PAPER

4

CORPORATE AND ALLIED LAWS

BOARD OF STUDIES THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA

The objective of the study material is to provide teaching material to the students to enable them to obtain knowledge and skills in the subject. Students should also supplement their study by reference to the recommended text books. In case students need any clarifications or have any suggestions to make for further improvement of the material contained herein they may write to the Director of Studies. All care has been taken to provide interpretations and discussions in a manner useful for the students. However, the study material has not been specifically discussed by the Council of the Institute or any of its Committees and the views expressed herein may not be taken to necessarily represent the views of the Council or any of its Committees. Permission of the Institute is essential for reproduction of any portion of this material.

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Published by Dr. T.P. Ghosh, Director of Studies, ICAI, C-1, Sector-1, NOIDA-201301 Typeset and designed by Ms. G.K. Madhwal, Section Officer and Mr. Raghubir Singh, StenoTypist at Board of Studies, The Institute of Chartered Accountants of India.

PREFACE The liberalisation and globalisation of our economic policies in tune with the global changes brought several reforms in the Corporate and Allied Laws of our country. A scheme of wellstructured Corporate and Allied Laws is sine qua non for the corporate growth. These laws have to be amended and fine tuned from time to time in accordance with the changes that are taking place within the country as well as outside. Indian Corporate and Allied Laws were once best known for their control that inhibited the growth of corporate sector. If an economy is to sustain and grow rapidly, there is absolute need for a change in the outlook of law. A number of external factors especially the WTO compulsions and relevant developments compelled the Government from time to time, to have a closer look at the existing laws and introduce appropriate amendments to the various corporate laws. The Government took several initiatives and series of action plan by brining more amendments in Corporate and Allied Laws in the last 2-3 years and new legislations were brought into force taking into account the global crisis in corporate governance. The preparation and updating of study material is a continuous process and in the process inputs from various sources, literature, have gone into the thought process for benefiting the students in enrichment of their knowledge. Our special thanks to Shri Deepak Kumar Khaitan FCS, Kolkata, in preparation of the study material relating to The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 and the Prevention of Money Laundering Act, 2002, Shri Bishnupada Sarkhel relating to The Banking Regulation Act, 1949, and Shri Amit Kumar Das relating to The Insurance Act, 1949, and The Insurance Regulatory and Development Authority Act, 1999. We hope that students will find this study material very user friendly and in case of any queries that they may have while reading the material, the same may be addressed to the Board of Studies. While writing your queries, it is advisable to ensure that where a single mail contains queries relating to different subjects, the queries are given clearly under different subject headings. Also, it is advisable not to include any queries other than subject queries and this shall enable us to respond you quickly. You may also note that the Board of Studies has constituted a consultative group of faculty to provide on-line help to students pursuing Chartered Accountancy Course. This group will react to the queries and respond within a reasonable time limit. Students with their queries in any subject may contact the group at guidance @icai.org with their subject-related problems and suggestions. Students who do not have the facility to get guidance for solving their academic problems arising in the course of their preparation may feel free to take advantage of this scheme. Students can also address their queries (subject and other queries separately) to the Board of Studies by post. [Director of Studies, ICAI, C-1, Sector-1, Noida-201301 (U.P.)].

SYLLABUS
PAPER – 4: CORPORATE AND ALLIED LAWS (One paper - Three hours - 100 marks) SECTION A : COMPANY LAW (70 MARKS) Level of Knowledge: Advanced knowledge Objective: To be able to analyze and apply various provisions of the Companies Act in practical situations Contents: 1. The Companies Act, 1956, Rules and Regulations thereunder in its entirety with specific reference to (a) Accounts and audit (b) Dividend (c) Directors - powers, managerial remuneration (d) Meetings, powers of the Board and related party transactions (e) Inspection and Investigation (f) Compromises, Arrangements and Reconstructions (g) Prevention of Oppression and Mismanagement (h) Revival and Rehabilitation of Sick Industrial Companies (i) (j) (l) 2. Corporate Winding up and Dissolution Producer Companies Offences and Penalties

(k) Companies incorporated outside India (m) E-governance Corporate Secretarial Practice – Drafting of Resolution, Minutes, Notices and Reports

SECTION B : ALLIED LAWS (30 MARKS) Objective: To develop ability to analyse the requirements of laws stated in the Section. Contents: 3. An overview of the following laws – (a) The Securities and Exchange Board of India Act, 1992, Rules, Regulations and Guidelines issued thereunder. (b) Securities Contracts (Regulation) Act, 1956 (c) The Foreign Exchange Management Act, 1999 (d) The Competition Act, 2002 (e) The Banking Regulation Act, 1949, The Insurance Act, 1938. The Insurance Regulatory and Development Authority Act, 1999. The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (f) 4. The Prevention of Money Laundering Act, 2002 Interpretation of Statutes, Deeds and Documents.

CONTENTS PAGE NO. SECTION A: COMPANY LAW CHAPTER 1: ACCOUNTS AND AUDIT ............................................................ 1.1 – 1.18 1.0 1.1 1.2 1.3 1.4 1.5 1.6 1.7 1.8 1.9 1.10 1.11 1.12 1.13 1.14 1.15 1.16 1.17 1.18 1.19 1.20 1.21 1.22 1.23 1.24 Maintenance of Books of Accounts ................................................................. 1.1 Nature of Books of Account............................................................................ 1.1 Persons who can Inspect ............................................................................... 1.2 Place of Maintenance of Books of Account ..................................................... 1.2 Period of Maintenance ................................................................................... 1.2 Persons Responsible for Maintenance & Penalty............................................. 1.2 Laying of Annual Accounts and Balance Sheet................................................ 1.3 Form and Contents of Balance Sheet and Profit and Loss Account. ................. 1.3 Deviation from Accounting Standards ............................................................. 1.4 Authentication of Annual Accounts ................................................................. 1.5 Board's Report .............................................................................................. 1.5 Directors' Responsibility Statement (Section 217 (2AA) ................................... 1.6 Disclosures in Board's Report ........................................................................ 1.6 Right of Members to Copies of Balance Sheet and Auditors' Report ................. 1.7 Filing with the Registrar ................................................................................. 1.8 Holding & Subsidiaries Accounts .................................................................... 1.8 Qualifications of an Auditor (Section 226) ..................................................... 1.10 Disqualifications of Auditors ......................................................................... 1.10 First Auditors............................................................................................... 1.10 Subsequent Auditors [Section 224 (1)].......................................................... 1.11 Auditors' Appointment by Special Resolution [Section 224A (1)] .................... 1.11 Re-Appointment of Retiring Auditor .............................................................. 1.11 Ceiling on Number of Audits......................................................................... 1.12 Filling up Casual Vacancy ............................................................................ 1.13 Remuneration of Auditors ............................................................................ 1.13

1.25 1.26 1.27 1.28 1.29 1.30 1.31 2.0 2.1 2.2 2.3 2.4 2.5 2.6 2.7 2.8 2.9 2.10 3.0 3.1 3.2 3.3 3.4 3.5 3.6 3.7 3.8

Removal of Auditors .................................................................................... 1.13 Powers of Auditors ...................................................................................... 1.14 Duties of Auditors ........................................................................................ 1.14 Audit of Accounts of Branch Office of Company ............................................ 1.16 Signature of Audit Report, etc. (Section 229) ................................................ 1.17 Special Audit (Section 233A)........................................................................ 1.17 Audit of Cost Accounts (Section 233B) ......................................................... 1.17 Manner and Time of Payment......................................................................... 2.1 Compulsory Transfer to Reserves: ................................................................. 2.2 Transfer of Higher Percentage of Profits to Reserves ...................................... 2.2 Declaration of Dividend out of Past Reserves ................................................. 2.3 Declaration of Interim Dividend ...................................................................... 2.3 Time Limit ..................................................................................................... 2.4 Unpaid or Unclaimed Dividend (Section 205A) ................................................ 2.4 Payment of Unpaid or Unclaimed Dividend (Section 205B) .............................. 2.4 When Dividend to be kept in Abeyance? (Section 206A).................................. 2.4 Investor Education & Protection Fund (Section 205C) ..................................... 2.5 Payment of Interest out of Capital (Section 208) ............................................. 2.5 Introduction ................................................................................................... 3.1 Legal Position of Directors ............................................................................. 3.1 Appointment of Directors ............................................................................... 3.2 Share Qualification for Directors................................................................... 3.19 Removal of Directors (Section 284) .............................................................. 3.21 Removal of Managerial Personal ................................................................. 3.22 Directors to act as a Board........................................................................... 3.25 Powers of Directors and Restrictions thereon................................................ 3.26 Duties of Directors ...................................................................................... 3.33

CHAPTER 2: DIVIDEND .................................................................................... 2.1 – 2.6

CHAPTER 3: DIRECTORS, POWERS, MANAGERIAL REMUNERATION........... 3.1 – 3.66

3.9 3.10 3.11 3.12 3.13 3.14 3.15 3.16 3.17 3.18

Directors not to hold Office or Place of Profit ................................................ 3.35 Liabilities of Directors .................................................................................. 3.38 Loans to Directors (Section 295) .................................................................. 3.41 Directorial Registers ................................................................................... 3.43 Political Contributions .................................................................................. 3.46 Managerial Remuneration ........................................................................... 3.47 Managing Director ....................................................................................... 3.53 Inter Corporate Loans and Investments (Section 372A) ................................. 3.55 Self-Examination Questions ......................................................................... 3.59 Answers to the Self-Examination Questions .................................................. 3.64

CHAPTER 4: MEETINGS, POWERS OF THE BOARD AND RELATED PARTY TRANSACTIONS ............................................................................................. 4.1 – 4.22 4.0 4.1 4.2 4.3 4.4 5.0 5.1 5.2 5.3 5.4 Introduction ................................................................................................... 4.1 Meetings of Directors..................................................................................... 4.2 Protection Against Abuse of Fiduciary Capacity of Directors .......................... 4.12 Disclosure of Interest In Contracts................................................................ 4.13 Sole Selling Agents ..................................................................................... 4.19 Inspection ..................................................................................................... 5.1 Investigation.................................................................................................. 5.1 Power Of Inspectors ...................................................................................... 5.2 Investigation Of Ownership Of Company (Section 247).................................... 5.3 Voluntary Winding up of Company, etc., not to stop Investigation Proceedings (Section 250A) ........................................................................... 5.4 Compromise and Arrangement ....................................................................... 6.1 Reconstruction .............................................................................................. 6.1 Amalgamation of two Companies-Steps to be Taken by Both ......................... 6.13 Self-Examination Questions ......................................................................... 6.15

CHAPTER 5: INSPECTION AND INVESTIGATION ............................................. 5.1 – 5.4

CHAPTER 6: COMPROMISE, ARRANGEMENTS AND RECONSTRUCTIONS ... 6.1 – 6.18 6.0 6.1 6.2 6.3

6.4 7.0 7.1 7.2 7.3 7.4 7.5 7.6 7.7 7.8 7.9 7.10 7.11 7.12 7.13

Answers to the Self-Examination Questions ................................................. 6.18 "Majority Rule" as Applied in the Management of A Company .......................... 7.1 Protection at Common Law ............................................................................ 7.1 Protection Under The Companies Act, 1956 .................................................... 7.1 Oppression and Mismanagement.................................................................... 7.2 Who May Apply To The Company Law Board When Oppression or Mis-Management Is Complained of ? .............................................................. 7.3 Difference between Sections 397 and 398 ...................................................... 7.3 Powers of The Company Law Board on Application Under Sections 397 or 398....................................................................................... 7.5 Powers of the Central Government: ................................................................ 7.6 General Observations on Remedy for Oppression Under Sections 397 and 398 .................................................................................... 7.7 Distinction between various Remedies for Oppressions: .................................. 7.8 Powers Of Central Government To Remove Managerial Personnel on the Recommendation of CLB ......................................................................... 7.9 Concept of Public Interest and its Impingement on Company Law .................. 7.10 Self-Examination Questions ......................................................................... 7.13 Answers to Self-Examination Questions........................................................ 7.14

CHAPTER 7: PREVENTION OF OPPRESSION AND MISMANAGEMENT ......... 7.1 – 7.14

CHAPTER 8: REVIVAL AND REHABILITATION OF SICK INDUSTRIAL COMPANIES .................................................................................................... 8.1– 8.14 8.0 8.1 8.2 8.3 8.4 8.5 8.6 Definitions..................................................................................................... 8.1 Procedure For Revival And Rehabilitation ....................................................... 8.2 Inquiry Into Working Of Sick Industrial Companies (Section 424B) ................... 8.3 Powers Of Tribunal To Make Suitable Order On Completion Of Inquiry (Section 424C) .............................................................................................. 8.5 Preparation And Sanction Of Schemes (Section 424D).................................... 8.5 Rehabilitation By Giving Financial Assistance (Section 424E) ........................ 8.10 Arrangement for Continuing Operations, Etc., During Inquiry (Section 424F) .. 8.11

8.7 8.8 8.9 8.10 8.11 8.12 9.0 9.1 9.2 9.3 9.4 10.0 10.1 10.2 10.3 10.4 10.5 10.6 10.7 10.8 10.9 10.10 10.11 10.12 11.0 11.1

Winding up of Sick Industrial Company (Section 424G) ................................. 8.11 Operating Agency to Prepare Complete Inventory, etc. (Section 424H) .......... 8.12 Direction not to Dispose of Assets (section 424I) .......................................... 8.12 Power of Tribunal to Call for Periodic Information (Section 424J) ................... 8.12 Misfeasance Proceedings Section (424K) ..................................................... 8.13 Penalty for certain offences (section 424L) ................................................... 8.13 Introduction ................................................................................................... 9.1 Dissolution of Company ................................................................................. 9.2 Winding-up by Tribunal ................................................................................ 9.13 Voluntary Winding up................................................................................... 9.24 General Provisions on Winding-up................................................................ 9.37 Introduction ................................................................................................. 10.1 Definitions................................................................................................... 10.6 Objects and Formation of a Producer Company ............................................ 10.8 Memorandum Of Producer Company (Section 581F) ....................................10.11 Articles of Association (Section 581G) .........................................................10.11 Inter-State Co-Operative Societies ..............................................................10.14 Management ..............................................................................................10.17 General Meetings .......................................................................................10.22 Share Capital and Member Rights ...............................................................10.25 Finance, Accounts and Audit .......................................................................10.25 Penalties....................................................................................................10.28 Amalgamation, Merger or Division ...............................................................10.28 Resolution of Disputes ................................................................................10.31 Foreign Companies ..................................................................................... 11.1 Application of Sections 592 to 602 to Foreign Companies (Section 591)......... 11.1

CHAPTER 9: CORPORATE WINDING UP AND DISSOLUTION......................... 9.1 – 9.56

CHAPTER 10: PRODUCER COMPANIES .................................................... 10.1 – 10.34

CHAPTER 11: COMPANIES INCORPORATE OUTSIDE INDIA ....................... 11.1 – 11.8

11.2 11.3 11.4 11.5 11.6 11.7 11.8 11.9 11.10 11.11 11.12 12.0 12.1 12.2 12.3 13.0 13.1 13.2 13.3 13.4 13.5 13.6 13.7 13.8

Documents, etc., to be Delivered to the Registrar By Foreign Companies....... 11.1 Return to be Delivered to Registrar where Documents are Altered ................. 11.3 Accounts of Foreign Company...................................................................... 11.3 Obligation to State Name of Foreign Company .............................................. 11.4 Service on Foreign Company ....................................................................... 11.4 Penalties..................................................................................................... 11.5 Effect of Company's Failure to Comply with the Provisions of Part XI of The Companies Act Relating to Companies Incorporated Outside India ...... 11.5 Registration of Charges, Appointment of Receiver and Books of Account (Section 600) ................................................................................. 11.5 Fees For Registration of Documents............................................................. 11.6 Registration of Prospectus ........................................................................... 11.7 Requirements as Regards Prospectus .......................................................... 11.7 Types of Penalties ....................................................................................... 12.1 Offences – Continuing or Not ....................................................................... 12.1 Non-Cognizable Offences ............................................................................ 12.2 Offences Compoundable – Section Wise List ................................................ 12.2 MCA 21 Project ........................................................................................... 13.1 Set up of MCA ............................................................................................. 13.1 MCA 21 Program ......................................................................................... 13.2 Program Scope ........................................................................................... 13.2 Front Office ................................................................................................. 13.2 Back Office ................................................................................................. 13.3 Key Benefits................................................................................................ 13.3 Some FAQs on E-filing ................................................................................ 13.4 Details of New Forms and Fees.................................................................... 13.7

CHAPTER 12: OFFENCES AND PENALTIES ............................................... 12.1 – 12.18

CHAPTER 13: E-GOVERNANCE.................................................................. 13.1 – 13.18

CHAPTER 14: OTHER RELEVANT MISCELLANEOUS PROVISIONS OF THE COMPANIES ACT, 1956 .............................................................................. 14.1 – 14.22 14.0 14.1 14.2 14.3 14.4 14.5 14.6 Application of The Companies Act, 1956 to Companies Formed or Registered Under Previous Companies Act................................................... 14.1 Companies Authorised to Register under The Act ......................................... 14.1 Guarantee Company .................................................................................... 14.7 Government Companies............................................................................... 14.9 Provisions for Removal of Administrative Difficulties ....................................14.12 Powers of the Central Government ..............................................................14.15 General Provisions .....................................................................................14.17

CHAPTER 15: CORPORATE SECRETARIAL PRACTICE - DRAFTING OF RESOLUTION, MINUTES, NOTICES AND REPORTS............................................................ 15.1– 15.34 15.0 15.1 15.2 15.3 15.4 15.5 15.6 15.7 Definition .................................................................................................... 15.1 Certain Companies to have Secretaries ........................................................ 15.1 Qualifications of Secretary ........................................................................... 15.2 Position of Secretary ................................................................................... 15.3 Appointment of Secretary............................................................................. 15.5 Duties of a Company Secretary .................................................................... 15.6 Company Correspondence & Reports ..........................................................15.11 Record Maintenance and Filing of Documents..............................................15.15 SECTION B: ALLIED LAWS CHAPTER 16: THE SECURITIES AND EXCHANGE BOARD OF INDIA (SEBI) ACT, 1992........................................................................................... 16.1.16.62 Unit I 16.0 16.1 16.2 16.3 16.4 16.5 Introduction ................................................................................................. 16.1 Purpose of the Act ....................................................................................... 16.1 History of the Legislation ............................................................................. 16.2 Short Title, Extent and Commencement ........................................................ 16.3 Definitions................................................................................................... 16.3 Establishment of SEBI Board ....................................................................... 16.4

