

the value of the shares

subscriber the memorandum has paid
to

agreed to be taken by him and

than five
the paid-up capital of the company is not less
(ii)
case of Public company and one lakh in the case of
lakhs in the

private company.
of
with the Registrar a verification
Further the company had to file

its business.
office before strarting
its registered
without
business
a company can start its

As section 11 is omitted, verificaiton by

the
of director and the
declaration
filing
the required

company.
Deposit
for Company Inviting or Accepting
Stringent Penalty to the penaity or
was silent with respect
2013
The Companies Act, from Public without
or accepting deposits
fine for Companies
inviting Amendment
Authorities. The Companies
from the Regulatory of Companies
approval for Directors
penalty
has introduced stringent to the Companies
Act, 2015 contravening
or accept or renew deposits
that invite
2013.
2015, a new section-
Act,
Act,
Through
the Companies (Amendment) 2013
prescribing
Act,
inserted to the Companies
has been
section 76A deposit.
for inviting
or accepting or renewing public
penalty
contravention of section 73 or section
for
Section 76A Punishment
76 other
or invites or allows or causes any
Where a company accepts of the
in contravention
or invite on its behalf any deposit
person to accept 76 or
under section 73 or section
manner or the conditions prescribed
or part
or if a company
fails to repay the deposit
mules made thereunder
under section
interest due thereon within the time specified
hereofor any be
or such further time as may
or section 76 or rules made thereunder
allowed by the Tribunal under section 73,
(a) the company shall, in addition to
the payment of the amount of
deposit or part thereof and the
interest due, be punishable with fine whicn
shall not be less than
one crore rupees but which may extend to ten crore
rupees; and
()every officer of the
company who is in default shall De
punishable with
imprisonment which may extend to seven years or witn
fine which shall not be less than
twenty-five lakh rupees but which may
extend to two crore
rupees, or with both:

Provided that proved that the officer of the company who

if it is
in default, has contravened such provisions knowingly or
wilfully with
the intention to deceive the company or its shareholders or
depo-itors
or creditors or tax authorities, he shall for action
bp liable under sectionh
447."

5 Dividend Cannot Be Declared by Company Running at Losses

The Companies (Amendment )

2015 has inserted a fourth
Act,
proviso to section 123(1) to the effect that "no company shall declare
dividend unless carried over previous losses and
depreciation not provided
in previous year or years are set off against
the company for the
profit of
current year". Hence, companies having losses or negative reserves
cannot declare dividends.

In addition to the above stated amendments,

the Companies
(Amendment) Act,2015 has made several other amendments in various
sections of the Act of 2013 so as to bring the company administration
more easy.

t tosulsy sdslosnsthe ortt ofyino ed iw v

nommoo e svei yom egmo ent yme
artoitgoa wo ofsbsm 2a lsoe nommoe 30 toemetiap
5
 Topic-I
Definition of Company. Discuss the
Characteristics
of a Company.
or
What are the Advantages of
Incorporation?
The word "company" is defined in clause 20 of section 2 of the
Companies Act, 2013 It is as follows:

under this Act or under

Company"means "a company incorporated

any previaus company law

the real meaning of the
The definition in the Act does not disclose
and its "characteristics".
ward "campany
of persons
is used to denote an association
The ward 'company on a business for
to conduct or to carry
together
wha have assaciated will contribute some money for
assaciating together
gain The persons
gain total amount is
known as share
af the business and the
thecanduct
This share capital will be used by the Company
the Company. of business
Capital af from the conduct
The
t cayan its Business. profit deriving

the members who have contributed

money towards
amang as dividend. The
willbe divided
associa-
af the Company. It is known will be
the share capital name. The association
will be known by
a separate
be
tion af persans Act and thereafter it will
under the Comanies
ncorporated (ragistered)
an artificial personality.
a legal persan having
It will be known by a
Acompanyis a "corporation aggregate".
It is a lega

separate mame.
t will be having "perpetual
succession".
in its own
of law. can acquire properties
person living only in the eyes
It
will be
of its
its
the Company

ne
The of
name it can contract debts. liability
value of thee
the extent of the
members liability will be only
to
have a common
Ers they hold in the Company. The Company may in 2015,
Before the Amendment
seal.
tis the signature of the Company.
Now it is optional.
rsquirement of common seal was mandato ry.
6
 Section9 of the Companies Act, 2013 declares the effect O
registration of a company under the Companies Act. It is as follows:

"From the date of incorporation mentioned in the certificate o

incorporation, such subscribers to the memorandum and all other persons,
as may, from time to time, become members of the company, shall be a
body corporate by the name contained in the memorandum, capable ot
exercising all the functions of an incorporated company under this Act
and having perpetual succession ("and a common seal" - these words were
omittted by Amendment Act, 2015) with power to acquire, hold and dispose
of property, both movable and immovable, tangible and intangible, to
contract and to sue and be sued, be the said name."

Section 9 of the Act, 2013 has been amended in2015 and the words "and a
common seal" have been omitted. The result is that now a company need not have
a common seal.

The advantages of registration of a company is in fact declared in

section 9 of the Act.

Essential Characteristics of a Registed Company

(Advantages of Incorporation)

The following are the essential characteristics of a Company

1)Separate Legal isEntity

When a Company incorporated under the Companies Act, a newN

legal person will be born

and thereafter, the Company will be regarded as
an entity separate from its members. This separate legal personality
confers upon the Company some rights
and liabilities apart from those of
its members.

The "separate legal personality" of the Company was well estab-

lished in the case Salomon v. Salomon & Co Ltd, (1897).
 Case
Facts of the He registerod a d
Salomon was a shoe manufacturer. of 30.0
total share capital
and Co Ltd with a 30,000Company
hamely Salomon
is wife and five children took up one share of one pound each
pounag S the Ch

shares of one pound and 10,000 pounds debe

ebentursalom
os. mon
he ws
took 20,000 the assets of the
he Co The Eand the
Salomon a charge over
dobentures gave to Company claimea
egal
within a year due to ge be
pP

lia
The went into liquidation neral
Company if he
trade depression.

an asset of 6,000 poun.

up, the Company had
At the time of winding
of the Company amounted
to 17.0 SU
the liabilities
On the other hand,
entitled to get 10,000
pounds which were securered tire

Salomon was A
pounds.
7,000 pounds were due to outside creditors. This liabili.
by debentures. of the Company. The
of share holders
was over and above the claim
that the company
waS a mere agent of
unsecured creditors claimed
in priority to Salomon. The Court
Salomon and hence they should be paid
it became a separate
held that as soon as the Company was registered,
Salomon. Salomon is only a member of the
person independent from
from its members and create
Company. A Company can borrow money
the debentures are secured and
the security upon its assets. In this case,
Salomon could claim priority over unsecured creditors.

A Company is an artifical, invisible and intangible person and lives

only in the eyes of law. A Company is an entirely different person from its
members.

A Company is a legal person without

physic and soul. It can act only
through human agency. It can appoint any member as its
servant. it will
be liable to the employee member as in the
case of any other
employee.
Lee v. Lee's Air
Farming Ltd. (1960)
Lee formed
a Company a share
with
took share for capital of 3,000 pounds. He
2,999 pounds. His wife took one share
Les was the for one pound. Mr.
director of the
Company. The Company
appointed Mr. Lee
8
 as the Chief Pilot of the
Company. While piloting the Company's plane,
he was killed in an accident. The workers of the Company were insurea
and they were entitled to
Compensation on death or injury. Mrs. Lee
claimed the Compensation .The Court held that the
Company is a separate
legal person and it can appoint a member as its servant.
Company
be liable to pay compensation to its workmen even though he is a wou
if he has sustained
memoe
any injury in the course of his employment.

2) Perpetual Succession
A Company is a legal
person with perpetual succession. Perpetual
succession means that the a Company may change from
membership of
time to time but that the continuity of the Company.
will not affect
According to F. Pollock, a company's perpetuity is like the river Thames.
The river Thames is still the same river though the parts which compose
it are changing every instant.

The Company will have a continuity in existance irrespective of any

change in the membership of that Company. The members may come
and go but the company can go on for ever until dissolved by the process
of law.

According to Gower, the Company's existance will not be affected

even though all the members of a Company were killed by a bomb. Not
even a Hydrogen bomb can destroy it.

3)Limited Liability
A Company may be incorporated with limited liability.The liability

may be limited by shares or by guarantee. a Company is registered

If

with limited liability, the liability of the members will be only to the extent
of face value of the shares which are held by them or the amount

,
guaranteed by them. the face value of a share in a Company is Rs. 100/
If

the person who holds a share is liable only to the extent of Rs. 100/-.
The creditors of the Company cannot get their claims satisfied beyond
the assets of the Company. The Creditors cannot proceed against the
personal property of thee share holder for the satisfaction of their claim.

9
 4) Separate Property
A Company is a legal person. It can
acquire,own,enjoy or dispose
properties in its own name. Although the capital of the of
Company is
contributed by its share holders, they are not joint owners of
Company's
property.

Bacha .F. Guzdar v. Commissioner of Income

In
Tax(1955),
Bacha .FGuzdar was a share holder of the Company which was
engaged
in agricultural operation. The
Company gave dividend to Bacha.F. Guzdar,
The Commissioner of Income Tax assessed the dividend to income tax.
Bacha F. Guzdar contented that the income is agricultural income and
hence not liable to tax. The Court held that income of the Company is
agricultural income and not liable to be taxed as far as Company is con-
cerned. A member who received dividend from such a Company cannot
claim that it is agricultural income because a Company is a legal person
who can own, enjoy and dispose of its own property.

A member of a Company has no insurable interest in the property of

the Company. Macaura v. Northern Assurance Company, Macaura

In

insured the timber of a Company for Rs. 42,000 pounds. He was a major
share holder of the Company. He insured the timber in his own name and
not in the name Company. Later the timber was destroyed by fire.
of the

He claimed the insurance amount. The Court held that over the Company's
properties, members have no insurable interest.

5)Transferability of Shares
The shares of a Public Company are freely transferable and a
shareholder can sell his shares in a Public Company in the open market.

6) Common Seal
In England, the possession and use of Common Seal by Companies
is avoided by the Companies Act, 1989.

In India, before
the Companies (Amendment) Act,2015 a company
had to have a common seal. The "SEAL" of the
Company represented
10
 its oftiGial
signature. On
common seal. the narme of the Company na
the
to bo ongraved. After the
have a common seal amendment in 2015, a company need no
of its own. The
the documents of the
without its seal
becomes valid after the compa
amendment.
7) Capacity
A Company istoSue
a
name. legal person which can sue and be sued in its own

8)Application of Doctrine of Ultra Vires

In the case of a company the application of ultra vires doctrine is an
essential
feature. It cannot
go beyond the "object clause of the
Memorandum of Association.

9) Winding Up
in order to terminate
functioning of a company special winding up
procedure is prescribed by law. The company will cease to be in existence
only by its compliance.

Topic II
Doctrine of Lifting the Corporate Veil
or
Disadvantages of Incorporation

A Company is a separate legal person apart from its members.The

'
Separate legal entity of the Company is well established in the decision
of the case Salomon V. Salomon and Company Ltd. This principle

may be called as the veil of incorporation'. The effect of this principle is

that there will be a between the Company and its members.
fictional veil

the Company can acquire properties in its own

After the incorporation,

name, it can sue and be sued in its own name. The liability of the mem-
bers will be limited to the face value of the shares held by them.

The separate legal entity of Company has itsown advantages. But

thehuman ingenuity started to use the veil of corporate personality as

11
 shield for committing fraud, The Veil of incorporation"
"nent.
be used
The
Court
for

and even the GovO veil order

defrauding share holder, creditors order to
in to tin
find
the corpo The Courts in
were compelled to break through or lift
such a
y.

out the real beneficiary behind the Companompany and punishpunish the
the
of the
Company
C Separate legal entity For this purpose, the
name. of cor
orporation
persons who have misused the mpany's the wall
is
wwho
Court can
or breaking verify
aoctrine of the corporate veil the
lifting mask
off the
evolved by the Courts. By pulling
underneith is really liable.
Ltd. (7986)
V. Escorts is
is
an
ofIndia that a Company
nsurance Corporation Court
observed who are itsits

In this case, the Supreme the individuals

from
and legal person
distinct
and the individual member
independent
Veil may be lifted
conduct.
members. The Corporate or improper
the fraud
for preventing
nay De held liable be lifted are
the corporate
veil may
under which
he circumstances
the following:

the
1)Protection ofRevenue
of a Company
is used for tax evasion,
the corporate entity
If
the Company.
the corporate entity of
courts may ignore of Income Tax
v. Commissioner
The Supreme Court in Juggilal will be disregarded
of the Company
held that the corporate entity
(1969), tax obligation.
used to circumvent
when the name of the Company is

was an assesse of
Patit (1927), 'D'
In Re Sir Dinshaw Maneckjee
tax. He was receiving huge dividend and interest
income from
Income
various Companies. He formed four private companies.
He agreed with
each hold a block of shares and debentures. Thereafter, the
Company to

these four companies in

dividend and interest income were received by
their own name and D' took pretended loans from these four companies.

By this way, he could avoid

tax obligation. But the court held that the
four Companies were
registered only for the purpose of receiving dividends
and interest
and to hand them over to 'D' as loans.The Companies were
formed purely for avoiding
super tax and thus the Court rejected the
12
separate legal pernonality of the Company

2) Prevention of Eraud or Improper Conduet

he legal pernonality of a Company may be disregarded by theGourt
in the interost ot the machinary of incorporation is uned for
Justice. if

some fraudulent purpose ereditors or avoiding

of contract or
like detrauding
poothe
performanee defoating law, the Court may disrogard
legal personality of the Company

Jones V. Lipman(1962)
Lagreod 5,000 pounds. He subsequently
to sell his land to 'J for
changed his mind and to avoid specifie pertormance of the contract he
sold the land to a newly formed Company. The Company had only two
members. One was 'L' and the othor was a clerk of his Solicitor. 'J ought
an action for the specific performance of the contract against 'L and the
Company.The Court looked into the reality of the situation and hold that
the Company should transfer the land to J. It is because the Company
was formed only for the purpose of avoiding specific porformance of the
contract.

3) Companyis a Sham
The Court willthe corporate veil of the company if it is a mere
lift

clock or sham. If the name of an incorporated company is used to avoid

contractual obligations or to defraud the members or creditors of the

company, the court may disregard the legal personality of the company.

Gilford Motor Company Ltd V. Horne(1933)

C.A. Horne was an employee of the plaintiff Company. At the time
of his retirement from the Company, he agreed that he will not solicit the
customers of the Company. Subsequently, he formed a Company and
solicited the customers of the old Company in which he was working.

Had he solicited the customers of plaintiff Company, it would have been

breach of contract. In this situation, the court held that the new Company
a sham or clock for the purpose of enabling the defendant to
is only

commit a breach of his agreement. The court granted injunction against

C.A Horne and the new Company.

13
 4) Determination of theCharacter ofthe Companie.,wwhether it is

of the Company
In order to determine the character
veil
may the corporate
enemy or not, the Court lift

Co(1916)
and Rubber selling
Tyre selling
Continental the purposeof
he
Company. The
Ltd V. for
Daimler Compan in England
Germen
was incorporated by a Company.
he
The
Company in Germany the English were German
in England, tyresmanufactured of shares in
gland, held the
bulk
and all the
directors
commenced
OTman Companyholders except one
German Company
share the English held that the
World War, Court
action was
remaining the first The English the
residents. During debts.
therefore
of trade
an action
for recovery alien and
was an enemy
English Company
dismissed.

IV and "one
Topic "Private Company'"
"Public Company",
Person Company" or
Formation of a Company
of
deals with formation
3 of the Companies Act,2013
Section
company.
a company may be
section 3 (1) of the Companies Act,2013
By
formed forany lawful purpose byy
where the company to be formed
is to
(a) seven or more persons,
be a public company; is to be
two or more person, where the company to be formed
(b)
company; or
a private
be formed is to the 'One
()
(c) one person, where the company to
Person Company' that is to say, a private company,
'theirname' or 'his name' to a memorandum
and complying
by subscribing
with the requirements of this Act in respect of registration.

By section 3(2)a company formed under subsection (1) may be

14
either

(a) a company limited by shares, opr

(b) a company limited by
guarantee,or
(c) an unlimited company.

hus the Companies Act, 2013 recognises three types of companies.

They are:
(i) Public Company
(ii) Private Company
(ii) One Person Company, a private comnpa

Based on the liability of members, the companies formed may be

classified into three.
They are:
(i) a company limited by shares, or
(ii) a company limited by guarantee,or
(iii) an unlimited company.

Public Company

Section 2(71) defines the expression "public company"

Public Company means a company which

(a) is not a private company:

(b) has a minimum paid-up capital as may be

prescribed

Section 2(71) was amended by the Companies (Amendment) Act,2015 and the
requirement of minimum paid -up share capital of five lakh rupees has been omitted

Before the amendment, a public company had to have a minimum paid-up share

capital of Rs. 5,00,000)

Thus now a public company need to have a minimum paid-up shar

capital as may be prescribed by the Central Government. The Central

Government has not yet prescribed the amount of minimum paid-up sna
capital that which a public company ought to have.

15
 Balisfiss h
be oalled a "Publio Company",
Company can
A
n

following conditions: company

ahould not be a privato
(1) It
in tho
,as shown as
company bo usod
the last
tho namo ofthe should
Along with
(2)
the word
"Limitod'
Momorandum,
word. to tho
Gubscribod
ahould havo
of soven porsons
A minimum
(3)
(3) of the company.
Momorandum
share capital
as may be
paid-up
have a minimum
should
(4)
(4)
It Govornment.
by tho Contral
proscribod
not restrict
of the company should
Association
The Articles of its shares.
(5)
members to transfer
the right of its
not contain
of Association
company should
of the
(6) The Articles
of members
(6)
limit as to the
maximum number
any

of the company
should not prohibit
The Articles of Association for any
to the public to subscribe
(7)
invitation
from making any
securities (shares
and debentures) of the company.

to form a Public Company

minimum number of persons required
The
to the maximum.
is seven and there is no limit

Private Company " Private

Section 2(68) of the Act of 2013 defines the expression

Company"

A company registerd under the Act can

be called a "Private
Company" if it satisfies the following conditions:

A minimum of two persons should have subscribed to its

16
 Memorandum (oxcopt in tho caso of One Person Company
(i) Along with the
name of the company ,as shown in the
womorandum, the words "Privato Limited' should be used as
last words.

(ii) tshould have a minimum paid-up capital as may be prescibe.

(Seotion 2(68) was amondod by the Companies (Amendment) Act,2015 and the
requlrement of minimum paid
-up share capital of one lakh rupees has been
omitted

Thus now a private company need to have a minimum paid-up share

capital as may be prescribed by the Central Government. The Central
Government has not yet prescibed the amount of minimum paid-up share
capital that which a private company ought to have.

(c) The Articles of the company should contain restriction as to

the right of its members to transfer its shares.

(d) The Articles of the company should limit the maximum number
of members to two hunderd, excluding past and present
employee members. two or more persons hold one share
If

in a company jointly, they shall be treated as a

single member.

The minimum number of members required to form a Private

Company is two and the maximum is two hundred (excluding past and
present employee members). The words Private Limited' are to be added

at the end of its name.

Distinction betweena Public Company and Private Company a

1) The minimum number persons required to form a Public Company
of

is seven.

The minimum number of persons required is two, in the case of

Companies. A One Person Company is also treated as a private

Private

company,but it need to have only one member.

17
 there is no
restrictio
In the case of a Public Company as to
2)
he
maximum number of members.
num numbe
the maximu
a Private Company, past or presen.me oers
In the case of
(excluding
two hundred
cannot exceed
members). to sut
public or
general
can invite
3) A Public Company
Company to subscri
of the public the
debentrues general
cannot invite
Company
A Private of the Company.
or debentures
shares transferred.
be freely
shares can
Company's
4)
A Public transferred.
be freely
shares cannot
Company's in the Board
A Private
three directors
must have at least
A Public Company
5) 149)
of Directors:
(Section In the case
two directors. of
must have at least in its Board
Company have one director
A Private it should

Person Company,
of One
149).
(Section
Directors: directors
( to its
remuneration payable net profits
exceed 11% of
remuneration its
6) Themanagerial cannot
Public Company
of a Act, 2013).
and managers) Section 197(1) of the
in anyfinancial year: (

there is no such restriction.

of Private Company
Inthe case is
for a general meeting
of Public Company, the quorum
7)Inthe case
five.

is two.
Company the quorum
Inthe case of Private

18
 One Person Company
It a new
is
concept introduced in the company law. A person who
intends to start his
business as a company with one
person only can no
register his business house
under the Companies Act, with the
limited liability. bano o

Section 2(62) ofthe Act defines the

expression "One Person
Company. It
means a company which has only one
person as a member.

A One Person Company is treated as a

purposes. Thus the provisions applicable to a
private company tor
private company (except
a
the requirementas to the minimum and
maximum members)are applicable
to a One Person Company.

A One Person Company can be formed for any lawful purpose. The
Memorandum the Company should be subscribed by the person who
of

intends to form the One Person Company.

The memorandum of a One Person Company shall indicate the name

of the other person (nominee), with his prior written consent in the
prescribed form, who
event of the subscriber's death or his
shall, in

incapacity to contract, become the member of the company. The written

consent of that person (nominee) shall also be filed with the
Registrar at
the time of incorporation of the One Person
Company along with its
memorandum and articles

In order to register a One Person

Company, as in the case of a
private company, it should have a paid-up share as may be
capital
prescribed by the Central Government. The Articles of the One Person

Company should
(i) prohibit any invitation to the public to subscribe for
any
securities of the company
(ii) restrict the right to transfer its shares.

19
 The Companies Incorporation
(
) Rules,2001. provide
1or
Company. th
tollowing rules in relation to One Person

en and
an indian citizen and
who is
1
Only a natural person a One Person
son residen
to incorporate compa
a private
india shall be eligible an Indian citi ndCompany Memorandum ar
in who is residenm
2. a natural person sole member of a One alteration of Me
Only for the In order to con-
in India shall
be a nominee directors is tc=

Person Company. company by

who has stayed in Indi number of d
means a person
in India"
two days duri
The term "resident and eighty ring A Or
one hundred
of not less than company
Tor a period
calendar year. of OneF
the immediately preceding
a One Personn capital)
more than turnov
to incorporate
No person shall be eligible
in more
than one such
company. two ye
or become nominee One
Company of the ne Person eith
member or nominee
become
No minor shall
hold share with beneficial interest.
or can
Company
Financial Investment
company cannot carry out Non-Banking
Such
in securities of any body corporates.
including investment
activities

Topic
V
Conversion of Companies
conversion of a
Section 18 of the Companies Act,2013 permits
can be
from one class to another. Thus a private company
company
converted into a public company. So also a public company can be
The conversion is to be effected by
into a private company.
Section 13
converted
of the company.
alteration of Memorandum and Articles
for alteration
provides for alteration of Memorandum. Section 14 provides
of Articles.

into a Public
Voluntary Convers ion of a One Person Company
Company or a Private Company
A One Person Company can convert itself into a public company
oor

20
a private company. The o
conversion be effected by alteration
is to
Memorandum and Articles of the for
company. Section 13 provides
alteration of
Memorandum. Section 14 provides for alteration of Articles.
In order to convertit into a

directors is to be
private company, the number of memDers
a nd
increased to two. It can be converted into a public
company by increasing the minimum number of members to seven and
number of directors to a minimum of three

A One Person Company cannot convert

voluntarily into any kind or
company unless two years have expired from the date of incorporation
of One Person the threshold limit (
Company. However if up share
paid
capital) is increased beyond rupees or its average annual
fifty lakh
turnover during the relevant period exceeds two crores rupees within

twoyears of its incorporation, it shall cease to be entitled to contie as a

One Person Company and it has to convert itself within six months into
either a private company or a public company.

The One Person Company has to make an application to the

Registrar for effecting conversion. The Registrar shall on the application
made by the company, close the former registration and issue a certificate
of incorporation in the same manner as its first registration.

The conversion and the new registration of a company shall not

affect any debts, or contracts incurred or entered
liabilities, obligations

behalt or the company before conversion and such debts,

into, by or on

liabilities, obligations and contracts may be enforced in the manner as if

such registration had not been done.

Conversion of One Person Company By Operation of Law

Rule 6 of the Companies ( Incorporation) Rules, 2014 deals with
conversion of a One Person Company into a Public Company or a Private

Company.

By Rule 6(1) of the Rules, the paid up share capital of a One

if

Person Company exceeds fifty lakh rupees or its average annual turnover
during the relevant period exceeds two crore rupees, it shall
cease to

21
 as a One Person Company
be entitled to continue
to convert itself
be requiredshall
Such One Person Company up share capital is
its paid
of the date
on which period
within six months of the relevant
or the last day as
lakh rupees crore rupees,
increased beyond fifty two
turnover exceeds
annual two of
during which
its average with minimum
private a company of sevenn
the case be, into either
may with at least
or a public company
members and two directors
members and three directors.
of sixty days from
The One Person Company shall, within a period
notice to
it ceased to be a One
Person Company, give
on which
Person Company
the date
that it has ceased to be a One
the Registrar
informing
to convert itself into a private
company or a
now required
that it is
and its paid-up share capital
exceeded fifty lakh
becacause of
ublic company turnover exceeded two crore.
Dub annu.
or average
rupees
shall alter its memorandum and articles
Person Company
Con
One Person to the c
to conversion. In order to convert
The to give effect
tion to
a resolution number of members and directors is to be
or membe
by passing nv. the
a company, O
into a public company by
by in
increasing
private

"ana number
it into he
be converted
can of to a
two.
S
It
directors
increasedto members to
of
minimum number

minimum of three.

has to make an application to the

The One Person Company
The Hegistrar shall on the application
Registrar foreffecting conversion.
the company, close the former registration and issue a certificate
made by
ofincorporation in the same manner as its first registration.

