The Companies Act, 1956

1 © Anant D. C. 2010
 The Companies Act, 1956
 Nature of Company
 Kinds of Companies
 Formation of Company
 Memorandum of Association
 Articles of Association
 Prospectus
 Shares
 Borrowing Powers
 Meetings and Proceedings
 Accounts and Auditors
 Prevention of Oppression and Mismanagement
 Winding up

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 Introduction
 After the end of World War II, the need for a further revision of the
company law was felt. Many changes had taken place in the
organization and management of joint stock companies. The
Government of India, therefore appointed on 25th October, 1950, a
committee of 12 members representing various interests under the
Chairmanship of Mr. H. C. Bhabha. The committee submitted a
comprehensive report on all aspects of company law in April 1956.
 The recommendations of the Bhabha Committee culminated in the
most comprehensive and the voluminous law in the Companies Act
of 1956. The Companies Act of 1956, which is patterned on the lines
of English Companies Act of 1948, is a comprehensive piece of
legislation covering the entire field of company organization and
management. This Act has been amended several times since it was
codified.

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4 © Anant D. C. 2010
 Characteristics of a Company
Separate legal entity – A company is regarded as
an entity separate from its members (it has an
independent existence). Any of its members can
enter into contracts with it in the same manner as
any other individual can and he cannot be held
liable for the acts of the company even if he holds
virtually the entire share capital. The company’s
money and property belong to the company and
not the shareholders (although the shareholders
own the company).

(Contd.)

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 Characteristics of a Company
Limited liability – A company may be a
company limited by shares, the liability of
members is limited to the unpaid value of the
shares. For example, if the face value of a share in
a company is Rs. 10/- and a member has already
paid Rs. 7/- per share, he can called upon to pay
not more than Rs. 3/- per share during the life
time of the company.
(Contd.)

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 Characteristics of a Company
Perpetual succession and a common seal – A
company is a juristic person with a perpetual
succession and a common seal. As such it never
dies; nor does its life depend on the life of its
members. It is not any manner affected by
insolvency, mental disorder or retirement of any
of its members. It is created by a process of Law
and can be put an end to only by a process of
law.
(Contd.)

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 Characteristics of a Company
Transferability of shares – The capital of a
company is divided into parts, called shares.
These shares are, subject to certain conditions
freely transferable, so that no shareholder is
permanently or necessarily wedded to a
company. When the joint stock companies were
established the great object was that the shares
should be capable of being easily transferred.

(Contd.)
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 Characteristics of a Company
Separate property – A company, as already
observed, is a legal person distinct from its
members. It is, therefore, capable of owning,
enjoying and disposing of property in its own
name.
Capacity to sue – A company can sue and be sued
in its corporate name. It may also inflict or suffer
wrongs.

 A company is not a citizen – Although a company is regarded as a legal

person (though artificial), it is a not a citizen either under the Constitution of
India or the Citizenship Act, 1955.

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 Kinds of Companies

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 Classification on the basis of Incorporation
 1. Chartered companies – These are the companies which are
incorporated under a special charter granted by the King or Queen
(in England) e.g. East India Company. A chartered company is
governed by its charter which defines its nature of the company.
These companies find no place in India after the country-attained
independence in 1947.
 2. Statutory companies – These are the companies which are
created by a special Act of the Legislature, e.g. the Reserve Bank of
India, the Life Insurance Corporation, the Unit Trust of India, the
Industrial Finance Corporation. These are mostly concerned with
public utilities.
 3. Registered companies – These are the companies which are
formed and registered under the Companies Act 1956. These are by
far the most commonly found companies.

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 Classification on the basis of Liability
 1. Companies limited by Shares - Where the liability of the members of a company
is limited to the amount unpaid on the shares, the company is known as a company
limited by shares. The liability can be enforced during the existence of the company
as also during the winding up of the company. If the shares are fully paid, the
liability of the shareholders holding such shares is nil.
 2. Companies limited by guarantee – Where the liability of the members of a
company is limited to a fixed amount which the members undertake to contribute to
the assets of the company in case of its winding up, the company is called a company
limited by guarantee. The Articles of such a company must state the number of
members with which the company is to be registered. Companies limited by
guarantee are not formed for the purpose of profit but for the promotion of art,
science, culture, charity, and sports or for some similar purpose.
 3. Unlimited companies – Any 7 or more persons (2 or more in case of a private
company) may form an incorporated company with or without limited liability is
known as an unlimited company. In case of such a company every member is liable
for the debts of the company, as in an ordinary partnership, in proportion to his
interest in the company.