16.6 16.7 16.8

Powers & Functions of SEBI [Section 11]...................................................... 16.6 Penalties....................................................................................................16.17 Guidelines, Regulations And Rules Under The SEBI Act...............................16.21 Unit II

SEBI (Disclosure and Investor Protection) 2000 .......................................................16.23 CHAPTER 17: SECURITIES CONTRACTS (REGULATION) ACT, 1956 ............ 17.1-17.28 17.0 17.1 17.2 17.3 17.4 17.5 17.6 17.7 17.8 17.9 17.10 17.11 17.13 17.14 17.15 18.0 18.1 18.2 18.3 18.4 18.5 Introduction ................................................................................................. 17.1 About Corporatisation & Demutualisation of Stock Exchanges ....................... 17.2 Highlights of New Legislation on Securities Laws. ......................................... 17.3 Definitions (Section 2) ................................................................................. 17.4 Recognition of Stock Exchanges .................................................................. 17.6 Granting of Recognition (Section 4) .............................................................. 17.7 Power of Central Government to Make Rules (Section 8)..............................17.11 Power to Stock Exchange to Make Bye-Laws (Section 9)..............................17.11 Power of SEBI (Section 10).........................................................................17.14 Penalties (Section 23).................................................................................17.18 Offences By Companies (Section 24) ..........................................................17.22 Title to Dividends (Section 27) ....................................................................17.23 Act Not to Apply in Certain Cases (Section 28) ............................................17.26 Power to Make Rules (Section 30)...............................................................17.26 Power of SEBI to Make Regulations (Section 31) .........................................17.28 Introduction ................................................................................................. 18.1 Broad Structure of FEMA ............................................................................. 18.1 FEMA, 1999 And FERA, 1973 a Comparison ................................................ 18.2 Preamble, Extent, Application And Commencement of FEMA, 1999 .............. 18.4 Definition (Section 2) ................................................................................... 18.5 Analysis Of Important Definitions.................................................................. 18.8

17.12. Right to Receive Income from Collective Investment Scheme (Section 27A) ..17.24

CHAPTER 18: FOREIGN EXCHANGE MANAGEMENT ACT, 1999 ................ 18.1 – 18.44

18.6 18.7 18.8 18.9 18.10 18.11 19.0 19.1 19.2 19.3 19.4 19.5 19.6 19.7 19.8

Regulations And Management Of Foreign Exchange ....................................18.12 Authorised Person (Section 10) ...................................................................18.23 Contraventions and Penalties In Brief ..........................................................18.25 Adjudication and Appeal .............................................................................18.30 Directorate of Enforcement .........................................................................18.38 Miscellaneous ............................................................................................18.39 Introduction ................................................................................................. 19.1 Why MRTP Act Needed A Fresh Look?......................................................... 19.2 What is Competition?................................................................................... 19.2 Competition Policy And Law ......................................................................... 19.2 Competition Laws In UK And US .................................................................. 19.3 Competition Act, 2002 ................................................................................. 19.4 MRTP Act, 1969 & Competition Act, 2002 ..................................................... 19.4 Main Ingredients Of Competition Law ........................................................... 19.5 Definitions................................................................................................... 19.5

CHAPTER 19: THE COMPETITION ACT 2002 .............................................. 19.1 – 19.50

CHAPTER 20: OVERVIEW OF BANKING REGULATION ACT, 1949, THE INSURANCE ACT, 1938, THE INSURANCE REGULATORY AND DEVELOPMENT AUTHORITY ACT, 1999, THE SECURITISATION AND RECONSTRUCTION OF FINANCIAL ASSETS AND ENFORCEMENT OF SECURITY INTEREST ACT, 2002 ................................. 20.1– 20.48 THE BANKING REGULATION ACT, 1949 ................................................................ 20.1 20.0 20.1 20.2 20.3 20.4 20.5 20.6 20.7 20.8 Introduction ................................................................................................ 20.1 Different Provisions Of Banking Regulation Act 1949 .................................... 20.2 Applicability Of The Banking Regulation Act, 1949 ........................................ 20.4 Business of Banking Companies .................................................................. 20.4 Reserve Fund (Section 17) ............................................................................ 20.6 RBI’s power to control loans & advances granted by banking company ............... 20.6 Accounts and balance sheet (section 29) ........................................................ 20.7 Audit .......................................................................................................... 20.7 Some Important Recent Changes:- ..............................................................20.12

20.9 20.10 20.11 20.12 20.13 20.14 20.15 20.16 20.17 20.18 20.19 20.20 20.21 20.22 20.23 20.24 20.25

Conclusion .................................................................................................20.12 Introduction: ...............................................................................................20.14 Important Definitions:..................................................................................20.14 Provisions Related To Insurance: ................................................................20.15 Insurance Association Of India, Council Of Association And Committee ........20.19 Tariff Advisory Committee And Control Of Tariff Rates: ................................20.19 Solvency Margin, Advance Payment Of Premium And Restrictions on the Opening Of A New Place Of Business ...............................................20.20 Provident Society: ......................................................................................20.20 Insurance Cooperative Societies: ................................................................20.21 Mutual Insurance Companies And Cooperative Life Insurance Societies: ......20.21 Re-Insurance:.............................................................................................20.22 Miscellaneous Matters: ...............................................................................20.22 Conclusion: ................................................................................................20.23 Introduction ................................................................................................20.25 Important Definitions...................................................................................20.25 Insurance Regulatory And Development Authority: (Sections 3-12) ...............20.26 Transfer Of Assets, Liabilities, Etc. Of Indian Insurance Regulatory Authority (IIRA) To Insurance Regulatory Development Authority (IRDA) (Section 13) ...............................................................................................20.27 Duties, Powers And Functions Of Authority: Sec – 14...................................20.27 Finance, Accounts And Audit: Sections 15 – 17 ...........................................20.27 Other Matters: Sections 18 – 32 ..................................................................20.28

THE INSURANCE ACT, 1938..................................................................................20.14

THE INSURANCE REGULATORY AND DEVELOPMENT AUTHORITY ACT, 1999

20.26 20.27 20.28

THE SECURITISATION AND RECONSTRUCTION OF FINANCIAL ASSETS AND ENFORCEMENT OF SECURITY INTEREST ACT, 2002 20.29 20.30 20.31 20.32 20.33 20.34 20.35 20.36 21.0 21.1 21.2 21.3 21.4 21.5 21.6 21.7 21.8 21.9 21.10 21.11 21.12 Introduction ................................................................................................20.30 Important Definitions...................................................................................20.30 Regulation Of Securitisation And Reconstruction Of Financial Assets Of Banks And Financial Institutions....................................20.32 Enforcement Of Security Interest.................................................................20.38 Central Registry .........................................................................................20.43 Offences And Penalties ..............................................................................20.44 Miscellaneous Matters ................................................................................20.45 Self Examination Questions ........................................................................20.47 Introduction ................................................................................................. 21.1 Definitions................................................................................................... 21.1 Punishment For The Offence of Money Laundering ....................................... 21.5 Obligation of Banking Companies, Financial Institutions and Intermediaries ... 21.5 Appellate Tribunal ....................................................................................... 21.6 Special Courts............................................................................................. 21.8 Authorities Under The Act ............................................................................ 21.9 Reciprocal Arrangement for Assistance in Certain Matters and Procedure for Attachment and Confiscation of Property ................................................21.12 Disclosure of Information ............................................................................21.12 Recovery of Fines.......................................................................................21.13 Power to Remove Difficulties.......................................................................21.13 Conclusion .................................................................................................21.13 Self Examination Questions ........................................................................21.14

CHAPTER 21: PREVENTION OF MONEY LAUNDERING ACT, 2002............. 21.1 – 21.14

CHAPTER 22: INTERPRETATION OF STATUTES, DEEDS AND DOCUMENTS ..................................................................................... 22.1 – 22.20 22.0 22.1 Introduction ................................................................................................. 22.1 Why do we need interpretation/construction? ................................................ 22.4

22.2 22.3 22.4 22.5 22.6

Rules of interpretation/construction .............................................................. 22.5 Internal aids to interpretation/construction ...................................................22.14 External aids to interpretation/construction ..................................................22.17 Rules of interpretation/construction of deeds and documents........................22.19 Self-examination Questions ........................................................................22.20

SECTION A

COMPANY LAW

1
(A) ACCOUNTS & AUDIT
1.0 MAINTENANCE OF BOOKS OF ACCOUNTS Section 209 of the Companies Act, 1956 requires every company to maintain proper books of account with respect to; (a) all sums of money received and expended by the company and the matters in respect of which receipts and expenditure takes places. (b) all sales and purchases of goods by the company (c) the assets and liabilities of the company (d) in the case of a company engaged in production, processing, manufacturing or mining activities, such particulars relating to utilization of materials or labour or other items of costs as may be prescribed by the Central Government to any class of companies. 1.1 NATURE OF BOOKS OF ACCOUNT

Proper books of accounts shall not be deemed to be kept with respect to the matters specified in Section 209(1) & (2), (a) if there are not kept such books as are necessary to give a true and fair view of the state of the affairs of the company or branch office, as the case may be, and to explain its transactions and (b) if such books are not kept on accrual basis and according to the double entry system of accounting. [Section 209(3)] 1.2 PERSONS WHO CAN INSPECT

The following persons have the right to inspect the books of accounts. (a) Directors of the Company [Section 209(4)] (b) Registrar of Companies (Section 209 A) (c) Such officer of Government as may be authorized by the Central Government in this behalf (Section 209A).

1.2

Corporate and Allied Laws

The books of account and other books and papers shall be open to inspection by any director during business hours. Inspection shall be made by the SEBI in respect of matters covered under sections referred to in Section 55A. Shareholder has no statutory right of inspection of the books of account unless the articles specifically provides for. 1.3 PLACE OF MAINTENANCE OF BOOKS OF ACCOUNT

The books of account are required to be kept at the registered office of the company. However, the books can be kept at any other place in India as the Board of Directors may decide. In such a case, the company should file with Registrar of Companies a notice in writing giving the full address of the place where the books are kept. This notice should be filed within 7 days of the Boards’ decision. 1.4 PERIOD OF MAINTENANCE

The books of account of every company relating to a period of not less than eight years immediately preceding the current year together with the vouchers relevant to any entry in such books of account shall be preserved in good order. In case of a company incorporated less than eight years before the current year, the books of account for the entire period preceding the current year together with the vouchers relevant to any entry in such books of account shall be so preserved. 1.5 PERSONS RESPONSIBLE FOR MAINTENANCE & PENALTY

The following persons shall be responsible for the failure of maintenance of proper books of account (a) where the company has a managing director or manager, such managing director or manager and all officers and other employees of the company; and (b) where the company has neither a managing director nor manager, every director of the company.] Penalty for default is imprisonment upto 6 months or fine upto Rs.10,000/- or both, if the persons mentioned above fail to take all reasonable steps to ensure that the provisions of Section 209 are duly complied with by the company or default has been committed by their own willful Act. Further a person shall be sentenced to imprisonment only if the offence was committed willfully [Section 205(5)]. In any penal proceedings, it shall be a defense to prove that a competent and reliable person was charged with the duty of seeing that these requirements are complied with and that he was in a position to discharge that duty [proviso to Section 205(5)]. The person so charged with responsibility of compliance with provisions of Section 209 is punishable with imprisonment upto 6 months or fine upto Rs.10, 000/- or both [Sections 205(7)]. Similar provisions are therein Section 211 [Section 211(7) and (8)].

Accounts & Audit

1.3

Even if the company is managed by Managing Director, it is possible for the Board of Directors to make the Chief Accountant responsible to ensure compliance with Sections 209 and 211 [Section 209(7) and Section 211(8)]. Managing Director may also charge the Chief Accountant with such duty by issuing a memo or office order. No person shall be sentenced to imprisonment for any such offence unless it was committed willfully. Where a director or any other officer has been convicted of an offence, he shall on and from the date on which he is so convicted shall be disqualified for holding such office in any company for a period of five years from such date. 1.6 LAYING OF ANNUAL ACCOUNTS AND BALANCE SHEET

At every annual general meeting of a company the Board of directors of the company shall lay before the company— (a) a balance sheet as at the end of the period specified in sub-section (3); and (b) a profit and loss account for that period. In the case of the first annual general meeting of the company, the profit and loss account shall relate to the period beginning with the incorporation of the company and ending with a day which shall not precede the day of the meeting by more than nine months and in the case of any subsequent annual general meeting of the company, to the period beginning with the day immediately after the period for which the account was last submitted and ending with a day which shall not precede the day of the meeting by more than six months, or in cases where an extension of time has been granted for holding the meeting under the second proviso to sub-section (1) of section 166, by more than six months and the extension so granted. The period to which the account aforesaid relates is referred to as a “financial year” may be less or more than a calendar year, but it shall not exceed fifteen months. If any person, being a Director of a company, fails to take all reasonable steps to comply with the provisions of this section, he shall, in respect of each offence, be punishable with imprisonment for a term which may extend to six months, or with fine which may extend to ten thousand rupees, or with both: 1.7 FORM AND CONTENTS OF BALANCE SHEET AND PROFIT AND LOSS ACCOUNT.

Every balance sheet of a company shall give a true and fair view of the state of affairs of the company as at the end of the financial year and shall, subject to the provisions of this section, be in the form set out in Part I of Schedule VI, or as near thereto as circumstances admit or in such other form as may be approved by the Central Government either generally or in any particular case; and in preparing the balance sheet due regard shall be had, as far as may be, to the general instructions for preparation of balance sheet under the heading “Notes” at the end of that Part.

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Similarly every profit and loss account of a company shall give a true and fair view of the profit or loss of the company for the financial year and shall, subject as aforesaid, comply with the requirements of Part II of Schedule VI, so far as they are applicable thereto. Insurance or banking company or any company engaged in the generation or supply of electricity, or to any other class of company for which a form of profit and loss account has been specified in or under the Act governing such class of company are exempted from the purview of Section 210. The Central Government may, by notification in the Official Gazette, exempt any class of companies from compliance with any of the requirements in Schedule VI if, in its opinion, it is necessary to grant the Every profit and loss account and balance sheet of the company shall comply with the accounting standards. The expression “accounting standards” means the standards of accounting recommended by the Institute of Chartered Accountants of India constituted under the Chartered Accountants Act, 1949 (38 of 1949), as may be prescribed by the Central Government in consultation with the National Advisory Committee on Accounting Standards established under sub-section (1) of section 210A. Further the standards of accounting specified by the Institute of Chartered Accountants of India shall be deemed to be the Accounting Standards until the accounting standards are prescribed by the Central Government under this sub-section. 1.8 DEVIATION FROM ACCOUNTING STANDARDS

Where the profit and loss account and the balance sheet of the company do not comply with the accounting standards, such companies shall disclose in its profit and loss account and balance sheet, the following, namely: — (a) the deviation from the accounting standards; (b) the reasons for such deviation; and (c) the financial effect, if any, arising due to such deviation. If any such person as is referred to in sub-section (6) of section 209 fails to take all reasonable steps to secure compliance by the company, as respects any accounts laid before the company in general meeting, with the provisions of this section and with the other requirements of this Act as to the matters to be stated in the accounts, he shall, in respect of each offence, be punishable with imprisonment for a term which may extend to six months, or with fine which may extend to ten thousand rupees, or with both . Further that in any proceedings against a person in respect of an offence under this section, it shall be a defence to prove that a competent and reliable person was charged with the duty of seeing that the provisions of this section and the other requirements aforesaid were complied with and was in a position to discharge that duty. No person shall be sentenced to imprisonment for any such offence unless it was committed willfully.

Accounts & Audit 1.9 AUTHENTICATION OF ANNUAL ACCOUNTS

1.5

According to Section 215, every balance sheet and every profit and loss account of a company shall be signed on behalf of the Board of directors by its manager or secretary, if any, and by not less than two directors of the company one of whom shall be a managing director where there is one. In the case of a banking company, by the persons specified in clause (a) or clause (b), as the case may be, of sub-section (2) of section 29 of the Banking Companies Act, 1949. In the case of a company not being a banking company, when only one of its directors is for the time being in India, the balance sheet and the profit and loss account shall be signed by such director; but in such a case there shall be attached to the balance sheet and the profit and loss account a statement signed by him explaining the reason for non-compliance with the provisions of Section 215 (1). The balance sheet and the profit and loss account shall be approved by the Board of directors before they are signed on behalf of the Board in accordance with the provisions of this section and before they are submitted to the auditors for their report thereon. 1.10 BOARD’S REPORT There shall be attached to every balance sheet laid before a company in general meeting, a report by its Board of directors, with respect to— (a) the state of the company’s affairs; (b) the amounts, if any, which it proposes to carry to any reserves in such balance sheet; (c) the amount, if any, which it recommends should be paid by way of dividend; (d) material changes and commitments, if any, affecting the financial position of the company which have occurred between the end of the financial year of the company to which the balance sheet relates and the date of the report; (e) the conservation of energy, technology absorption, foreign exchange earnings and outgo, in such manner as may be prescribed. [Section 217(1)] The Board’s report shall, so far as is material for the appreciation of the state of the company’s affairs by its members and will not in the Board’s opinion be harmful to the business of the company or of any of its subsidiaries, deal with any changes which have occurred during the financial year— (a) in the nature of the company’s business; (b) in the company’s subsidiaries or in the nature of the business carried on by them; and (c) generally in the classes of business in which the company as an interest. Further, the Board’s report shall also include a statement showing the name of every employee of the company who—

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(i) if employed throughout the financial year, was in receipt of remuneration for that year which, in the aggregate, was not less than such sum as may be prescribed; or (ii) if employed for a part of the financial year, was in receipt of remuneration for any part of that year, at a rate which, in the aggregate, was not less than such sum per month as may be prescribed or (iii) if employed throughout the financial year or part thereof, was in remuneration in that year which, in the aggregate, or as the case may be, at a in the aggregate, is in excess of that drawn by the managing director or director or manager and holds by himself or along with his spouse and children, not less than two per cent, of the equity shares of the company. The statement shall also indicate, — (i) whether any such employee is a relative of any director or manager of the company and if so, the name of such director, and (ii) such other particulars as may be prescribed. “Remuneration” for the purpose has the meaning assigned to it in the Explanation to section 198. 1.11 DIRECTORS’ RESPONSIBILITY STATEMENT (SECTION 217 (2AA) The Board’s report shall also include a Directors’ Responsibility Statement, indicating therein, — (i) that in the preparation of the annual accounts, the applicable accounting standards had been followed along with proper explanation relating to material departures; (ii) that the directors had selected such accounting policies and applied them consistently and made judgments and estimates that are reasonable and prudent so as to give a true and fair view of the state of affairs of the company at the end of the financial year and of the profit or loss of the company for that period; (iii) that the directors had taken proper and sufficient care for the maintenance of adequate accounting records in accordance with the provisions of this Act for safeguarding the assets of the company and for preventing and detecting fraud and other irregularities; (iv) that the directors had prepared the annual accounts on a going concern basis. (Section 217AA) 1.12 DISCLOSURES IN BOARD’S REPORT The Board’s report shall also specify the reasons for the failure, if any, to complete the buy-back within the time specified in sub-section (4) of section 77A. The Board shall also receipt of rate which, whole-time dependent