The conversion and the new registration of a company shall not

arfect any debts, liabilities, obligations or contracts incurred or entered
no,by oronbehalf ofthe company before conversion and such debts,
00ligations and contracts may be enforced in the manner as
Suchregistration had not
been done

22
Conversion of Private Company into One Person Company
Rule 7 of the Companies (Incorporation) Ruies,2014 provides tor
conversion of a Private Company into a One Person CompanY

APIVate Company having paid-up share capital of fifty lakh rupees

or less and
average annual turnover not exceeding two crore rupees
may convert itsolt into One Person Company by passing a specia
resolution in the general meeting

Bofore passing such resolution, the company shall obtain "No

Objeotion" in writting from members and creditors. The company shall
tile copy of the spocial resolution with the Registrar of Companies within

thirty days from the date of passing of such resolution. The company
shall file an application for its conversion into One Person Compa The
following documents are to be attached along with the application.

(0) A declaration of Directors The directors of the company shall

give a declarationby way of affidavit confirming that all
members and creditors of the ocompany have given their
consent for conversion, the paid up share capital of the
company lakhs rupees or less and the average annual
is fifty
turnover is less than two crores rupees.
(ii) A list of members and list of creditors
the latest audited Balance Sheet and the Profit
(iii)
and Loss
Account.
(iv) The copy of No Objection letter of secured creditors.

If the above conditions are satisfied, the

all
Registrar shall issue the
Certificate stating that it is One Person
Company.

23
 Topic-V1 Shares
Companies Limited by
of of members, Companies may be o
On the basis liability
assified
into three heads:
Shares
1)Companies limited by
guarantee
2) Companies limited by
with unlimited liability.
3) Companies

by shares, the liability of

a Company limited
of
each
In the case of him. If the
held by share
the face value of shares nares
member is limited to nil.
of the share holder
is
are fully paid, the liability

Under
However, to this general rule, there WAS one statutoty exception.
of members
number of a
any time the
at
45 of the Companies Act, 1956,
if
below 2, in the
section
in the case of a Public
Company, or
is reduced below 7,
for more than 6
Company
the Company carries on business
Company, and
case of a Private of the Company durina
is a member
reduced number, every person who
monthswith is aware of the fact that the
business after 6 months and
it carries
the time that liable for the
reduced number shall be severally
with
carries on business
Company
after6 months.
the Company contracted
whole debts of

reduced to 6 on 10th
Problem
in a Public Company became
The number of members
11th November 2004, 2nd April
2004. The Company incurs trade debts on
November of the
of members
18th May 2005, Discuss the liability
2005, 17th May 2005 and
Company.
after May
The members willbe personally liable for those debts contracted
reduced
6 months from the day on which the minimum number
is
after
10th 2005, ie.,
below the required number under the law.

The Companies Act,2013 does not contain a provision similar to

section 45 of the
old Act. Thus, now, no member will be personally
liable

eventhough the number of members is reduced below the required

minimum, if the company is registered as a limited company,
24
 of memb
n the case of companies limited by guarantee, the liability

will be limited to the extent of guaranteed amount.

will be
companies the members' liability
In the case of unlimited
unlimited as in the case of unlimited partnership.

Topic - VII
Holding Company and Subsidiary Company
defines a "Hoiag
2(46) of the the Companies Act,2013
Section
Company" and section 2(87) defines a "Subsidiary Company.

a over the affairs of another company

company has control
it

controlled by the
is

known as Holding Company. The company which is

Holding Company is known as Subsidiary Company.
Subsidiary
Under the following circumstances, a company becomes
Company of a Holding Company.

the composition of Board of Directors of the company is

1. If

controlled by the Holding Company

the
more than half in nominal value of equity share capital
of
2. If

company is held by Holding Company.

over another company, that

a Subsidiary Company has control
If
of the Holding
also be deemed to be the Subsidiary Company
company will
Company.

The Holding Subsidiary OCompanies shall be treated

Company and its

accounts of a Subsidiary Company will

as separate entities. The annual
accounts of the Holding Company.
be annexed with the annual

Subsidiary Company not to hold shares in its Holding Company

By section 19 (1) of the Act,2013, a subsidiary company shall
not
25
 ntep

and no holding con

its holding ompany

hold any shares
in
SuDsidlary companies
.ng
and
its
to any of
allot or transfer
its shares
of shares
of a company to its ay
transfer
such allotment or ubsidiary
shall be void. to the following cases: the Comptroller and Aud
company be applicable
shall not
holds such shares as the
as t
This section The Comptr
company er of the holdin\egal
If the subsidiary member the manner in v
(a) of a deceased direct

representative the auditor. The Cor

company Such shares as a holds power to conduct a
If the subsidiary
company
(b) 3 The au
trustee;or
is a shareholder even befoore report to the Com
the subsidiary company
(c) If
of the holding compaanv
became a subsidiary company
it The
upon the audit
the shares of a holding company
The subsidiary companies holding vote at a meeting to
or as a trustee only have right 5 TH
as a legal representative became a shareholder
The subsidiary company annual gene-
of the holding company.
not have right to vote ata
became a subsidiary company shall
before it
6
meeting of the holding company.
Company,
the comp
annual
Topic-VIll with a
Government Company made

a Government
Section 2(45) of the Companies Act, 2013 defines
Company. the
the
If the Central Government or any State Government or the an
Governments (Central and State or States) hold at least 51% of paid- up
share capital
a
of company, that company becomes a Government Com-
A
pany. subsidiary company of a Government will also be a Company
Government Company.

Special provisions applicable to Government is contained

in
Companies
Chapter XXIll (sections 394 &
395) of the Act

1
The auditor of a Government
Company shall be appointed by
26
the Comptroller and Auditor General of India.

2 The Comptroller and Auditor -General shall have the

power 1o
direct the manner in which the Company's accounts shall be audited Dy
the auditor. The
Comptroller and Auditor General shall also have the
power to conduct a supplementary audit of the accounts of the
company
3 The auditor of the company shall submit a copy of his audit
report to the Comptroller and Auditor -General of India

4 The Comptroller and Auditor -General has a right to comment

upon the audit report.

5 The comment upon the audit shall be placed before

report thhe
annual general meeting of the company.

6 the Central Government is a member

If
of a Government
Company, it shall
prepare an annual report on the working and affairs
of
the company within three months of its annual
general meeting. The
annual report shall be laid before both Houses of
Parliament together
with a copy of the audit report and any comment
upon the audit report
made by the Comptroller and Auditor -General of India.

7 If a State Government is a member of a Government Company,

the State Government shall prepare an annual
report on the working of
the company within three months of its
annual general meeting and the
annual report shall be laid before the State
Legislature along with audit
report and any comment upon the audit
report made by the
and Auditor General of India. Comptroller
 Topic IX
Foreign Company
Section 2(42) of the defines a
Companies Act,2013
"f
foreign
ompany
Act deals with
Chapter XXII (sections 379 to 393 of the
outside India. ecia
provisions applicable to companies incorporated

India and has a

incorporated outside
A company which is plac
of
business in India is called foreign company.

A foreign establishing a place of business within iIndia

company dia
shall, within thirty days of the establishment of the place of
business,
deliver to the Registrar for
registration the following documents.

1 A certified
copy of the Charter, Statute or Memorandum and Articles
or any instrument containing the constitution of the company. It the
instrument is not in English a certified
language, translation of that
will have to be filed.

2 The full address of the registered or

principal office of the Company.

3. The full address of the Directors and Secretary of the

company.

The name and address of any or

person persons resident in India,
authorised toaccept on behalf of the company service of processes
and any notices required to be served on the
company.

The full address of the principal place of business in India.

The above stated documents have to be filed with the Registrar of
the State where the principal place of business is situated and with the
Registrar at New Delhi.

A company
foreign shall conspicuously exhibit on the outside of
every office or place where c2"ries on business in India
it the name of

28
the country
languages
whore it is
incorporatod in
English and in ne o Y a

A toreign company
shall, in every calendar
year, make out a balance
sheet and profit and
loss account and deliver
three copies of
documents to the Registrar. tnos

A Toreign company may, even

has no place of business in India,
a prospectus if it
issue
offering shares or debentures for subscription. The
prospectus must be registered with the
Registrar before it is issued to thne
public.

If any foreign company ceases have a place of business in India,

to
it shall give notice of the fact to the Registrar.

If any
foreign company fails to comply with any of the
foregoing
provisions, the company shall be punishable with fine which shall not be
less than one lakh rupees but which may extend to three lakh
rupees and
in the case
of a continuing offence, with an additional fine which may
extend to fifty thousand rupees for every day during which the default
continues and every officer of the foreign company who is in default shall
be punishable with imprisonment for a term which may extend to six months
ar with fine which shall not be less than twenty-five thousand rupees but
which may extend to five lakh rupees, or with both.

29
 Topic Xx

Illegal Association

Act, 2013 doaln with

Section 464 of the Companios
ortain num
cortaln i
association or partnership of persons oxcooding numbe
oronibinion.

of the Act, no "assoclaton"

or "partnorahip" P
By section 464 consi
10 of tho Companios Mines
Or more than fifty numbors (by Rulo
of carrying on any ncollano
bu
shall be formed for the purpose busin
Rules,2014)
the acquisition of gain by tho associatio
that has for its object
thereof, unless
it is
members rogist.
partnership or by the individual law
other for thestorog
as a company under the Act or is formed under any time
being in force.

There can be a co-operative society with more than fifty members

However it is to be registered under the Co-operative Societies Act

There cannot be a partnership business with more than fifty partners

If a partnership is formed with more than
fifty person, every member of
shall be punishable with fine
the partnership which may extend to one
lakh rupees and shall also be personally liable for all the liabilities incurred
in such business.

an association
If of fifty or more persons conduct an
activity without
an object of making profit, it does not require
registration under the
Companies Act.

An illegal association cannot

enter into any contract. It cannot sue
any member or outsider.

The prohibition in
section 464 of the Act is not
Hindu Family
carrying on a business. applicable to a Joint
But if the business is
by two or more carried opn
families in
fifty, then partnership and total number exceeds
section 464 will be applicable.

30
 The prohibition in section 464 is not applicable an asso
to
by
Opartnership, if it is formed by professionals who are governe
special Acts.

Topic XI
Promoter
In the formation of a company, certain preliminary steps are
necessary. Usual steps in the formation of the company are following

1) Preparation of Memorandum of Association of the ompany

2) Preparation of Articles of Association of the Company.
3) Enteringinto Preliminary Contracts.
4) Registration of the Company

Allthese steps are taken by certain persons known as Promoters.

or syndicates can act as
Individuals, firms, association of persons
promoters.

A promoter a person who undetakes the necessary preliminary

is

to the formation of a company. According to Palmer," a

steps incidental
the scheme for the formation of the
Promoter is a person who originates
the Memorandum and Articles of the Company.
Company. He prepares
the terms of Preliminary Contracts. He finds out the first
He settles

directors. He prepares Prospectus and makes arrangement for advertising

and circulating the prospectus.

According to Gower," as a Potmaker

is the sole creator of the pots,

of the Company".
the Promoter is the sole creator

The Promoter settles the Company's name. He settles the details of

company's Memorandum and Articles. He arranges for the printing of the

Memorandum and Articles. He determines the nomination of directors,

solicitors, bankers, auditors and secretary. He arranges the registered

office of the Company. He arranges for the registration of the Company.
He is, in fact, responsible for bringing the Company into existance.

31
 te

O Ater

detines the ex e
Section 2(69) of the CompaniesAct,2013 expre
of the
promoter. The as promoters
following persons are trea in a pro.
(i) A person who has been named aspromoter the
by com Thereafter a contra
(ii) A person who is identified as a promoted ny
Company.
in
the Registrar nder
under syndicate and the company
be filed with The the sale were
annual
92
return
of the Act.
to Section details of
filed a suit to rescind
or the pany
over the
affairs compa
pany, that, since the Promoters
(in)
Person who has control
whether as
a shareholder, director r the Company could resci

rectly or indirectly

otherwise.
whose advice, directions or 2) Secretprofit
A person in accordancewith of the company is
APromoter shall

of Directors without knowledge ar

instructions the Board
a person who
is acting me
mere
act. However, profit, the Company
accustomedto be treated as a Pronm
would not
in a professional capacity
oter
In Gluckstei
who have made
Legalrelationship between Promoter and Company
a trustee of a proposed Compaany.
pay to the Comp
A Promoteris neither an agent nor
He is not a trust
e is not an there is no principal.
agent because stee
Remuneratio
is not in existance. However, from the momensnt A Prom
because the beneficiary
a Promoter stands in a fiduciar
he acts with the Company in mind, iary of a Promot
the proposed Company. the followirn
position towards

The consequences that follows from the creation of a

important
1)

fiduciary relationship between the Promoter and the Company he brings

into existance are the following.

1)Disclosure of interest
A Promoter shall not make any profit from the sale of his own property
to the
Company withoutdisclosing material facts. If a Promoter
to sell
contracts
his own
property to the Company without a
the making full
disclosure,
Company may either repudiate the sale or affirm the contract and
recover profits made out
of it by the Promoter.

Erlanger V. New Sembrero

'E was head of a syndicate.
Phosphate Company 1878)
The syndicate
(
containing mines of purchased an island
Phosphate for 55,000
pounds. 'E then formed aa
32
 the
Company. Thereafter a contract was made betwaen X,
a nomnd
dte and the company for the purchase of island at 1,10,000
Pouds
The details of the sale were not disciosed to the share holders. ThaCo d
ot Loras
pany filed a suit to rescind the contraact of sale. The House
they mado
that, since the Promoters had not disclosed the profit which
the Company could rescind the contract.

2) Secret profit the Company

omoter shall not make any atthe expense of
profit
the Company. he has earned secret
If
witnout Knowledge and consent of
him to account for it.
profit, the Company can compel

that the promoters

In GlucksteinBarnes (1900), the Court held
V. to
for it and they are bound
who have made secret profit should account
the the secret profits they made.
Company
pay to

Remuneration of Promoters remuneration for the services

A Promoter is entitled to a reasonable for his services in one of
a
Promoter. He can take the remuneration
of

the following ways.

own a profit to the Company for

at
He may sell his property
1) the fact should be disclosed
cash or fully paid shares. But
holders.
to the share
on the shares sold.
2) He may take a commission shares
to buy a certain number of

3) He may be given an option

at par.
in the Company

He may be paid a lumpsum by the Company.

A)

Duty of Promoter as issues prospectus for

regards Prospectus
applications for
The Promoter who
inviting
not
with full particulars. The prospectus should
should issue it
shares
or misleading statements or should not omit any
untrue
contain any statement in the
Promoter will be liable for false
material fact.
The
Prospectus.

33
Preliminary or Pre-incorporation Contra
cts

made
between
the Pro
t

",
"
Preliminary contracts are the tracts The Promot
Company. property o,
rty or ota
and third on of the some
parties behalf proposed aro righ
to acquire contracts are
Company enter into contracts
usually Such calla

TOr the
company which is yet to be incorporated.
c's.
or Contra
Preliminary Pre-incorporation
that a company
company whi
heldthe contrac
the court cannot ratify
In KelnInar V. Baxter (1866), In
contract into contract.
is formed subsequent to the preliminary of entering for
for
at the time an agreement the
Xistance signed The company was
Company
of a Hotel company.
the promoters. The
CPromoters the proposed
made by
ase
of
of wine on behalf consum.ed
the contract and the company
e and it ratified
Orporated party into liquidation The
by the contracting went
was supplied the company The Court he
held
the price,
C Wine. Beforepaying from the liquidator. i
of wine
claimed the price
be ratified by the company after its
uppliers not the price.
contracts
could to pay
able
that preliminary are personally
The Promoters
incorporation. enforce the contract
after its incorporation,
A Company cannot,
A company cannot ratify a contract entered
ed

made before itsincorporation.

on its behalf before incorporation.
into by the promoters

contracts is
The rule that a company is not bound by preliminary
Section 15 and 19 of the
statutory exception.
subject to an important
Specific Relief Act,
1963 deal with specific performance of preliminary
contracts. When the promoters of a company have,
before its incorpora-
tion, entered into a contract for the purpose of the company and such

warranted by the terms of incorporation, specific perform-

contract is
ance may be obtained by the company or enforced against the company.
The Company, however, should have accepted the
preliminary contract
and communicated such acceptance to the other
party to the contracot.
Topic xII
Incorporation of a Company
or
Registration of a company

Application farIncorporation ot Companies for ho

By rule 12 of the Companies (
Incorporation Rules),2014,
registration of a an
company, shall be tiled with the Registrar
application
within whose jurisdiction the registered office of thecompany is proposOd
tobe situated, in Form No. INC-2 for ( One Person Company) and Formn
the fee as
No. INC-7 (otherthan One Person Company) along with
in the Companies (Registration Offices and Fees) Rules, 2014
provided

Documents tobe filed for Registration

section 7 of the Act,2013, in order to register a company, the
By
following documents and information are to be filed with the Registrar
within whose jurisdiction the registered office of a company is propsed
to be situated.

(a) The Memorandum and Articles of the company duly signed by

subscribers to the memorandum
all the

(b) A declaration in Form No. INC -8 by an advocate, a charted

accountant or company secretary in practice, who is
accountant, cost
the tormation of the company, and by a person named in the
in
engaged
manager or secretary of the company, that all the
Articles as a director,
the Act and the rules made thereunder in respect of
requirements of
registration
have been complied with.
(c) An affidavit from each of the subscribers to the memorandum
any, in the articles that
and from persons named as
the first directors, if

the promotion,
he is not convicted of any offence in connection with
found
formationor management of any company, or that he has not been
or any breach of duty to any company
guilty of any fraud or misfeasance
law during the preceding five
under the Act or any previous company
for registration ot
years andthat all the documents filed with the Registrar
true to
thecompany contain information that is correct and complete and
The affidavit be submitted by
thebest of his knowledge and belief.
shall

35
 of the subscribers
to the memorandum and each of the first dires
oach directors
the articles in Form No. INC -9.
named.in
its registered
(d) The address for correspondence till office s
is

established.
surname or Tamily name
(e) The particulars of name, including
every of
residential address, nationality and such other particulars
of identity.
subscriber to the memorandum along with proof
the articles as the first
(0)
The particulars of the persons mentioned in
or family
or the company, their names, including surnames
directors
nationality
residential address,
names, ne Director ldentification Number,
proof of identity. in the
and such other particulars including of the persons mentioned
bodies
The particulars of the interests other firms or in
of the company
(g)
of the company.
articles as
the directors
to act as directors
first
consent
with their
corporate along
filed, shall
documentS and information
basis of
on the in the register
and issue a
The Registrar, and information
documents the proposed
register all the to the effect that
OF INCORPORATION
CERTIFICATE under the Act.
is incorporated
company
in the Certificate
of Incorporation,
the date mentioned which
On and from a corporate identity number,
the company
the Registrar
shall allot and which shall also be inclued
for the company
identity
shall be a distinct
in the certificate.

office
shall maintain
and preserve at its registered
The company filed with the Registrar
and information as originally
copies of all documents
until its dissolution.

Punishment for Fraud or

furnishes any false
y section 7(5) of the Act, if any person
eect any materla
particulars of any informaton or suppresses
filed with the
aton, of which he is aware in any of the documents
in relation to the registration of company, he shall be liable
a for

tersection 447 of the Act.

36
 who is
tioction 447 provides for
punishment for fraud Any person a
u t he guilty of fraud
shall be punishable with impriso
To WGh shall not be less than six months but which may e the
years arnd shall also be liable to fine which shall not be less tna
mount nvolved three time ne
in theGfraud, but which may extend to
amount involved in the fraud

ysection 7(6) at any time after the incorporation of

a
conpa
apYu al
if

the company has been got incorporated by furnishing any

false or incorrect intormation or representation or by suppressing
filed or
material Tact or information, in any of the document or declartion
the
made tor incorporating such company or by any fraudulent action,
he and
promototB, persons named as the first directors of the company
accounted etc..)
the perEiOns making declaration advocate, chartered
ahall each be llable for action under section 447 of
the Act.

Removal of the name of the Company from the Register

By seetion 7(7) of the Act, a company has been got incorporated
if

false or incorrect information or representation or by

by furnishing any or
any material fact or information in any of the documents
suppressing
tiled or made for incorporating such company, the Tribunal
declaration
may, on an application made to it -
the
(a)
(a) pass such order, as it may think fit, for regulation of
in its memorandum
management ot the company including changes, any,
if

the interest of the company and its

and articles, in public interest or in
members and creditors; or
direct that liability of the members shall be unlimited; or
(b)

(c) direct removal of the name of the company from the register

of companies; or
(d) pass an order for the winding up of the company: or

(e) pass such other orders as it may deem fit.

Before making any order the Tribunal shall give to the company a
reasonable opertunity of being heard in the matter.

37
 Topic XII
Memorandum of Association of Compan y
In order to register company one ot the documents to
a
ho s The Memorand
of companies is Memorandum of filed the forms given in
the Registrar
Company. with
C

the Charter of the comparny. t is the

i

Memorandum is dominant The companies is giver

and it defines the limits of the company's powers and objects ment tables in
Schedule
Table A is t
the limits of it's powers and objects Yac
as defined imited by shares
of company beyond
the in
B

.
and void. Table
the Memorandum will be ultra vires is
imited by guar
Table
The Memorandum of a company Is the constitution of the compan imitedby gua
It defines the relation of the company with outside world and the scope of Table
company ar
its activities.
Table-

and Iron Co. company

In Ashbury Railway Carriage
V. Riche(1857), the
Memorandum ofa Company is charter and defines
SC
its
Court held that the Content
the limitations of powers of the Company.
of a
In Cotman V.
Brougham (1918),the court held that the purpose ot
Memorandum of Association are two fold:

The share holders who contemplate the with

1) prospective
investment of their saving should know the
field in which it is las
going to be used.

2) It will give information anyone who deals with the company

to

to know whether the contract he

intends to make with the
company is within the objects of the
company.
The
Memorandum of a Company
be printed, divided into shall
paragraphs, numbered
consecutively and signed by seven
thecase of a public subscribers inn
company. If it is a
subscribers must private company, at least
sign the two
Company the person Memorandum. In the case of One
registering the
Person
company should
sign it.

38
 The
Memorandum ot a
company is to he ed in
the torms aa
given Sohedule I. The torma ot prepaed
in
companies is given in the Memorandum of ano ant
table gontained in Schedule .
tables in Schedule I; There aro tive
they are table
Table A is the A,D,C,D and
form of Memorandum ot ot a
limited by shares. Asooiation Gompar
Table B
is the form of
Memorandum of
Association of a Gompany
limited by guarantee and not
having a share aapital.
Table C is the form
of Memorandum of Association of a Gompany
limited by guarantee and
having a share capital
Table D is the form of Memorandum of Assoclation of an untimited
company and not having a share capital.
Table E Memorandum
is the form of of Association of an unlinmited
company and having share capital.

Contents of Memorandumn
Section 4 of the Companies Act,2013 statos that the Memorandum
of a Company shall contain the following
details

1) Name
The Memorandum a company shall state the name of the company
of

with the last word "Limited" in the case of a public limited company, or the
last word
"
Private Limited" in the case of a private limited company.

The name stated in the Memorandum shall not

(a) be identical with or resemble too nearly to the name of
an existing company.
(b) be such that its use by the company is undesirable in
the opinion of the Central Government

(c) be such that its use by the company will constitute an

offence under any law for the time being in force.

Rule 8 (1) of
the Companies (
Incorporation) Rules, 2014 give
guidlines for determining whether a proposed name is identical with

another or not. So also the Rule 8(2) declares when the name shall be
considered undesirable.

39
 .
ot
Tho Emblems and Namos (Provention Improper
or
Us) AG

.
prohibits the uso of the following namot
1) Unitod Nations
India
2) The Government of Ewina Buterc
3) Stato Governmont. The P1ainit v
Co. A new Con
which with a name
be registered Company. The
A company shall not to give the impression thatt aisar
injunction
pl

which is likely
word oroxpression the patronage of,
with, or having
is in any way connected Changs st Nas
The rioh
Government, section 13 ot
(i)
the Central
or
(i) any State Government, A com
corporation or body constituted by tth.
any local authority, are-
or any State Government.
(ii)

Central Government

.
1)

a name can be registered if it

However a company using such has
of the Central Government for the use of s
previous approval uch
obtained

word or expression.
nam
a Company name which resembles the
registered with a
If
is
A
the old company can apply to the court
name of an existing company,
restrain the new company from adopting the identical
for an injunction to

name. the names of

If
two companies contain any word which is in

common use, its use cannot be restrained.

Asiatic Govt: Security Life Insurance Co. Ltd V. New Asiatic

Insurance Co. Ltd.
A Company was incorporated under the name New Asiatic
Insurance
Co.Ltd. Another
Company, Asiatic Government Security Life Insurance
Company, which was
registered earlier, filed a suit for
new restraining the
company from using the name on
bled to a the ground that two names
large extent. The Court
held that the two resemn
and the suit
was dismissed. names were not identical

40
Ewing V. ButterCup Margarine Co,(1917) airy
he Plaintiff was carrying on trade undsr the riarrie tter
Co. A new company registered under the rnarns Butte1Cup Maga
Company. The piaintiffs filed a suit for irijunction The Court grarits
injunctioon.

ChangeofName is cortairisd
he rignt of a Cornpany to alter its Mernorandun i
section 13 of the Companies Act, 2013.