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Classification on the basis of number of members
1. Private company – A private company means a company
which by its articles –
a. Restricts the right to transfer its shares, if any;
b. Limits the number of its members to 50 (not including its
employee members) and
c. Prohibits any invitation to the public to subscribe for any
shares or debenture of the company.3
2. Public company – A public company means a company
which is not a private company by its articles –
a. Does not restrict the right to transfer its shares, if any;
b. Does not limit the number of its members; and
c. Does not prohibit any invitation to the public to
subscribe for any shares or debentures of the company

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Distinction between a Public Company and a Private
Company
Minimum number
Maximum number
Number of Directors
Restriction on appointment of
directors
Restriction on invitation to
subscribe for shares
Transferability of shares
Quorum
Managerial remuneration
14
Public Company Private Company
Persons required to form a public Persons required to form a private
company is 7 company is 2
No restriction of maximum number Maximum number cannot exceed
50
At least 3 directors At least 2 directors
The director must file with Registrar a Need not do so
consent to act as director
Invites the general public to subscribe Prohibits any such invitation to the
for the shares public
Shares are freely transferable Right to transfer shares id restricted
5 members personally present 2 members
Cannot exceed 11% of the net profit No such restriction
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 Foreign company
Any company incorporated outside India
which has a place of business in India. Every
foreign company shall file with the Registrar
the following documents –
A certified copy of the Charter, statutes and
Memorandum and Articles of the company;
The full address of registered or principal office;
A list of directors and secretary of the company;
Name and addresses of any persons resident in India;
and
The full address of the principal place of business in
India.

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 Formation of Company
Promoter’s preliminary steps before company is
formed –
whether it should be a private company or public
company;
whether it is worthwhile forming a new company;
and
taking over the business of an already established
concern.

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 Incorporation of Company
Any 7 or more persons (2 or more persons in case
of a private company) associated for any lawful
purpose may form an incorporated company
with or without limited liability. The following
documents duly stamped together with the
necessary fees are to be filed with the Registrar.
(Contd.)

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 Incorporation of Company
The Memorandum of Association duly signed by the
subscribers;
The Articles of Association, if any, signed by the
subscribers to the Memorandum Association;
The agreement, if any, which the company proposes
to enter into with any individual for appointment as
its managing or whole-time director or manager.
The sanction of the Controller of Capital Issues if the
Capital exceeds Rs. 1 crore.
A list of the Directors who have agreed to become the
first Directors of the Company. (Contd.)

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 Incorporation of Company
A declaration stating that all requirements of
the Companies Act and other formalities
relating to registration have been compiled
with. Such declaration shall be signed by –
An Advocate of the Supreme Court or a High Court;
or
An Attorney or a pleader entitled to appear before a
High Court; or
A Secretary or a Chartered Accountant in whole time
practice in India; or
A person named in the Articles as a Director,
Manager or Secretary of the Company.

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 Certificate of Incorporation & Effect of
Registration
 Certificate of Incorporation – When the requisites documents are
filed with the Registrar, he retains and registers the Memorandum,
the Articles and other documents filed with him and issue a
‘certificate of incorporation’.
 Effect of Registration –
 The company becomes a distinct legal entity. Its life commences
from the date mentioned in the certificate of incorporation.
 It acquires a perpetual succession – The members may come and
go but it goes on forever, unless it is wound up.
 Its property is not the property of the shareholders – The
shareholders have a right to share in the profits of the company
when realized and divided. Likewise, any liability of the company
is not the liability of the individual shareholders.

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 Memorandum of Association
The Memorandum of Association of a company is
a fundamental document of the company. It
contains ‘the fundamental conditions upon which
alone the company is allowed to be incorporated’.
It is the charter of the company and defines the reason
for existence.
It lays down the area of operation of the company.
It also regulates the external affaires of the company in
relation to the outsiders.
It not only shows the object of the formation of the
company but also the utmost possible scope of it.

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 Purpose of Memorandum
The prospective shareholders know the field
in, or the purpose for which their money is
going to be used by the company and what
risk they are undertaking in making
investment.
The outsiders dealing with the company
knows with certain as to what the objects of
the company.