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be bound to give the fullest information and explanations in its report aforesaid, or, in cases falling under the proviso to section 222, in an addendum to that report, on every reservation, qualification or adverse remark contained in the auditors’ report. The Board’s report and any addendum thereto shall be signed by its chairman if he is authorised in that behalf by the Board; and where he is not so authorised, shall be signed by such number of directors as are required to sign the balance sheet and the profit and loss account of the company by virtue of sub-sections (1) and (2) of section 215. If any person, being a director of a company, fails to take all reasonable steps to comply with the provisions of sub-sections (1) to (3), or being the Chairman, signs the Board’s report otherwise than in conformity with the provisions of sub-section (4), he shall, in respect of each offence, be punishable with imprisonment for a term which may extend to six months, or with fine which may extend to twenty thousand rupees, or with both: 1.13 RIGHT OF MEMBERS TO COPIES OF BALANCE SHEET AND AUDITORS’ REPORT A copy of every balance sheet (including the profit and loss account, the auditors’ report and every other document required by law to be annexed or attached, as the case may be, to the balance sheet) which is to be laid before a company in general meeting shall, not less than twenty-one days before the date of the meeting, be sent to every member of the company, to every trustee for the holders of any debentures issued by the company, whether such member or trustee is or is not entitled to have notices of general meetings of the company sent to him, and to all persons other than such members or trustees, being persons so entitled. [Section 219)(a)]. A copy of the documents need not be sent— (i) to a member, or holder of debentures, of the company, who is not entitled to have notices of general meetings of the company sent to him and of whose address the company is unaware; (ii) to more than one of the joint holders of any shares or debentures none of whom is entitled to have such notices sent to him; (iii) in the case of joint holders of any shares or debentures some of whom are and some of whom are not entitled to have such notices sent to them, to those who are not so entitled; (iv) in the case of a company whose shares are listed on a recognized stock exchange, if the copies of the documents aforesaid are made available for inspection at its registered office during working hours for a period of twenty-one days before the date of the meeting and a statement containing the salient features of such documents in the prescribed form or copies of the documents aforesaid, as the company may deem fit, is sent to every member of the company and to every trustee for the holders of any debentures issued by the company not less than twenty-one days before the date of the meeting;

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if the copies of the documents are sent less than twenty-one days before the date of the meeting, they shall, notwithstanding that fact, be deemed to have been duly sent if it is so agreed by all the members entitled to vote at the meeting. 1.14 FILING WITH THE REGISTRAR After the balance sheet and the profit and loss account have been laid before a company at an annual general meeting as aforesaid, there shall be filed with the Registrar within thirty days from the date on which the balance sheet and the profit and loss account were so laid, or where the annual general meeting of a company for any year has not been held, there shall be filed with the Registrar within thirty days from the latest day on or before which that meeting should have been held. Three copies of the balance sheet and the profit and loss account, signed by the managing director, manager or secretary of the company, or if there be none of these, by a director of the company, together with three copies of all documents which are required by this Act to be annexed or attached to such balance sheet or profit and loss account: In the case of a private company, copies of the balance sheet and copies of the profit and loss account shall be filed with the Registrar separately. If the annual general meeting of a company before which a balance sheet is laid as aforesaid does not adopt the balance sheet, or is adjourned without adopting the balance sheet, or, if the annual general meeting of a company for any year has not been held, a statement of that fact and of the reasons therefore shall be annexed to the balance sheet and to the copies thereof required to be filed with the Registrar. If default is made in complying with the requirements of sub-sections (1) and (2), the company, and every officer of the company who is in default, shall be liable to the like punishment as is provided by section 162 for a default in complying with the provisions of section 159, 160 or 161. 1.15 HOLDING & SUBSIDIARIES ACCOUNTS Section 213(1) of the Companies Act, 1956 states as follows: Where it appears to the Central Government desirable for a holding company or a holding company’s subsidiary to extend its financial year so that the subsidiary’s financial year may end with that of the holding company, and for that purpose to postpone the submission of the relevant accounts to a general meeting, the Central Government may on the application or with the consent of the board of directors of the company whose financial year is to be extended, direct that in the case of that company, the submission of accounts to a general meeting, the holding of an annual general meeting or the making of an annual return, shall not be required to be submitted held or made earlier than the dates specified in the direction notwithstanding anything to the contrary in the Companies Act, 1956 or in any other Act for the time being in force. The Central Government shall, on the application of the Board of directors of a holding company or a holding company’s subsidiary, exercise the powers conferred on that Government if it is necessary so to do,

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in order to secure that the end of the financial year of the subsidiary does not precede the end of the holding company’s financial year by more than six months, where that is not the case at the commencement of this Act, or at the date on which the relationship of holding company and subsidiary comes into existence, where that date is later than the commencement of the Companies Act. Consider the following practical problem and advise. S. Ltd. is a subsidiary company of H Ltd. The financial year of H Ltd. is from 1 st April to 31 st March, whereas the financial year of S ltd. is 1 st July to 30 th June every year. This is now causing difficulties particularly in view of the requirement of reporting and circulating the consolidated annual accounts as required by accounting year of S Ltd. for the year 1 st July, 2005 to 30 th June, 2006 be extended from present 12 months to 21 months, i.e. 1st July, 2005 to 31 st March, 2007, so that the financial years of the holding company and the subsidiary company end on the same date. The management can extend the financial year of S. Ltd. from 12 months to 21 months as mentioned in the question. Following steps are required to be taken for this purpose: (i) To convene a Meeting of the Board of directors of S. Ltd. where at the resolution for extending the financial year 1 st July, 2005 to 30 th June, 2006 (12 months) to 1 st July, 2005 to 31 st March,.2007 (21 months) is to be passed so that the year ending matches with the year ending of H. Ltd. (ii) To make an application under section 213(1) of the Companies Act, 1956 to the Central Government giving full details and specific reasons for seeking the extension in the year ending. The application may be made on a plain paper as there is no prescribed form for this purpose. (iii) To attach the following to the application: (a) A certified true copy of the last Balance Sheet and Profit and Loss Account of H Ltd. and S. Ltd. (b) A certified true copy of the Memorandum of Association and Articles of Association of both the Companies. (c) A certified true copy of the resolution of the Board of Directors proposing the extension of the financial year ending from 12 months to 21 months. (d) Requisite fee payable to the Central Government as per the Companies (Fees on Application) Rules, 1999.

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Corporate and Allied Laws

AUDIT
1.16 QUALIFICATIONS OF AN AUDITOR (SECTION 226) A person shall not be qualified for appointment as auditor of a company unless he is a chartered accountant within the meaning of the Chartered Accountants Act, 1949. Further in the case of a firm whereof all the partners practising in India are qualified for appointment as aforesaid may be appointed by its firm name to be auditor of a company, in which case any partner so practising may act in the name of the firm. 1.17 DISQUALIFICATIONS OF AUDITORS The following persons shall be not qualified for appointment as auditor of a company— (a) a body corporate; (b) an officer or employee of the company; (c) a person who is a partner, or who is in the employment, of an officer or employee of the company; (d) a person who is indebted to the company for an amount exceeding one thousand rupees, or who has given any guarantee or provided any security in connection with the indebtedness of any third person to the company for an amount exceeding one thousand rupees; (e) a person holding any security of that company after a period of one year from the date of commencement of the Companies (Amendment) Act, 2000. “Security” for the purpose means an instrument which carries voting rights. An officer or employee shall not be construed as an auditor. Further a person shall also not be qualified for appointment as auditor of a company if he is disqualified for appointment as auditor of any other body corporate which is that company’s subsidiary or holding company or a subsidiary of that company’s holding company, or would be so disqualified if the body corporate were a company. If an auditor becomes subject, after his appointment, to any of the disqualifications specified in sub-sections (3) and (4) of section 226, he shall be deemed to have vacated his office as such. 1.18 FIRST AUDITORS The first auditor or auditors of a company shall be appointed by the Board of directors within one month of the date of registration of the company; and the auditor or auditors so appointed shall hold office until the conclusion of the first annual general meeting. However the company may, at a general meeting, remove any such auditor or all or any of such auditors and appoint in his or their places any other person or persons who have been nominated for appointment by any member of the company and of whose nomination notice has been given to the members of the company not less than fourteen days before

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the date of the meeting and if the Board fails to exercise its powers, the company in general meeting may appoint the first auditor or auditors. 1.19 SUBSEQUENT AUDITORS [SECTION 224 (1)] At each annual general meeting, subsequent auditor or auditors are appointed by way of an ordinary resolution. The auditor or auditors so appointed appoint shall hold office from the conclusion of that meeting until the conclusion of the next annual general meeting and shall within seven days of the appointment, give intimation thereof to every auditor so appointed: Before any appointment or re-appointment of auditor or auditors is made by any company at any annual general meeting, a written certificate shall be obtained by the company from the auditor or auditors proposed to be so appointed to the effect that the appointment or reappointment, if made, will be in accordance with the limits specified. Every auditor appointed shall within thirty days of the receipt from the company of the intimation of his appointment, inform the Registrar in writing that he has accepted, or refused to accept, the appointment. 1.20 AUDITORS’ APPOINTMENT BY SPECIAL RESOLUTION [SECTION 224A (1)] The appointment or re-appointment at each annual general meeting of an auditor or auditors shall be made by a special resolution in the case of a company in which not less than twenty-five per cent of the subscribed share capital is held, whether singly or in any combination, by— (a) a public financial institution or a Government company or Central Government or any State Government, or (b) any financial or other institution established by any Provincial or State Act in which a State Government holds not less than fifty-one per cent of the subscribed share capital, or (c) a nationalised bank or an insurance company carrying on general insurance business, If any company omits or fails to pass at its annual general meeting any special resolution appointing an auditor or auditors, it shall be deemed that no auditor or auditors had been appointed by the company at its annual general meeting, and thereupon the provisions of sub-section (3) of section 224 shall become applicable in relation to such company. 1.21 RE-APPOINTMENT OF RETIRING AUDITOR At any annual general meeting, a retiring auditor shall be deemed to be re-appointed, unless— (a) he is not qualified for re-appointment; (b) he has given the company notice in writing of his unwillingness to be re-appointed; (c) a resolution has been passed at that meeting appointing somebody instead of him or

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providing expressly that he shall not be re-appointed; or (d) where notice has been given of an intended resolution to appoint some person or persons in the place of a retiring auditor, and by reason of the death, incapacity or disqualification of that person or of all those persons, as the case may be, the resolution cannot be proceeded with. Where at an annual general meeting no auditors are appointed or re-appointed, the Central Government may appoint a person to fill the vacancy. 1.22 CEILING ON NUMBER OF AUDITS Any person who is full-time employment elsewhere cannot be appointed as an auditor. Further no company or its Board of directors shall appoint a firm as its auditor if such person or firm is, at the date of such appointment or re-appointment, holding appointment as auditor of the specified number of companies or more than the specified number of companies. In the case of a firm of auditors, “specified number of companies” shall be construed as the number of companies specified for every partner of the firm who is not in full-time employment elsewhere. Where any partner of the firm is also a partner of any other firm or firms of auditors, the number of companies which may be taken into account, by all the firms together, in relation to such partner shall not exceed the specified number in the aggregate. Further where any partner of a firm of auditors is also holding office, in his individual capacity, as the auditor of one or more companies, the number of companies which may be taken into account in his case shall not exceed the specified number, in the aggregate. The ceiling on number of company audits does not include a private company. A person or firm holding, appointment as the auditor of a number of companies exceeding the specified number, shall, within sixty days from such commencement, intimate his or its unwillingness to be re-appointed as the auditor from the financial year next following such commencement, to the company or companies of which he or it is not willing to be reappointed as the auditor; and shall simultaneously intimate to the Registrar the names of the companies of which he or it is willing to be re-appointed as the auditor and forward a copy of the intimation to each of the companies referred to therein. “specified number” means, — (a) in the case of a person or firm holding appointment as auditor of a number of companies each of which has a paid-up share capital of less than rupees twenty-five lakhs, twenty such companies; (b) in any other case, twenty companies, out of which not more than ten shall be companies each of which has a paid-up share capital of rupees twenty-five lakhs or more. [Explanation I to sub-Sections (IB) & (IC) of Section 224] In computing the specified number, the number of companies in respect of which or any

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part of which any person or firm has been appointed as an auditor, whether singly or in combination with any other person or firm, shall be taken into account. 1.23 FILLING UP CASUAL VACANCY The Board may fill any casual vacancy in the office of an auditor; but while any such vacancy continues, the remaining auditor or auditors, if any, may act: Where such vacancy is caused by the resignation of an auditor, the vacancy shall only be filled by the company in general meeting. Any auditor appointed in a casual vacancy shall hold office until the conclusion of the next annual general meeting. Any auditor appointed under this section may be removed from office before the expiry of his term only by the company in general meeting, after obtaining the previous approval of the Central Government in that behalf. 1.24 REMUNERATION OF AUDITORS The remuneration of the auditors of a company may be fixed by the Board or the Central Government, in case the auditor is appointed by the Board or the Central Government as the case may be. In the case of an auditor appointed under section 619 by the Comptroller and Auditor-General of India, remuneration shall be fixed by the company in general meeting or in such manner as the company in general meeting may determine. The expression “remuneration” includes any sums paid by the company in respect of the auditors’ expenses shall be deemed to be included in 1.25 REMOVAL OF AUDITORS Removal of auditor only requires an ordinary resolution. However Section 225 prescribes certain procedure for the removal of an auditor. (1) Special notice shall be required for a resolution at an annual general meeting appointing as auditor a person other than a retiring auditor, or providing expressly that a retiring auditor shall not be re-appointed. (2) On receipt of notice of such a resolution, the company shall forthwith send a copy thereof to the retiring auditor. (3) Where notice is given of such a resolution and the retiring auditor makes with respect thereto representations in writing to the company (not exceeding a reasonable length) and requests their notification to members of the company, the company shall, unless the representations are received by it too late for it to do so,— (a) in any notice of the resolution given to members of the company, state the fact of the representations having been made; and

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Corporate and Allied Laws

(b) send a copy of the representations to every member of the company to whom notice of the meeting is sent, whether before or after the receipt of the representations by the company; If a copy of the representations is not sent as aforesaid because they were received too late or because of the company’s default the auditor may (without prejudice to his right to be heard orally) require that the representations shall be read out at the meeting : The copies of the representations need not be sent out and the representations need not be read out at the meeting if, on the application either of the company or of any other person who claims to be aggrieved, if the Central Government is satisfied that the rights conferred are being abused to secure needless publicity for defamatory matter; and the Central Government may order the company’s costs on such an application to be paid in whole or in part by the auditor, notwithstanding that he is not a party to the application. 1.26 POWERS OF AUDITORS 1. Every auditor of a company shall have a right of access at all times to the books and accounts and vouchers of the company, whether kept at the head office of the company or elsewhere. 2. He shall be entitled to require from the officers of the company such information and explanations as the auditor may think necessary for the performance of his duties as auditor. 3. Section 228(2) provides that where the accounts of any branch office are audited by a person other than the company’s auditor, the company’s auditor (a) shall be entitled to visit the branch office, if he deems it necessary to do so for the performance of his duties as auditor, and (b) shall have a right of access at all times to the books and accounts and vouchers of the company maintained at the branch office. 4. He has the right to attend any general meeting of the company and be heard on matters that concerns him as an auditor. 1.27 DUTIES OF AUDITORS 1. The auditor shall make a report to the members of the company on the accounts examined by him, and on every balance sheet and profit and loss account and on every other document declared by this Act to be part of or annexed to the balance sheet or profit and loss account, which are laid before the company in general meeting during his tenure of office, and the report shall state whether, in his opinion and to the best of his information and according to the explanations given to him, the said accounts give the information required by this Act in the manner so required and give a true and fair view [Section 227(2)] 2. It is the duty of the auditor who shall inquire—

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(a) whether loans and advances made by the company on the basis of security have been properly secured and whether the terms on which they have been made are not prejudicial to the interests of the company or its members; (b) whether transactions of the company which are represented merely by book entries are not prejudicial to the interests of the company; (c) where the company is not an investment company within the meaning of section 372 or a banking company, whether so much of the assets of the company as consist of shares, debentures and other securities have been sold at a price less than that at which they were purchased by the company; (d) whether loans and advances made by the company have been shown as deposits; (e) whether personal expenses have been charged to revenue account; (f) where it is stated in the books and papers of the company that any shares have been allotted for cash, whether cash has actually been received in respect of such allotment, and if no cash has actually been so received, whether the position as stated in the account books and the balance sheet is correct, regular and not misleading. (3) The auditors’ report shall also state— (a) whether he has obtained all the information and explanations which to the best of his knowledge and belief were necessary for the purposes of his audit; (b) whether, in his opinion, proper books of account as required by law have been kept by the company so far as appears from his examination of those books, and proper returns adequate for the purposes of his audit have been received from branches not visited by him; (bb) whether the report on the accounts of any branch office audited under section 228 by a person other than the company’s auditor has been forwarded to him as required by clause (c) of sub-section (3) of that section and how he has dealt with the same in preparing the auditor’s report; (c) whether the company’s balance sheet and profit and loss account dealt with by the report are in agreement with the books of account and returns; (d) whether, in his opinion, the profit and loss account and balance sheet comply with the accounting standards referred to in sub-section (3C) of section 211; (e) in thick type or in italics the observations or comments of the auditors which have any adverse effect on the functioning of the company; (f) whether any director is disqualified from being appointed as director under clause (g) of sub-section (1) of section 274; (g) whether the cess payable under section 441A has been paid and if not, the details of