A Companycan at any time change its name.The forrrialitiss rsquirsd

are
1) A special resolution (a resofution passedthres 1ort
tvy

majority in the general meeting of the memibers

the f
company), and
The approval of the Central Government in writing
2)
erter the ne
a Company changes its name, the registrar shall
If
a fresh certificats of incorporation.
on the Register and shall issue
name the Compary
name will not affect any right or obligation of
A change of
as no change has taken place, as in the cass
Thecompany continues
if

of theold wine in new bottle".

Rectification of nameof Company

through inadvertence or
By section 16(1) of the Act,2013, if,

on or on its registration by a
otherwise, acompany its first registration

name which
by a
new name, is registered Central Government, is identical with or too
(a)in the opinion of the
which a conpany in existence had been
nearly resembles the name by
it may direct the company to change its name and
previousily registered,
or new name within a period of three
the company shal change its name
an Ordinary
months from the issue of such direction, after adopting
Resolution for the purpose.

fan applicationismade to the Central Government by a registered

propritor ofatrade mark alleging thatthe name of a company is identicai

41
 with or too nearly resembles to the registered trade ma
ark
of
the Central Government may direct the company to cha
hang such
its na nge
such a direction is given, the companyshall change its its
amea
an Ordinary Resolution for the purpose nam
atter

ado
shallwit hin a
changing the name the company
After
of the change
period
iod
ot
notice to
days from the date of change, give the fit
The Registrar Regi
Regsy
along with the order of the Central Governii Or
certificate Incoporatiha|
shall
jon
Out necessary changes
memorandum.
in the can
and
t
with any
ny direcs
direc
ction
the company makes default in complying giv
shall be punishable with
If ble
Company
by the Central Government,
company
the
which tne derault con
fine
o
day during ontinues
for every with fine
Cnousand rupees is in default shall be punishable .."h
and every officer who but which may extend
rupess
five thousand
shall not be less than

lakh rupess.

Clause
2) Office
of Association must
mention the State in which
ch
The Memorandum
is to be situated. The
situation of the
office of the company
determines its domicile and nationality.
the registered
office of the company
registered

the office
In the Memorandum of Association of the company,
section 12 of the Act, a company
address need not be shown. However, by
of its incorporation and at all time9s
shall, on and from the fifteenth day
of receiving and acknowledging
thereafter,have a registered office capable
all communications and notices as may be addressed to it.

The company shall furnish to the Registrar "verification" (address

and some documents) of its registered office within a period of thirty days
of its incorporation. The verification of the registered office is to filed
in

the Form No INC-22. The following documents are to be attached along

with the form:

(a) The registered document of the title to the premises of the

registered office in the name of the company.

42
 the he
eompany
month.
notarized
Opy of lease
along
ng
with a or rent
m of

The
eopy ot rent aureemernt
paid e not oldar than one
company as its authorizaton
trom
(d)
(0)
The registered
th
er to use the the
alec proot andd proof of
oftiee premiseas
electricity of
etc., ownerahi
owner which evidence of anyany utiity service like
showing
is not the tolephone,
older address of the
the premises in the name of he
than two pro
montha.
Every
company shall
registered oftice paint o atfix its name and the address its
paint or
every office or
and keep the of
place in same painted or
or affixed, on the
which its painted outside of
position. The name is carried on, in a
shal be iness
business
any Now seal is
not
aved in
engraved in
car
legible
legiblechcharacters
conspicuous
on its seal, it

is aseal, the name

in compulsory, tthere
legible characters It
on it)

In the case of One Parson

"One Person
Company be snall Company",
Company" the words "One Person
mentioned in
company,wherever its name brackets bolow the name or ch
is
printed,
su
affixed or
engravod.
Change of Registered Qffice
The registered office of
a Company
may
1) Change from one place to
another place in the same City, Town
or Village.
2) Change from one Town to
another Town in the same State
3) Change from one State to another State.

the case of change of office from one

In
place to another place in
the same city, town or village, after changing the office, a verification is
to be given to the Registrar within 15 days of the
change.

Inthe case of change of office from

one town to another town, a
special resolution is required to be passed at a
general meeting of thee
share holders and verification (showing address and documents of title)
isto be filed with the Registrar within 15 days.

43
 the change of office has the effect of
If shifting the
office t
of one Registrar of to that of
jurisdiction Companies another"
ther w
same State, permission of the Regional Director must be obtainehin
tained
Director byti
an application in the prescribed form. The Regional has to
After get of 30 days.
the company's application a period
within confirm

Confirmation of
must
file a getting
the Regional Director, the company con
copy of
the a
e
within sixty the
confirmation with the Registrar of Companies days
days.
The
a certificate to the com.
Hegistrar has to register the same and issue
ompany
within of confirmauon
thirty days from the date of filing

state, a a speri.
In case of of office from one state to another
specia
shifting
of th
the share
meeting
resolution is required to be passed at the general share
confirmation of the Central
Centra
e
holders. In order to effecttthe alteration,the
is given by
be obtained. When the confirmation the
Government is to
the alteration
Government, a certified copy of the order confirming
Central of the
states. All the records
shall be filed with the Registrars of both the
the State in which the
the registrar of
Company shall be tranferred to
is transferred.
registered office of the Company

3)Object ofClause
Association of every Company shall clearly
The Memorandum of

state the objects of the Company.

The object clause shall state:-

The for which the company is proposed to be

(
1) objects
incorporated main objects).

2) Matters considered necessary for furtherance of main objects

(incidental or ancillary matters to the attainment of main objects).

shbury Railway Carriage Iron Company V. Riche (1875),

the court held that a statement of objects in the Memorandum has two
purposes.

1) It states affirmatively the ambit and extent of and power

vitality
of the company.

44
 2) It states
be done beyond that ambit
negatively
a nothing shall
Doctrine of Ultra
A vires
Company has power to do
Companies Act and the all acts whicn
a
Memnorandum of AssoCia
If a
Company does an act
Companies Act or
Memorandum
n the powers confered
act beyond the
um of Association,povthe
der

ac will be ultra vires.

the act
Such an act is absolutely
boay ofthe shareholders
cannot ratify it and make it aEven the whole body
void. Even
binding on the Compan

In Ashbury's case, the of

Company
company was formed with the object
carrying on business as "Mechanical ContractorS".
Engineers and General to
dt the
The directors company entered into an agreement with Riche
finance
the construction of the
construction Railway line in Belguim.
Beiguim. The contract was
udiated by the ComDan. auway breach
pudiated
repudiated Company subsequently. Riche filed a suit for
The House of Lords held that the contract was beyond the
contract. The
of contract.
ope of the Memorandum(ultra on the
vires) and thus it is not binding
of the
scope
moany even though it was ratified by the shareholders.

ALekshmanaSwamy Mudaliar v. Lic (1963)

The directors the company decided to donate Rs. 2,00,000/- to a
oT

Trust. he
The shareholders have passed a resolution accepting
Memorial
of the directors. The primary object of the company was
to
the decision is
Insurance Business. Donating money to a Memorial Trust
rry on Life
that the
tmain or incidental object of the company. So the court held
to the Memorial Trust is ultra vires. A company
decision to donate money
all acts Within the objects specified in the Memoran-
is
competent to do
the objects.
dum and it cannot travel beyond

Effect of ultra vires Transactions

1) Injunction
Whenever an ultra vires act is about to be done, any memebr of the

against the to restrain from

company can obtain an injunction company it

proceeding further.

45
 2) of the Directors
Personal Liability
is used by the
the dire
If the capital of the company diretors tor
liable.
be personaly
"Spurposes they will

3)
3) Breach of Warranty enter into a contract with
the
is induced to
Ifan outsider file a case against
the dirgcs coma
the outsider can directors tor
by the directors, contract.
from the ultra vires
loss resulted

act
under ultra vires
4) Property acquired
of the company
is used to purchase some propen
Dre

the capital
If
be declared valid even houg
the
such property will
over
right
thecompany's
vires the object
of the company.
is ultra
the purchase

5 Ultra -vires Contracts can recover fro

to an outsider it

If a company has lent money an outsider lends

the contract is ultra vires. If

the debtor eventhough vires contract he has only the

under an uitra
money to the company
remedy of restitution.

Change ofObjects
13(8) of the Act, a company which has raised money
By section unutilised amount out of
prospectus and still has any
frompublic through raised the
shall not change its objects for which it

the money so raised

unless a special resolution is passed by the
money through prospectus
through postal ballot.
to be passed
company. The special
resolution is

the objects shall contain the

The notice of the resolution for altering
following matters:
(i) The total money received;
in the prospectus.
(1)The total money utilized for the objectssostated
(i)
raised through
(iii) The unutilized amount of the money
prospectus.
The particulars of the proposed aliteration or change in the
(iv)

objects.
(v) The justification for the alteration or change in the objects.

6
 (vi)
he nount proposed be utilized for the new objeci
to
estimated financial impact ofthe
the earning and proposed altera
cash flow of the company.
(Vi The other
relevant information which is necessary tor th
members to take an informed
decision on the propOsed
resolution.
(ix) ne place from where
any interested person may obtain a copy
of the
notice of resolution to be
passed.
AS per section 13 (8) of the Act, 2013 the details of the
resolution shall also proposed
be published in the
one in vernacular newspapers (one in English and
language)which is in circulation at the place where the
registered oftice of the
company is situated and shall also be placed on
the website of the
company, if any, indicating therein the justification for
such change.

The dissenting shareholders shall be

given an opportunity to exit by
the promoters and shareholders having control in
accordance with
regulations to be specified by the Securities and Exchange Board.

The Registrar shall register any alteration of the memorandum with

respect to the objects of the company and certify the registration within a
period of thirty days from the date of filing of the special resolution.

4) Clause
Liability
The Memorandum must contain a statement as to the
liability of
members of the company. The liability of members may be limited by
shares or unlimited or limited by guarantee. In the case of a company

,
limited by shares, it is to be stated in the Memorandum that the liability of
its members is limited to the amount unpaid if
any, on the shares held byy
them. In the case of a company by guarantee,it is to be stated in
limited

the Memorandum, the amount which each member undertakes to

contribute to the assets of the company in the event of its being wound
up.

47
 5) Clause
Capital
amount of Share

i
The Memorandum shall contain the
which the company is proposed to be registered and the divisin."la
Capital
divisior
the company is ofit
shares ofa fixed amount. The capital with which is
is called
Registered Capital or Authorised Capital or Nominal
minal te,, intg
registerey
Capital.

of Capital Clause
Alteration
a
By section 61 of the Act, 2013, company
limited by shar
ares
the Articles of Association
alter its share capital if so authorised by on.
authorised The
share capital can be altered by increasing its capital or
on
solidate and divide all or any part of its share capital into shares
of
larger amount or convert fully paid shares into stock.

An ordinary resolution shall be passed the general meeting

in
to
exercise the power of alteration. The Company must give notice of
alteration to the Registrar within 30 days (section 64)

6) and Subscription Clause

Association
and subscription clause of a public company, there
In the Association

should be at least seven subscribers and they should have

signed and it
should be attested by witnesses. In the Case of a Private
at company,
least two persons should subscribe and
put their signatures. The names
and addresses of the subscribers should be mentioned in this clause.
The Subscribers should have given an
undertaking to take shares from
the company. The number of
shares each subscriber has
undertaken to
take should be mentioned in this clause.
not taken the Eventhough a subscriber has
agreed share he will be liable to
shares at the time of pay the value of
of such
company's winding up.
Topic- XIV
Articles of Association
to be pro
Aicles of Association isanother document which is
along with the Memorandum for the registration of
a
Conpa
the arties
ecuon 5(1) of the Companies Act,2013 says that
company shall contain regulations for management of the Compary
that contairns rules ar
Atucles Association is a document
of
of the Cormpany
regulations relating to the internal management

By section 5( 6) of the Act, the articles of

a company
as may
shall e in

respective forms specified in Tables F.G,H, and J in Schedule 1,

I

of
to J are model articles
be applicable to such company. Tables F
association of different kinds of companies.
that is applicable to
Table F is the form of articles of association

company limited by shares. that is applicable t a

Table G is the form of articles of association
a share capital,
company limited by guarantee and having that is applicable to a
Table H is the form of articles of association
limited by guarantee and not having a share capital.
company that is applicable to an
Table I is the form of articles of association
and having a share capital.
unlimited company an
association that is applicable to
Table J is the form of articles of

company and not having a share capital.

unlimited

or any of the
By section 5(7) of the Act, a company may adopt all
contained in the model articles applicable to such company.
regulations

should be printed and divided into

The Articles of Association
and consecutively numbered. It must be signed by the
paragraphs
and the signatures are to attested by
subscribers to the Memorandum
witnesses.

shall contain provisions for the following

An ArticlesofAssociation
49
 purposes
1) Share Capital and Variation of Rights

2) Underwriting Commission

3) Lien on Shares
4) Calls on Shares

5) Transfer of Shares

6) Transmission of Shares

7) Forfeitureof Shares

8) Alteration of Capital

9) Capitalisationof profits

10) Buy-back of shares

11) General Meetings

12) Proceedings at general meetings

13) Adjournment of meeting

14) Voting rights of members
15) Proxy
16) Board of Directors

17) Proceedings of the Board

18) Chief Executive Officer, Manager, Company Secretary or Chief Financial
officer

19) The Seal of the Company

20) Dividends and Reserve

21) Accounts

22) Winding up
23) Indemnity In this
clause the right of officers of the company to be
indemnified out of the assets of the
company against any
incurred by him in liability
defending any
proceedings, whether civil or
which criminal, in
judgment is
given in his favour or in
which he is
relief is
granted to acquitted or in which
him by the court or
Tribunal will be
provided.

Alteration of Articles
By section 14 of the
Company can be altered Act,2013, the Articles of
Association a
not be by a special
only of
contrary to the resoluton. Alteration should
should
provisions of
Companies Act. Memorandum of
Association or thee

50
 The alteration of articles
of conversion of
by special resolution may be
to o
(a) a private company into a public company, or
(b) a public company into a private company

a private company alters its articles in such a manner that tney

If

longer include the restrictions and limitations which are required to

included in the articles of a private company under the Act, the company
shall, as
from the date of such alteration, cease to be a private company.

Any alteration having the effect of conversion of a public company

into a Private company shall not take effect except with the apprOval ot
the Tribunal.

Every alteration of the articles and a copy of the order of the Tribunal
together with a
approving the alteration shall be filed with the Registrar,
of the altered articles, within a period of fifteen days, who
printed copy
the same. Any alteration of the articles registered shall bpe
shall register
if it were originally in the articles.
valid as

Provisions for Entrenchment

The power to alter the articles is a statutory power and any provision
If the articles of
inthe articles making the articles unalterable is void.
aa

the company shall not alter its

company contain any restriction
that

will be contrary to the companies Act and therefore inactive.

it
articles,
section 5(3). the Articles may contain provisions for
However by
of the articles may be
entrenchment to the effect that specified provisions
are more restrictive than
altered only if conditions and procedures as that

applicable in the case of a special resolution, are met or complied

The provsions for entrenchment shall only be made either on

ation of a company, or by an amendment
agreed to by in the articles

allthe members of the company in the case of a private company and by

a special resolution in the case of a public company. If the articles
containingprovisions for entrenchment, whether made on formation or by
amendment, the company shall give notice to the Regiatrar of such

51
 provisons in the prescribed form,

1894),
(1894), it
Corporation
it
was
In Malleson V.National of
the company its poweer of
held

in the Articles depriving

tha
ha
provision
alteran
would be void.

A Company may
resolution.
alter

The provisions
Even
of articles
at any time by paso:
its
cannot

clerical errors
in
articles
be altered
should be
by
et
set
the articles
a
an speci
ordina r
right
by
by
a
resolution.

special resolution.
of a public C.
of conversion companu
the effect with the appro
having
take effect except
Any alteration
shall not
into a private company
Law Tribunal.
the National Company
vama.
Vardhavamar
Co. V. Vardha
and Publishing the powa.
Printing held that
In Mathrubhumi Court
the Kerala High by special
Ltd, (1992), articles
Publishing 31 to alter
under section
the Company of share holders in
conferred on the majority
be abused by
resolutionshould not
the minority.
order to oppress
which is
is The
illegal.
must not sanction anything The
The alteration of the Company.
for the benefit
must be made bonafide
alteration
or a fraud on the minority
not constitue an oppression
alteration must
shareholders.

British Abreasive Wheel Co. Ltd (1919), a company

In Brown v.

The majority of the shareholders were willing

was in financial difficulties.
if the remaining shareholders (about of the 2%
toprovide more capital a special
shares. The majority then passed
whole) would sell them their
resolution altering the articles so
as to enable 98% of the share holders
to buy out any other shareholder. The Court held that the alteration
an oppression
was not made bonafide for the benefit of the Company. It is
on the minority shareholders.

the of the existing

Thealteration must not in any way increase liability

52
 o
members to
contribute to the
agree in share capital of tho
writing.

e Company is a
club or association, of
promoing art, the formed for tho pa
articles may be altered to
higher rate. provide for subs

ation must
A company cannot
not
cause a breach of contract with an outsido
by altering the articles
justify a brean

.
o
as ern Foundaries Ltd V. shirlaw(1 940), the plaintiff was
appointed a Managing Director of the company. The appointmont wa
for 10 years. After 2
years, company was amalgamated with another
the
company and the new articles empowered the dismissal of the Managn9
Director. The plaintiff was dismissed from the service. He claimed
compensation for dismissal. The court held that a company cannot
justify
a breach of contract
by altering the Articles.

articles of association
It
is altered by a special resolution, the altered
articles is to be registered with the Registrar of companies. It is to be
done within fifteen
days of passing of resoluton. In case approval of

Tribunal is required, the copy of the approval order is also to be produced

along with the altered articles for registration.

Effect of Registration ofMemorandum and Articless

By section 10 (1) of the Act, the memorandum and articles shall,

when registered, bind the company and the members thereof to the same
extent as they respectively had been signed by the company and by
if

each member, and contained covenants on its and his part to observe all
the provisions of the memorandum and of the articles.

By section 10 (2) all monies payable by any member to the company

to the
under the memorandum or articles shall be a debt due from him
company.

53
 Topic-XV
"Constructive Notice" of Memorandumnm
Articles and
of a com
ofAssoCiation company
Tne Memorandum and the Articles
On arh
are
registration, they becom
y

of companies. in the
to be with registrar
registered for public inspection office of
are open fee.
fe.
public documents. They of the prescribed
on payment
Registrar of mpanies
is presumed to have.ead
with the company ed to have
dealing and is deemed
Every person of Association
and Articles This
This imputation.
imputation oe
the Memorandum documents.
of these Artict s
of the
contents
Notice of Memorandum and
knowledge
is known as Constructive
knowledge
of Association.
1934)
V. Ramamoorthy( that all deeds
Kotla Venkata Swamy required
of a company
of Association and a working
The Articles the Secretary
the Managing Director, a deed
deed of
of
should be signed by The plaintiff
accepted
befalf of
the company. The Court
director on and a working director.
the Secretary had
executed by held that the plaintiff
mortgage Court
invalid. The
declared the mortgage of Articles.
of the contents
notice
constructive

(1982)
Shibendra Nath Mukherjee of a
Nath Datta V.
Rajendra held that the Articles of Association
the Court
In this case, with a registered
document and anyone who deals
company is a public of the
notice of the Articles. By operation
have taken is
company must with the company
person dealing
notice, every
doctrine of constructive and Arti-
of the contents of Memorandum
presumed to have knowledge
cles of Association.

who
Notice operates against outsiders
The Doctrine of Constructive
from alleging
are dealing with the company. This doctrine prevents them
Memorandum and Articles of the
That they have no knowledge that the
vires. However this doctrine is
Company rendered a particular act ultra
Subject to the limitation contained in the principle of "indoor management".

54
 Topic-XVI
poctrine of lndoor Management:"Turquar le"

The Dctrine the doctrine

of Indoor
a
Management is limitation
of constructive notice. The doctrine of
Indoor Managemenas utsiders
nai
who are dealing with the company to assume that as far as the into
proceedings
or the
company are concerned, everything has been propethe
done. Any one who is dealing with the
company is bound to read
documents. is not
registered They must see that the proposed dealing
inconsistant
with the Memorandum and Articles of the company.
need not enquire into the reqularity of internal proceedings
However they
tne Memorandum and Articles. This limitation to the doctrine
as required Dy
notice is known as Doctrine of Indoor Management or he
of construcuve
Rule in Turquand's Case.

those
The doctrine of constructive imposes a duty upon
notice wnoIt
with company to know the constitution of the company.
are dealing
the company against outsiders. The doctrine of Indoor
tries to protect
on the other hand, allows those who are dealing with
Management,
is taking place within
ompany to dispense with the knowledge of what
cor
are closed to them. They can assume that the company's
the doors that
which are necessary to implement a contract have
internal regulations
With. The doctrine of Indoor management seeks to protect
heen complied
against the company.
outsiders

Bank V Turquand,(1856)
Royal British
R' lent 2000 pounds to a company. The Director of the company
a bond to R. The Articles of the company had empowered
them to
aave
issue such bonds provided they were authorised by a resolution passed
at a general meeting of the company.
by the shareholders

R' sueed 'T', who was the Managing Director of the company for

the amount due on the bond.

The company claimed that the resolution authorising the directors

55
 fo iasue bonde had not beon passod and thus tho bond
authority
wsiss

The Court held that 'R' could rocovor tho amount ot

the company on the ground that 'AWasontitled to
the
assu
boe

required resolution has beon passod. Tho Doctrin

Doctrine
of
Management is based on public convonionco and justice,

Exceptions to the Doctrine of Indoor Managoment

There are cortain oxceptions to tho Doctrine of Indoor Mana

They are:

1)Knowledgo of Irregularity

If a person who is dealing company has actual or constructi

with a
tivs
notice of the irregularities regarding the internal management, he is n
allowed to claim the benefit under the Doctrine of Indoor Management,

Howard V Palent Ivory Co.( 1888)

the directors borrow up

The Articles of a company empowered to

the
1000 pounds without approval of the shareholders general meeting.
in
to
had to obtain consent of
But for any amount beyond 1000 pounds, they
the company. He lent to the
the shareholders. 'H' was a director of
2000 pounds without consent of the share holders.
company an amount of
of the internal irregularity and
The court held that the director had notice
hence the company was liable to pay only 1000 pounds.

Sassoon and Co. Ltd,

T.R. Pratt (Bombay) Ltd. V. E.D.

The company A and company Bwere same

directors of

Company A lent money to Company B on a mortgage of

its assets.The

with. The court

procedure prescribed in the Articles were not complied
held that the lender had notice of the irregularities and hence the mort

gage was not binding.

56
 2) Negligenc

If a person who dealina with a company cou

h
is
ale
irregula
Management,
PO enquiry, he cannot claim benefit
ot

Indoor

aand Biharilal V. Dinshaw and Co.(1942)

Anar

The accountant of a to A. The

company sold company's property
nsaction was apparently beyond the scope of the accountant's
authority.
tran
eld that 'A' could rule. He
The court not claim the benefit of Turquand
too have made proper of the accountant.
ought enquiry as to the authority

3) Forgery

the
The protection of Indoor Management will not be available in
or
ase of forgery Committed by the company's officials. If the Secretary
cas
nas Torged signatures of directors in the share certificate
a company
to an outsider under the seal of the company, the outsider
and issued it
anot claim protection of Indoor Management Forgery makes a
cann
void.
document

57
 Topic-XVIl
Prospectus
ofaoompany,
darn raiso n60G.
ATtor tho ingorporation issuing Gocuritios (anay lmA
by tshares
the of ita buainese
TO conduet
debentures).

soduritios
may lssue known as icoffer"
"public offe or
Apubli company "proapectu",
topic); or
(a) to public through (soo noxt
placomont"
through "privato issue
(b) issue or a bonus
a rights
()
(o) through

lasue socuritios-
may
A private company issuo or bonus issuo
(a) by way of rights
through "privato placement".
(b)
to subscribe its
public
invite the general
A Public Company can
through prospectus.
shares and dobentures
in order to
the public company
is a document issued by
Prospectus debentures of the company.
make offersfor shares and
to
invite the public
to
to invite the public
cannot issue prospectus
A Private Company
its shares or debentures.
subscribe

for its shares or

the public to make offers look
investor can
inviting
A prospectus,
which a proposed
is a window through
debentures,
of the company.
into the soundness

defines the term

Companies Act,2013
Section 2(70) of the
"prospectus".

or any notice,
Any document described or issued as a prospectus
offers from the public
circular, advertisement or other document inviting

for the subscription or purchase of any securities of a body corporate

58
 can be called
"shelf prospectus".
a prospectus. It includes a "red herring prospectus
"
and

be daoa
a

nd

ctus and
signed by the directors
issued by a public company
shall

shall state the following intormatto

(i) Names and addresses of the registered office of the conpa
auditors, lega
COmpany secretary, Chief Financial Officer,
advisers, bankers and underwriters
Dates of the opening and closing of the issue
the separate bank
(ii)

(ii) AStatement by the Board of Directors about

issue are to bpe
where
transferred.
all monies received out of the

details of al
A disclosing
(iv) Statement by the Board of Directors issue.
of the previous
monies utilised and unutilised monies out
(v) Details about underwriting of the issue.
auditors and bankers to the issue.
(vi) Consent the
of directors,
and issue or
(v)
(vii) Procedure and time schedule for allotment
securities.

(viii) Capital structure of the company.

Main objects of public offer.
the company and
(ix) its
(x) Main objects and present business of
of the project.
location, schedule of implementation

(xi) Risk factors specific to the project

(x)
(x) Gestation period of the project.

(xi) Extent of progress made in the project.