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 Contents of the Memorandum
 The name clause – The first clause of a memorandum
shall state the name of the proposed company, which
establishes its identity and is the symbol of its existence.
Undesirable name to be avoided –
 Too similar to the name of the another company;
 Misleading;
Prohibition of use of certain names like emblem, Flag,
Official seal etc.
 The state in which the registered office of the company is
situate;
 The objects of the company;
 In the case of a company having a share capital, the
amount of share capital with which the company is to be
registered.
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 Alteration of Memorandum
 Change of Name –
 By Special resolution (passed by three-fourths majority) – A
Company may change its name by a special resolution and
with the approval of the Central Government.
 By Ordinary resolution (passed by a simple majority) – If
through inadvertence or otherwise, a company is registered by
a name which, in the opinion of the central government, is
identical with, or too resembles, the name of the existing
company.
 Change of registered office – A company may by
special resolution alter the provisions of its
Memorandum so as to change the place of its
registered office from one state to another.

(Contd.)

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 Alteration of Memorandum
 Alteration of objects – The objects clause is the most
important clause in the Memorandum and can be
altered by a special resolution so as to enable the
company –
 To carry on its business more economically or more efficiently;
 To attain its main purpose by new or improved means;
 To enlarge or change the local area of its operations;
 To carry on some business which under exiting circumstances
may conveniently or advantageously be combined with the
objects specified in the memorandum;
 To restrict or abandon any of the objects specified in the
Memorandum;
 To sell or dispose of the whole or a part of the undertaking;
 To amalgamate with any other company.

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 Doctrine of Ultra Vires
 A company has the power to do all such things as are –
 authorized to be done by the Companies Act, 1956;
 essential to the attainment of its objects specified in the
Memorandum;
 reasonably and fairly incidental to its objects.
 ‘Ultra’ means ‘beyond’ and ‘vires’ means ‘power’. The term
ultra vires of a company means that the ‘doing of the act,
beyond the legal power and authority’ of the company. The
purpose of these restrictions are two fold –
 First, to protect investors in the company so that they may know
the objects in which their money is to be employed; and
 Second, to protect creditors by ensuing that the company’s fund,
to which they must look for payment, are not wasted in
unauthorized activities.

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 Articles of Association
 The Articles of Association are the rules, regulations and bye-laws for the internal management
of the affairs of the company. They are framed with the object of carrying out the aims and
objects as set out in the Memorandum of Association.
 Contents of Articles – Articles usually contain provisions relating to the following matters:
 Share capital, rights of shareholders, variation of these rights, payment of underwriting
commission
 Lien on shares (Lien means a right to retain possession of some property of another until
some claim attaching to it is settled)
 Calls on shares
 Transfer of shares
 Forfeiture (fine, penalty) of shares
 General meetings and proceedings thereat
 Voting rights of members, voting and poll
 Directors, their appointment, remuneration, qualifications, powers and proceedings of Board
of Directors
 Manager
 Secretary
 Accounts, audit and borrowing powers
 Capitalization of profits In framing the Articles of a company care must be
 Winding up taken to see that regulations framed do not go
beyond the powers of the company. If they do, they
would be ultra vires the Memorandum or the Act
will be null and void.

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Articles and Memorandum – Distinction
Memorandum of Association Articles of Association
1 It is the charter of the company indication the They are the regulations for the internal
nature of its business, its nationality, and its management of the company and are
capital. It also defines the company’s subsidiary to the Memorandum.
relationship with outside world
2 It defines the scope of the activities of the They are the rules for carrying out the
company, or the area beyond which the objects of the company as set out in the
actions of the company cannot go. Memorandum.
3 It, being the charter of the company, is the They are subordinate to the Memorandum.
supreme document.. If there is a conflict between them, the
Memorandum prevails.
4 There are strict restrictions on its alterations. They can be altered by a special resolution
Conditions of incorporation contained in it provided they do not have any conflict with
can be altered of the company law board. the Memorandum and the Companies Act.
5 Any act of the company, which is ultra vires, Any act of the company which is ultra vires
the Memorandum is wholly void and cannot the articles can be ratified by the
be ratified even by the whole body of shareholders.
shareholders.