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amount of cess not so paid. (4).Where any of the matters referred to in clauses (i) and (ii) of sub-section (2) or in clauses (a), (b) (bb)],(c) and (d) of sub-section (3) is answered in the negative or with a qualification, the auditor’s report shall state the reason for the answer. 1.28 AUDIT OF ACCOUNTS OF BRANCH OFFICE OF COMPANY 1. Section 228 requires that where a company has a branch office, the accounts of that office shall be audited by the company’s auditor appointed under section 224 or] by a person qualified for appointment as auditor of the company under section 226, or where the branch office is situate in a country outside India, either by the company’s auditor or a person qualified as aforesaid or by an accountant duly qualified to act as an auditor of the accounts of the branch office in accordance with the laws of that country. 2. Further in the case of a banking company having a branch office outside India, it shall be sufficient if the auditor is allowed access to such copies of, and extracts from, the books and accounts of the branch as have been transmitted to the principal office of the company in India. 3. Where a company in general meeting decides to have the accounts of a branch office audited otherwise than by the company’s auditor, the company in that meeting shall for the audit of those accounts appoint a person qualified for appointment as auditor of the company under section 226, or where the branch office is situate in a country outside India, a person who is either qualified as aforesaid or an accountant duly qualified to act as an auditor of the accounts of the branch office in accordance with the laws of that country, or authorise the Board of directors to appoint such a person in consultation with the company’s auditor. 4. The person so appointed as the branch auditor shall have the same powers and duties in respect of audit of the accounts of the branch office as the company’s auditor has in respect of the same. 5. The branch auditor shall prepare a report on the accounts of the branch office examined by him and forward the same to the company’s auditor who shall in preparing the auditor’s report, deal with the same in such manner as he considers necessary. 6. The branch auditor shall receive such remuneration and shall hold his appointment subject to such terms and conditions as may be fixed either by the company in general meeting or by the Board of directors if so authorised by the company in general meeting. 7. The Central Government may make rules providing for the exemption of any branch office from the provisions of this section to the extent specified in the rules and in making such rules the Central Government shall have regard to all or any of the following matters, namely :—

Accounts & Audit

1.17

(a) the arrangement made by the company for the audit of accounts of the branch office by a person otherwise qualified for appointment as branch auditor even though such person may be an officer or employee of the company; (b) the nature and quantum of activity carried on at the branch office during a period of three years immediately preceding the date on which the branch office is exempted from the provisions of this section; (c) the availability at a reasonable cost of a branch auditor for the audit of accounts of the branch office; (d) any other matter which in the opinion of the Central Government justifies the grant of exemption to the branch office from the provisions of this section. 1.29 SIGNATURE OF AUDIT REPORT, ETC. (SECTION 229) Only the person appointed as auditor of the company, or where a firm is so appointed in pursuance of the proviso to sub-section (1) of section 226, only a partner in the firm practising in India, may sign the auditor’s report, or sign or authenticate any other document of the company required by law to be signed or authenticated by the auditor. 1.30 SPECIAL AUDIT (SECTION 233A) Where the Central Government is of the opinion— (a) that the affairs of any company are not being managed in accordance with sound business principles or prudent commercial practices; or (b) that any company is being managed in a manner likely to cause serious injury or damage to the interests of the trade, industry or business to which it pertains; or (c) that the financial position of any company is such as to endanger its solvency; the Central Government may at any time by order direct that a special audit of the company’s accounts for such period or periods as may be specified in the order, shall be conducted and may by the same or a different order appoint either a chartered accountant whether or not such chartered accountant is a chartered accountant in practice or the company’s auditor himself to conduct such special audit and such auditor shall be known as Special auditor. The report of the special auditor shall, as far as may be, include all the matters required to be included in an auditor’s report under section 227 and, if the Central Government so directs, shall also include a statement on any other matter which may be referred to him by that Government. 1.31 AUDIT OF COST ACCOUNTS (SECTION 233B) Where the Central Government is of the opinion that it is necessary so to do in relation to any company required under clause (d) of sub-section (1) of section 209 to include in its

1.18

Corporate and Allied Laws

books of account the particulars referred to therein, the Central Government may, by order, direct that an audit of cost accounts of the company shall be conducted in such manner as may be specified in the order by an auditor who shall be a cost accountant within the meaning of the Cost and Works Accountants Act, 1959. If the Central Government is of opinion that sufficient number of cost accountants are not available for conducting the audit of the cost accounts of companies generally, that Government may, by notification in the Official Gazette, direct that, for such period as may be specified in the said notification, that such chartered accountant possessing the prescribed qualifications may be appointed to audit the cost accounts of the company. The cost auditor shall be appointed by the Board of directors of the company [in accordance with the provisions of sub-section (1B) of section 224 and with the previous approval of the Central Government. Before the appointment of any auditor is made by the Board, a written certificate shall be obtained by the Board from the auditor proposed to be so appointed to the effect that the appointment, if made, will be in accordance with the provisions of sub-section (1B) of section 224. An audit conducted by an auditor under this section shall be in addition to an audit conducted by an auditor appointed under section 224. Cost auditor shall have the same powers and duties in relation to an audit conducted by him under this section as an auditor of a company has under sub-section (1) of section 227 and such auditor shall make his report to the Central Government] in such form and within such time as may be prescribed and shall also at the same time forward a copy of the report to the company. Note: For detailed material on Accounts & Audit, students are advised to refer to Study Material on Accounting and Audit respectively.

2
(B) DIVIDEND
2.0 MANNER AND TIME OF PAYMENT (a) Dividend to be paid only out of profits: According to Section 205 dividend shall be declared or paid by a company for any financial year (a) out of the current year profits of the company for that year arrived at after providing for depreciation or (b) out of the profits of the company for any previous financial year or years arrived at after providing for depreciation and remaining undistributed or out of both or (c) out of moneys provided by the Central Government or a State Government for the payment of dividend in pursuance of a guarantee given by that Government : (b) Provisions for depreciation (a) The company should provide for depreciation for any previous financial year or years before declaring or paying dividend for any financial year provide and such depreciation be provided out of the profits of that financial year or out of the profits of any other previous financial year or years (b) If the company has incurred any loss in any previous financial year or years then, the amount of the loss or an amount which is equal to the amount provided for depreciation for that year or those years whichever is less (c) Such loss shall be set off against the profits of the company for the year for which dividend is proposed to be declared or paid or against the profits of the company for any previous financial year or years, arrived at in both cases after providing for depreciation (d) The Central Government may, if it thinks necessary so to do in the public interest, allow any company to declare or pay dividend for any financial year out of the profits of the company for that year or any previous financial year or years without providing for depreciation (e) It shall not be necessary for a company to provide for depreciation where dividend for any financial year is declared or paid out of the profits of any previous financial year or years

2.2

Corporate and Allied Laws

(c) Method of depreciation Depreciation shall be provided either— (a) to the extent specified in section 350; or (b) in respect of each item of depreciable asset, for such an amount as is arrived at by dividing ninety-five per cent of the original cost thereof to the company by the specified period in respect of such asset; or (c) on any other basis approved by the Central Government which has the effect of writing off by way of depreciation ninety-five per cent of the original cost to the company of each such depreciable asset on the expiry of the specified period; or (d) as regards any other depreciable asset for which no rate of depreciation has been laid down by this Act or any] rules made there under, on such basis as may be approved by the Central Government by any general order published in the Official Gazette or by any special order in any particular case : (e) In the event of the depreciable asset being sold, discarded, demolished or destroyed the written down value thereof at the end of the financial year in which the asset is sold, discarded, demolished or destroyed, shall be written off in accordance with the proviso to section 350. 2.1 COMPULSORY TRANSFER TO RESERVES:

Dividend shall be declared or paid by a company for any financial year out of the profits of the company for that year arrived at after providing for depreciation only after the transfer to the reserves of the company of such percentage of its profits for that year, not exceeding ten per cent, as may be prescribed According to The Companies (Transfer of Profits to Reserves) Rules, 1975, (a) Where the dividend proposed exceeds 10 per cent but not 12.5 per cent of the paid up capital, the amount to be transferred to the reserves shall not be less than 2.5 per cent of the current profits; (b) Where the dividend proposed exceeds 12.5 per cent but des not exceed 15 per cent of the paid up capital, the amount to be transferred to the reserves shall not be less than 5 per cent of the current profits; (c) Where the dividend proposed exceeds 15 per cent but does not exceed 20 per cent of the paid up capital, the amount to be transferred to the reserves shall not be less than 7.5 per cent of the current profits; (d) Where the dividend proposed exceeds 20 per cent of the paid up capital, the amount to be transferred to the reserves shall not be less than 10 per cent of the current profits No transfer to reserves is required if the rate of dividend proposed is 10 per cent or less. 2.2 TRANSFER OF HIGHER PERCENTAGE OF PROFITS TO RESERVES

A company can make a transfer of more than 10 per cent to reserves voluntarily provided it

Dividend

2.3

ensures the minimum distribution specified in Rule 3 of the Companies (Transfer of Profits to Reserves) Rules, 1975. The minimum distribution is the rate of dividend equal to the average of the rates of dividend for the last 3 financial years. Where bonus shares have been issued during the financial year, minimum distribution would be constructed as the average of the amount of dividend for the last three financial years. Where, however, the net profits after tax for the financial year are lower by 20 per cent or more than the average net profits after tax of the last two financial years, it will not be necessary to ensure the minimum distribution for making a higher transfer to reserve. Where no dividend is declared, the transfer to reserves should be lower than the average amount of dividends declared during the last three financial years. 2.3 DECLARATION OF DIVIDEND OUT OF PAST RESERVES

Dividend can be declared by the company out of accumulated profits subject to the following conditions; 1. The rate of the dividend declared does not exceed the average of the rates at which dividend was declared by it in the 5 years immediately preceding that year or 10 per cent of its paid up capital, whichever is less. 2. The total amount to be drawn from the accumulated profits earned in previous years and transferred to the reserves does not exceed an amount equal to 1/10th of the sum of its paid up capital and free reserves and the amount to drawn must first be utilized to set off the losses incurred in the financial year before any dividend in respect of preference or equity shares is declared. 3. The balance of reserves after such drawl does not fall below 15 per cent of its paid up share capital. 2.4 DECLARATION OF INTERIM DIVIDEND

According to Section 2 (14A) dividend includes any interim dividend. Therefore, the procedures which are applicable to final dividend (i.e. Sections 205, 205A, 205C, 206, 206A & 207) also applies to any interim dividend. Accordingly, like final dividend, interim dividend shall be considered as debt once declared and, therefore, cannot be revoked. The Board of directors may declare interim dividend and the amount of dividend including interim dividend shall be deposited in a separate bank account within five days from the date of declaration of such dividend. 2.5 TIME LIMIT

According to Section 207, a company which has declared dividend to the shareholders should make the payment within 30 days from the date of its declaration. The term payment implies the posting of dividend warrant irrespective of the fact whether the shareholder has received it or not. Failure to post dividend warrant within 30 days, constitutes an offence under the Act. The penalty for the default is punishable with simple imprisonment for a term which may extend to three years and shall also be liable to a fine of one thousand rupees for every day during which such default continues and the company shall be liable to pay simple interest at

2.4

Corporate and Allied Laws

the rate of eighteen per cent per annum during the period for which such default continues: However, it shall not be an offence be deemed to have been committed in the following cases: (a) where the dividend could not be paid by reason of the operation of any law; (b) where a shareholder has given directions to the company regarding the payment of the dividend and those directions cannot be complied with; (c) where there is a dispute regarding the right to receive the dividend; (d) where the dividend has been lawfully adjusted by the company against any sum due to it from the shareholder; or (e) where, for any other reason, the failure to pay the dividend or to post the warrant within the period aforesaid was not due to any default on the part of the company. 2.6 UNPAID OR UNCLAIMED DIVIDEND (SECTION 205A)

A dividend which has been declared by a company but has not been paid, or claimed within thirty days from the date of the declaration, to any shareholder shall, within seven days from the date of expiry of the said period of thirty days, transfer the total amount of dividend which remains unpaid or unclaimed within the said period of thirty days, to a special account to be opened by the company in that behalf in any scheduled bank, to be called “Unpaid Dividend Account of. Company Limited/Company (Private) Limited”. 2.7 PAYMENT OF UNPAID OR UNCLAIMED DIVIDEND (SECTION 205B) Any money transferred to the unpaid dividend account of a company in pursuance of this section which remains unpaid or unclaimed for a period of seven years from the date of such transfer shall be transferred by the company to the Investor Education and Protection Fund established under sub-section (1) of section 205C.] Any person claiming to be entitled to any money transferred under sub-section (5) of section 205A to the fund of the Central Government, may apply to the Central Government for an order for payment of the money claimed; and the Central Government may, if satisfied, whether on a certificate by the company or otherwise, that such person is entitled to the whole or any part of the money claimed, make an order for the payment to that person of the sum due to him after taking such security from him as it may think fit : 2.8 WHEN DIVIDEND TO BE KEPT IN ABEYANCE? (SECTION 206A)

Where any instrument of transfer of shares has been delivered to any company for registration and the transfer of such shares has not been registered by the company, the company shall — (a) transfer the dividend in relation to such shares to the special account referred to in section 205A unless the company is authorised by the registered holder of such share in writing to pay such dividend to the transferee specified in such instrument of transfer; and (b) keep in abeyance in relation to such shares any offer of rights shares under clause (a) of sub-section (1) of section 81 and any issue of fully paid-up bonus shares in pursuance of sub-section (3) of section 205.

Dividend 2.9 (a) INVESTOR EDUCATION & PROTECTION FUND (SECTION 205C) amounts in the unpaid dividend accounts of companies;

2.5

The following amounts shall be credited to the Fund: (b) the application moneys received by companies for allotment of any securities and due for refund; (c) (d) (e) matured deposits with companies; matured debentures with companies; the interest accrued on the amounts referred to in (a) to (d) as above;

(f) grants and donations given to the Fund by the Central Government, State Governments, companies or any other institutions for the purposes of the Fund; and (g) the interest or other income received out of the investments made from the Fund: No such amounts referred to in clauses (a) to (d) shall form part of the Fund unless such amounts have remained unclaimed and unpaid for a period of seven years from the date they became due for payment. 2.10 PAYMENT OF INTEREST OUT OF CAPITAL (SECTION 208) (a) For the purpose of raising money to defray the expenses of the construction of any work or building, or the provision of any plant, which cannot be made profitable for a lengthy period, the company may— (i) pay interest on so much of that share capital as is for the time being paid up, for the period and subject to certain conditions and restrictions (ii) charge the sum so paid by way of interest, to capital as part of the cost of construction of the work or building, or the provision of the plant. (b) No such payment shall be made unless it is authorised by the articles or by a special resolution. (c) No such payment, whether authorised by the articles or by special resolution, shall be made without the previous sanction of the Central Government. (d) Before sanctioning any such payment, the Central Government may, at the expense of the company, appoint a person to inquire into, and report to the Central Government on, the circumstances of the case; and may, before making the appointment, require the company to give security for the payment of the costs of the inquiry. (e) The payment of interest shall be made only for such period as may be determined by the Central Government; and that period shall in no case extend beyond the close of the half-year next after the half-year during which the work or building has been actually completed or the plant provided. (f) The rate of interest shall, in no case, exceed four per cent per annum or such other rate as the Central Government may, by notification in the Official Gazette, direct.

2.6

Corporate and Allied Laws

(g) The payment of the interest shall not operate as a reduction of the amount paid up on the shares in respect of which it is paid.

3
(C) DIRECTORS, POWERS, MANAGERIAL REMUNERATION
3.0 INTRODUCTION When a company is incorporated under the Companies Act, 1956, it becomes a legal entity (i.e., a legal person) capable of exercising all its functions. This impersonal creation of law can only act through some agency, and it must be a human agency. It being impracticable for all the members of a company (Whose number may be very large in a big public company) to conduct its affairs they elect their representatives for this purpose. These elected representatives are usually known as directors. Under Section 2, a director “includes any person occupying the position of director by whatever name called” Directors of a company collectively are referred to as “the Board of Directors” or the “Board”. Any person, in accordance with whose directions or instructions the Board of Directors of a company is accustomed to act, is also deemed to be a director of the company (Sections 303 and 397). 3.1 LEGAL POSITION OF DIRECTORS (i) As trustees: Although a director is described as a trustee, yet he is not a trustee in the true sense of the term; he is so only in a limited sense, viz., he stands in a fiduciary relationship with his company. It has been said that directors are trustees. If this means no more than those directors in the performance of their duties stand in a fiduciary relationship to the company, the statement is true enough. But if this statement is meant to be an indication by way of analogy of what those duties are, it appears to me to be wholly misleading. I can see but little resemblance between the duties of a director and the duties of a trustee of a will or of a marriage settlement “(As per Romer J. in re City Equitable Insurance Co., (1925) I ch. 407). Since he is in a fiduciary relationship with the company, he is, to that extent, also a trustee of the company’s assets which are under the director’s control or which have come into their hands (Iyyappan vs. The Dharmodyam Company, 1963 I.S.C.R.85). He is a trustee in the sense that he must act in the interest of the company and not in his own interest. (Regal vs. Gulliver (1942), I All E R. 378) Because of his fiduciary relationship he

3.2

Corporate and Allied Laws must exercise the powers according to the best of his judgement for good of the company and its shareholders. It is his duty to abide by the provisions of the articles and to exercise his power after due deliberation and careful consideration of what he is intending to do. His transactions must be fair and proper [Narayandas Sowani vs. Sangli Bank Ltd. (1965) 35 Comp. Cas 596 SC] Though the directors are trustees, even in the limited sense, for the company and the shareholders, they are not trustees for the creditors or for individual shareholders or for outsiders.