Deadlines for completion of the project.
(xii)
a Government
Any or legal action pending or taken by
litigation
(xiii)
the last five years
Department or a statutory body during
the company.
against the promoter of
Minimum subscription and amount payable by way of premium.
(
(xiv)
directors appointment, remuneration etc.)
(xv) Details of and
of auditor with respect to its profits and losses
(xvi) Report
assets and liabilities

director or proposed
A copy of the prospectus duly signed by every
for the
director must be delivered to the registrar, before its publication,
59
 registration. On the face of the prospectus it
should
ould be
copy of it has been delivered to the registrar
for
prospectus should be issued within 90 days after thest

c
after the mentiones
copy was date
egistration
delivered to the registrar tor registration on

a is issued without a copy

If
prospectus
the Resg o
delivered to
for registration, the company and every person responsible
or egista
fo.

of to be punished. The company shall

prospectus are liable be
thousand
with fine which shall not be less than fifty rupees
rupees but
but punishatls
which
Every person who is
reoponsibleh
extend to three lakh rupees.

issue shall be punishable with imprisonment a term which

for a term ma
which may h
oxtere
shall not be less than
to three years or with fine which
fifty
housand
to three lakh rupees.
rupees but which may extend

Securities to be dealtwith in Stock Exchanges

40 of the Act,2013, every company making public offe.
By section
an application to one
making such offer, make
or more
shall, before
or exchanges and obtain permission for the
recognised stock exchange
with in such stock exchange or exchanges
securities to be deait

monies received on application from

of the Act, all
By section 40(3)
to the securities shall be kept in a separate
the public for subscription
be utilised for any purpose
bankaccount in a scheduled bank and shall not
other than
of securities if the socuritios
for adjustment against allotment
(a)
havebeen permitted to be dealt with in the stock exchang specifiod in the
prospectus.
the
(b) for re-payment of monies within the time specified by
from applicants in
Securities and Stock Exchange Board, received
for any other reason
pursuance of the prospectus, where the company is
unable to allot securities.

any default in complying above said provisions, the

with the

companyshalbe punishable with a fine which shall not be less than five
lakhrupeesbutwhich may extend to fifty lakh rupees and every officer of
thecompany whoisin default shall be punishable with imprisonment for

60
 atermwcn nmayextend to one vear. or with tine which shall not ba o"
than fty
fift thousand rupees but
whioh may xtend to three lakh rupees, or
with both

is-statement
Mis-state in Prospectus and
the Consequences
Golden Rule ot Prospectus)

Prospectus window through which an investor can oon

is the

soundness a Ot
the
the company's venture. lt must give investors a Comp ote
icture oof company's activities and its position. The prospectus must make
of
picture
est disclosure of all material and essential of the
particulars company

A Prospectus is a document which gives information to the public as

thecompany's soundness. The Prospectus must be full, frank, and

disciosure of all material facts with scrupulous accuracy. No
onest disch
honest
terial
fact should be mis-stated or withheld. Greatest care should be
mater for the
in its preparation. The persons
en in who are responsiblee
taken
n and issue of prospectus should not only state all relevant
preparation is the "golden rule" as
but also not to omit any material facts. This
cts
fact of
to the
framing prospectus.

This rule was down in New Brunswik

laid & Canada Railway
nd Land
Lan Co. V. Muggeridge( 1860).
and

Liability formis-statements
in a prospectus gives rise to civil as well as criminal
A Mis-statement

liability.

1) Civil Liability
A person who was induced to subscribe shares of a company on the
faith of a mis-statement in the prospectus has four-fold civil remedies.

a)Recission of Contract
Any one who purchases shares from a company on the faith of a
in the prospectus can apply to the court for the recission
mis-statement
of the contract.

61
 Ross V. Estate investment Co.(1868)
The Prospectus of a company contained a statement
that
that
company had a th
contracted for purchase of But in fact,
property. But,in tact, the,
ther,
Was only negotiation for such purchase. The Court held that it was a mi
mis
tatement and a person who purchased shares on the faith of
the

prospectus can file a suit for recission of the contract.

Henderson v.
Lacon(1867)
The Prospectus of a company stated that the directors and their
the remaining shares
Tiends had subscribed large portion of the capital and
The fact was that the directors had only
only are offered to the public. could rescind
The Court held that the subscribers
subscribed ten shares.

the contract.

Rex V. Lord Kylsont(1932) it paid dividend every

a company stated that
A Prospectus issued by
of depression). The Company
paid
1921 to 1927 (years
year between at a
the company was running
of reserves. Actually
dividend out past of material
The Court held that there is supression
lossduring that period. The shareholders could
rescind
amounts to mis-statement.
fact and it

the contract.

for Deceit
(b)Damages company on the faith
of
a person is induced take shares from a
to
sue the company for
If

a mis-statement in the prospectus, he can

compensation.

(c)Suit against Directors for Compensation

A person who has taken shares of a company on the faith of
miS
statement or fraud in the prospectus can claim compensation from directors
who are responsible for the issue of the prospectus.

Derry v. Peak (1889)

In this case the directors made a mis-statement without fraudulent
intention and the Court held that since there is only mis-representation,
the directors are not liable to pay compensation.

62
 WA

eutore even
to he AGi mpag
()Ltaby mmaGant meepGGniain
Hy vitue of undar
Sestin att of
and
and eve'y
eve eootlon as
at the he
D Gom
Gonpanise Aot,g019, the dirGore
soapectuBpetaonDromotors
proapectus are llable and
Gperis
etallh to oxperto)) resonsinle torhe issue
the
the o
taln or Talbo
talae siat pny
Y
npensalion
componsalion to th6 suhseriiher of shares on
statemont in he
prospoclB
(2)Crininal
Linbility

Geotion 34 ot the
the iaue of Opanies Act,2013
Companies AGt,2013 presories punishmen To
prospeotus
fEvery person iho
reBponaible for the alning
ia oontaining untrue
untruestatements,
issue of statere
atatement shall be O prospectus containing
containing uuntrue or nislesdirnG
18 provicded
"aable for the
punialhable traua The puishman
the offence of fraud,
for fraud in
section AA7 ot the Act. By sectiorn 447
who i TOuna to be guilty at p***"
of trad he Qunishable with imprisonmer
slialt

a
be leis
monthe but which may G/1ena 1 t"
not
which tN than siv
ana tsna
hall also bo
fine which shall not be lsse the
years liable to
amount involved in the fraud, but extent to three times the
which may
amount involved in fraud,

63
 Topic -XVill
Private Placement

A public company may issue securities

or
(a) to public through "prospectus", known as "public offer
or
(b) through "private placement";
issue or a bonus issue.
(c) through a rights

A private company may issue securities

or bonus issue
(a) of rights issue
by way
(b) through "private placement".
or
means any offer of securities
The expression "private
placement"
of persons by
a company
securities to a select group
invitation to subscirbe issue of private placement
offer) through
other than by way of public
offer letter.

a company may make privatep

By section 42 of the Act,2013, offer letter.

of a private placement
placement through issue

of its securities unless

a placement
A company shall not make private the
has been previously approved by
securities
the proposed offer of of the offers.
a resolution for each
by special
shareholders of the company,
shall not
or invitation to subscribe securities
The offer of securities in a financial
in the aggregate
more than two hundred persons
be made to or to employees of
institutional buyers
offer made to qualified
year. Any be
stock option shall not
under a scheme of employees
the company The
the limit of two hundered persons.
considered while calculating
would be reckoned individually for
restriction of two hundered persons
shares or debenture.
of security that
is equity shares, preference
each kind

All offers shall be made only to such persons whose names are
The offer
recorded by the company prior to the invitation to subscribe.
should be made to them by name. It should be accompanied by aan
application addressed to the person to whom the offer is made. It should

64
 e sent to hinn othor in
olootronio mode within thirty days O
writing or in
acordin9 the
reo
namea of uch
be with an inveatmont pornons, The value of such offor por
hall sizo of not loss thaan pO
(ace valuo ot the twornty thousand rupees
soouritioa.

A comploto rocord
o privato placement offors shall bo kopi Dy the
pany and complote information
Co about such offer shall be filed
a poriod wiu
the Registrar withi of days
thirty from the date of making private
offer.
placement

The payment to be made for subscription to the

socurities sha De
om the bank account
made from of the person subscribing to such securities
the company snall keep the record of the Bank account from where
and for subscription have
mants fo
such payments been received.

in leu or Prospectus
Statement
ection 70 or no ompanies Act. 1956 dealt with Statement in lieu of

Prospectus.
or a Fublic
If the promoters Company were confident of obtaining the required
share to their frio.
friends and relatives, no prospectus need be issued
capital byy issuing
In such a case, they had
the Dublic.
to prepare a draft prospectus containing the
tnformation required
tor
a actual prospectus. This document is called Statement in
A cOpy Ot it
ought to have filed with the Registrar before three
liat of Prospectus.
of shares. Such a statement should not contain any false
days of any allotment
lieu of
a Statement in prospectus contained any untrue statement, any
n
If
atement.
who authorised the delivery of the statement in lieu
prospectus for of

ragistration was punishable imprisonment for a term which may extend to two
with

with fine which may extend to fifty thousand rupees or with both.
years or

65
 Topic-XIX
Shelt Prospecetus

Section 3t of the CompaniesAct, 2O13 provicdes tor sling oft

S
a
atus wih the Repistrat

prespectus in respect of which

Seitrospectus maans therein are issued for subsorins

r r
suities orclass ofsecuities noluicss

rosgectus
sues over a certain peiod wthout issue of a tu

the issue of securities is thas

The general prineiple regarding
apublic omany otes to the pubie
to subscribe its securities
whenever b
sue a Butin tha case ofnotified companies,
iehas t prospectus on every
the requirement ofissuing prospectus
ling a sheif pruspectus.
sue ot sacuibes can be avoided

of companies,as the Securities and Exchange

cassas
Anyclassor ions in behaf, may file
this behalf,
in this
regulations
file

(SES)may provide by
Soard ofIndia of companies.
with the Registrar
a SiheilfPrespectus
not be
with the Registrar shall
a shelt prospectus
of offer oi securites
by
A company filing afresh at every stage
prospectus A shelf prospectus
requiredto file of such shelf prospectus.
of opening of the
first
theperiod ofvalidity the date
within
one year from
shallbevalid for
a period of
under that prospectus.
ssueofsecurities
an information
shall also file
A company filing ashelf prospectus to new charges created and
facts relating
Memorandum on all material of a second or
to the making
changes n the financial position
prior

under the Shelf Prospectus.

When an
subsequent offer of securities is made,
every time an offer of securities
ntormation memorandum is filed,
with the shelf prosoectus shalH
be deemed to
Suchmemorandum together
e prospec
 Topic -XX
Red-herring
Prospectus
Section s2 of
the
Companies Act,2013
provides for Ssu

o
herring prospectus. It
means a prospectus
complete particulars of the which does
therein. o quantum or price
price of the securities included
s
A COmpany
proposing to make an offer of securities may
red-nerting prospectus prior to the issue of a
prospectus. A company
to isSue a
proposng red-herring prospectus shall file it with the Registra
at least three days prior to the
offer and opening of the subscription ist.

Upon the closing of the offer of securities, the prospectus statung

therein the total capital raised, whether by way of debt or share capital,

and the closing price of the securities and any other details as are not
included in the red-herring prospectus shall be filed with the Registrar
and the Securities Exchange Board of India.

A red-herring prospectus shall carry the same obligations as are

a prospectus and any variation between the red-herring
to
applicable
as variations in the
prospectus and a prospectus shall be highlighted
prospectus.

Topic-XXI
Issuing Houses and Deemed Prospectus
of prospectus are
The relatig to preparation and issue
provisions
and persons responsible for the issue of
most stringent. The company
In order to
for mis-statement in the prospectus.
prospectus are liable
a company may allot the whole of the
evade the onerous requirments,
an intermediary known as 'Issuing House' without
shares or debentures to
or debentures to the public. The Issuing House then
offering the shares
the shares or debentures to the public by means of an advertise-
offers
the strict sense, is not a prospec-
its own. The advertisement, in
ment of
Thus the company can evade the rules appli
tus issued by the company.
67
 cable to the issue
of prospectus and the liability resulting fro
statements. me
in order to avoid such practices,
section 25 the
of the c
3 provides that an 'offer for
sale' advertised by

company T Ho
issued by the
an Compani
Is8uin
uing
snall be deemed to be a Prospectus
Thus
and promotersrs for mie
mis
its directo.s
responsibility of the company, the company's prospan
as if it is th
ment in the advertisment shall be same

Topic-XXII
Global Depository Receipts
a speCial resolution
after passing in
By section 41, a company may,
receipts
in any foreign country,
ES general meeting, issue depository

"Global Depository
the expression
Section 2(44) of the Act defines
in the form
of a depository receipt, by
instrument
Heceipt It means any outside India and
created by a foreign depository
whatever name called, receipts.
a making an issue of such depository
authorised by company
in the
for such issue are provided
The manner and conditions

Issue of Global Depository Receipts) Rules, 2014.

Companies (

is eligible to
A company may issue depository receipts provided
it

of the Foreign
do so in terms of the "Scheme" and relevant provisions
Exchange Management
Rules and

the Foreign Currency Convertible

The word "Scheme" means
Rgulations.
Bonds and Ordinary Shares Through
m) Scheme,1993.
(
epository Receipt Mechanis

The depository receipts shall be issued by an overseas depository

shall be kept
bank appointed by the company, and the underlying shares
in the custody of a domestic custodian Bank.
The underlying shares shall

be issued the name of the overseas depository bank and against such
in

shares, the depository receipts shall be issued by the overseas depository

bank abroad. A holder of depository receipts may become a member of
the company and shall be entitled to vote as such only on conversion of

68
 dePostory raceipts into
the
in the underlying shares after following proceduro
provided Scheme and of the Companies Act. he
oceeds of issue of depository provisions
proceeds
in India or either be remitted to a bani
receipts shall either
ccount in deposited in an Indian bank
ank having operations operating abroad or any
reign
foreign bar in India
with an agreement that the foreign
ank shall take responsibility for
furnishing all information which may Do
quired and in the event
of a
required sponsored issue of depository receipts, he
eeds of the sale shall be
proceebd credited to the respective bank account of
the shareholders

Topic XXII|
Share Capitai
The words share Capital'the money raised
refers to y
issue shares. The Share
A Company
Shares. limited by shares can
of the
pital of
Capital
th
company can be classified under several heads. They are
the following:-

1) Nominal Capital orAuthorised Capital or Registered Capital

In the Memorandum of a company, there wili be provision
for the
shares. This
ximum capital which the company can collect by issuing
maximum
is known asAuthorised / Nominal Registered Capital.
apital
cap

2) Issued Capital
It is the aggregate nominal value of shares which are offered to the
for subscription.
oublic

3) Subscribed Capital
It is that part
of the issued capital which is taken up by the public.

4)
4) Called up Capital
It is the aggregate
of the amount called up on the shares actually
subscribed.

5) Paid Up
Capital
It is that part of the subscribed capital which is paid up by the share
holders. 69
 6) Uncalled Capital which is not
not yet
yet
1s that part of the subscribed capital calle
up

7) which can be catt

Reserved Capital capital alled
the uncalled only
his is that part of
of the company.
the time of winding up
the Sharo Ca
Act,2013 Capital
of
43 of the Companies
By section of two kinds, namely-
shall be
limited by shares
Company
Capital limited by shares
(a) Equity Share capital
of a company
all share
It means

share capital.
than preference
differential rights as to
or with
with voting rights
It may be
dividend or voting.
Rights
Differential
to Equity
Shares With shares with
Rules applicable shares can issue equity
by
A company limited
or voting.
as to dividend
differentialrights

Rule 4 of the Companies

(Share Capital and Debentures)
for issuing equity
to be satisfied
the conditions
prescribes They are:
Rules, 2014 to dividend or voting.
right as
shares with differential

of the company should authorise

(i) The Articles of Association

the issue of shares with differential rights.

should be authorised
(i)The issue of shares with differential rights
(ii)

y an ordinary resolution passed at

a general meeting of the

areholders. If the equity shares of a company are listed on

a recognised
shall be
ckexchange, the issue of shares with diffe rential rights

oved by the shareholders through postal ballot.

ii) The shares with differential rights shall not exceed twenty-six

0
 shares
shares with
ith
oaal post-issue
post-issue
differenties
differential
paid up equity
equity share
share capital
pital including equy
including equity

"
rights issued capita
at any
point
(iv) The
distributable profit for
company should have
the last
three
consistent track record o
years
(v) The
company y
statements and annual should not not have
have defaulted in filing financial
returns
GTurns detau
preceding the financial
precedi for three financial years immediateiy
three
yar year in
in financia
which it
which to issue such shares.
is decided to
it is
1
(vi) The
company has "as no subbst of a
red
declareo
declared dividend to
to its subsisting default in the payment
or redempnption of its shareholders repayment of its matured deposits
nareholders or rer
GTerence shares or debentures that have become
due for redemption orpreference share
payment of interest on such depos*
of payment of
dividend.

The
company has not defaulted in payment of the dividend on
(vii)

shares
preference
or
Tepayment of any term loan from a public financial
state level
institutiOn financial institution or scheduled Bank that has
become repayable or interest navable thereon or dues with respect to
statutory payments relating to its employeesto any authority or default in
the amount in Fund to the
crediting Investor Education and Protection
Central Government.

(vii) The company has

not been penalized by Court or Tribunal
during tne last three years of any offence under the Reserve
Bank of
India Act,1934,
the Securities and Exchange Board of India Act, 1992,

the Securities Contracts Regulation Act,1956, the Foreign Exchange

such
Management Act, 1999 or any other special Act under which
companies being regulated by sectoral regulators.

The company shall not convert its existing equity share capital with
differential voting rights
voting rights into equity share capital carrying
and vice versa.

The holders of the equity shares with differential rights shall enjoy

71
 all other rights etc., which
such as bonus shares, rig the
of to the differentialrights w hoj
equity shares are entitled to, subject hoiders
with
such which
shares have been issued
rential rights
rights, the

fa equity
with differe
shares
of the shargss soRegister gi,
Ompany issues the relevant particulars
company
all issusd
OMembers shall contain
shareholders.
of the
dlong with details

ShareCapital
of the company li nited
(b) Preference
issued share capital by
of the right with resno..
ct to
It is that
part a preferential
a fixed amount or an ame
or would carry
carries
shares which either as
of dividend, be free or subices
(i) payment rate, which may either bjeo
at a fixed
(i)

calculated
and of capital
to income-tax; up or repayment
of winding
in the case
(ii)
repayment,

Share Capital
Alterationof theAct,2013)
61 and 64of the company may be altered if the power
to

(Sections of
The share capital of Association of the company.
If

the Articies
is given by
the capital a special resolution, the Articles
alter Articles, Dythe
is given by alteration of
nosuchpower a prOVIsion allowing
first and incorporate
is to be altered

capital.

the alteration of capital, the

in the Articles for
be altered in several ways. may
If there is provision It be-

share capital of a company may

the authorised share capital.

1) By increasing shares of larger
share capital into
any part of the
2) By consolidating
amount.
stock.
By converting paid up shares into
3) fully

the company
The power to alter the capital must be exercised by
in the general meeting. The company
by passing an ordinary resolution
has to give notice of alteration of capital to the registrar within 30 days.

72
 (Section 66 of the
ShareCapita
Act,2013)
Section 66 of the
Act,2013, dea
eals with reduction of share capital.
A
Company
od limited by
by
sharas can reduce its Share Capital Dy a
shares
Special resolution,
ofthecompany should
There should
be provision in
in the
the Articles of Association
ap
allowing such Artici
reduction
The Coorompany may
reduce its methods
share capital in the following
1)
xinguishing
in
or reducina the liability on any of its
snare
respect of share
capital not paid
up
2) y wting or cancellina anv paid up
off which is lost o
capital
unrepresented by available assets.

3) payirng which in excess of the wants of the

off capital is

company.

ACOmpany pass a special resolution for the reduction of

shall first

share capita.. Thereafter it has to apply to the National Company Law

Tribunal tor an order confirming the reduction of capital. The Tribunal
must give opportunity to the creditors of the company to object to the
reduction of the Share Capital. The Tribunal can settle a list of such

creditors who raised objection. If a creditor does not consent to reduction,

the Tribunal may securehis interest. After securing the claims of creditors
the Tribunal may confirm the reduction. The order of the Tribunal
confirming the reduction shall be produced before the registrar
and a
copy shall be filed with him for registration.

73
 Topic-XXIV
What is meant by "Share'? of
What are the different types Shares ?
the the Co
"Share Capital" of the
in
"Share" is the share company.
ble uniteny Tho
divided into certain indivisible units of
a Company is a
capital of The share(s) of a fixey
called 'shares".
units are
amount and such
a company shall be movable property.

Shares
Types of
of two types of share.
Act, 2013 authorises the issue ares,
The Companies
They are-
1) Preference Shares.
Shares.
2) Equity

Shares preferential right

1)Preference shares which enjoy
shares are those
Preference of capital the winding up
on the of

dividend and repayment

to
with respect

the company.

of the following types:

Shares may be
Preference

PreferenceShares Shares have a right to

claim
1).Cumulative Preference
Cumulative
The holdersof is no profit, the
If in a particular
year, there
in all years.
fixed dividend out of the next year's
can claim that year's profit
preference shareholder
shares goes on accumulating
till it

on these
profit. dividend payable
The
is fully paid off.

2)Non-Cumulative Preference Shares

holders are entitled to get
a fixed
Non-Cumulative Preference share
is no
in a particular year, there
dividend out of current year's profit.
If

the next year.

they cannot claim the dividend
in
profit,

3)Participating Preference Shares

entitled
The holders of participating preference shares are not only

74
 fixed rate.of dividend but also to share in the surplus of profit whic
to after the claim of the
main equity share olders are met.
rem
a-Participating Preference Shares a
4) The holders of non-
shares are entitled to
participating preference of the
rate of div
ividend. They do not profit
fixe share in the surplus
any along with equity share holders.
company

onvertabl Preference Shares into

5) The holders of these shares hav a right toconvert them
shares
sha
within a certain period.
equity

ertable Preference Shares

6) convert shares into
The holders of these shares have no right to

equity.

and Rede
Redemptionof Preference Shares
ISSueand a share canital mav if so authorised
by its articies
Acompany naving the following
shares. In order to issue preference shares,
preference
prefere
should be satisfied.
issue
by passing. a
onditions
(i)
neissue of such shares is to be authorised

resolution in the general meeting of the company.

ial res shares,
special such issue of preference
The company, at the time of
(ii) hares issued
shares
sisting default in the redumption of preference
ha5 no subsi:
no shares.
has
and
and inin the payment of dividend due on any peference
rlier
rlier

shares only on the terms on

A company may redeem preference its

were issued. The preference shares may be redeemed

they
which
at a fixed time or on the happening of
a particular event;
(a)
annd
at any time at the company's option;
(b)
at any time at the, shareholder's option.
(c)

2)Equity Shares

Equity Shares are those which are not preference shares. Equity
rights
Shares do not carry any preferential right. It may be with voting

75
 or voting.
or with differential rights as to dividend

Nature of Shares orDebentures the shares or debentiir.

By section 44 of the Act,2013,
es of
in the manner nre
a
transferable comp
shall be movable property rOvided
by
articles of the company.

Topic-XXV
Sweat Equity Shares
Act, 2013 defines thee
of the Companies expressi
Section 2(88) ssion

"Sweat Equity Share"

means equity Shares issued by

h

Shares"
"Sweat Equity a discount or for consideras.
or directors at
to its employees
company know-how or making available rights in the
cash
other than for providing
property rights.
nature of intellectual

can be issued on.

54 of the Act, Sweat Equity Shares
By section
on
the following conditions:
satisfying

shares is to be authorised by a
1. The issue of sweat equity in the general
passed by the company
special resolution
meeting.

current
the number of shares,
2 The resolution should specify
if any, and
the class or classes of
market price, consideration,
shares are to be
or to whom such equity
directors employees
issued.

the
3 Not less than one year should have been elapsed since
the company had commenced
its business.

restrictions and provisions as are applicable

The rights, limitations,
to the sweat equity shares. The
to equity shares shall be applicable
with other equity
holders of such shares shall rank pari passu (equal)
shareholders

76
 TOpic -XXVI
Bonus Shares
Sectio s3 of the Act,P013 deals with issue of Bonu
EBy section
63( 1), a company may issue paid-up bonus nharo
ts members out of -
fully

its its treereserves

() the security premium account; or
(ii) the capitat
redumption reserve account
reserves
No issue ot bonus shares shall be made by capitalising

reated by the revaluation of assets.

re
Or
TosoY
tos(?) acompany shali not capitalise
its profits
ES
ot issuing fully paid-up bonus shares uniess*
or the putpose
(a) it is authorised
(a) by its articles authorised
nas, On the recomnmendation ofthe Board, been
(b)
in general meeting of the company

() t nas not defaulted in pavment of interest or principal

in respec

deposits or debt securities issued by

otfixed
(d) *
or
O detaulted in respect ofthepayment
the employees, such as, contribution to provident
fund,
of statutory dues

gratuity and bonus;

the date oft
the partly paid-up shares, if any outstanding on
(e)
allotment, are made fully paid-up.

decision of its Board

The company which has once announced the same.
a bonus issue, shall not subsequently withdraw the
recommending

The Bonus Shares shall not be issued in lieu of dividend.

77
 Topic-XXVII
Rules to be followed for the Allotment of

A publie Company can by l8suinga prospect

Sharo
shares. Application
tor shares ia an offer tom ite

.
subscribe its pun
the
The offer may be accepted by th
member of the public.
The slhares aro then said
the pan
o
the offerOr.
to
becompany
communicated to otod toan
applicant.
The allotment creates pon H
a binding contract between
the t
The following are the rules governing the firgat applica
oan
and the company.
allotmon
of Shares.