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 Constructive Notice of Memorandum
and Articles

 Every outsider dealing with a company is deemed to

have notice of the contents of the Memorandum and
the Articles of Association which on registration with
the registrar assume the character of public
documents. This is known as constructive notice of
Memorandum and Articles.
 The office of the Registrar is public office – The Memorandum
and the Articles are open and accessible to all.
 Presumption that the outsider has read Memorandum and
Articles.

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 Doctrine of Indoor Management
 There is one limitation to the doctrine of constructive notice
of the memorandum and the Articles of a company. The
outsiders dealing with the company are entitled to assume
that as far as the internal proceedings of the company are
concerned, everything has been regularly done. They are
bound to read the registered document therewith, but they
are not bound to do more; they need not inquire into the
regularity of the internal proceedings as required by the
Memorandum and Articles. This limitation of the doctrine of
constructive notice is known as the ‘doctrine of indoor
management’.
 The Memorandum and Articles are public documents. They are open to
inspection by everybody. But the details of internal proceedings are not
open to public inspection. An outsider presumed to know the
constitution of a company, but not what may or may not have taken
place within the doors that are closed to him.

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 Prospectus
 In order to finance its activities, a company needs to have capital.
This raised by a public company by the issue of the prospectus
inviting deposits or offers for shares and debentures (document
which either creates or acknowledges a debt) from the public. The
central theme of the prospectus from the money raising point of
view, is that it sets out the prospects of the company and the
purpose for which the capital is required. The prospectus is the
basis on which the prospective investors from their opinion and
take decisions as to the worth and prospects of the company.
 Section 2 (36) defines a prospectus as “any document described or
issued as a prospectus and includes any notice, circular,
advertisement or other document inviting deposits from the public
or inviting offers from the public from subscription or purchase of
shares in, or debentures of a body corporate.”

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 Contents of Prospectus
 Prospectus is the window through which an
investor can look into the soundness of a
company’s venture. The investors must therefore
be given a complete picture of the company’s
intended activities and its position. This is done
through prospectus, which must secure the fullest
disclosure of all material and essential particulars.
 Section 56 lays down that a prospectus issued
shall –
 state the matters specified in Part I of Schedule II, and
 set out the reports specified in Part II of Schedule II

(Contd.)
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 Contents of Prospectus - Part I of Schedule II
 General information  Company, management and project
 Name and Address of Registered office.  History and main objects and present
 Consent of the Central Government. business of the company.
 Names of Regional stock exchange and other stock  Subsidiary(ies) of the company, if any.
exchanges where application made for listing of
present issue.  Promoters and their background.
 Date of the opening of the issue. Date of closing of  Names, addresses and occupation of
the issue. manager, managing director and other
 Name and addresses of trustee, auditors and lead directors, whole-time directors.
managers.
 Location of project and details about it.
 Capital structure of the company
 Nature of product.
 Authorized, issued, subscribed and paid up capital.
 Size of present issue giving separately reservation for  Future prospects.
preferential allotment to promoters and others.  Particulars in regard to the company and other
 Terms of the issue listed companies under the same management
 Terms of payments.  Outstanding litigation pertaining to operation
 Rights of the instrument holders.
and finances of the company and criminal
 How to apply – availability of forms, prospectus and prosecution launched against the company and
mode of payment. the directors or particular default in statutory
 Any tax benefits for company and its shareholders. due or institutional due if any etc.
 Particulars of the issue  Management perception of risk factors e.g.
 Objects. sensitivity to foreign exchange rate
 Project cost. fluctuations, difficulty in availability of raw
 Means of financing (including contribution of materials or in marketing products etc.
promoters).

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 Contents of Prospectus - Part II of Schedule II
 General Information  Statutory and other
 Consent of the Directors, information
Auditors, etc., their names  Minimum subscription.
and addresses.  Expenses of the issue giving
 Change, if any, in directors separately fee payable to
and auditors during last 3 Advisors, Registrars, Managers
years and reasons thereof. and Trustees.
 Report of the auditors and  Commission or brokerage.
accountants.  Details of purchase of the
property.
 Details of directors, proposed
directors, remuneration.
 Rights of members regarding
voting.