(ii) As agents: Although directors are not agents in the legal sense, the law of agency governs the relationship between the company and its directors. Whenever an agent acting on behalf of his principal will be liable, the directors would also be liable in the like circumstances; where the liability would attach to the principal and the principal only. The liability is the liability of the company. Thus when directors act properly on behalf of the company, they do not incur personal liability; if they exceed their powers but the acts are intra vires the company, it can ratify the acts. They are not in the position of agents to shareholders. In certain respects, their powers are more extensive than those of agents because the shareholders who appoint them do not have much opportunity to control their acts. (iii) As managing partners: The directors who look after a company does so for themselves as well as for the shareholders. Their position is similar to that of managing partners, for they are appointed to their offices by an arrangement between them and other members. But they do not have all the powers or liabilities of managing partners. Even amongst the directors themselves there is no mutual agency as in the case of partners. “Directors” are described as trustees, agents of managing partners, not as exhausting their powers or responsibilities but as indicating useful points of view. It does not matter much what you call them, so long as you understand what their true position is, “they are commercial men managing a trading concern for the benefit of themselves and all other shareholders in it” (as per Lessel M.R. in re Forest of Dena Mining Co 10 Ch D-450). The best way to describe their position is to say that they stand in a fiduciary position towards the company in regard to powers conferred on them by the articles (Re City Equitable Fire Insurance Co). ♦ Number of Directors: The articles generally specify the maximum number of directors that a company may have. Every public company (other than a public company which has become such by virtue of Section 43-A) must have at least three directors. Every other company must have at least two directors (Section 252). 3.2 APPOINTMENT OF DIRECTORS You will appreciate that the competence and integrity of directors of a company go a long

Directors – Powers, Managerial Remuneration

3.3

way in bringing about its success. The company, therefore, must be pretty choosy in selecting the proper persons to vest them with its management. Accordingly, only an individual can be a director of a company. Consequently a body corporate, firm or other association of persons cannot be appointed as director (Section 253). Usually the articles of a company name the first directors but their appointment will be valid only if the conditions prescribed by Section 266(1) of the Act have been complied with namely (i) that the director has given his consent in writing and the same has been filed with the Registrar; and (ii) that he has subscribed to the memorandum undertaking to purchase the qualification shares or has acquired the number of shares prescribed as the qualification for a director or has an affidavit with the Registrar to the effect that he shall take or pay for his qualification shares or that shares of the value not less than qualification shares, are registered in his name. (iii) Section 257 provides that a person who is not a retiring director and is other wise not disqualified must either himself or some other member intending to propose him must give a written notice of at least 14 days before the meeting along with a deposit of Rs.500 which shall be refunded to such person or, as the case may be, to such member, if the person succeeds in getting elected as a director. The Amendment Act has added this requirement of deposit of Rs.500, 1998 to discourage frivolous notice to contest for election as director of a company. These restrictions, however, do not apply to the case of a private company. Section 254 provides that “in default of and subject to any provisions in the articles” subscribers to the memorandum who are individuals shall be deemed to be the directors of the company till the company under Section 255 appoints directors. Generally, however, the articles name the first directors. Sometimes (as Regulation 64 of table A lays down) articles may also provide that both the number and the names of the first directors have to be determined in writing by subscribers to the memorandum or a majority of them. In such a case it has been held that a majority or subscribers should be present (and not the quorum as required by the articles) before the first directors could be validly appointed [Re London Southern and Company (1885) 31 Ch. D. 223]. According to Section 255, unless the articles provide for the retirement of all directors in every general meeting, at least 2/3rds of the total number of directors of the public limited company in question must, in the first place, be appointed, save as otherwise expressly provided in the Act by the company in general meeting; secondly, they must be persons whose period of office is liable to be determined by rotation. The remaining directors of such company must also be appointed in the same way unless some other provision for such appointments is made in the articles of the company concerned as where, for instance, the articles authorise a financial institution, which may have advanced large

3.4

Corporate and Allied Laws

loans to the company to induct a director on the Board of the Company. Now, the general meeting italicised above may be either an annual general meeting or an extraordinary general meeting. But in practice, appointments of directors pursuant to Section 255 are made, at the first annual general meeting after the in corporation of the company. Persons who are named, as directors in the articles of the public company have to retire from office at such meeting unless any of them (not exceeding 1/3rds of the total number of directors constituting the Board for the time being) had been appointed under an authority conferred upon some person by the articles as aforesaid. The provisions as regards the retirement of directors by rotation are designed, in the words of Justice Sarkar “to eradicate the mischief caused by self-perpetuating managements” Oriental Metal pressing works vs. Bhaskar A.I.R 1961 S.C. 578 at p.575. According to Section 256, out of the 2/3rds rotational directors only 1/3rds must retire by rotation at one general meeting. If the number is not three or multiple of three, then the number nearest to 1/3 must retire from office. First those directors who are the longest in office must retire. If two directors have been appointed on the same day, their retirement will be determined either mutually or by lot. The vacancies caused by such retirement may be filled in the same annual general meeting by appointing either the retiring directors or some other person. But the meeting may also decide that the vacancies shall not be filled. Where, however, the meeting has not done either of two, and then the meeting is deemed to have been adjourned for a week. If at the adjourned meeting held after the said week, fresh appointment is not made and if no resolution against appointment is passed, then the retiring directors shall be deemed to have been appointed except in the following cases: (a) Where at the meeting or at the previous meeting the resolution for the reappointment of a particular director was put to vote but lost; (b) where the retiring director has expressed his unwillingness to be reappointed by a written notice addressed to the company or its Board of Directors; (c) Where he is unqualified or has been disqualified for appointment; and (d) where any special or ordinary resolution is required for his appointment or reappointment. You should also remember that a director who is to retire by rotation at an annual general meeting cannot continue in office after the last day on which the meeting ought to have been called as required by Section 166 [R.H.C. Insurance Society Ltd. (1960) 65 C.W.N. 26; Krishna Prasad Pilani vs. Colaba Land Mills (1960) Bom. 321]. It should further be noted that a company, which does not carry on business for profit, or a company, which by its articles prohibits the payment of dividend to its members, would not be affected by the provisions of Sections 177, 255, 256 and 263. Section 177 provides that at any general meeting a resolution put to vote at the meeting shall unless a poll is demanded be decided on a show of hands. Section 255 provides that at least 2/3rds of the directors shall retire by rotation Section 256 provides that 1/3rds of the retiring directors shall retire every year. Section 263 provides each director should be elected separately. Such a

Directors – Powers, Managerial Remuneration

3.5

company, which does not carry on business for profit or prohibits the payment of dividend to its members may provide by its articles for election of directors by ballot. The Companies that will come under this section would be mostly the Chambers of Committee, Clubs and other associations licensed under Section 25 of the Act where, in most cases, there exists a practice of electing office bearers by ballot. In some companies where the articles provide election of directors by ballot, if the context permits the word ‘ballot’ would probably mean ‘poll’. ♦ Right of person other than retiring Director to stand for Directorship: In terms of Section 257 as amended by the Amendment Act of 1988, a person other than a retiring director proposing himself as a director, or any member proposing him for directorship has to not less than fourteen days before the meeting give notice signifying his candidature along with depositing with the company concerned a sum of Rs.500 which shall be refunded to such person or member in the event the person concerned succeeds in getting elected as a director of the company. Conversely as clarified by circular nos. of 1989 dt. 15.9.89, in case such a person is not elected as director, he or the member, as the case may be, will not be entitled to the refund of Rs.500 and the amount deposited shall stand forfeited by the company. This provision, it may be noted, does not apply to the appointment of directors otherwise than by the company in the general meeting. Nor does it apply to a private company, which is not subsidiary of a public company. The company shall inform its members of the candidature of a person for the office of director or the intention of a member to propose such person as a candidate for that office, by serving individual notices on the members not less than seven days before the meeting. But the company may avoid serving individual notices as aforesaid if the company advertise such candidature or the place where the registered office of the company is located, of which one is published in English and the other in the regional language of that place. (sub-section 1A of Section 257). Sub-section (1A) will have to be complied with by all companies, public and private. ♦ Appointment by proportional representation: But the articles of a public company or a private company which is subsidiary of a public company may adopt the principal of proportional representation for appointing not less than 2/3 rd if the total number of the directors, whether by a single transferable vote or by a system of cumulative voting or otherwise. In such a case, appointments will be so made once in every three years and interim casual vacancies will be filled in conformity with the provisions of Sections 262 and 265. Cumulative voting denotes that if there are five candidates or distributes his five votes. He can cast all the five votes in favour of one candidate or distribute his five votes among different candidates. This system of voting ensures that the Board will have fair representation of the minority interest. ♦ Increase in the number of Directors: A public company may by an ordinary

3.6

Corporate and Allied Laws resolution, increase or reduce the number of its directors within the limits fixed by the articles buy any increase in the number of its directors beyond the maximum permissible under the articles must be by a special resolution and have the approval of the Central Government (Sections 258 and 259). Where, however, such permissible maximum is 12 or less, no approval of the Central Government shall be required if the increase does not make the total number of directors more than 12 (Proviso to Section 259). In other words, the approval of the Government would not be required for increase in the number of director’s upto 12 irrespective of the provision in the articles of association. If the articles fix no maximum or minimum, the provision as to minimum required by Section 252 will govern. Any resolution in any manner increasing the number above twelve as fixed by the proviso will have to require Central Government approval.

♦ Appointment of Small Shareholders as Director: The Companies (Amendment) Act, 2000 has provided that a Public Company (a) with a Paid-up Capital of Rs. 5 crores or more and (b) 1000 or more small shareholders may have a director elected by such small shareholders as may be prescribed. In exercise of the powers conferred by Section 642 read with Section 252 of the Companies Act, 1956 (1 of 1956), the Central Government has framed the following rules, called the Companies (Appointment of the Small Shareholders’ Director) Rules, 2001. They shall come into force on the date of their publication in the Official Gazette Notification No. GSR 168(E), dated 9.3.2001. In this rules, unless the context otherwise requires “small Shareholder” means shareholder holding shares of nominal value of twenty thousand rupees or less in public company to which Section 252 of the Act applies. These rules shall apply to public companies having(a) Paid-up capital of five crores rupees or more; (b) One thousand or more small shareholders. Manner of election of small shareholders’ director: (1) A company may act suo moto to elect a small shareholders’ director from amongst small shareholders or upon the notice of small (2001) 22 TCR…..(St.) Appt. of Small Shareholders’.Rules shareholders, who are not less than 1/10 th of total small shareholders and have proposed name of person who shall also be a small shareholder of the company. (2) Small shareholders intending to propose a person shall leave a notice of their intention with the company at least 14 days before the meeting under the signature of at least 100 small shareholders specifying name, address, shares held and folio number and

Directors – Powers, Managerial Remuneration

3.7

particulars of share with differential rights as to divided and voting, if any, of the person whose name is being proposed for the post of director and of other small shareholders proposing such person as a candidate for the post of director or small shareholders. (3) A person whose name has been proposed for the post of small shareholders’ director shall sign, and file with the company, his consent in writing to act as a director. (4) The listed public company shall elect small shareholders nominee subject to sub-rules (1), (2) and (3) above through the postal ballot. (5) The unlisted company may appoint such small shareholders’ nominee subject to above conditions if majority of small shareholders recommend his candidates for the post of director in their meeting. (6) Tenure of such small shareholders’ director shall be for a maximum period of 3 years subject to meeting the requirement of provisions of Companies Act except that he need not have to retire by rotation. (7) On expiry of his tenure, the same person if so desired by small shareholders, may be elected for another period of 3 years. (8) Such director shall be treated as director for all other purposes except for appointment as whole time director or managing director. Disqualification: A person shall not be capable of being appointed as small shareholders’ director of a company, if – (i) (ii) (iii) (iv) (v) he has been found to be of unsound mind by a court of competence jurisdiction and the finding is in force; he is an un-discharged insolvent; he has applied to be adjudicated as an insolvent and his application is pending; he has been convicted by a court of any offence involving moral turpitude and from the date of expiry of the sentence; he has not paid any call in respect of shares of the company held by him, whether along or jointly with others, and six months from the last day fixed for the payment of call; or an order disqualifying him for appointment as director has been passed by a Court in pursuance of Section 203 and is in force, unless the leave of the court has been obtained for his appointment in pursuance of that section.

(vi)

Vacation of office: A person appointed as small shareholders’ director shall have to vacate the office if, — (i) such person so elected, as director of small shareholders ceases to be a small

3.8

Corporate and Allied Laws shareholders’ director on and from such date on which he ceased to be a small shareholder;

(ii) (iii)

he has been rendered disqualified by virtue of sub-rule (1) of rule 5; he fails to pay any call in respect of shares of the company held by him, whether alone or jointly with others, within six months from the last date fixed for the payment of the call; he absents himself from three consecutive meetings of the Board of directors, or from all meetings of the Board for a continuous period of three months, which ever is longer, without obtaining leave of absence from the Board; he is a partner of any private company of which he is a director, accepts, a loan, or any guarantee or security for a loan, from the company in contravention of Section 295; he acts in contravention of Section 299;

(iv)

(v)

(vi)

(vii) he becomes disqualified by an order of court under Section 203; (viii) he is removed in pursuance of Section 284. Restriction on number of directorship: No person shall hold office at the same time as small shareholders director in more than two companies. ♦ Additional Directors: When empowered by the articles, the Board of Director can appoint additional directors. But such additional directors shall hold office only up to the date of the next annual general meeting. Also the total number of additional directors and other directors together must not exceed the maximum strength fixed for the Board by the articles (Section 260). This Section applies to all companies, public and private, Additional Directors must acquire the qualification shares within two months. The power under Section 260 can be exercised by a board even enough the strength of the board has fallen below the minimum. However, such appointment of additional Directors must be in the interest of the general body of shareholders [Anantha Lakshmi vs. Indian Traders Ltd. A 1953 Mad. 467]. ♦ Can an additional Director Continue to be in office where the annual general meeting is not held as per Section 166? In Krishna Prasad Pilani vs. Colaba Land Mills Co. 29 Comp. Crs 273, it was observed that an additional Director shall vacate his office latest on the date on which the annual general meeting could have been held under Section 166. He cannot continue in office on the ground that the meeting was not held or could not be called within the time prescribed. ♦ Can an additional Director be appointed in general meeting? Where the articles have conferred the power of appointing additional directors on the Board of Directors

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3.9

the company in a general meeting is precluded from appointing additional directors [Blair Open Hearth Furnance Co. vs. Reigart, (1913) 108 L.T. 665]. However, though in ordinary circumstances the company in general meeting is precluded from appointing such directors yet if owing to a deadlock or otherwise there is no board capable of making the necessary appointment the company in a general meeting may do so [Barrow vs. Potter, (914) 1 Ch. 895]. ♦ Casual Vacancy: Where the office of a director appointed by the public company in general meeting is vacated before his term of office expires in the normal course, resulting in a casual vacancy may, in default of and subject to any regulations in the articles, be filled by the Board of Directors at a meeting of the Board. (Section 262) Since Section 262 requires the filling of casual vacancy at a Board meeting, appointment can be made only by a validly convened and constituted Board meeting. This cannot be done by a resolution by circulation. Regarding the tenure of a director appointed against casual vacancy, sub-section (2) of Section 262 provides that the person appointed in the casual vacancy shall hold office only upto the date to which the director in whose place he is appointed would have held office. ♦ Appointment of directors by Central Government: Section 408 (as amended from February, 1975) empowers the Central Government to appoint such number of persons as the Central Government may, by order in writing, specify as being necessary to effectively safeguard the interest of the company or its shareholders or the public interest for a maximum period of 3 years at a stretch, with a view to preventing the oppression of the members or mismanagement of the affairs of the company provided the conditions prescribed by the section are fulfilled. Note: For a detailed discussion on Section 408 refer to Chapter 3 of this book. ♦ Appointment of alternate directors: The Board of Directors of a Company may, if authorised by its articles or by a resolution passed by the company in general meeting, appoint an alternate director to act for a director during his absence (for a period of not less than 3 months from the State in which meetings of the Board are ordinarily held). Such a director only officiates for the permanent incumbent and cannot hold office for a period longer than that permissible for the original director and as such vacates the office on the return of the original director. Also, if the term of office of the original director is determined before he returns, any provision for the automatic reappointment of retiring director in default of another appointment shall apply to the original director and not to the alternate director (Section 313). ♦ Assignment of office by director: Any assignment of office made after the commencement of the Act by any director is void [Section 312]. It was held in Oriental Metal Pressing Works Private Ltd. vs. B.K. Thakoor (A.I.R.)

3.10

Corporate and Allied Laws

1960 Bom. 167 that the appointment of one as managing director by the will of one D was void in view of the provisions contained in Section 312, since, according to the High Court, the words ‘any assignment’ were comprehensive enough to include every assignment to transfer of a director or of the appointment by a director of a person to the office of a director in his place, whether by a deed inter vivos or by will. But this ruling has been reversed by the Supreme Court (vide A.I.R. 1961 S.C. 573). The Court considers that the word ‘assignment’ in Section 312 does not mean or include appointment. From its every nature transfer inevitably imports the passing of a thing from one person to another. A transfer without the passage of the thing, even when that is an office is inconceivable. On the other hand, an ‘appointment’ has nothing to do with passing from one person to another; it connotes the putting in of someone in a vacancy. So transfer and appointment are dissimilar. It would be an unusual statute, which by using a single word intended to prohibit at the same time, two wholly different acts. A construction leading to such a result cannot be permitted. ♦ Who cannot be appointed as directors? The Companies Act prohibits undischarged insolvents and fraudulent persons from discharging any of the functions of a director. Under Section 202 if an undischarged insolvent discharges any of the functions of a director he is punishable with imprisonment (extending to 2,years) or fine (extending to Rs. 5000) or with both. ‘Company in this context includes an unregistered company as well as a foreign company having an established place of business in India). Similarly, Section 203 provides that: (a) where a person is convicted of an offence in connection with the promotion, formation or management of a company; or (b) where in the course of winding up of a company, it appears that (i) a person has been guilty of an offence under Section 542 (whether convicted or not), or (ii) has been otherwise guilty while an “officer” of the company of any fraud, misfeasance or breach of duty in relation to the company, the Court may order that such person shall not, without the leave of the Court, be a director of a company for a period not exceeding 5 years. (The court as regards (a) includes the convicting court and as regards (b) the court having jurisdiction to wind up the company). Furthermore, under Section 274 a person cannot be appointed as director of a company in any of the following cases, namely: (i) where he has been found to be of unsound mind by a court of competent jurisdiction and the finding is in force; (ii) where he is an undischarged insolvent; (iii) where he has applied to be adjudged as an insolvent and his application is pending; (iv) where he has been convicted by a court of an offence involving moral turpitude and sentenced to an imprisonment for not less than six months and a period of

Directors – Powers, Managerial Remuneration five years has not elapsed from the date of expiry of the sentence;

3.11

(v) where he has failed to pay any call in respect of shares held by him, whether singly or jointly with others and six moths have elapsed since the last day fixed for the payment of the call; (vi) where he has been convicted of an offence in relation to promotion, formation or management of the company, or where has been found, during the course of winding up to be guilty of fraudulent conduct of business or misfeasance in relation to the company and as a consequence the Court has disqualified him from being appointed as director for a period not exceeding 5years. [It may be noted that the Court may remove this disqualification; the disqualifications mentioned in (iv) may be removed by the Central Government by notification in the Official Gazette]. A private company, which is not, a subsidiary of a public company can provide for additional grounds for disqualification. But a public company or its private subsidiary cannot provide for additional grounds for disqualification. CLARIFICATIONS FROM THE DEPARTMENT OF COMPANY AFFAIRS ON DISQUALIFICATION OF DIRECTORS UNDER SECTION 274(1) (G) OF THE COMPANIES ACT, 1956 I. General Circular No. 8/2002 dated 22-03.2001 1. Issued by the Ministry of Law, Justice & Company Affairs, Department of Company Affairs vide No. 2/5/2- 1-CL.V; As you are aware, the provisions of Section 274 of the Companies Act, 1956 were amended through Companies (Amendment) Act, 2000 (w.e.f. 13-12-2000) and a new clause (g) was inserted to sub-section (1) of this Section. Through this clause a director of a public company, which has made defaults in filing of annual accounts and annual returns and in repaying deposits/interests thereon on due date or redeeming its debentures on due date or in paying dividend for period specified in that section, is disqualified to be appointed as director of other public companies for a period of five years from the date on which such public company (ies) so defaulted. 3. A high proportion of the companies had been defaulting in filing the annual accounts and annual returns and a large number of companies were defaulting in repayment of deposits/ interest thereon and in redemption of debentures which put investor to lots of hardships and the remedial action including a deterrent punishment to the errant directors was essential. But ironically, the errant directors were not only continuing in the defaulting companies but becoming directors in other companies too. It was in this context that in the Companies Act, 1956 the new sub-section 274(1)(g) was inserted and the RBI also took some remedial measures.