1) Minimum Subscription
of any socuritia.
39(1) of the Act,2013, no allotmernt
By section
shall be made unles.
offered to the public for subscription the
company
the prospectus as the minimum amount has
amount stated in

the sums payable on application for the amount so staatod

subscribed and by cheque or othe.
to and received by the company, or
have been paid
instrument.

be made unless the minimum amount

The first allotment shall not
been subscribed. The amount
of minimum
has
for initial expenses
required
in the prospectus.
The application money
has to be stated
subscription
share capital
should be received by cheque or other
on such subscribed
shares shall not be allotted
If there is no
minimum subscription,
instrument.
to the applicants.

2) ApplicationMoney
for each share shall not be less
The money payable on application
of the nominal value of the
Share. An allotment shall not be
than 5%
received by cheque or other
money is
made without the application
amount received from the applicants for shares shall be
instrument. The
Bank.
deposited in a Scheduled

If the stated minimum amount has not been subscribed and the sum
payable on application is not received within a period of thirty days fromn
thedate of issue of the prospectus, the amount received shall be returned

78
 a perirlod of
fifteen
and ir suGh
within
days trom the olosure of tie issu
oney la not no ropaid
money within uoh
aree
re officers in detault period, tho direotors of the Gormpany
who shall jointly pay
unt with
with intorest at and sovorally be liabls to
amount tho rato of
on per oont per Annum
tifteon

Allotment of
Shares without out minimu" subsGription
minimum
recoiving
rocoiving
is

gular. Irregular allotment of voidablo n

irrogular,r shares mad by a Gompany is v
or io applicant. The directors are liable to aompensatg thø
the option
and the n
mpany alloto for loso.

3) Opening of tho
Subucription List
When iharos of a company are offered to the public by
issuin9
ctus, no allotment is to of the 1ifth day
be mado until tho beginning
prospectus, the prospectus.
the date of
the It is known as the oponing of subncription
from
st. If the allotment is made bofore the opening of subsGriptton

ors responsible for it shall bo liablo to fine.

directors

Stock EXGDAnG9
4) SharOS1obe doalt in one or more Rocognisod or a
by the issue
A Company intending to offar shares to the public
or more
an application to one
spectus shall, before such issue,mako shares in
d stock exchanges for permission to deal with those
prospectus
recognized
Stock Exchange.
that

should given. be An
Prospectus the name of the exchange
In the within
is not granted
of shares made will be void if permission
allotment
from the closing of the subscription list.
10 weeks

the company does permission or an application

not apply for
If

1s rejected, the company shall repay within

8 days, all
for permission
for
If the company
fails to repay the
received from the applicants.
moneys
Within 8 days, it will be liable to pay interest.
money

5)Returns of Allotments
is to be made by a resolution of the Board of Directors.
An allotment
time. The allotment must be
Itmust be made within a reasonable
Allotment must be aboslute and
communicated to the applicant.
79
 666

res in
dornpany spedifirig

Mdor tho dommon doal (if

anY
Ad&oMitead SHiaf beiddodd

AoMBO dortifcat
ouplioate Cortitioate

any unaro
If
cortiticate is worn out,
e ia no further detaced,
space on the back tor endoraement ot transter, then
there
Up production and aurrender back
thereot to
endoreen
the company, a new
to the
certificate

may be issued in lieu th compa

thereot

f any to the
proof thereof
certiticate is lost
upon
or destroyed then

nd
of the estroyed then
u such indemnity as the
afaction
satiste oompany and on
on oxecution
oxec of
mpany deem adequate, a new thereof shall
be given.
certiticate in lieu

tor
New cortiticate

certificate
will
ued
be issued only
only on
on payn
paymont of twenty rupees
each

npliction of Doctrine of Estoppel

of estoppels
thecompany creates two kinds
ainst the company.They are:

1)Estoppel astoTitle name or

P
ITa company issues a share certificate in the
not entitled to those
not afterwards be alleged that the person is
cannot
shares.

2)Estoppel asto Payment stated in the

the amount
A company is estopped from alleaing that
If the share
certificate
certificate as being paid has not been paid.
share
share afterwards allege
that the shares are fully paid the company cannot
stated
that they are not fully paid.

the
If the share certificates are forged one, the company can deny
a case.
The doctrine of estoppel is not applicable in such
liability.

Problem had
4000 shares to 'B' for sale. "B'
B' was a share broker. C entrusted
his name.
and applied to the company to transtfer the shares
in

forged C's signature

a new share certificate in the name of B. B
sold these
The company issued

81
 Pettarthe cngy 2LT
iliiet

TeCompany is motboumd
aasnaran
of sitaras
e sares inthe
gof
the mame
fai of sihare
share ce
s ar
me shares E
.
e
f
icate
eo
purchaser
seing a bonafide
cf mar
claim vaiuE
hee
y
3suBd the comcany necan
Tme company
dey
cannot deny
he seal cf the ce
ice the company. under company

ause e
from
simare ceificate
sssEd
a
andtisnot fored
ne

Topic-Xix
Securities at
a Premium
or
Shares ata Premium
anc
can isssues securites(shares
Bysacicna 78, acompanyat a price higher than their mominal
value
ie,
at premium,
debentures)
at is.
Era s Rs.100-Fhe company
ssues

THenominal valiueof a
share
issusd
are at a premium
120,the shares
suc
need not authorise
orArticles ofAssociation account
The Memcrandum to a separate
so received must be transferred
issue. The premium
Premium Account'
called the Securites

can be utilised for the following purposes:

ThePramium socollected
Bonus Shares.
1 Forissuing fully paid
expenses
2) To write of preliminary
Towrite f expenses,commssion ordiscount on
theissue of
securties or debentures.

To pay premium ontheredumption ofredeemable

preference
4
shares or of any debentures of the company.

2
 Topic-XXX
hare at a
Discount
Section 53 of the a
ie., for a
price
nes
Companies Act,2013 prohibits issuing
shares
fiscount, iesser than
an the nominal value.

By section a conpany
53(1),
shall not issue s
ere is an shares
However, exception. A co can issue sweat equity
company
a discount to its directors or employees.
at

By section s3(2)any share at a discount price

issued
ISsued by
by a company
comp
be void
shall
be
a company Issues shares at a discount, the company shall
If
but
with fine which one lakh rupees
ishable Snall not be less than
is in default
h may extend to five lakh
rupees and every officer who
which six
which may extend
bepunisaDie with imprisonment for a term
but
with fine which shall not be less than one lakh rupees
shall
Sha or
nths
h may extend to five lakh rupees or with botn.
which

Topic-XXXI
Calls
on Shares
to
to
a demand
is made a to its share holders
A "call by company share. t
whole or part of the balance remaining unpaid on each
the
of Directors at
a
pay
made after a of the Board
s
is to
be
be passing resolution
in accordance
of the Board. The "call" must be made strictly
ngeting
mee
of the articles.
the provisions
with

make the nature of trust and must be

The power to calls is in
the directors make
bona fide for the benefit of the company. If

axercised
to pay without clearing their own dues on
a"call upon the shareholders draw
the directors make a "call" only to enable them
to
the shares or
if

is no good faith.
theirpay, there

83
 Example
Company X
had no money
to pay directors' fees

company's bank account the a.The

into the amount
Thereupon, paid as fees. The ci.. directg.
took the amount
due on their shares and rema

exercised their power

to make a
ectors
cal bona fide and for the ben remaii
have
have e
directors of the amount ro ne
by the unt ot
company. So
the payment
them from the liability ning
remaining
on their shares would not discharge au topay
their shares.

Topic-XXXII
Lien on Shares

A company has a first

and paramount
on every share
hare not
lien ne

or not)
be (
(
presently payable
for all monies (whether The company'e
Tully paid share), of that share. company's lien
in respect
at a fixed time, of such shares
or payable dividends payable in respect
all
on a share extend to

on which the company has a lien

an.
sell any share
The company may which the lien
respect of
a sum in
the share only if
can sell
The company days notice
Before selling such share, fourteen
exists is presently payable.
the holder demanding payment,
in writing should
be given to registered
name should be
such shares, the purchaser's
sells
If the company

registered
as holder of the shares.

Topic-XXXIli
Forfeiture of Shares
fails to pay any calls
When a person to whom shares are allotted
to sue him for the payment or it
on his shares, the company may proceed

forfeit his shares.

may
of a call only if speciall
Shares can be forfeited for the non-payment
the Board of Directors by the Articles.
power is given to

can forfeit the shares of a shareholder for the non-

A company
of a call, if the following conditions are satisfied:
payment
84
 )h Greitst noi
etittyisit
paymet friist
miust ts
te #dtittised try fi6 Ai6t6s
#itittisoo

i otiGG fi the
dauiting shars
hidsr
ties 66tioatiy triut so
ie
with interest, mst gis tiM(squiring ths paymsit mut
gtalethep5siiity
afe th 16 thian 14 dnys tirrie
torfeitufs for th6
faiturs te yay itrit thio pariod
3) 11 ths
detauin sharsnrs holdsr
the speoified time, ths
doss rin
ieldor doss pny ths arnunt witvir
fio pay
dirsotors must passa rssolution forfoifing thes
hafG5,
shar6s, rssouticn is nos
restlution not passsd, ts
fort6sitiurswil tsirvaHC

and
rnd
A) Ths dirsotors
A)
for ths
thhe bensfit of
must 6x6roise the
the
ths
ponsr f torfsiturs in good faith

Gornpany

Effsct of
Forfsiturs
1)persori hoSS sharss hsvs tssn forteitsd csas6s to bs á rrierroer
in respsot
o g torfeitsd stharss,
Forfsiturs relísvss the shars holder o
tO pay tuturg calls,
(iability But hs rsrosins liabls to pay al money which
Wefs pays1s by in to ths Gormpany in respsct of ths sharss at the date
of forfeiturs,

2) The 1ability of the member whoss shares are forfeited ceases as

andwhern tig company receives payment in full in respect of the shares
1fthere S Winding up of a company within one year fron the date of
forteitureof sharss, the member whose shares have been forfeited is
fiable tobe put or the List 'B' of contributors.

Be-i93ue of Forfeited
Shares
The forfeited shares
may be re-issued by the Board of directors.
inorder tore-issue the forfeited shrares, the Board of Directors should
pass a resolution. Thereafter, the forefeited shares are transferred in the
name of the buyer

85
 Topic-XXXIV
Surrender of Shares

power to the
ne dire
If the Articles of Association give
directors
can give
back his shares to toac
the surrender, the share holder he
ne surrender a member shall be valid if the diOm ccopm
of shares by

save the company

from h ors
company
h

a
going
dccepted the surrender
to
hrough
hav
paid up he
formalities of forfeiture. In
the case of fully shares, the he
for new shares of the same
nedirectors
can accept the surrender in exchange nor

value.The of surrender is
effect
the termination
of
membership of a
share
holder.

Topic-xXXv
of Shares
Transfer & Transmission

Transfer ofshares
have a right to transfer their
The shareholders of a public company
be taken away by any provision
shares. It is a statutory right and cannot
of a Company are movable property.
in the Articles of Association. Shares
the right to pledge or
The shareholders right to transfer includes
A public company's Articles of Association may
hypothicate the shares.
cannot be
of transfer but the right to transfer
provide for the regulations
fact easy trasferability of shares is one of the
absolutely restricted. In
essential features of a Public Company.

Inorder to register a an instrument of transfer

transfer of shares

duly stamped and executed by the transferor

and transferee together
with share certifcate should be submitted to the company. The instrument

oftransfer shall specify the name, address and occupation of the trans-
feree. It shall be in the prescribed form. If the company registers transfer,
the transferee becomes the member of the company. The company has
to issue new share certificate in the name of the transferee within one
month.

In Mathrubhumi and Publishing Co.

Printing Ltd. Vardhaman
v.
Publisher Ltd, (1992), the Court held that
transfer becomes complete
86
 ashare hider
compamy's te anetier s
ae
a company wter
oriy
register.

seror
ransfer
and
feror
or
transtereE
he refusal
refuses
transferee
es
witin onee mon trarehe
t
register a transfer,
register t shall
he fact
infior e
may
1o of refusal. The

,
REins: to he Natiomal
appeal to the
in two mo register
months of the the etNation Compary Law Tatuna
r. The appeal shall se prefered
transfer.
transf
notice of aopea
sucin
refusa
refusal
in Transfer
F sharees are
transfered o on
the foll the
the basis of a aforge
folowing are the basis forged instnument of trans
consequences
A forged transfer

ontinues
t e the
toth register of
is a and he oigr
nullity and the original owner of
an
sharehoider and the c
sares
company is ound to restore his
e
name members.

2
e has
f
the
sold
soid the
npany has issued
shares to
a share certiicate to
an nocent
innocentpurchaser,
transferee ane
he company is latie
e t
sate such purchaser
purchasar.
if him as a
com refuses to register
it
sharahcidar.

3ay
it
f the company has been
recove indemnity from the person
may recover
put to loss ty

who
reason of the forgac
lodged
ra

Transmissio
ofShares
When tne ownership of shares change from one to ancthar cy
of law, it is called transmission of shares.
peration
ope

Death of aregistered member shall necessitate change in the om

holder are entitied
ership. Thelegal representatives of the deceased share
transfer is not required
toget itregistered in their name. The instrument of
the legal
in case of transmission of shares. A mere application
the case
in the
by
is sufficient to get his name as a member. The
registered
representative
new share the name of the legai
company has to issue
certificate in

representative within one month.

87
 a oompany refuses to register a transfer, it shai
shall
icantwithin one month the fact of retusal. The
legal intotm
ns

COMpany LRw Tnbunal againe,reprer

hay anpeal to the National inst the
members. The appeal
of sh tneeserts
egister his name in the register all ret
berefu
of such refusal.
of the notice
wthin two months prete

Topic XXXVI of Shareholders

right
Pre-emptive
or
Rights Issue
deals with pre-emptive right of
82 of the Act, 2013,
Section shar
holders

the subscribed capit.

to increase capital
t company proposes
such shares shall
be offered to
to the
the evia
otment of further shares, existing
them. Thehe
of shares held by righ:
right 5
equity shareholders
in the ratio

new shares to them,

betore they are offere ed .
share holders to be offered
or pre-emption.
the The
The

public, is known
as share holders right
known as Tights issug"
is othewise
of the share holders
preterential right

notice specitying the

The offer new shares shall be made by
for
fifteen and
shall give a minimum
number of shares offered. The notice
not accepted
the offer. if the offer is
maximum thirty days time to accept
within the time the
shares may be sold to the public

,
the public without offering it
A Company can offer the new shares
to

a special resolution is passed by the

to the existing shareholders
if

directors to allot shares

company in its general meeting authorising the
to outsiders.

88
 Soction 71
soction of the
Act,2013
A com
A deals with
with
mpany must "dobonturos.
"debo
The initial
nitial have
whiich
the com
capital is
collected necessary capital
mpany can
"y o
capital to carry on its
businesh
n raiso by the issue
1sue of shares. Anothr method by
raise the
sha
Sectior
ection 2(30) of 5ary fund is by issuing debentures.
necessar
the
Act,2013
defines
defines the word "debenture",
It is an v
instrument
issued by the
includes deber
debenture stock
ent which and the
company
company evidencing a debt, t
document either bonds of a company. A debenture' is a
creates a debt compa
or acknowledges the debt.
debt. the
In Levy v.
Abercorries slate
ebenture is the and slab Co,
Slate and tno Court held that the
Co, the
description of
owledges a debt. of an instrument which creates or
ackn

According to
instrument under seal and
Palmer, Oenture is
a debt. The debenture is an instrume
evidencing
essence of it is admission of indebtedness.
A
1S an
benture instrument issued by a the
a company for acknowiedg
tedness
indebtedness
of
urity upon the
specified sum. It Sum,
usuallyy gives a charge
usually It by way of
security property of the
company

By section 71(1), a companv mav issue debentures with an optlon

to Convert sudn debentures into
shares, either whollyorpartly at the tine
In order to
of redumption. issue such debentures, a special resolution
ssed at the general meeting is required.
passed

No company shall issue any debenture carrying any voting rights.

Ifdebentures are issued by a company, it shall create a debenture

available
redumption reserve account out of the profits of the company
of dividend. The amount credited to such account shall bee
for payment
utilised only
for the redumption of debentures.

89
 The company has to pay interest and redeem the e
accordance with the terms and conditions of their issue. debenture
1f a esin
com i
ures
rails to redeem the debentures on the date ot their or
maturity or
fails
due, the to
interest on the debentures when
is Tribunal m
it
unal may,
holders, onpay
application of any or all the
debenture direct,
direct, by
by o th
forthwith on payment of prina
order,
the
company to redeem the debentures principal
and
interest due thereon.

is not complied with, every officer

officer
the order of the Tribunal
If
of
the
with
default shall be punishable imprisonment
Company who for
is in
a
three or with fine which shall
all not less
term which may extend to years
extend to five lakh rupees,
than two lakh rupees but which may with

both.

and transmission of sharo.

The provisions applicable to transfer res

are applicable to debentures also.

are the following.

The characteristic features of a debenture

1. Debenture is a document given by a company as evidence of

a debt.
2. It is issued under the company's seal.
date of repayment.
3 It usually specifies the
It specifies the rate of interest.
5. It generally creates a charge on the undertaking of the company
or some part of its property
6. A debenture holder does not have any right to vote.

Eixedand Floating Charges

When debentures are issued by a company a charge may be created
onthe assets of the company. The charge may be a fixed charge or a
floating charge.

When charge is created on some ascertained and fixed assets of

the company, it is known as fixed
charge. If fixed charge is created on
the assets, the
company is prevented from dealing with that
property
90
 lho
wifl

Floati
A GhaUe onalok
trad In

e
ample of loaliny oharge The
a loe
Ompany 9an dssl
alharge is orestsd ssts k
on w .an is he
is v
uni
varslon of a floaliy
the conv oharge
tes s11
atallination har
haye orysAaltises
aIyala he connpany goos into auidation
when
liquidation or wen the
when ths
int tized
ohargs
When the prinoipal or intrest and the holder o1 ompany
6ompany ds1auts
detsuksiin
ying osting ohargs trings
ayi ohargo will be orystallise
aaction, the floating trings

Topic-XXXVII
Rightto Nominate
holdr of
By section 72 of the Act,2013, Ovory sscuritiss.
d debentures) a company may, at any ihd, norninato any perssr d
of
in the event or nis dgath.
It is to
be dgriss srs
amhis securitios shall vest fe

form.
the proscribod

two or more persons jointly, the icirt

the securities are held by
to whom all the rights in the
If

nominate any person

holders may together
death of all the joint holders.
shall vest in the event of
securitios

on the death of the

If a nomination made, the nominee shall,
is

become entitled to all the rights in the securities

to
holder of securities,
all other persons.
the exclusion of

If the minor, the holder of the securities may appoint

nominee is a
in the event of the
another person to become entitled to the securities
death of the minor nominee during his minority.
 Topic-XIXx
Membership
who collectively constitute a
The
The por
persons company as a
The terms member, corporasate
antity arG called mnembérs. hareholder' and
of shares' are
used interchangeably in the case of a 'holder
of a company company limited
shares. But in the case limited by by
member guarantee without a
share capital may not be a share
holder, Thus all
memberS but all the members the
shareholders are are not
shareholders.

hscribers of the iemorandum

ofAssociation a company
be deemed to be the members of the of
shall
company.
a Member ofthe Company 2
w can be
Who a
Members of company Is
open to every
An
An artificial persn
person is ale
is person who is
to contract. artificial also competent
qualified to become a
as an ordinary persobn member of
the company

1. Minors
The general prindipie is that a
contract of a minor is void ab initio
Houever, a minor in india ay appiy tor shares and receive an allotment
to a right to repudiate liability on him before or
ofshares subject within a
after attaining majority.
reasonable time

a company limited by shares, there no

Inthe case of is objection to

issue fully paid up shares to a Minor.

InNaveen Chandra V. Govardhandas, (1967), the Court held

thatif a minor's name is entered into the register of
members as an
allottee,the company cannot afterwords suo moto delete his name.

InDevan Singh V. Minerva Films

Ltd, (1958), it was held that
here isnothing in law to
prevent minors from
a company if they are
properly represented
acquiring or holding sharees
by lawful guardian.
Aminor
may become a
me
nember by
transmission.
92
 1t so
A Company member of another company,
as a A Company can become
er' corporate
and by its Articles.
y 'holder authorised trom
e limited
by a company
is prohibited
shall not
By section 19 of the Act,
subsidiary
without a A holding company
us all company. Any Sucn
the any shares in its holding
companies.
holding
of its subsidiary was a
holders. its shares to any company
allot or transfer
the subsidiary
or transfer shall be void. of the holdiig
If
allotment company
became a subsidiary However the
company shareholder even before
as a member.
it

in continuing the holding

of
there is no illegality a meeting
Company, to vote at
shall not have right
uDialary company
etent company.
or by guarantee
er a company by shares
limited cannot
of 67 of the Act,
By section own shares. A company a
share capital cannot buy
its
otherthan
and having a or the very same company.
A company
become a member its shares.
A banking
shall not make a loan to purchase
banking company, business to a
course of its
can make a loan in the ordinary are made to
company
its own shares. So also where loans
person for purchasing up shares to
bee
can be permitted to purchase fully paid
employees, they
held as beneficial owners.

1887), the Articles of Association of a

In Trever V.
Whitworth,(
its own shares. W sold
authorised the company to purchase
company shares was paid
Before the full price of the
his shares to the Company.
'W claimed the balance of the price
the companywent into liquidation.
of the shares from the liquidator.
The liquidator denied the claim of W
to purchase its own shares
held that a company had no power
TheCourt of Association, it is ultra
in the Articles
and even if there is permission
law and hence the claim of 'W failed
Viresthe company
 Buy-back of Shares
68 of 2013, a Company may purchase
Virtue of section the Act,
its own shares out of -

(i) its free reserves; or

or
(ii) the securities premium accounts;
(iii) the proceeds of any shares.
buy- back the
its own shares unless
in
shall not purchase has been passed
Company and a special resolution
S authorised by itsArticles
the buy-back.
general meeting authorising
of the paid up capital. The
be less nan 25 25% of
The buy-back should year shall not exceed
in any nancia
buy- back of equity shares
capital.
its total paid-up equity the Redins
to be filed with gistrar and
and
A
of solvency
has
its e
Boardof India has bought back its
declaration (SEB) before the resoli..
tion for
and Exchange a company
Securities
is implemented.
If
em within securities
them
destroy within seven
back days
buying them and physically
is completed
it has to extinguish process
which the buy-back
on
of the last day
back of its sec ties, it
to the buying
has resorted of six monthes
If a company within a period
of securities
cannot make
a further issue

3 Partnership Firmis not a person the eye of laW and

firm
in it cannot be
A partnership can buy the shares
However, a partnership firm
amember a
of company.
names of partners. its
ofacompany in
the individual

Foreigners
Foreigners can become members of companies registered in india.
will be suspended they become
Therights ofthe foreigners as members
if

an enemy alien

94
 Modes of acquiring Membership of a Company

the following
pErson can become a member of a Company under
circumstances.

Subscribing toMemorandum
1)BySubscriber Decomes a member on the
to the Memorandum
aistration of the
Company even tnough there is no application for shares
or allotment.

official Liquidator
Suliman Bhat (1955)
v.
S subscribed to a Company's Memorandum
for 200 shares. He
K only
oniy 20 shares. The Company went into liquidation. The official
took
Aator claimed the value of 180 shares from 'S'. The
Court held that a
der to the Memorandum is liable for all the shares which he has
liquidator

subscribe
taken to take.

2)By applicationand allotment

An application for shares an
take shares.
is offer to Allotment is
acceptance of that offer by the company. When shares are allotted to an
applicant, he becomes a member.

Punishmentforthe use of fictitious names

By section 38 of the Act, 2013, a person who makes application in
fictitious name to a company for acquiring shares/ debentures or

subscribing any shares shall be liable to punishment provided in section

447 of the Act. By 447, any person who is found to be guilty of
section
fraud shall be punishable with imprisonment which shall not be less than
six months but which may extend to ten years and shall also be liable to
Tine which shall not be less than the amount involved in the fraud, but
which may extent to three times the amount involved in fraud.

3) By Transfer
When a person who purchased the shares from theopen market
applies to register his name in the place of the original share hoider and

95
 E is name
memicer by tramsre
is entemedin the registar
members

Transnissic
a deceassd
share holder apg es
When tee heirs of entaring nae
heir nan
enteng their
ing
ecome
meir nemes and
when the

members of he Compary
company

Shares nd pay
E ertakingte akeguaificatien
an undertaking
t take the
as ubscriber
Clirector
wno hEssigned
in the same position
shares is also
uicatiom
Memoramdum

under the
Cessation of Membership
ceases to be the member
Amember of company a will

alioing circumstances.

his shares to
1)By Trasier cease to be a member if
he transfers
A person will

another person.

2) By Fordeture he will cease to be a member

shares of a member are forfeited,
ifthe

a
3)ByRescindingwho
the Contract
the shares from the commpany
can file

A person purchases or fraud

of mis-representation
contract on the ground
suit to rescind the the
When the Court passes a decree rescinding
intheprospectus.
to be a member.
contract, he will cease

4)By Redumption When a

the redeemable preference shares.
company can redeem
A
the shareholder will cease to be a member.
company redeems theshares,

5) By Surrender
ifa shareholder surrenders his shares to the company. he will cease
96
 to De d tnember. In order to
surrender shares,there should be provision
in the Articles
allowing surrender

6)By Issue ofShareWarrants

uShare warrants are issued to a member in exchange of fully paid

shares, he will cease to be a member.

7) By Death can register

On the death of a share holder, his legal representatives
ceases
their names in the place of the deceased and the deceased person
to be the member.