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 Misstatements in Prospectus and their Consequences

 A prospectus is a document which holds out to the public as to what a

company is what it proposes to do and what its prospects are. It invites
deposits from the public or invites offers from the public to subscribe to the
share capital and debentures of the company. It is therefore but reasonable
that there must be full frank and honest disclosure of all material facts
scrupulous accuracy in a prospectus and no material fact should be misstated
or withheld. This is the golden rule as to framing of prospectus.
 If there is any misstatement of a material fact in a prospectus or if the omits
any material fact, there may arise:
Civil liability – If there is a misstatement of a material Criminal liability - Where a prospectus
information in a prospectus and if it has induced any contains any untrue statement, every
shareholder to purchase shares he can – person who authorized the issue of the
prospectus is punishable with
•Rescind (withdraw, cancel) the contract.
imprisonment, which may extend to 2
•Claim damages from the company whether the years or with fine, which may extend to
statement is fraudulent or an innocent one. Rs.5000/- or with both.

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 Shares
The capital of a company is divided into
certain invisible units of a fixed amount.
These units are called shares. Share means a
definite portion of the share capital of a
company. It carries certain rights and
liabilities while the company is a going
concern or while the company is wound up.

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 Types of Shares
 Preference shares –  Equity shares – Equity
Preference shares with shares, with reference to any
reference to any company company limited by shares
limited by shares are those are those which are not
which have both the
following two characteristics preference shares. Equity
 They have a preferential right share capital is the sum total
to be paid dividend during of equity shares. In other
the lifetime of the company; words, equity share capital is
and one which does not carry
 They have a preferential right
preference as to
to the return of capital when  Payment of dividend; and
the company goes into
liquidation (insolvency).  Repayment of capital.

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 Application and Allotment of Shares

An application for shares is an offer by a

prospective shareholder to a company to take
shares; allotment is the acceptance by the
company of the offer. Allotment results in a
binding contract between the company and the
shareholders.

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 Rules of Allotment
 The competent authority (Board of Directors) shall allot the shares.
 The allotment must be absolute and unconditional.
 Minimum subscription – No allotment shall be made of any share capital
of a company offered to the public for subscription unless
 The amount stated in the prospectus as the minimum amount has been
subscribed, and
 The sum payable on application for such amount has been paid to and received
by the company.
 Application money – The amount payable on application on each share
shall be at least 5% of nominal amount of the share.
 Statement of lieu of prospectus – The allotment should be made after
atleast 3 days from the date of filing a statement of lieu of prospectus with
the Registrar.
 Shares and debentures to be dealt in on stock exchange – Every company
intending to offer shares or debentures to the public for subscription by the
issue of a prospectus shall, before such issue, make an application to one or
more recognized stock exchanges for permission for the shares indented to
offer

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 Share Certificate
Every person whose name is entered as a
member in the register of members of a
company has a right to receive a certificate of
shares and shall be under the seal signed by at
least 2 directors and the secretary of the
company and shall specify
the shares to which it relates,
the amount paid up thereon, and
The name, address and occupation of the holder of
the shares.

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 Forfeiture (fine, penalty) of Shares

If a shareholder, having been called upon to any

and call on his shares, fails to pay the call, the
company has two remedies against the
shareholder, namely –
It may sue him for the amount due.
It may forfeit (surrender, give up) his shares.

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 Borrowing Powers
A company needs money to finance its activities. A
part of this requirement is met by the issue of
shares, for the rest the company has to resort to
public borrowing.
Every trading company, unless prohibited by the
Memorandum or the Articles, has implied power
to borrow money for the purpose of its business. It
has also the power to give security for the loan by
creating a mortgage or charge on its property.

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 Debentures
 The most usual form of borrowing by a company is by the
issue of debentures. Debenture means a document, which
either creates a debt or acknowledges it.
 The characteristics are –
It is issued by the company and is usually in the form of a
certificate which is an acknowledgment of indebtedness.
It is issued under the company seal.
It is usually specifies a particular period or date as the date of
repayment and specified principal and interest at the
specified date.
A debenture holder does not have any right to vote in the
company meetings.

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 Kinds of debentures
 Bearer or unregistered debentures – which are payable to bearer and
are regarded as negotiable instruments.
 Registered documents – are payable to registered holders and his
name appears both on the debenture certificate and in the company’s
register of debentures.
 Secured debentures – which create some charge on the property of the
company.
 Unsecured or naked debentures – which do not have any charge on
the assets of the company.
 Redeemed debentures – usually issued on the condition that they shall
be re-issued after certain period.
 Convertible debentures – give an option to the holders to convert them
into equity shares at stated rates of exchange after a certain period. If
the holders exercise the right of conversion, they cease to be lenders to
the company and become members instead.