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Corporate and Allied Laws

3. The intention and propose of the above amendment was to disqualify the errant directors, protect the investors from mismanagement, ensure compliance in filing of annual accounts and annual returns which are means of a disclosure to all the stakeholders, increase the compliance rate of filing of the statutory documents and infuse good corporate governance in the regulation of corporate affairs in the country. 4. The Department, however, has received representations from public financial institutions, Government owned financial companies and other financial Institutions and Companies in respect of these provisions. The Banking Division in the Finance Ministry has also supported the apprehension of the Financial Institution. The representation have been considered carefully keeping in view on the one hand, the need for strict compliance with the provisions of the clause (g) of sub-section (1) of Section 274 of the Companies Act, 1956 and on the other hand the non-obstante clause in statutes of some of the public Financial Institutions and the special situation of the nominee directors of public Financial Institutions/banks and the nominees of Central and State Government companies. 5. The Government has decided to – (i) clarify the legal position in respect of the Public Financial Institutions/banks having non-obstante clause in their statute; (ii) to give some relief to the nominees of the Public Financial Institutions/Banks/Central and State Government; and (iii) to exempt Government Companies from the applicability of the provisions of Section 274(I)(g) of the Companies Act, 1956. 6. While considering the applicability of the provisions of Section 274(1)(g) of the Companies Act, 1956, the Government has taken into account the following points: (i) In addition to protecting the interest of the Public Financial Institutions/banks, which they represent, the Nominee Directors are also expected to serve the best interest of sound public policy and bring about higher levels of corporate governance. (ii) In view of implicit disqualification in Section 274(1)(g), qualified and experienced professionals, both official and non-officials, suitable for being appointed on the Boards of assisted concerns may not agree/available, thus adversely affecting the interests of the Banks/ Financial Institutions. (iii) Presence of the Nominee Directors on the Boards of assisted concerns and close monitoring through them of all the affairs of the assisted concerns is for more desirable when the company is in default to the Banks/Financial Institutions. 7. However, the Government hereby further clarifies that the Nominee Directors of Public Financial Institutions/Banks/Government should in order to avail the relief granted are expected to comply with the following: (i) The Nominee Directors are expected to work assiduously towards observance of good corporate governance practices in the company with due regard to the legitimate interest of the various shareholders. The various provisions relating to

Directors – Powers, Managerial Remuneration

3.13

good corporate governance has been introduced in the Companies Act Rules/Regulations and clause 49 of the Listing Agreement introduced by the SEBI. The Nominee Directors are expected to study these provisions of corporate governance and have them implemented. (ii) (iii) Ensure that the operations of the company are conducted in consonance with public policy. Ensure strict compliance in letter and spirit of all the statutory provisions in particular the provisions of the Companies Act and the regulations, clarifications etc. issued thereunder. It is the duty of the nominee directors to fully acquaint themselves in the relevant provisions of the Company Law and ensure that measures are instituted to monitor and certify that these statutory provisions are being observed. The Nominee Directors should see that important committees of the Board of Directors are constituted and are functioning effectively such as Audit Committee, Nominations Committee, Remuneration Committee etc. The Nominee Directors are expected to seek membership of these important committees and through their active participation in such committees ensure that the objectives of setting up these committees are being achieved. The Nominee Directors are expected to regularly attended and actively participate in the proceedings of the Boards and in committee on which they are included. Their frequent absence for sufficient reasons from the meetings of the Board of Directors/Committees would negate the purpose for which the Institutions have nominated the Nominee Directors and they would not be able to perform the various responsibilities listed out in this paragraph. Duly safeguard the interest of the Government/Banks/Financial Institutions, which they represent. Ensure proper utilisation of financial assistance by the assisted company and prevent any misuse/diversion of funds by the promoters/management of the companies.

(iv)

(v)

(vi)

(vii) Provide adequate feedback to the nominating Institutions/banks/Companies on the affairs and operations of the assisted concerns. (viii) The Financial Institutions are expected to closely monitor the participation by the Nominee Directors in the Boards/Committees as above and to ensure that they are discharging their responsibilities as listed out above. In case any Nominee Director is failing to discharge his/her responsibilities the Institutions are expected to take steps to replace him/her. The Institutions are also expected to send a six monthly report to the Department of Company Affairs (DOCA) bringing out the steps taken by them to ensure that their Nominee Directors are discharging their responsibilities. The Financial Institutions should also in a separate section of their annual Report

3.14

Corporate and Allied Laws clearly bring out the measures instituted by them to ensure that the system of Nominee Directors is functioning effectively.

8. Accordingly, it is clarified that: (i) Nominee Directors appointed by the Public Financial Institutions and Companies established under the Acts of Parliament having non-obstante provisions over the Companies Act, 1956, like IDBI, LIC, UTI, IIBI etc, in their respective statutes shall not be liable to be disqualified for appointment as directors by virtue of Section 274(1)(g) of the Companies Act, 1956. (ii) Nominee Directors appointed on the Boards of assisted concerns or other public companies by – (a) public financial institutions within the meaning of Section 4A of the Companies Act, 1956; (b) Central or State Government; and (c) banking companies are also exempt from the provisions of Section 274(1)(g) of the Companies Act, 1956. II. (F.No. 2/5/2001-Cl.V dt. 14 th January, 2003) Further in continuation of the above Department’s Circular No. 8/2002 dated 22 nd March, 2002, it has been further clarified that default of privately placed bonds/ debentures/debt instruments by public financial institutions will not be considered as default to disqualify directors u/s 274(1)(g) of the Companies Act of 1956. (F.No. 2/5/2001-Cl.V dt. 14 th January, 2003) III. (F.No. 2/5/2001-Cl.V dt. 14 th January, 2003) G.S.R. 830 (E). - In exercise of the powers conferred by clause (b) of sub-section (1) of section 642 of the Companies Act, 1956 (1 of 1956), the Central Government hereby makes the following rules to carry out the purpose of clause (g) of sub-section (1) of section 274 of the said Act, namely: 1. Short title, commencement and extent. (1) These rules may be called the Companies (Disqualification of Directors under section 274(1)(g) of the Companies Act, 1956) Rules, 2003. (2) These rules shall come into force from the date of their notification in the Official Gazette. (3) These rules shall apply to all public limited companies registered under the Companies Act, 1956. 3. Definitions – In these rules, unless the context otherwise requires, (a) “disqualifying company” is the company in which the default has occurred on account of which a director stands disqualified;

Directors – Powers, Managerial Remuneration

3.15

(b) “appointing company” is the company in which an individual is seeking appointment as a director, including re-appointment as director. 3. Disqualifications under clause (g) of sub-section (1) of section 274 of the Companies Act, 1956.(a) Whenever a company fails to file the annual accounts and annual returns, as described in sub-clause (A) of clause (g) of sub-section (1) of section 274, persons who are directors on the last due date for filing the annual accounts and the annual returns for any continuous three financial years commencing on and after the first day of April, 1999, shall be disqualified. (b) If a company has failed to repay any deposit, irrespective of the enactment, rules or regulations under which the deposits have been accepted by the companies, or interest thereon, or redeem its debentures, or pay any dividend declared on the respective due dates, and if such failure continues for one year, as described in sub-clause (B) of clause (g) of sub-section (1) of section 274, then the directors of that company shall stand disqualified immediately on expiry of that one year from the respective due dates: Provided that all the directors who have been directors in the relevant year, from the due date to the expiry of one year after the due date, will be disqualified: Provided further that disqualification on account of the reasons cited under this Rule shall also apply to the reappointment as a director. Explanation.- For the purpose of this rule, it is clarified that non-payment of dividend referred to in sub-clause (B) of clause (g) of sub-section (1) of section 274 due to the reason of dividend not being claimed or kept in separate bank account as required under section 205A of Companies Act, 1956 or paid into Investors Education & Protection Fund as required under section 205C of that Act shall not be deemed to be a failure to make payment of dividend. 4. Duty of Statutory Auditor to report on disqualification.(a) It shall be the duty of statutory auditor of the appointing company as well as disqualifying company, as required under section 227(3)(f) to report to the members of the company whether any director is disqualified from being appointed as director under clause (g) of sub-section (1) of section 274 and to furnish a certificate each year as to whether on the basis of his examination of the books and records of the company, any director of the company is disqualified for appointment as a director or not. (b) It shall be the duty of the statutory auditors of the “disqualifying company” as required in section 227(3)(f) to report to the members of the company whether any director in the company has been disqualified during the year from being re-appointed as director, or

3.16

Corporate and Allied Laws

being appointed as director in another company under clause (g), of sub-section (1) of section 274. 5. Duty of company to intimate disqualification.Whenever a company fails to file the annual accounts and returns, or fails to repay any deposit, interest, dividend, or fails to redeem its debentures, as described in clauses (A) and (B) of clause (g) of sub-section (1) of section 274, the company shall immediately file a return in duplicate in Form ‘DD-B’, prescribed under these rules for this purpose, to the Registrar of Companies, furnishing therein the names and addresses of all the Directors of the company during the relevant financial years: Provided that names of such directors who have been exempted from application of Section 274(1)(g) by the Central Government, from time to time, shall be excluded. Provided further that no unusual abbreviations or short forms shall be used in filling up the Form ‘DD-B’, which shall give such details as may be necessary to distinguish and identify each director without any ambiguity. 6. Failure to intimate disqualification shall render director as officer in default.When a company fails to file the Form ‘DD-B’ as above within 30 days of the failure that would attract disqualification under Section 274(1)(g), officers of the company listed in section 5 of the Companies Act, 1956 shall be officers in default. 7. (a) Upon receipt of the Form ‘DD-B’ in duplicate under Rule 5, the Registrar of Companies shall immediately register the document and place one copy of it in the document file for public inspection. (b) The Registrar of Companies shall forward the other copy to the Central Government. 8. Names of the disqualified directors on the web-site etc.(a) The Central Government shall place on the web site of the Department of Company Affairs the names and addresses and such other details including names and details of the companies concerned, as may be necessary, in respect of all the disqualified directors. (b) The Central Government may also publicize the names of disqualified directors in such manner, as it may consider appropriate. (c) The Central Government shall take such steps as may be required to update its website to ensure that name of the person, in whose respect disqualification period has expired after 5 years, is deleted from the web-site. 9. Duty of every director.-

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3.17

Every director in a public company registered under the Companies Act, 1956 shall file Form ‘DD-A’, prescribed under these Rules, before he is appointed or re-appointed. 10. If any question arises as to whether these rules are or are not applicable to a particular company, such question shall be decided by the Central Government. 11. Punishment for contravention of the rules.If a company or any other person contravenes any provision of these rules for which no punishment is provided in the Companies Act, 1956, the company and every officer of the company who is in default or such other person shall be punishable with fine which may extend to five thousand rupees and where the contravention is a continuing one, with a further fine which may extend to five hundred rupees for every day after the first, during which the contravention continues. 13. On the commencement of these rules, all rules, orders or directions in force in relation to any matter for which provision is made in these Rules shall stand repealed, except as respects things done or omitted to be done before such repeal. [F. No.1/8/2002-CL.V] IV. F.No.2/5/2001-CL.V - G.S.R. 829 (E).- 21 st October, 2003 In exercise of the powers conferred by clause (a) of sub-section (1) of section 620 of the Companies Act, 1956 (1 of 1956), the Central Government hereby directs that clause (g) of sub-section (1) of section 274 of the said Act shall not apply to a Government company, a copy of this notification having been laid in draft before both Houses of Parliament as required by sub-section (2) of section 620 of the said Act. ♦ Can a Minor be appointed as a Director? In case of a minor there is no provision in the Act expressly disqualifying him. However, since a minor is not competent to contract. He cannot file with the Company or with the Registrar any valid consent to act as Director, as required under Section 264. But, as Section 264 applies only to public companies and private companies, which are their subsidiaries, there is nothing to prevent a minor becoming a Director of independent private companies. [Ramaiya, 1988 E., p.829] ♦ Restrictions on number of directorships: A person cannot hold office at the same time as director in more than fifteen companies [substituted in place of twenty by the Companies (Amendment) Act, 2000] excluding a private company which is not subsidiary or holding company of a public company, and unlimited company, an association not for profit and a company in which such person is only an alternate director (Sections 275 and 278). In this context let us now consider an illustration. A is director in 14 public limited companies. He is offered the directorship of (i) BC Private Limited; (ii) XYZ Ltd.; (iii)

3.18

Corporate and Allied Laws

Indian Automobile Association, a company registered under Section 25 of the Companies Act. Can A accept these directorships? In the first case, A can accept the directorship of BC private Ltd. In view of the provisions of Section 278(I)(a), because private company, which is neither a subsidiary nor a holding company of a public company, is not to be counted in calculating the number of directorships as prescribed by Section 275. In the second case too; A can accept the directorship of XYZ Ltd. Because with this he becomes a director of 15 companies which is the prescribed maximum limit. In the third case as well, A can accept the directorship of the Indian Automobile Association because the directorship is also to be excluded from the computations of 15 directorships under Section 278(I)(c). ♦ Choice by person becoming director of more than 15 companies: Section 277 provides that where a person already holding the office of director in 15 companies is appointed as a director of any other company, the appointment: (a) shall not take effect unless such person has within 15 days thereof, effectively vacated his office as director in any of the companies in which he was already a director; and (b) shall become void immediately on the expiry of the 15 days if he has not before such expiry, effectively vacated his office as director in any of the other companies aforesaid. Where a person already holding office of director in 14 companies or less is appointed as a director of other companies, making the total number of his directorships more than 15, he shall choose the directorships which he wishes to continue to hold or to accept, so however that the total number or the directorships, old and new, held by him shall not exceed fifteen. Please note that none of the new appointments of Directors shall take effect until the aforesaid choice is made; and all the new appointments shall become void if the choice is not made within 15 days from the day on which the last of them was made. According to Section 279 any person who holds office or act as a director of more than 15 companies in contravention of the aforesaid provisions shall be punishable with fine, which may extend to Rs.50,000 in respect of each of those companies exceeding fifteen. ♦ Consent of candidate for directorships: A person who is proposed as a candidate for the office of director, is required to sign and file with the company his consent to act as director (if appointed). However, a director retiring by rotation or otherwise or a person who has left at the office of the company a notice under Section 257 signifying his candidature for the office of a director, is not required to do so [Section 264(1)]. A person shall not act as a director unless he has signed and filed with the Registrar

Directors – Powers, Managerial Remuneration

3.19

his consent in writing to act as director within 30 days of his appointment [Section 264(2)]. The aforesaid provision does not apply to: (a) director reappointed after retirement by rotation or immediately on the expiry of term of his office; or (b) an additional or alternate director, or a person filling a casual vacancy under Section 262 appointed as director or reappointed as an additional or alternate director immediately on the expiry of his term office, or (c) a person named as director under the articles as first registered. ♦ Appointed of directors must be voted individually: Each director shall be appointed by a separate resolution in the case of a public company unless the meeting first agreed by resolution that the appointment shall be made by single resolution and no vote has been cast against it. A resolution moved in contravention of this provision shall be void, whether or not objection thereto was raised at the time it was so moved. Thus, two or more directors of a company cannot be elected as directors by a single resolution unless it is done in conformity with the provisions of Section 263. When such a resolution is passed, provision for automatic reappointment of directors retiring by rotation shall not apply. Section 263 does not apply to a company whose articles provide for election of directors by ballot and which does not carry on business or prohibits the payment of a dividend to the members (Section 263A). ♦ Principle of proportional representation for appointment of directors: Under Section 265, a company can adopt the principle of proportional representation for the appointment of its directors, buy only if its articles so provide. In such a case, not less than 2/3rds of the total number of directors shall be appointed according to the aforesaid principle, whether by the single transferable vote by a system of cumulative voting or otherwise. Such appointments are to be made once in every three years and interim casual vacancies can be filled in accordance with the provision, mutatis mutandis, of Section 263. 3.3 SHARE QUALIFICATION FOR DIRECTORS It is that number of shares which a shareholder must hold in order to be eligible for election as a director. The Companies Act, 1956 does not prescribe for any share qualification for a director. However, Regulation 66 of Table A provides that the qualification for being a director of a company is the holding of at least one share in the company. The articles of a company usually prescribe for such qualifications so that a director has a personal interest in the company. In the event of such a provision by the articles, it becomes incumbent on the part of every director to hold qualification shares and if does not hold them at the time of his appointment as director, he must acquire them within two months after his appointment as director. Any provision, made in the articles of

3.20

Corporate and Allied Laws

the company requiring a person proposed for directorship to hold qualification shares either before appointment or within a third shorter than two months after his appointment will be void. The nominal value of qualification shares must not exceed Rs. 5,000 and if the nominal value of each share is Rs. 5,000 or more than the number of shares prescribed, as qualification will be only one. It is, of course, not necessary for any company to insist upon the holding of shares for the purpose of qualification for directors. For the purpose of share qualification, the bearer of a share warrant is not deemed to be the holder of the shares mentioned in the warrant (Section 270). A Director acting without qualification shares is punishable with fine, which may extend to Rs. 500/- for every day during which he continues as director (Section 272). The provisions relating to the share qualification of a director do not apply to a private company, unless it is subsidiary of a public company (Section 273): nor do they apply to directors appointed by the Central Government under Section 408. ♦ Vacation of office by director: The office of a director shall become vacant if (1) he fails to obtain with in the prescribed time (two months) or ceases to hold thereafter the qualification shares when he is so required by the articles; (ii) he is found to be of unsound mind by the Court; (iii) he applies to be adjudged an insolvent; (iv) he is adjudged as an insolvent; (v) he is convicted by a court of an offence involving moral turpitude and is sentenced to imprisonment for not less than six months; (vi) he does not pay the call in respect of shares held by him within six months from the last date fixed for the payment. The Central Government can, by notification in Official Gazette, remove this disqualification; (vii) without obtaining leave of absence from the Board, he absents himself from three consecutive meetings of the Board or from all meetings thereof for a continuous period of 3 months, whichever is longer; (viii) he, whether by himself or by any person for his benefit or on his account or any firm in which he is a partner or any private company of which he is a director, accepts a loan or any guarantee or security for a loan from the company without previous approval of the Government as required by Section 295; (ix) having been appointed a director by virtue of his holding any office or other employment in the company, he ceases to hold such office or other employment in the company (x) he fails to disclose his interest in contract or a proposed contract by the company as required by Section 299 (xi) he is disqualified by an order of Court under Section 203 from acting as director of the company (xii) he is removed by the company in annual general meeting in pursuance of Section 284; and (xiii) he holds any office or place of profit in the company or its subsidiary without the consent of the company accorded by a special resolution. Note: (i) An alternate director vacates office when the original director returns [Section 313(2)]. (ii) A person vacates the office of director automatically in such other company after the expiry of 15 days if he, while holding directorship in 20 companies, is appointed director in other companies unless he gives notice of choice [Section 277(I)(b)].