8)Sale in Execution
When shares are of a decree of Court, the
sold in execution
shareholder will cease to be member

9)Insolvency
The shares of an insolvent vest in the official assignee or the
receiver and the assignee can apply to transfer the shares in his name.
When a transfer is effected on the basis of an application, the shareholder
will cease to
be a member of the company.

Topic-XL
Meeting of Shareholders

The word 'meeting' means a gathering or assembly ofa number of

In the administrative work of a company, the
persons for certain purpose.
role. Company administration is based
meeting has very much important
so the majority opinion is to be obtained in the
upon democratic principle,
meeting.

Different kinds of Meeting of Shareholders

Annual General Meeting

By section 96 of the Act,2013. every company, other than a Cne

97
 of s
of its
its
moeting membe,
mombo
a goneral such mootin
ooting
Person shall in each yearihold calling sha
Company,
The notices
as its annual general meeting.
mooting.
specify that it is an annual goneral
be held
ithin
withi
a oriod
o o
shall yoar
year of
the
first financia otings
meeting the are
The first annual general closing of mootings to
of general the
of financia
the date
fin
annual
nine months form of closing bet
subsequontthe date etween the
The second and from intorval

o
Company. ofsix months fifteen monthsnext.
be held within a period or the
not be more than that
of
shall and
year. There meeting
meeting nine mo onths
months
general witnin
within
date of one annual in the year
meeting
moeting
general
annual general meeting
first annual
holds its general
Ifa company any annual
to hold
t not be necessary
Snal the time within
of its incorporation. extend
reason,
for any special general meetin9
may, first annual
The Registrar other than
meeting, months.
which any annual general not exceeding three
by a period hours,
shall be held, business
called during
shall be a National
meeting that is not
or
on any day
general
Every annual 6 p.m. the company
9 a.m. and office of
that is, between at the registered the registered
either in which
It is to be held
Holiday. town or village
within the city,
atsomeother place
situtate.
office of the company

Business
Qrdinary Business and Special
classified into
two
can be
meeting
The business of annual general
heads. They are:
1) Ordinary businesss
2) Special business

at a meoting is known as
The business transacted
following
ordinary business

the
a)Considerationof accounts, balance sheet and reports
of
 Board of Directors and auditors.
b) The declaration of dividend.

c) Tne appointment of directors in the place of those retiring

d) ne appointment of auditors and fixing their remuneration.

than those
the general meeting other
All business to be transacted in
stated above shall be special business.

other general meeting, if any

or any to be
In annual general meeting, of the matters
to be transacted, a statement suchn
special business is to the notice calling
in the is to be annexed
transacted meeting

meeting
Meeting
of Tribunal to call Annual General meeting of a
Power annual general
If any default is made in holding of the company, the
Tribunal
on the application of any member
company, an annual general meeting of the company.
the calling of
may call or direct

Meeting
3 Extra -ordinary
General
the meeting of the shareholderss
General Meeting is to
to
Extra Ordinary It can be
called at any time
Meeting. annual
than Annual General until the next
other be postponed
which cannot
a business general meeting
transact business at an extra ordinary
All the
general meeting.
are special business.
may be convened by the Board
-ordinary general meeting
The extra of shareholders.
motion or on the requisition
of directors on its
own

convene the extra -ordinary general meeting

The directors should of the paid
not less than one-tenth
on the requisition of members holding
must set out the mat-
to vote.
the right The requisition
up capital carrying

ters for consideration.

should call a meeting

and
When a requisition is made the directors
from the date of the requisition.
it should actually be held within 45 days
99
 ll iso,thememberswhodate
have given

i
requisition
the deposit of of
iroo mnonths after the
O within thre monthe, the
Iling in not convened

Ee
f
Wn havenot paid
or oxra-ordinary general meoting.
a call on the shares aro not ontitlod

RRHAis al a Valid Meeting

call the Meeting

Praer Authority should

a valid meeting is that it must be

The tirst important requisite of

authority. Normally, the Board of Directors

ealled or convened by proper
i the oonvening authority for every general meeting. They should pass a
resolution to call a meeting of the shareholders at a duly convened Board

they failed to call the meeting, the Tribunal or the members

Meeting. If

who have given requisition to convene an extraordinary general meeting

may call the meeting.

2 Notice ofmeeting should be given topersons entitled

one day
The notice be given at least twenty
of meeting should
in writing
or throug
Derore the date of general meeting. It may be given a shorter
be called after given
electronic mode. A general meeting may
mode by not less
h
tnan
notice if consent is given in writing or electronic
to vote at such meeting.
ninety-five percent of the
members entitled
and the
a shall specify the place, date, day
Every notice of
meeting be
of the business to
hour of the meeting and shall contain a statement
transacted at such meeting.

to
The notice of every meeting of the company shall be given
of
(a) every member of the company, legal representative
deceased member or the assignee of an insolvent
any
100
 member.
()
(b) the auditor or auditors of the company; and
(c) every director of the company.

y of such
notice to or the non-receipt
acCidental omission to give to receive such
who is entitled
Otice by, any member or other person of the meeting.
the proceedings
invalidate
notice for any meeting shall not

Smyth V.
Darley(1849) deliberate omission to give
held that the
in this case, the Court the meeting
member will invalidate
notice of a even to a single
meeting invalidate the proceedings
An accidental omission to give notice does not
at the meeting.

nine Members holding a

In Re West Canadian Collieries
Ltd.,
issued shares of the company
of 101 shares out of the 6,92,718
total a special resolution for
not given notice of a meeting at which
were of the resolution was
of capital was passed. The validity
address of these
address cards containing the names and
eduction
red
The to
hallenged. warrant sent to
was removed from the file because dividend
MMembers
9Were wished to verify their address
returned uncashed. The company
the file. When
the address cards were removed from
then
ar that purpose,
could not issue notice to
and to members were issued the company
to cards were not replaced in the
notice members because the address
9
a memt
held that this was
an accidental omission and the meeting
these ourt
The
file.

valid.
was
be Quorum forMeeting
3 3. Thereshould
members required to be
means the minimum number of
Oorum means
Quorum
a legally binding business at the meeting.
fortransacting
present

f the quorum is not present, there is no meeting and the proceedings

are invalid.
held thereat

The quorum is generally fixed by the Articles. Uniess the articles

101
 h
provide for a larger number,
in

present shalltbe
the case of apiutno
the quotum
fa donpa1
meoting
as f we
members personally
maeting is
fi mot
as on the date of
umber of members
memters of
e aY6sg4
thousand. It is fifteen, if the number of
if is thirty,
e foumer sss4
onethousand but up to five thousand.
five thousand

in the case of a Private Cormpany,

1wo hao porsaly presen

shall be the quorum for a meeting

and not proxios dan ts cnore

in person
present
Only members
for the purpose of quorum

shall appiy witn respect to the ugrure

The following provisions
a or private company
meeting of public

4within half an- hour, a quorurm 1s niot present, if wl tand

1)
same day in the next wssk at tme same
adiourned to the
and place or to sucn other day and such other sime and
place astheBoard may determine. ifthe meeting was calle

upon the requisition of members and there is no quorun witie

half-an-hour, the meeting will stand cancelled

2) Ifatthe adjourned meeting also a quorurn is nat presert N

half an hour, the members present are the quorut

that on
case of a meeting called by the Tribunal it may order
Inthe t
in person or by proxy
shall be deemed
member of the company present
constitute a meeting.

4)
4) Chairman ofthe Meeting

a Chairman is to be elected by the members

At thegeneral meeting,
of the meeting. it is the responsblity
of
topreside over the proceedings
that the meeting is properly conducted
the Chairman tokeep order and see
He has to put resolutions to the meeting, count votes and declare the
102
result. He should authenticate the minutes by his signature.

5) Minutes oftheMeeting
of the meeting.
record of the proceedings at
Minutes are the official
and resolutions arrived
of decisions of
They are the permanent record summary
minutes containing
must keep
the meeting. Every Company
of the general meeting.
all proceedings

6) Voting and Poll

in an
a wish or opinion
The term vote means an expression
any proposal.
of
Every holder
of
o
authorised formal way for or against at a general
to vote on every motion placed
shares have right
equity rights. They
The preference shareholders do not possess voting
meeting. the rights
on resolutions which directly affect
have right to vote only be by show of hands
to the preference shares. The voting may
attached
a poll.
taking
by
or

XLI
Topic
ProxiesS
is used in two senses. The instrument by which a
word 'Proxy
The vote for the shareholders in a General Meeting is
nnointed to
isappoir
The so appointed is also known as Proxy.
person The person
'Proxy'.
called
of the CompaniesAct,2013, a member of a company
105 o
+05
Bysection .ninta proxy to vote at the meeting. A proxy need not be
to appoint
mpany. The proxy shall not have a right to speak at
isentitled company.
of the
he can demand
he de a poll. A proxy is not entitled to
a member
However
the meeting.
on a poll.
vote except
and signed by the
shall be in writing
of proxy
The instrument with the company 48 hours before
It must be deposited
Shareholder. member of the company
Proxies can be inspected by every
themeeting. A member who wants to inspect
a
to vote at meeting.
who is entitled
103
 proxlas should oive a nole o he Gompany 9 days betoro the dat
eeting of hia intention to nspaot tho proxies

A Membar who haa apponted a l'iOXy Gan dreotly allend

the mesti.
and vote, In suoh a case the proxy will be revoked

Topic-XLII
Resolutions

A Resolution is the
formal
decision at a
it. When a motion is mooting on a
proposed at a proposal befor
meeting is
resolution of the pasod,
become a
it

company. There are three

kinds of
Rosolutions
1)
Ordinary Resolutions

A Resolution passed
by a
simple majority of
as an Ordinary sharoholders is known
Resolution. An
Ordinary Resolution is
transacting the ordinary normally used for
business in the Annual General
Moeting.
2) Special Resolution

A Special
Resolution is passed by threo-fourth majority of the
members voting at a meeting. The intention to propose the resolution Dy
a special resolution must be to
specifically statod in the notice calling
meetin9. In the cases Special Resolution
following is
ncessary

1 Change of name of the Company.

2) Change of Registered Office from one state to another state.

3) Change of Object of the Company

4) Alteration of Articles of Association

5)Reduction of Share Capital.

104
 6) Voluntary winding up.

Resolution Requiring Special Notice

that the mover

with the difference
resolution 14
is a kind of ordinary not less than
to the company
It

resolution should give must give its

of the proposed The Company
must be done
the resolution.
before moving
days notice
It
of the resolution.
the notice
members notice intimating
seven days before the meetings.

in the following
matters:
Special Notice is required
other than the retiring auditor
1) Appointment of an Auditor
of his term.
2) Removal of a Director before the expiry
in the place of
the removed
3) Appointment of another Director
Directobr.

Topic-XLI
of Directors
Board
to 172 of the Companies Act,2013 deal with
149 of
Sections remune ation of directors, disqualification
of directors,
of etc., of directors.
office by directors,
of office
appointment
vacation
directors, in the eyes of the law. It is
living only
ie a legal p.
person
is legal and mind. It cannot act just like
company both
bot body
both bodv
A lacks
of law,
which
w, which
only through
through
some human agency. Directors
Directors
can act
act only siness
a company acts and does
a creation It can business.
through
whom aa

a human-being. through
persons oard of
as 'Board
Directors."
of Directore
are those known
are collectively the
They the Court observed that
Land Co.(7910)
lBath v. Standard of the company which
and the only brain"
of
directors
are the "brain
does act only through the Board
Board of can
and the company
is the body",

Directors.
shall have a
shall
of the Act,2013, every company
By section 149 (1)
105
 Board of Directors. The Board of Directors shall consist of individuals
uals
as directors.

ne case of a company, a minimum of three directors are

public
required to constitute its Board. It is two in the case a
private company.
Tis one, in the case of a One Person
Company. The maximum number
of directors in the Board is fixed at fifteen directors. If the company passes
aspecial resolution, there can be a Board consisting of more than fifteen
directors.

The following
companies shall appoint at least one woman
() director
Every listed company
(i) Every other public
company having
(a) paid up share
capital of one hundered crore
rupees
or more
(b) turnover of three hundred
crore rupees or more.

Independent Directors
Every listed public
company shall have at least one-third of the total
number of directors as "independent
directors".

The following classes of companies also shall have at least two

directors as independent directors.
(i) The public companies
having paid up share capital of ten cro
rupees or more.
The public companies
(ii)
having turnover of one hundred crore
rupees or more.
(ii) he public companies which have, in aggregate, outstanding
loans, debentures and deposits, exceeding fifty crore rupees.

An "Independent means a director, other than a Managing

Director"

a
Director or whole-time director or a nominee director,
(a) who, in the opiriion of the Board, is a person of integrity and
possesses relevant expertise and experience;
(b) who is not a promoter of the company or its holding, subsidiary
or associate
company;

106
 (b) who is not related to promoters or directors of the company,
its holding, subsidiary or associate company;
the company
(c) who has or had no pecuniary relationship with

company or their promoters

1s holding, associato
subidiary or financial
preceding
or directors, during the two immediately
the current financial year;
years or during relationship
with
had pecuniary
of his relatives has
or or
(d)none
(d) or associate company
subidiary
the company, its holding, the two immediately
or directors, during year,
thoir promoters
or during the current financial
years
preceding financial of the total voting
than two percent
() who holds only less
powor of the company.

are appointed from a data bank of persons

Independent Directors the Central
is notified by
become independent directors. It

director shall be approved

to
offering
The appointment of independent
Government.
company in general meeting.
av the

Shareholders
elected by Small the small
actor have one director elected by
may
A listed company
Direct
a shareholder holding shares
of
shareholder means
Lders. Small a public company
of twenty thousand
rupees or less in
alue
shareholde,
value
nominal
rs
of Directors

Appointment If first directors

First
Directors are usually named in the Articles.
rectors
The first to the Articles, the subscribers of the memorandum
1) directors shall
in the
named until directors are duly
are not directors of the company
the dire
the
to be
be deemed in the genera
general meeting.
the members
elected by

Dy the Shareholders
Appointmentof Directors the general
be appointed by the shareholders
2. in
The directors must
of the company.
meeting

has been alloted

No person shall be appointed as a director unless
ldentification Number.
It is allotted by the Central Government.
theDirector
107
 An individual intending to be appointed as director shall make
make
an a
application for allotment of Director ldentification Number to the
Central
Central
Government. Within one month of application, the Central Governmen
ent

allots a Director Identification Number to the applicant. Every person

proposed to be appointed as a director by the company in general meeting

shall furnish his Director ldentification Number and a declaration that he
is not disqualified to become a director under the

Every person appointed as a director shall not act as a director unless

he gives his consent to hold the office as director and such consent has
been filed with the
Registrar within thirty days of his appointment.

in the case of a public company, number of

one-third of the total
directors can be given permanent appointment. The remaining two-third
are liable to retire by rotation.

A company can adopt Articles the system A

by its of voting.
retiring director is
eligible for re-election.

3. Appointment of Directors by theBoard

The Board of directors is empowered to appoint:-
a) Additional directors.

b) Alternate directors.
c) Directors filling casual vacancy.

(A) Additional Directors

The directors may appoint additional directors if so authorised by
Articles of Association. The number of directors and additional directors
together must not exceed the maximum limit fixed for the board by the
Articles. The additional directors shall hold office only upto the date of
the next annual general meeting.

(B) Alternate Directors

The Board of Directors of a

company may appoint alternate director,
if so authorised
by the Articles. He is appointed to act for a director who
will be
absent for a period of at least 3 months from the state in which

108
 of the board are held. He canno

er
neotings
than that permissiblo the original dirsef im
to odd f
on the re1uffn t f
PPointed tHe has to vacate office

etead
Aal
he
eeME AY
of
Vavaney
odee of any director
Nreetors may
ea0n of death,resignalion,
fill
is vacated

up the vaGafi
tH

ifi#AVlil
8 t
6

4akeaden ahare or failure to accept fi6Gfliefha

W Aelhé edtee titt the end of
the tem A itH M w

iy iHa #aties (
Aetnent of Dirsstars froriinee
of Association A
ireotors
The Articles ltliar may av6
tl right to
debentue holders, financial instiftiit
1 RMIg
or 6mprios ma hnvs
vanced loan to the compan arienti fheminses &he isd
directors.

The number ofdirectoMs HI afrfelnHe 6td

tria #R1A
of thetotal strengtr

ot Dirsotors
Disqualification

1) f
circumstancss
he
f hs
is fun44KA Hn
isar unisongoA iHsArs
2)

applicsticn
is paninG
4) Ifhe has basri

manthsand
expiry of the santancC
&poA I Jore 1as1 sas trem thedate of

5 If he has bean dispaified sg A the Court or Tribunal

on
agraund affraud in teromicaie forrmatic armanagement of
the campany
 the comgany
6) he has not paid any calls in respect of any shares of
tized tor
have from the last day
held by him and six months elapsed

the payment of the call

Restriction onnumber ofDirectorshi

in more than twenty
Aperson cannot hold office of director in nich
at atime. Themaximum number of public companies
companies
ten
a person can be appointed at the same time as a director is

fa person holds office as a director of more than the prescribed

tive
be punishable with fine which may extend to twenty
limits, he shall
continuees
thousand rupees for every day during which the contravention

RemunerationofDirectors
payable to the directors of the company
is
The remuneration
determined either by the Aticles or by a resolution passed in the general
The amount of remuneration payable to the directors and
meeting
Managers in respect of a financial year shall not eceed 11% of the net

profits of the company.

Legal Position ofDirectors

In the eyes of law, directors are agentscompany for whicch
of the
the
they act. If directors make a contract in the name of Company.
be within
company will be bound by it.. However, the contract should to
the scope of their authority. if they have exeeded the powers given
them by the Memorandum or the Articles they will be personally labie

sense of the word because

Directors are not trustees in the real

they are not vested with ownership company's property.ne

of the
must
to the Company. They
directors stand in a fiduciary relationship
powers honestly and in the interest of the company. ney
exercise their
should not exercise their poweres for their own
benefit.

is not entitied to
A an
is not
employee of a Company. He
director of the company
or benefit granted to the employees
any privilege director from being an empioyee
However, there is nothing to prevent a
110
 Lee V.
of
a Company. He may be employed in a different capacity. In

was also appointed as pio

lot

Lee Airfarming Co. Ltd, 1961, the director

of the Company. He died in an accident. His widow claimed compensato

widow
held that the
under the Workmen's Compensation Act. The Court

was entitled to get compensation.

the first
Dutyto Disclose Interest shall at
director
184 of the Act, every
By virtue of section as a director and therearteo r
which he participates
meeting of the Board his concern
in
in every year disclose
at the first meeting of the Board firms or otne
or companies or bodies coroorate,
interest in any company It is to
be
shall include shareholdings.
association of individuals which
in writing in the prescribed
torm. The director who fails to
done
such a disciosure shall
be punishable with
imprisonment for
a term w
one
may extend to but year orwith fine which shall not be less tan tifty
which may extend to
housand rupees one lakh rupees, or with bot

a copany who
A director of is in any wav. whether directiy o
:oncerned or interested
con ina contract entered into or
ndirectly, or on
on behalt
beha ot the his
into,
by company, shall disclose the nature of
tered at a meeting of
or interest the Board of Directors. He shall not
concern in the Board meeting
in in which
such contract or arrange
articipate

discussed.
or rrangement entered into
by the company without
A contract of the i
rest the director, or with participation of
of
the interessted
interested
of interest Participation of
at
at the ons:
disclosure be voidable
be voidable option of the company. Further the
shall be punishable with
shall
director, shall th
imprisonment
imp for a term which
director
or with sfine
interested
to one year which shall not be less than fifty
may extend which may extend to one lakh rupees, or with both.
but whicn
rupees
thousand be liable tto vaccate the office of director.
he shall
Moreover

Loans toeection
Directors
185 of the Companies Act, a company shall not make aa
or indirectiy, To any or the tollowing persons or institutions
loan, directly
the previous approval
of the Central Government.
without obtaining
111
 1) Any direotor of the company or relative of any diregtor

2) Any firm in whioh a direotor or a relative of a dirootor is a

partner

3) Any Private Company of whioh a direotor a

i director or
member
A) Any body corporate of whone meoting a direotor has 25% of
the total
voting power
5) Any body corporate whose
Board of Direotor is acoustomed
to act in
accordance with the direotions of the board of
director of the lending
oompany.
A
company is
prohibited from
director from giving a guaranteo for a loan taken
any other porson and by
loan. A providing for any socurity for
company any
is
prohibitod from buc
for a loan providing any guarantee or security
given by a diroctor to any person.
If
any loan is advanced a guarantee or
or
Contravention of the law, the socurity is given in
shall not comany shall bo punishablo with fine whion
be less than five lakh
rupoes but which may extond to twenty
five lakh
rupees. The director or the othor
shall b porson to whom loan is advao d
punishable with imprisonmont which
with fine which shall not may oxtond to six monthe or
be less than five lakh rupees but whicn may
extend to twenty five lakh
rupees or with both.

Duties of Directors

By section 166 of the Act, 2013, a director of a company shall act in

good faith in order to promote the objects of the company for the benefit
of its members as a whole, and in the best interest of the company, its

employees, the shareholders,'the community and for the protection of

environment.

A a company shall exerocise his duties with due and

director of
reasonable care, skill and diligence and shall exercise
independent
judgment.

112
 persoial iiloroot ontits uin the intarsst l ia 6atiati

40VAnlags oither himsif t intiisiali

he 6Gnpany

may ontend t five 1aki ss

whieh

Vacation
By
of offiun by Dirstors
virtuo of sooiGn 167 ths GomgarieshoM,M14 6s Os A
dirøotor
shall beoomo vnoarit urider thie tollGming iAMsAa166

a1f
(a)
ho is fournd to be of unsourid mind by a Court A A A
jurisdlotion.
to b6 Bdjudicatsd an insalvert
If he applios
(b)
f he adjudgsd an insovsnt
is
a maoral 1urpt5
heiscovicted by Gourt of any offsncs invhing
(C)

to irmprisorimnsnt for nt lsss than si moAAEA

If
(d)
and gentenced haa
to pay any ca1l in respsct of sharss of ths umpany
Iffuhehim
(o)
fails

within
six rnionths from the last dats fivsd tor the paynent

the call. Direcior

rom all the nsstings of the Board
1fhe absents hirmse lsa1e
of twelve mionths with or withiout seskiig
ld during a period
(1)

of absence
of the Board,
into a Contract with the cormpany without
discosing i
(1)
Ifhe enters
contract to the Board.
interest in the
been disqualified by an order of the Court
or Tribunal on
() Ifhe has
in the promotion, formation or management of
theground of fraud
the company.
113
 Resignation of Director

roctor may resign his from his office by giving a notice in writing
Company. The Board shall on roceoipt of such notico tako noto of
the same.

no company shall intimate the Registrar the fact of resignation within

thirty days from the
date of receipt of notice of resignation. The diroctor
wnO resigned
shall also send to
the Registrar a copy of the rosignano
Stating reasons for
resignaton. It is to be done within thirty days.

Removal of Directors
A company may, by oramary
rOsolution, remove a director
than a director
appointed by ne Dunal) before the
(other

a expiry of the period

of his office. He
should be given oasonable ofopportunity boing heard,

Topic XLII
Meeting of Board

The company are empowered to do several acts for

directors of the
the successful management of the company. Directors of the company
of the Board. The following
exercise most of their powers at the meetings
are the rules relating to the meeting of Board.

1.Number of Meetings
Every company shall hold the first meeting of the Board of Directors
within thirty days of the date of its incorporation. Thereafter it shall hold a
minimum number of four meetings of the Board of Directors in every year.
Between two meetings, there should not occur an intervention of more
than one hundred and twenty days.

The participation of directors in Board may be either

a meeting of the
in perons or through video conferrencing or other audio visual means.

2.Notice of Meeting
A meeting of the Board shall be called by giving not less than seven
114
 The
days notice in
writing. The notice be given to every director.
is to

notice should be sent to the registered address with the company.

It may
be sont by hand means
delivery or by post or by electronic

3. Quorum for meeting

of its total strength
is one-third
Board
he quorum for a meeting of the
the directors by
The participation of
means shall also be
Or two directors whichever is higher. counted
other audio visual
video conferrencing or by
for tho purposes of quorum.

4. Adiournment ot Meoting
ameoting Board cannot be held for want of quorum,
of the
automatically stands adjourned to the same day in the next
week.

Book
5. Minutos dings of every meeting of the
The procoedi Board are to be recorded
n aMMinutes Book.
on Voting
or his relative or a
astriction dir
6.Restrict
a
director firm in which he or his
relative is
wn
When enter intoa contract with the
company for sale, purchase
has ads, materials or
services, the contract should
aapartner
pa of 9 resolution
of goods,
passed at its
be approved
by
orsupplyard D ctor shall not meeting. Inthe Board Meeting
Board participate or vote. His
His presence would
the directór
by the quorum.
the
interested for
the
becounted
not

ding itical
Topic-XLI Hegardino Contributions
Prohibition
of
Act, 2013,
the Act, a
company other than a
Bysection
182
hich
which has been in Government
existence for less
than three
and acompany
antribute any amount directiy or
company may contr
financial
years, alParty" means a ponucal party
indirectly to any
registered unde
party. of the People
political
Act,1951.
29A of the Representation
section

115
 The aggregate contribution amount shall not excesed seven ang
ar per cent of the net
profit in any financial
and
year

A at a meeting of
resolution, authorising payment, passed the
Or Directors contrioution. Boargs
is required to make a political The
company
shall disclose in its profit and loss account any amount Contribrss.
to ne namentributed
any political party during the financial year. The name af
of
by it it
the
parties
and the amount paid to each is to be mentioned.

ve
in
violation of sz
f the
a company makes any contribuition
If

be punishable with fine which abovestate

stated
principles, the company shall
ibuted. Every officer of may extend
to five times the amount so contributed.
the
who is in default shall be punishable with imprisonment for a company
fine which term
may extend to six months and with may which
extend to
the five
amount so contributed. times

Topic-XLIV
Auditors
Or
"An Auditor is a watch dog Dut not a bloodhound".
Comment

Chapter X (sections 139 to T46) Or the

Companies Act,2013 deals
with appointment, removal, remuneration, powers, duties
etc., of auditors
of company.