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 Meetings and Proceedings
Meetings – The meetings of a company may classified as:
 Meetings of shareholders -
General meetings of shareholders -
 Statutory meeting,
 Annual general meetings, and
 Extraordinary meetings.
Class meetings.
 Meetings of creditors and debenture holders -
During the lifetime of the company, and
At the time of winding up of the company.
 Meetings of directors.

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 Statutory Meeting (sec. 165)
This is the first meeting of the shareholders of a company. It
must be held within a period of not less than 1 month nor
more than 6 months from the date at which the company is
entitled to commence business.
 The Board of Directors must at least 21 days before the day on which
the meeting is to be held, forward a report, called the ‘statutory
report’ to every member of the company. This report contains all the
necessary information relating to formational aspects of the company
for the information of the members like –
 Total shares allotted,
 Cash received,
 Abstract of receipts and payments,
 Directors and auditors,
 Contract,
 Arrears,
 Commission and brokerage.

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 Annual General Meeting (Sec. 166 & 167)
 Every company must in each year hold, in addition to ant other
meetings, a general meeting as its annual general meeting and
must specify the meeting as such in the notices calling it. A
period of not more than 15 months should pass between the
date of one annual general meeting of a company and that of
next.
 It is only at the annual general meeting of a company that the
shareholders can
 exercise can exercise any control over its affairs,
 discuss the affairs and review the working of the company, and
 take necessary steps for the protection of their interests.

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 Extraordinary General Meeting (Sec. 169)

Any general meeting other than an annual

general meeting is called an extraordinary
general meeting. It is called for the
transacting some urgent or special
business which cannot be postponed for
till the next annual general meeting.

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 Class Meetings (Sec. 106)
Under the Companies Act, class meetings of
various kinds of shareholders and creditors are
required to be held under different
circumstances. Class meetings of the holders of
different classes of shares are to be held if the
rights attaching of these shares are to be varied.

49 © Anant D. C. 2010
 Meetings of Directors
Directors of a company exercise most of their
powers at the meetings of the Board. The
companies Act contains the following provisions
relating to Board meetings –
Number of meetings – A meeting of its Board of directors
must be held at least once in every 3 months and at least 4
such meetings must be held in every year.
Notice of the meetings- Notice of every meeting must be
given in writing to every director.
Quorum for meetings – The quorum for a meeting of the
Board is 1/3 rd of its total strength.

50 © Anant D. C. 2010
 Requisites of a valid meeting
 Proper authority – The proper authority to convene a general
meeting of a company is BoD who should pass a resolution
to call the meeting, at a duly convened Board meeting.
 Notice of meeting – Proper notice of the meeting should be
given to the members by giving at least 21 days notice in
writing to the members.
 Quorum of meeting – The quorum is generally fixed by the
Articles. Quorum means the minimum number of members
who must be present in order to constitute a meeting and
transact business thereat. If the quorum is not present there is
no meeting and the proceedings held thereat are invalid.
 Chairman of meeting – A chairman is necessary to conduct a
meeting.
 Minutes of meeting – Every company must keep a record of
all proceedings of every meetings

51 © Anant D. C. 2010
 Accounts and Auditors
Books of Account – (Sec 209) – Every Company must
keep at its office proper books of account with
respect to -
all receipts and payments of money and the matters in
respect which the receipt and expenditure take place;
all sales and purchases of goods by the company;
the assets and liabilities of the company; and
in case of company engaged in production, processing,
manufacturing or mining activities, such particulars
relating to utilization of material or labour or to other
items of cost.
(Contd.)

52 © Anant D. C. 2010
 Accounts and Auditors
 Where the company has a branch office, whether in or
out of India, books of account relating to the
transactions effected at branch office must be kept at
the branch. But at intervals of not more than 3 months,
summarised account should be sent to the company at
its registered office.
 The books of account must give a true and fair view of the state
of affairs of the company;
 The location of books ordinarily be kept at the registered office
of the company;
 The books of account with the relevant vouchers must be
preserved for a period of atleast 8 years;
 The books of account and other books are open for inspection
during business hours by any director or any government
authorized officer.