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3.21

♦ Resignation of director: A director can resign from his office. For this purpose, he must service a notice of his resignation upon the company (Municipal Freehold Co. vs. Poling ton (1890) 63L. T. 238]. Palmer, however is of the view that if the articles permit a director to resign at any time, the resignation will be effective from the time of the service of the notice. There is no need for its acceptance by the Board or the company in general meeting. If, however, the articles contain no such provision then the resignation of the director will be effective only when he serves notice on the company or the Board and resignation is accepted by them. A verbal resignation is enough, though articles usually provide for a written notice [Latchford Premier Cinema Ltd. vs. Ennion (1931) 2 Ch.439, Sawer vs. Mann (1938) 184Lt.42]. But a managing or governing or whole-term director cannot resign merely by giving a notice. In his case, a formal acceptance of resignation by the company is essential so as to make it complete and effective. This is because he occupies two positions or possesses two capacities, viz., (i) one that of a director, and (ii) the other that of manager or officer of the company in the sense of a whole-time employee. An employee cannot give up office at his pleasure, simply by giving notice. The notice or the letter of resignation is required to be approved or accepted by the company and officer concerned has to be relieved of his duties and responsibilities attaching to the office which he has resigned from [Achutha Pal vs. Registrar of Companies (1956) 36 Comp. Cas 598]. However, in the case of an ordinary director, formal acceptance of resignation is not needed [Abdul Hug vs. Katpadi Industries Ltd. A.I.R. 1960 Mad. 483.]. A director cannot withdraw his resignation, without the consent of the company, even if such withdrawal is sought before the Board considered the resignation (Glossop vs. Glossop (1970) 2 Ch. 370: Lakshmana Mudaliar vs. Emperor (1932) 2 Comp. Cas.370]. Where the articles of a company provide that a person shall be a director for life or until he resigns, a director so appointed will not be entitled to damages against the company for wrongful termination of contract on the company going into liquidation; the reason is that the articles operate so long as company exists and it must be deemed to have been contemplated by articles that office shall come to an end on the company going into liquidation [Re-Farrer (1987) 2 All E.R.505]. 3.4 REMOVAL OF DIRECTORS [SECTION 284] A director (other than a director appointed by the Central Government under Section 408) may be removed from the office by an ordinary resolution before the period of office expires. But he cannot be removed in this way if he is the director of a company holding office for life on 1-4-1953. It is further provided that the directors appointed on the principle of proportional representation under Section 265 cannot be removed by an ordinary resolution as aforesaid. Special notice shall be required for a resolution to remove a director under Section 284. On receiving the notice of this resolution the

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company must forthwith send a copy thereof to the director concerned, and the director shall be entitled to be heard on the resolution at the meeting. The director can make a representation in writing, a copy of which shall have to be sent to every member to whom the notice of the meeting is sent. If the copy of the representation is not sent either due to its having been received too late or due to the company’s default, the director may get the representation read out at the meeting. However, the copy of the representation need not be sent out at the meeting if on the application of either the company or any person claiming to be aggrieved, the Court is satisfied that these rights are being abused to secure needless publicity for defamatory matter. The right under the section is a statutory right given to the company to remove by an ordinary resolution, any director in whatsoever manner or on whatsoever terms appointed. Where the directors attempt to avoid their removal by omitting to call a meeting or by not attending with a view to creating a situation of no quorum, the Court/the Central Government will convene the necessary meeting under Section 186. [Re El Sanbrero Ltd., (1958) 3 AIIER of (ch.II)]. Thus, where one of the only two director shareholders who was holding 51% shares wanted to remove his fellow director who did not attend the meeting to frustrate him because the articles required quorum of two, the Court (here it would have to be CLB) ordered a meeting to be called with the presence of one as sufficient quorum [Opera Photographic Ltd., Re. 1989 B CLC 763 Ch I]. What is important in this decision is the judicial recognition of the importance of a statutory right. The right of the majority shareholder to remove a director whom he fell out cannot be permitted to be vetoed by the quorum requirements. The vacancy resulting from the aforesaid removal may be filled in by the appointment of another director at the same meeting at which the director is removed, provided special notice of the proposed appointment has been given. A director so replaced holds office for the remaining period for which the director who has been removed would have held office had he not been removed. If the members of the company do not fill the vacancy, the Board of Directors may fill it as casual vacancy. But the director who was so removed from office shall not be reappointed to the Board when the casual vacancy is filled. The above-mentioned provisions do not deprive any director, so removed of his rights to compensation or damages payable to him in respect of the premature termination of the directorship, or of any appointment terminating with that as a director (Section 284). 3.5 REMOVAL OF MANAGERIAL PERSONNEL In the principal Act, in part VI, a Chapter i.e., (VIA) and Sections 388B, 388C, 388D and 388E dealing with the powers of the Central Government to remove managerial personnel from office on recommendation of the Company Law Board have been added by the Companies (Amendment) Act, 1963 the object of introduction of these Sections, as explained by the Finance Minister, being that the existing provisions in Sections 397 and

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398 of the Companies Act and other that follow provide for the removal from office in a company of persons found to have been guilty of mismanagement in regard to the affairs of that company only. Section 274 disqualifies a person from being appointed as a director of a company if he is convicted by a court for any offence involving moral turpitude and sentenced to imprisonment for a period of not less than 6 months. But under these Sections, a conviction by a court is a prerequisite. This process, being very difficult and lengthy process, the Central Government has tried to find an alternative procedure for effecting removal of such persons from position of authority when the Central Government comes into possession of certain facts which indicate that any person concerned with the management of the affairs of a company has been guilty of negligence or default etc. in carrying out of his obligations and functions and in other circumstances given in the Sections mentioned above. These Sections apply to companies both public and private, but do not apply to such body corporate as foreign companies, which are incorporated outside India, as they are not companies within the definition given in Section 3 of the Companies Act, 1956. Further, these Sections deal only with the person who is or has been in management and not with one whose concern with the management has ceased. These Sections will apply to a whole body of individuals constituting the Board of Directors. Though the explanation “managerial personnel” as enumerated in Section 197A does not include the Board of Directors or individual director, they will also come within the scope of Section 388B because they supervise, control and direct the manager. It may be construed from the construction of these Sections that directors come within the scope of the provisions of these Sections. A summarised view of these Sections is given below: (A) Reference to Company Law Board of cases against managerial personnel: There can be circumstances relating to the affairs of a company, which might suggest: (a) that any person, concerned in the conduct and management of the affairs of a company is or has been guilty of fraud, misfeasance persistent negligence or default in carrying out his obligation and functions under the law or breach of trust in connection therewith; (b) that the business of a company is not or has not been conducted and managed by such; person in accordance with sound business principles or prudent commercial practices; (c) that the company is or has been conducted and managed by such person in a manner which is likely to cause or has in fact caused serious injury or damage to the interest of the trade, industry or business to which such company pertains; (d) that the business is or has been conducted and managed by such person with an intent to defraud its creditors, members or any other persons or otherwise for

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Corporate and Allied Laws a fraudulent or unlawful purpose or in a manner prejudicial to public interest.

If the Central Government is convinced that any one of the aforementioned circumstances exist, it may state a case against the person aforesaid and refer it to the Company Law Board with a request that the Board may enquire into the case and record its findings as to whether or not such a person is fit and proper to hold the office of director or any other office concerned with the conduct and management of any company. The statement of the case should be in the form of an application presented to the Company Law Board or such officer thereof as it may appoint in this behalf, and the person against whom such a case is stated and referred, should be joined as a respondent to the application. The application should contain concise statement of such circumstances and materials, as the Central Government may consider necessary for purpose of enquiry to be made by the Company Law Board. The application must be signed and verified in the manner laid down in the Code of the Civil Procedure, 1908 for the signature and verification of a plaint in a suit by the Central Government. At any stage of the proceedings, the Company Law Board may allow the Central Government to alter or amend the application in such manner and on such terms as may be just and all such alterations or amendments shall be made may be necessary for the purpose of determining the real questions in the enquiry (Section 388B) (B) Interim order by Company Law Board: During the pendency of case before the Company Law board, certain situations might come to the knowledge of the Board which might necessitate the passing of an interim order restraining, in the interest of the members or creditors of the company, the delinquent person against whom the case is pending. In such situations, the Board may either on the application of the Central Government or on its own motion, by order, direct that the respondent (delinquent person) shall not discharge any of the duties of his office until further order and appoint in his stead another suitable person to discharge the duties connected with the office of the respondent subject to such terms and conditions as the Board may specify in the order. There person, who is temporarily called upon to discharge the duties in lieu of the respondent, will be regarded as a public servant within the meaning of Section 21 of the Indian Penal Code [Section 388C]. (C) Findings of the Company Law Board: At the end of hearing of the case, the Company Law Board shall record its findings. In the findings it must specifically state as to whether or not the respondent is a fit and proper person to hold the office of director, or any office and to be concerned with the conduct and management of the company [Section 388D]. (D) Power of the Central Government to remove managerial personnel: Either on the

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basis of the aforesaid finding of the Company Law Board or upon a decision of the Board, the Central Government may, notwithstanding any other provisions contained in this Act, by order remove the delinquent respondent from his office. An order of removal having been passed under Section 388E the person concerned will be debarred from holding the office for a period of five years from the date of the order of removal. This time-limit may, however, be relaxed by the Central Government with the previous concurrence of the Company Law Board, and the Central Government may accordingly permit such person to hold the office of a director or any other office connected with the conduct and management of the affairs of the company, even before the expiry of the period of five years. But, for the loss or termination of his office, he will not be entitled to or be paid any compensation in any event, even if there is anything contained in any other provisions of the Act, or any other law or contract, memorandum or articles. On the removal of the person the company may, with the previous approval of the Central Government, appoint another person to that office in accordance with the provisions of this Act. [Sections 388E(3), (4) and (5)]. 3.6 DIRECTORS TO ACT AS A BOARD Directors must act together as a body and generally, at meeting properly convened, unless special powers are delegated to an individual director. Every company must hold a meeting of the Board of Directors. Once in every three months and at least four such meetings shall be held in every year. (The Central Government can by notification direct that the provision of Section 285 shall not apply to any class of companies or shall apply in a modified form.) These provisions shall not be deemed to have been contravened merely by reason of the fact that the meeting of the Board, which had been properly called, could not be held for want of a quorum [Section 288(2)]. Notice of the Board’s meeting must be given in writing to every director for the time being in India, and at his usual address in India (Section 286). The quorum for a meeting of the Board of Directors must be one-third of its total strength (any fraction contained in that one-third being rounded off as one), or two directors whichever is higher. However, where at any time, the number of interested directors exceeds or is equal to two thirds of the total strength the number of directors who are not interested and who are present at the meeting not being less than two shall be the quorum. There must be at least 2 non-interested directors (Section 287). If the meeting could not be held for want of quorum, then unless the articles otherwise provide, the meeting shall automatically stand adjourned till the same day in the next week at the same time and place, or if that day is a public holiday, till the next succeeding day which is not a public holiday at the same time and place (Section 288(I)]. Section 289 contains conditions, which must be complied with for the passing of a resolution by circulation. The resolution must be circulated in draft along with necessary

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Corporate and Allied Laws

papers to all the directors, or to all the members of the Committee not being less than the quorum fixed for the Board meeting then in India and to other directors and members at their usual addresses in India. Also the resolution must have been approved by such of the directors as are there in India, or by a majority of such of them as are entitled to vote on the resolution. ♦ Passing of resolution by circulation: Powers of the directors which are not expressly required to be exercised at the Board’s meeting can also be exercised by means of resolutions passed by circulation. Moreover, Regulation 81 of Table A of Schedule 1 to the Act provides that save as otherwise expressly provided in this Act, a resolution in writing, signed by all the members of the Board or of a committee thereof, for the time being entitled to receive notice of a meeting of Board or Committee, shall be as valid and effectual as if it had been passed at a meeting of the Board or Committee, duly convened and held. Section 289 lays down the procedure for the passing of resolution by circulation. A resolution is deemed to have been duly passed by the Board or by Committee thereof by circulation only if: (i) the resolution has been circulated in draft along with the necessary papers to all the directors or to all the members of the committee then in India (not being less in number than the quorum fixed for a meeting of the Board or Committee) and to all other directors or members at their usual address in India; and (ii) the resolution has been approved by such of the directors as are then in India, or by a majority or them as are entitled to vote on the resolution. 3.7 POWERS OF DIRECTORS AND RESTRICTIONS THEREON The board of directors in entitled to exercise all such powers of the company and to do all such acts and things as the company is authorised to exercise and do. But the Board shall not exercise any power or do any act or thing which is, by the Act or any other statute or by the memorandum or articles of the company or otherwise required to be exercised by the company in general meeting. In exercising such powers the Board shall be subject to regulation made by the company in that general meeting (Section 291). But this ‘subject to regulation’ does not mean that the company in general meeting can override the Board’s powers of carrying on the business, by prescribing a regulation, or passing a resolution, taking away the powers which have been conferred upon the Board by the articles [Automatic Self Cleaning, etc. Co. vs. Cunningham (1906) 2 Ch.34]. In generality the statement in the question is quite correct. The powers cover all the dayto-day activities for the company and the actions of the Board of Directors cannot be called into question. However in no case, can the directors usurp the powers vested by the articles in the body of shareholders, nor can the shareholders usurp the power vested

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likewise in the Board of Directors (Muraka Paint & Varnish Co. Ltd. vs. Mohanlal A.I.R. 1961 Cal. 251 A.P. Pothon vs. Hindustan Trading Corporation, A.I.R. 1966 Ker. 149). The directors, being agents, are naturally subject to the will of their principal, viz., the shareholders. Also because of the need to protect the interest of the shareholders, of the company and in the public interest the law has imposed certain restrictions on the powers of the Directors the most important of these are contained in Section 293 of the Companies Act. The general powers of the Directors are subject to the following limitations: (i) The Board of Directors must necessarily act according to the Memorandum and the Articles of Association. The implication of this is that the Board or the shareholders cannot exercise certain powers, which are ultra vires the company. The acts which are intra vires the company i.e., those powers which the company is entitled to exercise and the activities that the company engage itself in, fall within the purview of the Board of Directors generally, unless the Articles specifically reserve them for shareholders. For example, it is common that declaration of the dividend is reserved for the shareholders, to be decided upon at the Annual General Meeting (Regulation 85 of the table A of Schedule I to the Companies Act). In case, power is reserved for the shareholders by the articles and the Directors happen to exercise that power, it is possible for the shareholders to ratify the action of the Board: in the final analysis, the power is exercised by the shareholders and not by the Directors. (ii) Certain power can be exercised only by the shareholders under law. In these, the Directors clearly have no authority. Some of the prominent examples are given below: (a) Issue of shares at a discount [Section 79(2)(i)] (b) undertaking lines of business other than those mentioned in Memorandum as the main objects including auxiliary to those [Section 149(2A)]. (c) selling or otherwise disposing of company’s undertaking or substantial part of the undertaking (Section 293)]. (d) investing, otherwise than in trust securities, the amount of compensation received by the company in respect of compulsory acquisition of the company’s undertaking or of any premises or property used for in such undertaking (Section 293). (e) borrowing in excess of the aggregate of paid up capital plus free reserves (Section 293). (f) contributing in any financial year, to charitable and other funds not relating to the company’s business, amounts exceeding Rs.50,000 or 5% of its average net

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Corporate and Allied Laws profits during the three preceding financial years whichever is greater (Section 293 as amended by the Companies) (Amendment) Act, 1977). (g) issuing bonus shares or debentures. (h) reorganisation of capital and amendment of Articles or Memorandum of Association (Sections 94, 31 and 16 respectively). (i) (j) winding up unless ordered by the Court (Section 484). appointment of sole selling agents except that the Board can make the appointment subject to approval of the company in a general meeting within 6 months of the appointment (Section 294).