The term means an examination of books of account by an

Audit

authorised person. Ihe person who is so authorised to examine the books

of accounts of
a company is called Auditor.

A company carries on business with the capital furnished by persons

who buy its shares. The contributers of capital are not in direct control of

its application. The Directors and Superior Officers of the

company utilise
the funds contributed by the shareholders. The Companies Act therefore
provides for the employment of an auditor who is the servant of the
shareholders and whose duty is to examine the affairs of the company

116
on their bohalf at the end of a year and report to them what he has tound.

By section 139 of the Act. every company shall, at the

first
annua
as an auditor. The auditor
goneral meeting, appoint an individual or a firm the
of that meeting
till

conclusion
ppointed shall hold office from the
the auditor
Thereafter
meeting.
Conclusion of its sixth annual general the
shall hold office
till

the general meeting

ppointod by the members
in

sixth meoting.
conclusion of overy
shall
of the auditor
an a written consent
Beforo appointing auditor,
be obtained.
The
The company shall inform the auditor of his appointment.
of such appointment with the Registrar
company shall also file a notice
thin fifteen days of the meeting in which the auditor is appointud.

A listedcompany shall not appoint or re-appoint an individual as

more than one term of

for more five consecutive years. A firm shall not
for
auditor inted or re-appointed as auditor for more than two terms of five

years. An individual or a who has completed his or

opoin firm
he aPtie itss

for re-appointment as auditor in the same company

consecut be
be ineligible
hall the completion of his or term.
ars from from its
term
years
five
for

Board
dmay
May
may
fill
fill any casual vacancy occuring in the office of the
be removed from office before the
The ttor ma expiry of his
An Audit in General Meeting after
obtaining the approval of
ay

theCompany
Auditor.

term
by
Government.
Central
Au
o an
the an Aud Auditor is fixed
n of
of by theCompany in general
remuneration
The

meeting

isentitled
ar appointment as auditor of a company only if
A person ntant, The following persons shall not be qualified
Accountant.
he is aChartered of a company.
as auditor
for appointment
A body corporate
or employee of
the company
An officer

117
 Em
r
CITET
wite

who
i e pater ofan
is in
cicer or

the empicument af an cficer

empioyee

r
df tre

emgicoya
cz

am acus amd wuches

Hieis
etittied to raguire

E and eglianaion
m e cmay
the cicers cf thecompany
iorthe peiomanicE unEss
zs auditar

=mas a ig teeve ncnice cf amy

gereral meeing of te
e
compar
has a ige
ie hasthe mige
to atiend

to
amy general meening
recene
remumerzticm.
Duties
Luditer

1) e mas a
duny to emquire weter me lcars and adarcas made
by te
eer
s
compary con e basis ofsecurity are propey secured
licans and advances made
by the comgany are sow
s
depasits
as
=venue
to enquire ether persoral experses are chaged i
account

as
issue of
to enguire wether casns actuely recaived an tme

shares
He has to enquirs wteher he bocks of acoouns are propey

The auditor awes a duty to check he accurecy cf accounts

auditor isnot bound to be a detective or to approach hs work wit
suspecion.He is a watch dog but not a bloodhound. He can beleve the

servants ofthe company. He is endiled to assume that they are honest

He is ony bound to be reasonably cautions and careful.

118
Topic-XLV
of Majority and Protection of Minority
Supremacy
or
v. Harbottle
and its
Discuss the Rule in Foss
Exceptions
or
and Mismanagement
Prevention of Oppression The
democratic principles.
upon
is based with
administration is vested with

Company the affairs of the company of the

overall power of controlling of the affairs
to the management a special
members. The question relating a simple majority or by
upon either by
Company is to be declared is that the majority
majority. The principle of company management
decision must prevail.

share holders was legally

The rule supremacy of majority of
of
In this
in the well known case Foss v. Harbottie( 1843).
cOgnised
recog
action was brought by two share holders in a company alleging
wa
an
an action which resulted in a loss
case, directors were guilty of fraudulent acts
d of
that
the In themeeting of the company the majority
the general
the company. not to take any action against the directors.
lders resolved
to
the suit filed by the minority shareholders on the
the sharemissed
sharehola the
the dismissed of the majority should prevail.
Court decision
The the decision

.
that
ground cision is that convened meeting, a
if at a validly
of this decisi is binding upon the minority and
result d by a majority,
it

The by the consequences

is passed to protect the minority against
to pr
rule is known as Rule in Foss v. Harbottle.
resolution
not interfere
will rule
basic
basic
This
This
court
resolution.
ofthe
in
in Foss v. Harbottle
rule
to the
the rule
in Foss v. Harbottle recognises that
rule enunciated
Exceptions
the minority. However there are
must prevail Over
The general
dhe will of the
majority can bring an
on which the minority shareholders
niumber Of occasions are the exceptions
of majority deciSion. They
the validity on the
action challenging
Harbottle. These exceptions are based
in Foss v.
to the rule
and fair play.
of natural justice
principle
119
 ) Aut Uvis ilaun

Companies Abt, th minoly an ing# il to 6halleige tie validiny o

the
majority deceion

Edward
Hailiwell(yGo)

nthis 0a9e,
ajority deoision to
the minority
siareholders Ghalleiged thiG validity
pay dividend out of
f
The paymGnt of dividernd
O dapilal is an illegalaot. The Gourt Gapital.
held that in such a siluation
ashareholder oan svsn
apply to the 6ourt for arn
company from injunotion restraining
doing thal act. th

2) To
f the Prevent Fraud on Minority
tne e majority of a
minority the Court company's members use their powGr 1o defraud
will
upset the interfere atthe instano6 of the
miniorty
majority sohene for doing harm.

Menier v.
Hooper's Telegraphs Works
The majority members of Ltd(1874)
company 'A were also menbers of
Company 'B'. At a meeting of the
company 'A the majority resolved to
compromise an action against the
to company 'B'. The Company 'B in a manner favoursble
Court held that thee
minority membGrs of company
'A could bring an action to set aside the
compronise decision, If the
majority of a company takes a decision to benefit themselves
at the
expense of the minority, the Court will interfere to
protect th6 minority

3) Acts against the Articles

If the
majority resolve to do an act inconsistant with the Articles of a
Company, the minority can bring an action to restrain the
majority from
doing that act.

120
 Wheel Co (1919
Abbrasive
riti
British tobuy ou the minority with aview to oxpand ths
decided
sell their shares.
refusedto The majority then altersed
#rownA majority
#rown
Themino
minority
ha ng a special resolution in order to onatbie them to buy
pe
pao08
by minority The Court held that the
alteration was for the
eapital
Articlasofthe
Article8 ajority and not for the benefit of the
the
the
sharo#
majority company asawhole
ration could be restrained.
the ofthe
alforat
benelitthe

Hence olating Personal Rights of Individual Members

Vie
4) najority decision violates the rights of a single shareholde
the
n the Companies Act or the Articles of the company. the
under
unde
in at the instance of even a single shareholder
conterred
wilintertere
will
court

Oppression and Mis-management

5) Act.2013
XVI (ections 241 to 246) of the Companies
Chapter
for prevention of oppression and mis-management.
rovides
ent of
provides

The power to prevent oppression and mis-manag

Tribunal.
Company Law
affairsisvested with the National
company's Tribunala
to the for
may apply
a company who appliescapitaital
Any member or members of The member share
to prevent oppression or mismangement. issue
issued
of the i er
reliet should be holding
not less than one-tenth
and other sums a manner
should have paid
all calls
ve to
of the company and he have been
conductea
affairs of the company or oppressiv
SSnare. Ifthe or in a manner prejudicial relief.
cial to public interest opriate relle
appropriate
to the Tribunal
for on
him, any member can apply than its
not less of
a share capital,total number
umber seek
company having
or not less than one-tenth
of the y and and
hundred memmbers jointlyy
make an applicationof oppressIO
oression
members whicheever is less can also
for prevention for bringing
remedy from the Tribunal. In an action orders fo
can pass appropriate
ismanagement, the Tribunal
an end to the matters complained of.

121
 The Tibunal can, nter ala,
paao
(1) An odor to rogulate the 6onduot of affai6 of he Gompany in

uture

() 0rdor torminating or sofling asido or modilying any

agreemont betwoon the oompany and the managing directo, or any hGr
direotor or manager
(3) order torminating or setting aside or modilying any
agreement between the 0ompany and any ofher person
(4)
a
the direotora of the
order
emoving the managing direotor, manager or any of
oompany
(6) an order prosoribing ho mannor in which tho
managirig
direetor or manager of the oompany ls to be
appointed 1o an subsequent
order removing the exiating managg direotor or managear
(6) an order for reoovery or undue gains made
by any managing
director,manager or any onor diT Golor
during the period of his
appointment.
(7) an order to reatrain the
dompany from Gommitting an act which
la ultra vires the article8 or memorandum of the
company.
(8) an order to reatrain the Gompany from committing breach of

any provision of the company's momorandum or articles.

(9) an order to declaro a rosolution altoring the memorandum or
company void the rosolution was passed by suppression
articles of the
if

by mis-statoment the members.

material facts or obtainod
to
of

(10) an ordor to restrain the company and its directors from acting

on such resolution.
(11) an order to restrain the company from doing an act which is

contrary to the provisions

of the Companies Act or any other law for the

time being in forc.

(12) an order to restrain the company from taking action contraryy

to any resolution passed by the members.

(13) anorderawarding damages or compensation from the company

orits directors for any fraudulent, unlawful or wrongful act or omission on
its or their part.

(14)anorder awarding damages or compensation from the auditor

foranyimproper ormisleading statement of particulars made in his audit
reportorfor any fraudulent, unlawful or wrongful act or omission.

122
 an order awarding damages or compensation from any expert
(15)
statement made
advisor or consultant for any incorrect or misleading
of
act or omiSsIOn
the company or for any fraudulent, unlawful or wrongful
to

on his part.

and not exhaustive,

orders are only illustrative
The above stated
thinks fit.
other order if it

The Tribunal can pass any

Tubes Ltd (1965) of

Santhi Prasad Jain v. Kalinga shareholders holding equal number
three
A private company had utilise a
on the board. In order to
shares and with equal representation the company was
loan offered by the Orissa Government,
facility was
of capital
converted a public company. A substantial increase
into
of the Companies
39000 more shares. By Section 81
proposed by issuing holders.
offered to the existing share
Act, these shares should be first
the majority.
the shares to outsiders selected by
But the majority allotted of the majority and
contented that the allotees were friends
The petitioner to increase
iner
made with the malafide intention
allotment was purposely
and to squeeze out the petitioner.
their voting strength

the majority did not amount to

to
The Court held that the act of mere frivolous
It was pointed
out by the Court that
oppression on minority. and persisting course
were not sufficient. A"persistent
and wild allegations
of conduct" must be shown.

v. Nageswara Rao(1956)
Electric Supply Corporation against
Rajamundry shareholders
shareholders
was presented by some minority
A Petition of the
that the directors mismanaged the affairs
the company alleging to
shareholders had not taken any decision
company. The majority of the
there was sufficient evidence
The Court held that
directors.
proceed against the com-
and appointed two administrators to manage
of mismanagement
pany for six months.

Iron Foundry Pvt. Ltd(1966)

Ramasankar Prasad v. Sindri
force.
In this case, the minority overthrown the majority by physical
a minority
held that it amounts to oppression of the majority by
TheCourt
123
 and the decision of minority was set aside.

Topic-XLVI
Sick Companies -Revival and

(
Rehabilitation

Chapter XIX Sections 253-269) deals with Revival ane

Rehabilitation of Sick
Companies.

Declaration ofaCompanyas aSICK

COMPANY
The
jurisdictionto declare a
with the company as a "sick company" is vestea
National
Company Law Tribunal.

In order to
declare a company as a
to be filed sick company, an
by the secured application isS

creditors of the
company.
If a demand
on
by the secured
creditors of a
fifty percent or more of its company representng
has failed to outstanding amount of debt, the
pay the debt within a company
the notice of period of thirty days of the of
demand or to secure servi
or compound it to the le
satistaction of the reasod
creditors, any secured
to the Tribunal for creditor may file an
a applicauo
determination that the comoany be declared as a
sick company.

The Tribunal shall, within a perod of sixty days of the receP bf an

application, determine
whether the company is a sick company or not.
is to be done after giving the
company a reasonable opportunity or
heard. De

the Tribunal is satisfied that a

If
company has become a sick company
but the company is able to pay its debts the
within a reasonable time,
Tribunal shall give such time the company tne
to to make repayment or
debt.

124
 evival and Hehabilitation of Biok Company

On he detormination any setured

0ompany as a siok oompany,
of a
Tor ho
to tho Tibunal
0routor or the oompany may make an applioalton or
tor the rovival
may bo adoptod
otoinalion of the measures that
is to be tiled
witin a
Tohabilitation of the oompany,
uoh an applioation as a
of the oompany
date of detemninatlon
of aixty daya Irom the of revival and
period a draft sohome
Aong with the appioation
aiok oonmpany. has filed an applioalion
ia to be ilod
I the siok oompany
rahabilitation to that olfeot
ahall tilea deolaration
4/it taa no dratt soheme to it
offer,

the Tribuna
an for revival or rebabilitation,
On reeeipt of applioation
a meoting of oreditos
an interim adniniatrator to 0onvene
ahall appoint ls p06sible to revive or
and to coaider whether ii
of the company 1e has to subrmit his report to the
Tibunal
the siok oompany
rehabilitate

within sixty days,

the sick
for rovival
and rehabiltation is filed by to of1er
the application and rohabilitation
If
draft schome of rovival to take over tho
has no
company and administrator
it

tho intorim
diroot to protoct
may may issuo directions
the Tribunal The Tribunal
of the company. and for its propor
managment of the sick company
the assots
and presorvo
managoment. tho
of tho roport of
and on considoration
After hearing
the parties
satisfied that the creditors
the Tribunal is theo
outstanding against
if

interim administrator, of the amount

in value
threo-forths that
representing
and voting havo rosolved
sick companypresent
such company, the
to revive and rehabilitate
(0) it is not possible
for the winding up
be initiated; or
shall order that proceodings be revived
Tribunal
certain measures the sick company may
(i) by adopting for the
the Tribunal shall a company administrator
and rehabilitated,
and cause such administrator to prepare a scheme
of revival
company
andrehabilitation of the sick company.

125
 a scheme of
revival.
The Company Administrator shall prepare
by tne Comp
rehabilitation of the sick company. The scheme prepared
Administrator shall be placed before the creditors in a meeting conven

Tor their approval. If the scheme is approved, the Company Administrat

the scheme
shall submit the scheme before the Tribunal for sanctioning

On shall within sixty days pass am

receipt of the scheme, the Tribunal

order sanctioning such scheme shal

scheme. A copv of the sanctioned

De filed with the by the sick company within a period of thirty

Registrar
aays from the date of receipt of a copy thereof. The Tribunal shall
authorise the company administrator to implement the sanctioned scneme.

If the scheme is not apporved by the creditors, the company

administrator shall submit a report to the Tribunal within fifteen days and
the Tribunal shall order for the the sick company.
winding up of

Topic-XLVII
Winding up of Company
A Company person. a creature the law and
of
is an artificial It is

the of the company can be

it

put an end
to life
whenever it is desired to

A Company's life can be ended by the

done only through legal process.
process of winding up or liquidation.

a company represents the last stage of

Winding up or liquidation of
to the life of the company.
It is
its life. It is the process of putting an end
of such
a proceeding by which a company is dissolved. In the course
the debts of the
dissolution the assets of the company are realised,

companies are paid off out of the realised

assets and the surplus, if any,
to their holdings in the
,
is then paid the members in
off to proportion

company.

According Gower, winding up of a company is the process

to
of
whereby its life is ended and its property administered for the benefits
its creditors and members. An administrator called liquidator is appointed
and he takes the control of the company, collects its assets, pay its

debts and finally distributes any surplus among the members in

126
 of tho
accordunco wilth thoir righto, On the dissolution, tho oxistanc0
trom
COmpany Comos to an ond and its namo is struck off by tho rogistrar

tho rogistor of
companios.
doals
Companios Act,2013
haptor XX ( sootions 270 365) of tho

with winding up of companios

Up up of a
Modos of Winding tho winding

aompany
y may bo
of tho
soction 270
ojther
Companios Act,2013,

or
1) by the Tribunal;
2) voluntary

by the Tribunal
1) Winding up
up
soctions 324 to 365 deal with vwinding
270 to 303 and
Sactions

Tribunal.
by the of the National
as per the order )can
a company
up of as "NCLT"or "Tribunal"
(
winding to
The horeinaftor
referred the winding
Earlier
Tribunal".
Company Law
Tribunal
Winding Up by Now the jurisdiction
the "Compulsory by the High Courts.
be called ordered
could be
up of a company to the NCLT
is conferred
winding up
to order
up of a
a company
winding
can order the
The NCLT
The ( Tribunal)
under the following
circumstances:
of the Act,
under section 271

Inability to
Pay Debts Tribunal may order its
(a) to pay its debts, the
If a company is unable

winding up.
debts in the
be deemed to be unable to pay its
A Company shall

following three cases:

(a) If a creditor to whom a company owes a sum exceeding

127
 Rs.1,00,000 has served on the company a demand notice

TOr payment and the company has failed to pay the sum withi-

twenty-one receipt of the notice

or to provide
days after
adequate security or re-structure or compound the debt to the

reasonable satisfaction of the creditor.

(b) If
any execution process issued on a decree or order of any
court or tribunal in favour of a creditor is returned unsatisfied
in whole or in part.

c) It it is proved to the satisfaction of the Tribunal that the company

is unable to pay its debts. For determining whether a company
is unable to pay its debts, the Tribunal shall take into account
the contingent and
prospective liabilities of the company.

Sreelekshmi Silks V. Ramanika Silks Pvt. Ltd(1998)

The respondent company owed to the petitioner a sum
of Rs
20,05,150. The petitioner filed an application for compulsory
winding up
of the respondent company. The respondent raised certian defences.
The Court held that the defences set up was not in
good faith and the
winding up of the respondent company was ordered.

Ram Bahadur Thakur V. Sahu Jain Ltd(1981)

In this case, the court held that a creditor who files a petition to
winding up of a company on the ground of inability pay debts must
to
have a claim exceeding Rs. 500/- (now Rs.1,00,000) against the company
and must serve upon the company a notice of demand for payment. 1 ne
debt must be presentily payable and the title demanding of the petitioner
it should be complete. If a company has guaranteed a debt and the
principal debtor failed to pay, the company is bound to pay the money.
I"

the company also fails to pay the money, the creditor can file a petition
for winding up.

(b) Special Resolution

Tf the company passes a general meeting,
special resolution in its
to wind up the company by the Tribunal, the Tribunal can order winding

128
 up of that company's affairs.

and Integrity of India

(b) Actedagainst the Sovereignty
If a company has acted against
of india, or
the Sovereignty and Integrity
() the interests of
or
(i) the security of the State,
States, or
relations with foreign
(ii) friendly
public order, docency or morality.
(iv) of the company.
the Tribunal can order winding up

(c) Sick Company Tribunal can order winding up

of
the
By section 265 of the Act,2013, will
Once such an order is passed, the sick conpany
a Sick Company. up of any
as per the provisions applicable to the winding
be wound up
other ompany.
the Central
by Registrar
other person authorised by
(d) Application
The Registrar
or any
to the Tribunai o
order winding up of a company
apply
Covernment can in a fraudulent
grounds: have been conducted
on the following of the company
the affairs
(i)
and unlawful purpose
manner for fraudulent of its
was formed or management
the company in the formation
(i)
(ii)
concerned or misconduct
the persons misfeasance
(ii)
(ii) of fraud,
have been guilty
affairs
therewith. it can order
connection is true,
in
that the allegation
is of opinion
If the Tribunal
of the company.
winding up

Statements and Annual Returns its

(e) Default in filing Financial with the Registrar
(e) If a company has
made a default in filing five
preceeding
financial statements
or annual returns for immediately
the company
order winding up of
the Tribunal can
consecutive years,

( Just and Equitable

The Tribunal may order for the winding up of a company if it is ot

129
the opinion that it is just and equitable.

What is just and equitable" depends upon

the facts of eacn case.
The Tribunal may order winding up under
this head in the following ases.

(1) When the Substratum of the Lost

Company is
that
Under the following circumstances. the Tribunal may hoia
the substratum of the company has lost and winding up itiay
be ordered.
nas
a) ne odject for which the company was incorporated
substantially failed.
of the company
b)It
b) is impossible to carry on the business
except at a loss.

ihe existing assets of the company are insufficient to

c)
meet the existing liabilities.

When the the share holders are using their powerss

2) majority of
an oppressive policy towards the
unfairly or have adopted
minority.

the of the company.

a dead- lock in management
3) If there is

is likely
to be prejudiced.
(4) lf public interest

business or
formed to carry on illegal
(5) If the company was
becomes illegal.
when the business of the company

is only a mere bubble or sham.

(6) If the company

of members is
(7) In the company, if the number
case of a public
in the case of private company,
if it

reduced below seven and

be ordered to be
isreduced below two, the company may
wound up.

130
 The tollowing winding uP
cases illustrate when the "courts" ordered

of companies under the ground "just and equitable

Re German Date Coffee Company coffee on a

was to manufacture
ne main object of the company German patent.
The
The
could not acquire
aerman patent. The company and started manufacturing
Swedish patent
acquired for winding up
company however of the filed a petition
share holders company
coffee. Two has lost. The court

.
substratum of the company
that the
on the ground
ordered winding up.

N.K. Prasad Andhra Bank( 1983)

The business opf
The company was formed for banking business.
and the compensation was paid by the
the company was nationalised
and
Government. The directors called a meeting
for shareholders

changes memorandum to start non-banking business.

in the
proposed for
that it is a fit case
The share holders descended. The court held
the ground of Just and equitable.
ordering winding up on

( 1964)
Ramachandran v. Naras Raopat Electric Corporation in a
was to supply electricity
The main business of the company The
state.
area. The business was taken over by the
particular
in fixed deposit
and the
the state was put
compensation money paid by substra-
The court held that the
did no business for 17 years.
company winding up.
lost and thus ordered
tum of the company has been

Yenidje Tobacco Co. Ltd Re 1960)(

sole shareholders and directors
of the company
W and 'R'were the
and voting power. They became bitterly
with equal rights of management
servants of the
the appointment of important
hostile and disagreed about
between them were made through through
Company. All communication of the disagreement.
secretary. The Company made huge profits in spite
and ordered
The court held that there was dead -lock in the management
the winding up.

131
 Re Middles
Borough Assembly Rooms Company(1880)
A Company
suspended its business for more than 3 years due
depression in trade. A Shareholder presented a petition for winding
the company. Majority of shareholders opposed it. The Court held tha
the company intended to continue its operation when trade prospects
improved and the petition was dismissed.

Rupa Bharati v.
Registrar of Companies(1969)
There was failure to
resume business for five years and the
prospects also seemed
gloomy. The Court ordered winding up of the
company.

Registrar of
Companies v. Chouchan Brothers Industries Pvt.
Ltd,(1913)
A
company could not commence
incorporation. The Court ordered
business for 3
years after
winding up of the company.

The Malabar Iron and Steel

Works Ltd v. The Registrar of
Companies(1965)
The Court held that the
power of the Court to
wind up a company is
discretionary. If a company does not
commence business for a year me
Court may order winding up if there no intention of commencing its
is
business. If
the delay is
sufficiently accounted for, the court will not
order winding up.

Who Can Apply for Winding Up Order

By section 272 of the Act of 2013, the following persons can appiy
to the Tribunal for the winding up of the Company.

1) The Company -when there is a special resolution passed by

the share holders.

2) Any Creditor or creditors, including

any contingent or
prospective creditor or creditors

132
 A Secured creditor, the or not
holder of any debenture (whether
holdes
a trustee is appointed in
respect of such debentures), the trustee for the
hus
of debentures shall be deemed be the creditors
to of the company
they can also apply for winding up of the company

or contributories
3) Any contributory towards the
who is liable to contribute
means a person who
Contributory
being wound up. A person
the event of as a
its
in
assets of the company shall also be considered
shares in a company of
is holding fully paid-up to contribute towards the assets
he has no liability
contributory though
the company.

a petition for winding up

A contributory shall be entitled to present

ofthe company evenif

or
(i) he holding fully-paid shares,
is

(ii) the company may have no assets at all,or

for distributingg
(ii) thecompany may have no surplus assets left
after satisfaction of its liabilities.
among the shareholders

4) The Registrar
The Registrar can apply to the Tribunal for winding up on the

following grounds
(i) The company is unable to pay its debts
-
(ii) If a company has acted against
and of
Integrity
interests of the Sovereignty
(a) the
India, or
or
(b) the security of the State,
with foreign States, or
(c) friendly relations

(d) public order, decency or morality.

a
company have been conducted
in
If the affairs
of the
(iii)

manner or the company was formed

for
fraudulent
or the persons
fraudulent and unlawful purpose
of its
concerned in the formation or management
or
affairs have been guilty of fraud, misfeasance

misconduct in connection therewith.

a company has made a default with the
(iv)
i in filing

133
 Registrar its financial statements or annual returns
immediately preceeding five consecutive years.

The registrar shall obtain

the previous sanction of the Cent
Government for presentating a
petition for winding up. The
Governme-
has to give an
opportunity to the company to make its
representatior
before sanction is
accorded.