53 © Anant D. C. 2010
 Annual Accounts and Balance Sheet
The annual accounts of a company
consist of a balance sheet as at the end
of a financial year and profit and loss
account for the financial year. At every
annual general meeting of a company,
the board of directors must lay before the
meeting –
a balance sheet for the year;
a profit and loss account for the period; and
director’s report.

54 © Anant D. C. 2010
 Auditors
 The audit of a joint stock company is intended for the protection of the
shareholders and the auditor is expected to examine the accounts
maintained by the directors with view to informing the shareholders
of the true financial position.
 Qualifications – A person is qualified for appointment as auditor of a
company only if he is a chartered accountant within the meaning of
the Chartered Accountants Act 1949.

Rights and Powers of Auditors Duties of Auditors

Right of access to books, accounts and vouchers;
Right to obtain information and explanation;
Right to visit branch office and access to books;
Right to receive notice of general meeting and
attend them; and
Right to receive remuneration
Acquaintance with the Articles;
Report to members;
Statutory report (certify the report); and
Assistance in investigation

55 © Anant D. C. 2010
 Prevention of Oppression and Mismanagement

The management of companies is based on the majority

rule. Like any democratic set-up, the majority has its way
in the company though due provision must also be made
for the minority to have its say.
The oppression of mismanagement of companies by
majority calls for remedial action. In such case the
minority shareholders may apply to
 the Court for the winding up of the company on the ground that it is
just and equitable to do so;
 the Company Law Board for appropriate relief’ and
 the Central Government for appropriate relief

56 © Anant D. C. 2010
 Powers of the Company Law Board
 Under section 397 and 398 the Company Law Board has
all the necessary powers to end oppression of minority as
well as to prevent mismanagement. It has the power to
provide for –
 the regulation of the conduct of the company’s affairs in future;
 the purchase of the shares or interests of any members of the
company by other members thereof or by the company;
 in the case of purchase of shares by the company as aforesaid, the
consequent reduction of its share capital;
 the termination setting aside or modification of any agreement
between the company and its management upon just and equitable
terms.

57 © Anant D. C. 2010
 Powers of the Central Government
Power to prevent oppression or
mismanagement (Sec 408) – members of a
company may apply to the Central
Government for relief or even the Central
Government may also move into the matter
by itself.
Power to remove managerial personnel.

58 © Anant D. C. 2010
 Winding up
Winding up or liquidation of a company
represents the last stage in its life. It means a
proceeding by which a company is dissolved.
The assets of the company are disposed of, the
debts are paid off out of the realized assets.
According to Prof. Gower, winding up of
company is the process whereby its life is ended
and its property administrated for the benefit of
its creditors and members.

59 © Anant D. C. 2010
 Modes of Winding Up

Winding up by the Court; or

Voluntary winding up;
Members voluntary winding up, or
Creditor’s voluntary winding up.
Winding up subject to the supervision of the
Court.

60 © Anant D. C. 2010
 Winding up by the Court
 Winding up of a company under the order of a Court is also known as
compulsory winding up.
 Grounds for winding up by the Court (Sec. 433)
 Special resolution for the winding up of the company by the Court;
 Default in holding statutory meeting or in delivering statutory report to the Registrar;
 Failure to commence business within a year from the date of incorporation;
 Reduction in membership below the statutory minimum;
 Inability to pay its debts; and
 Just and equitable.
 When the substratum of the company is gone;
 The object for which it was incorporated has substantially failed;
 It is impossible to carry on the business;
 The existing and probable assets are insufficient.
 When the majority of the shareholders are using their powers unfairly or have adopted an
oppressive policy toward the minority;
 Where there is a deadlock in the management of the company;
 Where public interest is likely to be prejudiced (unfair, biased);
 When the business of the company becomes illegal;
 When the company is a mere bubble and it does not carry on any business or does not have
any property.

61 © Anant D. C. 2010
 Voluntary winding up
 Voluntary winding up of a company means winding up
by the members of creditors of the company without
interference by the Court. The object of this is that the
members and creditors are left free to settle their affairs
without going to the Court of law. They may however
apply to the Court for any directions, if any, when
necessary. (sec. 518).

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 Winding up subject to supervision of Court

Winding up subject to the supervision of the

Court presupposes a voluntary winding up of a
company. At any time after a company has
passed a resolution for voluntary winding up, the
Court make an order that the voluntary winding
up shall continue, but subject to the supervision
of the Court.

63 © Anant D. C. 2010