5) Any person authorised by the Central Government in that

behalf

6) The Central Government

company has acted
or a State
against -
Government I a

(i) the interests of the

Sovereignty and Integrityof India, or
(i) the security of the
State, or
(in) friendly relations with foreign States, or
(iv) public order, decency or
morality.

Commencement of Winding Up
By section 357 of the Act, winding up of a company is deemed to
have commenced from the time of the d
presentation of the petition,
not from the date of order of before the presentation of he
winding up. If,

petition, a special resolution has been passed by the company for winding
up by the Tribunal, the winding up shall be deemed to have commenced
at the time of passing of the resolution.

Power of Tribunal during. and atthe end of.the Hearing

By section 273 of the Act, when a winding up petition is filed, the
Tribunal shall proceed to hear the winding up petition. After hearing the

petition, the Tribunal may-

(a) dismiss it, with or without cost;
(b) make any interim order as thinks fit; it

(c) appoint a Provisional Liquidator of the company till the making

of a winding up order;

(d) make an order for the winding up of the company, with or

without costs;

134
 ()
e) any other order aa it thinka fit

daya to
An order under thia section ahall be made witiln ninety

date of presentation of the petition

on the "juat and oquilabo

he petition
tor winding up
ia presented
make an ordor
of winding up, I ia or

tound, the Tribunal

may retune to
la available lo ho polilionor
romedy
that some other offeetive
theopinion
Company iquidator
Liguidator and
of Provinional up, and bofore making
APpolntment of a potillon for windino
Atter the prenentation P'rovieional Liquidator of
the 1ibunal nay oppoint
a
the winding up order, be aPpointod from a panel
ia to
the A proviaional llquidator
company. Government oonaisting of oharterod
maintained by the Central oto
advocates, company secretaries, cost acoountants,
accountants,
the Tribunal shall give notice to
Betore appointing a provisional liquidator,
the company and aftord to an opportunity to make its representations.
it

is to protect and
The object of appointment of a provisional liquidator
of winding up
assets of the company during the pendeney
preserve the
take into his custody or control
The provisional liquidator has to
petition. He has to
all the property, etfects
and actionable claims of the company.
of
the properties
and measures to protect and preserve
take such steps be deemod
so taken into his custody shall
the company. The properties order tor the
of the Tribunal trom the dato of the
to be in the custody
winding up.
if the Tribunal
on winding up peitition,
At the end of the hearing a Company
the Tribunal will appoint
orders winding up of the company, An Official
conduct the liquidation proceedings.
Liquidator. He has to
the Central
a from the panel prepared by
Liquidator or liquidator The Tribunal
be as the Company Liquidator.
Govenment may appointed
as the Company Liquidator
may appoint the Provisional Liquidator, any,
if

for the winding up of the company.

for the conduct of the proceedings

be
The liquidation proceedings, after the winding up order, are to
by the Company Liquidator, who is appointed by the Tribunal.
undertaken
135
 Proceedings afterWinding_ upOrder

1. Notification intheOfficial Gazette

If the Tribunal
passes an order for the of a
winding up company,
Tribunal shall
give intimation to the
Company Liquidator and the Registr
The and the
petitioner
company should also file a certified
order with the copy of tF
Registrar within thirty days The
the Official Registrar shall notify
Gazette that a i
winding up order has been
Tribunal. passed by the

Deemed notice of Dischargge

The winding up order
shall be deemed to be a
the officers, notice of discharge to
employees and workmen of the
business of the company, except when the
company is continued.

Effect of Winding
up Order
The order for
winding up of a
company shall operate in favour of all
the creditors and all
contributories of the
out on the joint company as if it had been made
petition of creditors and
contributories.

Stay ofSuits onWinding up Order

By section 279 of the Act, when a a
winding up order is passed or
provisional liquidator is
appointed, no suit or other legal proceeding
shall be commenced, or pending at the date of the winding up order,
if

shall be proceeded with, or

by against the company, except with the leave
of the Tribunal.

Any application to the Tribunal seeking leave shall be disposed of

by the Tribunal within sixty days.

The restriction shall not be applicable to any proceeding pending in

appeal before the Supreme Court or a High Court.

136
 Jurlsdiction of Tribunal to try Suits
sntertain
By section 280 the Tribunal shall have jurisdiction to

dispose of

(a) any suit or proceeding by or against th Gompän

the company
(b) any claim made by or against relating to
of priorities
or any other question
(c)
(C) any question privileges,
rights, entitlements,
assots, business, actions, or in any natter
obligations
benofits, duties, responsibilities, up of the company,
or in relation to winding is instituted or
arising out of, instituted, or
has been
whether suoh suit or proceeding betore or after the order for the windin9
tUch claim has arisen or arisGs,
is made,
up of the conpany
a "Hangman"
plays the Rols of
2. Company Liquidator appoints a Companyy
a winding up order,
it

Tribual makes
When the He is, in fact, responsible a
affairs of the company.
to wind up
the
the the last stage of
of cornpany,
Liquidator
or wind up the
affairs
functions. He is also
to liquidate he has to do various
In this process, below.
discussed
company. duties. They are
They
bound by various
Report sixty
Report -Preliminary shall, within
to file First Liquidator
Duty the Company
section 281 of the Act, a report containing
By submit to the Tribunal,
the date of order,
days from
the following particulars. assets of the company including
details of the in the
The nature and in hand and
(a)
(a)
value, the
cash balance
location and the company.
any, held by
their if
securities,
bank and the negotiable
issued, subscribed and paid-up.
of
The amount capital
(b)
(b) liabilities of
the company including
The existing and contingent
(c) of its creditors
adresses and occupations
names and addresses and
and the names,
(d) The debts due to the company
from whom they are due
occupations of the persons
the company.
(e) Guarantees, if any, extended by
them
(1) The List of Contributories and dues, if any, payable by
and details of unpaid call.
of trade marks and intellectual properties, if
any,
(g) The details

137
 owned by the company.

(h) The details of subsisting contracts, joint ventures and

collaborations.

() The details of holding and subsidiary companies.

(i) The details of legal cases filed by or against the company

Duty totakecustody of Company's Properties

The Company or control a
Liquidator has to take into his custody
tne property, effects
and actionable claims of the company. He has
take such steps and
measures to protect and preserve the properties of
the company. The
properties so taken into custody by the Company
Liquidator shall be deemed to be in the custody of the Tribunal from the
date of the order for the
winding up.

Duty and Right to seek assistance of

"Winding up Committee"
The Tribunal when ordering
winding up of a company appoint a
person as Company Liquidator. The
Company Liquidator so appointed
shall make an
application to the Tribunal, within three weeks from tne
date of winding up order, for
constitutionof a winding up committee
assist and monitor the progress of
liquidation proceedings.

The Winding up Committee shall comprise of the following persons,

namely
to the Tribunal;
(i) Official Liquidator, attached
()
(ii) nominee secured creditors; and
of

(ii) a professional, nominated by the Tribunal.

are correct)
Company Liquidator shall be convener/ convenor (both
The
of the meetings of the winding up committee which shall assist and monitor
the liquidationproceedings in the following areas of liquidation funcions,
namely:
(i) taking over assets;
(ii) examination of the statement of affairs;

(ii)
(ii) recovery of property, cash or any other assets of the company

including benefits derived therefrom.

(iv) review of audit reports and accounts of the company:

138
 other claimant and distribute sale
established under proceeds in
with priorities the Act.
Act accordance
all such actions, steps, or
(h) To take to
deed, sign,
verify any paper, document, execute and
bond, or instrument as application,
affidavit, may be petition,
windi up of the necessary
() for
company
-

(ii) for tribution of assets, and

for discharging his
(ii) duties and
functions as obligations and
Company
apply to the Tribunal for Liquidator,
He can necessary orders or
the winding up of the company. directions for

The exercise of
powers Dy the
to the overall control of the
Company
Tribunal.
Liquidator shall be subject

Duty to applyfor
Dissolution ofthe
When the affairs of a Company
company have been
Company Liquidator shall make completely wound up, the
an
dissolution of such company. application to the Tribunal for

Then the Tribunal can make

an order that the
from the date of order, and company be dissolved
the company shall be
dissolved accordingly.

A copy of the Order shall, within thirtydays, be forwarded by the

Company Liquidator to the Registrar. The Registrar shall record in the
Register relating to the company a minute of the dissolution of the
company.

Ifthe Company Liquidator makes a default in forwarding a copy of

the order to the Registrar within the period of thirty days from the date of
order, he shall be punishable with fine which may extend to five thousand
rupees for every day during which the default continues.
 (v) sale of assets:

(vi) finalisation of list of creditors and contributories;

of claims;
(Va) compromise, abandonment and settlement
(vii) payment of dividends, if any; and
from time to
(()any other function, as the Tribunal may direct
time.

The Company a monthly

Liquidator shall place before the Tribunal
report along with minutes of the meetings of the Committee. The report
is to be signed by the members present in the meeting for its consideration.
This process is to be continued till the final report for dissolution of the
company is submitted before the Tribunal

General Powers and Dutiesof CompanyLiquidator

Section 290 of the Act, confers very wide
powers on the Company
Liquidator in order
enable him to wind up the
to
company's affairs.
However these powers are to be exercised subject to the
directions of the
Tribunal.
The Company Liquidator shall have the following powers:
(a) To carry on the business of the so far company as may
be necessary for the beneficial
winding up of the
company.
(b) To do all acts and to execute, in the name and on behalf
of the company, deeds, receipts and other documents,
all

and for that purpose, to use the company's seal.

(c) To sell the immovable and movable property and

actionable claims of the company by public auction or

private contracts, with power to transfer such property to
any person or to sell the same in parcels.
(d) To sell the whole of the undertaking as a going concern.
(e) To any money required on the security of the assets
raise

of the company.
(f) To institute or defend any suit,
prosecution or other legal
proceeding, civil or criminal, in the name and on behalf
of the company.
(g) To invite and settle claim of creditors,employees or any
2) Voluntary Winding Up
deal 1urnar
ons 304 to 365 of the Comoanies
Act,2013

winding up of companigs.
of the conpsriy
n ths hssis
winding up
Voluntary
winding
up means
resolution
passeo o tig sha16 holds

or a special
of a simple resolution
a general meeting.
in
Dasis of a simie
be wound up on
trig npls

membsrs undar thn

voluntarily
A company may meeting
of its
in the general
resolution" passed
cirumstances:
following
If the period
of by its articles has expired.
duration tixed
(0)
on the happening of any event
(ii)
Where the articles provides that
the event is occured.
the company is to be dissolved, and

can also be dissolved, without assigning any reason,

if
A company
a to wind
"special resolution"
thecompany in its general meeting passes
up the company voluntarily.

Declaration of Solvency or
a company voluntarily, the director
to wind up
If proposed
it is
more than two directors, the
directors or in case the company has
at a meeting of the Board, make
a declaration
majority of directors shall,
the effect that -
verified by an affidavitto
into the affairs of the company:
they have made a full inquiry
()
that
(ii) they have formed an opinion
or
the company has no debt;
be from the
the debts of the company can paid in full

proceeds of assets sold in voluntary winding up.

A possible only when the company is

voluntary winding up is

solvant and is able to pay its liabilities in full

141
 A doolaration will be valid only if

() it is mado within five wooks immodiately preceding t

date of the passing of the rosolution for winding up 1hG conpany and it

delivered to the Registrar for rogistration before that dato

() it should contaln a declaration that the Company is

nor
being wound up to defraud any person or persons,

(1) t should be accompanied by a copy of the report of the

auditors of the company on the profits and loss account, balance sheet
and statement the assets and company on
of that date
liability of the

the assets of the

((V)it is to bo accompanied by a report of the valuation of

company prepared by a registered valuer,

It the company
wound up in persuance of a resolution
is
pasS60
within a period
of five weeks after
making of the declaration, and its debIs
are not paid in full, it
shall be
presumed, until contrary is shown, that the
director or directors did not
have reasonable
grounds for his or their
opinion. The /
director directors
responsiblo for making such a declaration
shall be
punishable with imprisonment for a term which shall not be less
than three years but which may extend to five
years or with fine which
shall not be less than fifty thousand rupees but which
may extend to three
lakh rupees or with both.

Meeting of Creditorss
The Company shall along with the calling of meeting of the company
(members) at which the resolution for voluntary winding up be proposed,
to

convene a meeting of its creditors, either on the same day or on the next
day. The notice of meeting should be sent to the creditors by registered
post.

the creditors meeting the Board of Directos shall cause to

In
present
a full statement of the position of the affairs of the
Company together with
a list of creditors of the company, copy of the declaration of
solvency and
the estimated amount of the claims. One of the
directors is to preside at
the creditors meeting.

If two-thirds in value of creditors of the company are of the opinion

142
 is the interest of
company be wound uP
that it in
all parties that the

voluntarily, the company shall be wound up voluntarily.

of the opinion
the company are
ne two-thirds in value of creditors of
debts and pass a
in full
Company may not be able to pay for its
is to be
the interest of all parties the company
Tesolution that it shall be in
days
the company shall within fourteen
Wound up by the Tribunal, up.
before the Tribunal for winding
thereafter file an application

to Wind Up Voluntarily
Publication of Resolution up and
a resolution for voluntary winding
If a company has passed
up, shail within
a resolution of creditors agreeing for voluntary winding
it

notice of the resolution

fourteen days of the passing of the resolution give
and also in a newspaper which is in
by advertisement in Official Gazette
circulation in the district where the registered oftice of the company is
situate

Effect of Voluntary Winding Up

A voluntary winding up shall be deemed to have commenced on the
date of special resolution passed in the members meeting. The company

shall cease to carry on its business. However the corporate state and
corporate powers of the company shall continue until it is dissolved.

Appointment of Company Liquidator

The company in its general meeting where a resolution of voluntary
winding up is passed, shall appoint a Company Liquidator
from the panel

by the Central Government for the purpose

of winding up its
prepared
affairs and distributing the assets of the company and recommend the
fee to be paid to the Company Liquidator. The creditors in their meeting
have to approve the appointment. If they do not approve, they can appoint
another person as Company Liquidator and fix the fee of the Company
Liquidator.

he company shall the Registrar of the appointment

give notice to
of the Company Liquidator along with the name and particulars of the
Company Liquidator.

143
 all the powers
On the appointment of a Company Liquidator, ot
he
and manager shall ceas
ase OXe
Board of Directors, managing director exco

1Or the purpose of giving notice of appointment to the Rogistrar.

Functions of Liquidator in Voluntary winding up

Company

In the case of
voluntary winding up, the Company Liquidator shall

settle the be prima facie evidence of the

list of
contributories, which shall
lability of the persons named therein to be contributories.

He can call general meeting of the members for the purpose of

the sanction of the
obtaining company for any purpose that he may
consider
necessary.

He shall maintain
regular and proper books of account and the
members and creditors and any officer authorised
by the Central
Government may inspect such books of account.

shall prepare quarterly statement of accounts and file such

He
statement of accounts duly audited within thirty days from the close of
each quarter with the Registrar.

He shall pay the debts of the company and shall adjust the rights of
the contributories among themselves.

As soon as the affairs of a company are fully wound up, the Company
Liquidator shall prepare a report of winding up, showing that the property
and assets of the company have been disposed of and its debts fully
discharged, and thereafter call a general meeting of the members and
submit the report for their consideration.

If the majority of the members, after considering the report, are

satisfied that the company is to be dissolved, they may pass a resolution
for its dissolution.

144
 win tO weeks the Company Liquidator shall send to the Hegistra

resolutions passed
a copy OT the final
winding up accounts, copies of
the meetings.

Tribunal
before the
with his report
e nas to file an application along
of the company.
TOr passing an order of dissolution
the report of the Company
after considering and fair, the Tribunal
satisfied, been just
up has
is
the Tribunal
of winding
If

that the process within sixty days of the receint

Liquidator the company
dissolving
shall pass an
order
of the application.

file a copy of the order with the

The Company Liquidator shal
The Hegistrar shall forthwith publish a notice
Registrar within thirty days.
in the Official Gazette
that the company is dissolved.

Topic-XLIII
Contributories

The past and present shareholders who are liable to pay towards
the capital of the company at the time of winding up of the company are
called contributories. Those shareholders who are holding fully paid up
shares are also called contributories. The Liquidator has to prepare
lists of contributories. It is to be prepared in two parts. List A contains
t
the names of present members and List B contains names of past
members. Contributories in List A are liable to pay the unpaid balance in
them. If a shareholder is holding fully
respect of the shares holding by
he shall not be liable to
paid shares and the liability is limited by shares
contribute at the time of winding up. If a share holder is holding partlyy
paid shares he has to contribute the balance amount in respect of those
shares. The liability to make payment arises only when the Tribunal makes
an order to pay the balance amount. Past members are also liable as
contributories. However if he has ceased to be a member for one year or
upwards before the commencement of the winding up, he is not liable as
contributory.
So also if the present member is capable to pay the balance,
145
 the past member is not liable to pay the unpaid balance. The past
membe
Decomes liable only on the default of the present member.

Topic XLIX
Dormant Company
or
Inactive Comany
or
Defunct Company
Section 455 of the Companies Act,
2013 deals with "Inactive
Companies" and "Dormant
companies".

"Inactive
Company" means a company which
() has not been carrying on any business
(i)
or operation, or
(ii) has not made any "significant
accounting transaction"
during the last two financial years, or
(ii) has not filed financial statements and
annual returns
during the last two financial years.

"Significant Accounting Transaction" means any transaction other

than
(a) payment of fees by a company to the Registrar;
(b) payment made by it to fulfil the requirements of the Act or any
other law;

(c)allotment of shares to the requirements of this Act;

fulfil and
(d) payments for maintenance of its office and records.

fa company is formed and registered under the Act for a future

project or to hold an asset or intellectual property and has not significant
accounting transaction, such a company or an "inactive company" may
make an application to the Registrar for obtaining the status of a "dormant
company".

The Registrar on consideration of the application allow the status of

146
 to that effect,
a certificate
cert
and issue
a dormant company of dormant companies.
a register
gister
maintain
shall
The Registrar
acial statements
stateme or annual returns for
financial
to
Issue a notice to that
file
file
to shal issue
aa company fails shall
any ta company
any the Regis
Registrar in
in the register
th.
years, company maintained for
two consecutiveye of such
the name
and enter
companies.
dormant have
shall have minimum number
ny shall of directors.
company It

A dormant scribed annual fee to the Registrar to retain its dormant

the prescribed
has to pay an application and paying prescribed fee, can
After filing it become
status.
an active company.

The name a dormant company, which fails to

of
comply vwith the
of section 455, will be struck off from the
orovisions register of dormant
companies.

Defunct Companies

Section 560 of the Companies Act of 1956 dealt with defunct company.

A defunct company means a company which is not carrying on any business

or which is not in operation.

name a defunct the register of the

company could be struck off
The of

formalities were to be satisfied before

companies by the Registrar. The following
striking off the name
of the company.

If the Registrar had reasonable cause to bolieve that a cornpany was

not carrying on business or in operation, he had to sond a notics to the conpany
inquiring whether the company was still in operation or not.

2 If the Registrar did not receive any answer to such notice within one
month, the Registrar
had to send to the Company a letter by registered post stating
thatif no answer
was received to the second letter within one month, a notice would

147
 tne company
be published the Gazette to striking off the
name or
in Official with a view
from the Register.

notice, he
the
3. the Registrar did not receive any answer
to
motns
of three
w4s to Publish in the Official Gazette a notice that at the expiration
the Registrar
be struck off
from the date of the notice, the name of the company would
to ne
A had also to be given e the
company would be
ana the dissolved. notice
haa to
the Registrar
At the expiry of three months from the date of notice, Gazete.
a notice in
the Official
ompanies name off the register and to publish d
stood dissOVed
the company
of this notice,
ne publication in the Official Gazette

company
creditor of the
the company, or
ne company, or any member of an
Company Law Tribunal to pass
to the National
COuld, within twenty years, apply
If the Tribunal
found that the company
the name of the company.
order for restoring
to do so, the
Tribunal could
or it is otherwise just
was on business
carrying
actually
to the register.
the name of the company
order to restore

Topic L (NCLT)
The National Company Law Tribunal
and Tribunal
The National Company Law Appellate
(NCLAT)

The National Company Law Tribunal

Act,2013 empowers
the central
Section 408 of the Companies The
Law Tribunal(NCLT),.
the National Company
Government to constitute the functions
to exercise the powers and discharge
function of the NOCLT is

under the Act.

as may be conferred on it

number of
a President and such
judicial
The NCLT is to consist of

and technical members.

has been a Judge of a

The President shall be a person who is or

for five years. The President shall be appointed after

High Court
consultation with the Chief Justice of India.

148
 A person shall not be as a Judicial Mermoer
qualified for appointment
nless he

a) is, has been, a Judge of a High Court; or

or

1S, or has been, a District Judge for at least

five years; or
(b)
a court.
has, for at least ten years been an advocate
of
(C)
(c)

Secretaries
Chartered Accountants, Cost Accountants, Company
etc., are eligible to be appointed as technical members.

The judicial and technical members are to be appointed on tne

recommendation of a Selection Committee.

The powers of the NCLT may be exercised by the Benches. The

number of Benches may be specified by the Central Government. The
Principal Bench of the Tribunal shall be at New Delhi which shall be
presided over by the President of the Tribunal. The powers of the Tribunal
shall be exercisable by Benches consisting of two Members out of whom

one shall be a Judicial Member and the other shall be a Technical Member.

The President shall for the disposal of any case relating to

rehabilitation, restructuring or reviving of companies, constitute one or

more Special Benches consisting of three or more Members with majority

of Judicial Members.

If the Members of a Bench differ in opinion on any point or points, it

there is a majority. If the

shall be decided according to the majority,
if

the point or points on which

Members are equally divided, they shall state
be referred to the President for hearing on
they differ, and the case shall
of the Tribunal
such point or points by one or more of the other Members
of the
and such point or points shall be decided according to the opinions
heard the case, including those who first
majority of Members who have
heard it.

Any person aggrieved by an order of the Tribunal may prefer an

appeal to the Appellate Tribunal.
149
 from an order mado by
No appoal shall lie to tho Appellate Tribunal

the consent of parties

of forty-five days from tho

shall bo filod with a period
Evory appoal
is mado availablo to the
dato on which a copy of the order of the Tribunal
an appeal aftor
porson aggrioved. Tho Appollato Tribunal may ontortain

within a furthor period

the oxpiry of the said poriod of forty-five days but
that tho appollant
was
it is satistiod
notoxceeding forty-five day8,
if

the said period,

the appoal within
preventod by sufficiont causo from filing

Tribunal shall, after giving

On receipt for an appoal, the Appollate
the parties a reasonable opportunity
of being heard, pass such orders
order of
thereon as it thinks fit. It can confirm, modify or sott aside the

the Tribunal.

The Appellate Tribunal shall send a copy of every order made by it

to the Tribuna and the parties to appeal.

The National Company Law Appellate Tribunal

410 of the Companies Act,2013 provides for establishment

(
Section
The main function
of National Company Law Appellate Tribunal NCLAT).
of the NCLAT is to hear appeals from the orders of N.C.L.T

The NCLAT shall consist of a Chairperson, Judicial members and

Technical members. The Chairperson and Judicial Members are appointed
by the Central Government after consultation with the Chief Justice of

India.The Chairperson shall be a person who has been a Judge of the

Supreme Court or the Chief Justice of a High Court. A Judicial member

shall a person who is or has been a judge of a High Court or a judicial
be
member of the NCLT for five years. A technical member of the NCLAT
shall be a person of ability, integrity and standing
having special knowledge
and professional experience of not less than 25
years in science,
technology, economics, banking,
industry, law, matters relating to labour,
industrial finance or any other matter. The technical members of thne
Appellate Tribunal shall be
on appointed the recommendation of a
150
gelection Committee.

An appeal
against any decision or order of
the NCLAT shall lio to
the SupremeCourt of
India on any
question of law arising out of the
The Appeal is to be order
preferred within sixty days from the date of
the order of the receipt of
Appellate Tribunal. The Supreme Court may condone
any delay in filing appeal, there is sufficient cause for the
dealy. However
if

the delay should not exceed sixty days.

Topic- LI
emoval of Names of Companies from the Register
of
Companies
Power of Registrar
by section 248 (1) of the
Companies Act,2013, if the Registrar nas
reasonable cause to believe
that

year
a
of its
a Company has
incorporation; or
failed to commence its business within one

(b) the subscribers the memorandum has not paid the

to
subscription which they had undertaken to pay within a period of ne
hundred and eighty days from the date of incorporation and a declaration

by a director is not filed within 180 days of its incorporation;

or

on any business or operation fora

(c) a company is not carrying
made
period two immediately preceding financial years and has not
of
the status of a dormant
any application within such period for obtaining
company,

he send a notice to the company and all the directors of the company,
shall
of
of his intention to remove the name of the company from the register
with
companies and requesting them to send their representations along
of thirty days from the date of the
relevant documents within a period
notice.

151
 The notice shall also be published in the Official Gazette

At the expiry of the notice, the Registrar may,

the timne mentioned in

f no explanation is given by the company against the proposed action,

strike off the company's name from the register of companies and publish
notice thereof in the Official Gazette. On the of this notice in
publication
the Gazette ,the company shall stand dissolved.

a
Any person aggrieved by an order of the Registrar notifying
company as dissolved may file an appeal to the Tribual within a period or
three years from the date of order. the Tribunal is of the opinion that
If

the removal of the name of the company form the register is not justified,
it may order restoration of the name of the company in the register ot
companies.