It follows that except in certain special matters, the Board of Directors can exercise all the powers and carry on all the activities that are necessary to achieve the object of the company. A distinction, however, is necessary between the following three categories of powers and activities: (1) Those powers and activities in respect of which the Directors have complete discretion. (2) Those activities where approval of the shareholders is required but the third parties would be protected if the Board acts without the consent of the company. (3) Power, which only the shareholders can exercise, sometimes, subject to the approval of the Central Government. ♦ Certain powers exercisable with the consent of the general body meeting: Under Section 293 the Board of Directors of a public company cannot, except with the consent of the company in general meeting: (i) sell, lease or otherwise dispose of the whole, or substantially the whole, of the company’s undertaking or where the company owns more than one undertaking, of the whole or substantially the whole of any such undertaking. Any resolution permitting the aforementioned transaction may attach such conditions to the permission as may be specified in the resolution. Such conditions may include those regarding the use, disposal or investment of the sale proceeds, which may result from the transaction; (ii) remit, or give time for the repayment of, any debt due by a director; (iii) invest otherwise than in trust securities, the amount of compensation received by the company in respect of the compulsory acquisition of any such undertaking as is referred to in clause (i) or of any premises or properties used for any such undertaking and without which it cannot be carried on or can be carried on only after a considerable time;

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(iv) borrow moneys where the moneys to be borrowed together with moneys already borrowed by the company will exceed the aggregate of the paid up capital of the company and its free reserves, (i.e., reserves not set apart for any specific purpose). Temporary loans (i.e., loans repayable on demand or within 6 months from the date of the loans, such as, short-term cash credit arrangements, the discounting of bills and the issue of other short-terms loans of a seasonal character but does not include loans raised for the purpose of financing expenditure of a capital nature) obtained from the company’s bankers in the ordinary course of business are not covered by this provision. However, if a bank, in the ordinary course of its business, accepts deposits of money from the public repayable on demand or otherwise, and withdrawable by cheque, draft, order or otherwise, such acceptance must not be deemed to be a borrowing by the bank within the meaning of clause (iv) above. A debt incurred by the company in excess of the ceiling placed by clause (iv) above, shall not be valid or effectual, unless the lender proves that he advanced the loan in good faith and without knowledge that the aforesaid limit had been exceeded; and (v) contribute to charitable and other funds not directly related to the business of the company or the welfare of its employees, any amounts the aggregate of which will in any financial year, exceed Rs.50,000 or 5% of its average net profits during the immediately preceding three financial years, whichever is greater. As regards the exercise of the power mentioned either in para (iv) or (v) above, the resolution in the general meeting must specify the total amount upto which moneys may be borrowed or total amount which may be contributed to charitable and other funds in any financial year. (vi) appoint a sole selling agent for any area; the appointment may be made in the first instance without the approval of the general meeting but it will be subject to the subsequent approval by the company in the first general meeting held after the date on which the appointment is made [Section 294 (2)]. (vii) appoint a director to hold any office or place of profit (excepting that of managing director, manager, legal or technical advisers, banker or trustees for the holders of debentures of the company) special resolution being needed therefore; the consent of the company or its subsidiary in general meeting is necessary (Section 314). (viii) make loan to or give guarantee, or provide security in connection with a loan made by any person to or to any person by, another company except where the aggregate of loans made to companies not under the same management as the lending company does not exceed the prescribed percentage of the aggregate

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Corporate and Allied Laws of the subscribed capital and free reserve of the lending company (not applicable to banking, insurance and purely privates companies and companies established for financing industrial enterprises) [Section 370] (ix) to commence any new business; there is the necessity of a special resolution being passed by the company in its general meeting [Section 149(2A)].

Tutorial Note: The list of the above-mentioned powers is not exhaustive but illustrative. It should be borne in mind that there are instance of other powers needing general body meeting’s consent. ♦ Powers to be exercised by Board only at its meeting: According to Section 292, the following powers can be exercised by the Board only by means of resolution passed at its meetings: (a) to make calls; (aa) to authorise the buy back of shares (b) to issue debentures; (c) to borrow money otherwise than on debentures; (d) to invest the funds of the company; (e) to make loans. The Board may, however, by resolution passed at meeting, delegate the last three powers mentioned above to the extent specified hereunder. Such a delegation can be made to any committee of directors, the managing director, the manager or any other principal officer of the company or in the case of a branch office of the company, a principal officer thereof. Every resolution delegating the power referred to in (c), (d) and (e) above shall specify: (i) the total amount outstanding at any time up to which money may be borrowed by the delegate; (ii) the total amount up to which the funds may be invested as well as the nature of investment; and (iii) the total amount of loans and the purpose thereof up to which and for which loans may be raised respectively. It is to these extents that the delegate may exercise the aforesaid three powers. The company in general meeting may impose restrictions and conditions on the exercise by the Board of any of the five powers mentioned above. In connection with the power mentioned in (c) above a question may arise whether borrowing on a promissory note is within the powers of the directors. It has been held in [P. Rangaswami Reddiar and Another vs. R. Krishnaswami Reddiar and another (1971) 43 Comp. Case 232] that where such a borrowing permissible under the company’s articles and moneys were borrowed on promissory notes, such transaction would come within the powers of the director, It has also been held in the same case that where a person was appointed as the managing director of the company by the Board’s resolution vested with full powers of the management of

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the affairs of the company and authorised to sign all the papers of the company, he would have full powers to borrow money on a promissory note even without a resolution of the Board as contemplated by Section 292(c) of the Act. In addition to Section 292, some other Sections also require the Board to exercise its powers in its meeting which are: (f) receive notice of disclosure of shareholdings of directors under Sections 307 [Section 308(2)].

(g) Fill in casual vacancies in the Board (Section 262); (h) sanction or give consent to contracts of or with any directors [Section 294(4); and (i) receive notice of disclosure of interest (Section 299) The following powers may be exercised by a resolution passed at the meeting only with the consent of all the directors present at the meeting. (1) To appoint a managing director or manager a person who is already a managing director or manager of another company [Sections 316(2) & 386(2)] (2) To the sanction investment in companies in the same group [Section 372(5)]. ♦ Validity of acts of directors: All the acts of a director or a committee of the Board shall be valid not withstanding that his appointment was afterwards discovered to be invalid by reason of any defect or disqualification or by reason of the appointment being terminated by virtue of any provision contained in the Act or in the articles of the company. But this provision of law shall not have the effect of validating the acts of a director after his appointment has been shown to the company to be invalid or to have been terminated (Section 290). But where there was no appointment at all, the acts of such de facto directors are not protected. This protection applies only to defects in appointment discovered after the appointment. Thus, if a director, whose term of office has expired, acts as director, such acts cannot be regarded as valid; that is not a defect afterwards discovered (Kamal Distillery vs. Ladhi Parshad, A.I.R. 1960 Punj. 655). It has been held in Morris vs. Kaneseen 1945 I All E.R. 586 that this rule is intended to be machinery to avoid calling into question the validity of transactions when there has been a slip or irregularity in the appointment of directors and to override substantive provisions of law relating to such appointments. The presumption as to the validity of acts of directors would not cover the case where there has not been any appointment at all. ♦ Consideration of a few complicated problems based on power of directors: Having read the directorial powers in detail it would be worthwhile to consider a few

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problems on these powers. The Directors of X & Co. Ltd. desire to authorise the Managing Director to enter into the following transactions namely- (a) invest from time to time surplus funds in the purchase of shares of other companies: (b) borrow from banks money required for the purpose: (c) give loans to persons, including firms in which directors or their relatives are partners; (d) give donations to charitable trusts in which any of the directors may be interested as trustees. Let us now examine the measures to be taken for the proper implementation of the above proposals. (a) Although Section 292 empowers the Board of Directors of a company to delegate to the Managing Directors the power to invest, in general terms, the funds of the company nevertheless because of the overriding provisions of Section 372(5) (which Section we shall discuss in detail in Study paper 3), the transaction in the instant case would be invalid. Section 372(5) provides that no investment in shares of a company can be made by the Board of Directors of an investing company in pursuance of sub-section (2), unless it is sanctioned by a resolution passed at a meeting of the Board with the consent of all the directors present at the meeting except those not entitled to vote thereat, and unless further notice of the resolution to be moved at the meeting has been given to every director in the manner specified in Section 286. Since Section 372 does not provide for delegation of the power, the proposed delegation to the Managing Director in question, notwithstanding the general provision of Section 292, cannot be made. (b) In terms of Section 292 the Board of Directors may also delegate to the Managing Director the power to borrow money otherwise than debentures, which it can exercise only by means of resolutions passed at Board meetings. As per Explanation to Section 292(1), it is the arrangement for an overdraft or cash credit that constitutes the exercise of the borrowing power and not the actual utilisation of the arrangement. In other words, an arrangement for an overdraft or cash credit to the tune of say Rs.5 lakhs constitutes the exercise of the borrowing power and not the actual drawing of this amount on the basis of the overdraft or cash credit. Consequently, the transaction in the instant case shall be valid. But before implementation of the proposal, the Board must pass a resolution at its meeting authorising the Managing Directors to borrow from banks money required for the purpose of the company’s business. Also the resolution delegating this power shall specify the total amount outstanding at any one time up to which the delegate may borrow money. If however, the moneys to be borrowed together with the money already borrowed by the company (apart from temporary loans obtained from the

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3.33

Company’s bankers in the ordinary course of business) will exceed the aggregate of the paid up capital of the company and its free reserves, [that is to say, reserves not set apart for any specific purpose] the Board of Directors of the company in question must obtain the consent of the company in its general meeting. Consequently, care should be taken to ensure that while delegating the power to the managing director the aforesaid provision has not been violated; also it should be ensured that the memorandum of association permits borrowing. (c) Since according to Section 295(1), (which we shall discuss later) without obtaining prior approval of the Central Government in that behalf, a company can not directly or indirectly lend money to persons including firms, in which directors or their relatives are partners, the company in question must in the first instance seek the Central Government’s approval. Secondly since the power to make loans may be delegated under Section 292(1)(e), the Board of Directors of the company in question must pass a resolution therefore and every resolution delegating this power to the Managing Director shall specify the total amount up to which loans may be made by the delegate, the purpose for which loans may be made and the maximum amount of loans which may be made for each such purpose in individual cases. Thirdly, by virtue of Section 291(1), the Board must see with reference to the memorandum and articles whether the company is authorised to exercise the power. (d) Under Section 293(1) (e), the Board of Directors of a public company can contribute or donate to charitable and other funds not directly related to the business of the company or the welfare of its employees any amount the aggregate of which will not, in any financial year exceed Rs.50,000 or 5% of its average net profits during the three financial years preceding whichever is greater. If this power of the company is not ultra vires the memorandum of the company, then only the Board can act in pursuance of the above-mentioned resolution of the company and in so acting, it can authorise the Managing Director to exercise the power on behalf of the Board. It may be noted that the power of the Board to donate to general charities is not conditional to the existence of any profits. In such case, they may contribute up to the limit given in Section 293(1)(e), even though the company may be working at a loss. 3.8 DUTIES OF DIRECTORS The duties of directors may now be summarised as follows: (i) Since the directors are in fiduciary position, their duties are onerous. As you know, they are trustees of the money of the company in the bank as well as of the property

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Corporate and Allied Laws of the company. They are also agents in the transactions entered into by them on behalf of the company. Therefore they must act in utmost good faith and take as much care as a man of ordinary prudence would take in respect of his own affairs. In other words, they will have to exercise all the powers they are vested with only in this fiduciary capacity. You must remember that a director is a trustee only of the company and not of the shareholder thereof. Therefore, though he may possess inside information which may augment the value of shares, yet he is not obliged to disclose the information to a shareholder who offers to sell his shares to the director [Percival vs. Wright (1902) 2 Ch. 421]. However, in exceptional circumstances, the director may owe a fiduciary duty to shareholders as well e.g. where directors are negotiating terms of sale of issued shares of the company. That is where the directors approach the shareholders and not vice versa for sale of shares.

(ii) (iii)

He is required to evince as much skill as is expected from a person of his knowledge and experience-thus far and no further. Every director must act honestly. A director shall be liable to the company for any of his underhand dealings irrespective of whether or not the company suffers on account of such underhand dealings. Causing shares to be allotted to a minor, sale by director to company without the disclosure of his interest, fraudulent misrepresentation to co-directors enticing them into advancing money to him on insufficient security, taking of bribes, etc… are some of the instances of dishonest acts. Where a director derives any secret benefits or accept any bribes or any other illegal gratifications, he must account for them and make them over to the company Eden vs. Ridsdale Co. 23 A.B.D. 336. A company may repudiate a contract if it has been induced by bribes [Shipway vs. Broadwood (1899) I.Q.B. 369; Grant vs. Gold Explanation Syndicate (1990) 1 A.B. 233]. It is normally not the duty of the director to detect the frauds of the manager and the chairman of the company. He can therefore, rely on co-directors and officers. If the duty of detection of fraud is cast on a director, anything like an intelligent devolution of labour will be impossible. But if there is anything that gives rise to the slightest suspicion, then he will be put on an enquiry. If he fails to make the requisite enquiry to allay his suspicion then he will be guilty of dereliction of duty and be liable for damage emerging from such dereliction. It is the duty of a director to see that company’s moneys are kept properly invested, unless the articles warrant the delegation of this duty to others. It is incumbent upon directors to insist on some independent valuation of investment and fixed assets at appropriate intervals. Revaluation of immovable property may not be necessary for a considerable time, but revaluation of shares must be made once a year. In this regard, a director should not put any reliance on the assurances of the chairman or on the expression of the auditor’s belief. Likewise auditor too

(iv)

(v) (vi)

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(vii) Directors are required to ensure the accurate compilation of the stock sheets and the physical checking of certain of these items being done by the auditors. (viii) According to Palmer a list of cheques that the Board authorises is to be placed before each meeting of the Board. (ix) It is the duty of the directors not to act in a manner prejudicial to public interest or oppressive to any members. If they so act, proceedings will be against them under Section 397. Duties of directors regarding take-over under Section 395.

(x)

3.9 DIRECTORS NOT TO HOLD OFFICE OR PLACE OF PROFIT Any office or place shall be deemed to mean office or place of profit under the company [within the meaning of the Section 314(3)]: (a) in case the office or place is held by a director, if the director holding it obtains from the company anything by way of remuneration over and above the remuneration to which he is entitled as such director, whether as salary, fees, commission, perquisites, the right to occupy free of rent any premises as a place of residence or otherwise. (b) in case the office or place is held by an individual other than a director or by any firm, private company or other body corporate, if the individual, firm, private company of body corporate holding it obtains from the company anything by way of remuneration whether as salary, fees commission, perquisites, the right to occupy free of rent any premises as a place of residence, or otherwise. Except with consent of the company accorded by a special resolution, (a) no director of a company shall hold any office or place of profit, and (b) no partner or relative of his, no firm in which he or his relative is a partner, no private company of which he is a director or member and no director or manager of such a private company shall hold any office or place of profit carrying a total monthly remuneration of such sum as may be prescribed. [The government by its notification of February, 1994 has fixed this amount at Rs.10,000 or more]. However, any of the aforesaid persons may be appointed as a managing director or manager, banker or trustee for the debentureholders under any subsidiary of the company, unless the remuneration received from such subsidiary in respect of such office or place of profit is paid over the company or its holding company. The special resolution may be passed before or at the general meeting of the company held for the first time after the holding of such an office or place of profit. Further, where a relative of a director, or a firm in which such a relative is a partner is appointed to an office or place of profit in the company or a subsidiary thereof without the knowledge of

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the director, the consent of the company may be obtained either in the general meeting held for the first time after the holding of such an office within 3 months from the date of the appointment whichever is later [Section 314(I) and the provision thereof]. But the abovementioned provisions of sub-section (1) shall not be applicable in a case where the relative of a director or firm in which such relative is a partner holds any office or place of profit under the company or its subsidiary, if the said relative’s or firm’s appointment had taken place before the director in question became the director of the company [Section 314(1A)]. A partner or a relative of a director or manager, a firm in which such director or manager or relative of either is a partner, or a private company of which such a director or manager or relative of either is director or member cannot hold any office or place of profit which carries a total monthly remuneration of such sum as may be prescribed [The Govt. vide its notification of 5 th February, 2003 has fixed this amount as Rs.50,000 or more], except with the prior consent of the company by special resolution and the approval of the Central Government. When an office is held in contravention of the provision in sub-section (I), the director, partner, relative, firm etc., concerned shall be deemed to have vacated office from the date next following the date of the general meeting of the company referred to above or at the expiry of the period of the three months, as the case may be, and shall be liable to refund the company any remuneration received or the monetary equivalent of any perquisite or advantage enjoyed by him for the period immediately preceding the date aforesaid in respect of such an office or place of profit [Section 314(2)(a)]. The company shall not waive recovery of any sum refundable to it under Section 314(2)(a), unless permitted to do so by Central Government [Section 314(2)(b)]. Every individual, firm, private company or other body corporate proposed to be appointed to any office or place of profit shall, before shall, before or at the time of such appointment declare in writing whether he or it is not connected with a director of the company in any of the ways referred to in sub-section (I) [Section 314(2A]. If may happen that after the commencement of 1947 Amendment Act, an office or place of profit is held without the prior consent of the company by a special resolution and the approval of the Central Government. In such a case, the partner, relative, firm or private company appointed to it shall be liable to refund to the company any remuneration received or the monetary equivalent of any perquisite or advantage enjoyed by him on and from the date on which the office was so held by him [Section 314(2B)]. The company shall not waive the recovery of any sum refundable to it under sub-section (2B) or (2c) as the case may be, unless permitted to do so by the Central Government [Section 314(2D)].

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It may be noted that nothing in Section 314 shall apply to a person who, being the holder of any office or place of profit in the company, is appointed by the Central Government under Section 408 as director of the company [Section 314(4)]. The aforementioned provisions are calculated to prevent directors from obtaining unfair advantage from the company by providing sinecures to their business associates and relations without the knowledge of the shareholders. Let us examine the following problems: 1. Mr. Smart is a director of ABC Ltd., accepts the offer Executive-Technical Operations” of the same company on Rs.15,000. Can he be an employee at the same time company? In case his son is appointed to the same provisions of the Companies Act? of employment as “Chief a monthly remuneration of being the director of the post, does it attract any

Answer: Ordinarily, the shareholders in general meeting elect a director, and once so elected, he enjoys well-defined rights and powers under the Act. An employee is appointed by the company under a contract of service is a servant of the company and the company can always direct his actions and interfere with his work. In Lee Behrens & Co. (Re [1932] 2 com cas. 588 it was observed that directors are elected representatives of the shareholders engaged in directing the affairs of the company on its behalf. However, there is nothing in law to prevent a director from accepting employment under the company under a special contract, which he may enter into with the company. (R.R. Kothandaraman vs. Commr. of I.Tax (1957). Section 314 provide for a director holding an office or place of profit under a company. Except with the consent of the company accorded by a special resolution no director shall hold any office or place of profit and no partner or relative of his, no firm in which he or his relative is a partner, no private company of which he is a director or member and no director or manager of such a private company shall hold any office or place of profit carrying a monthly remuneration of Rs. 10,000 or more. The special resolution may be passed before or a general meeting of the company held for the first time after the holding of such an office or profit. If it is done without the knowledge of the director, the consent of the company may be obtained either in the general meeting held for the first time after the holding of such an office or within 3 months from the date of appointment whichever is later. If a partner or a relative of a director or manager, a firm in which such director or manager or relative of either is a partner or a private company of which such a director or manager or relative of either is director or member can not hold any office or place of profit which carries a total monthly remuneration of Rs.20,000 or more except with the prior consent of the company by special resolution and the approval of the Central Government.

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Thus, in the instance case, Mr. Smart can accept the offer of employment as Chief Executive-Technical Operations. If his son is appointed to the said post, it requires the consent of the company. 3. Mr. True is a director of a company and also a chartered accountant by profession and one of the partners in M/s True & Fair Co. The company appointed the said firm as chartered accountant of the company on a regular basis. Does Mr. True holds any office or place of profit in the company. Would your answer be different if his appointment is on a case-to-case basis? Answer: Chartered Accountants appointed by a company on a regular basis are hit by a restrictive provisions of sub-sections I and I(b) of Section 314 if he is a director receiving remuneration over and above to which he is entitled. In case the office or place of profit is held by an individual other than a director or by any firm, private company or other body corporate, if it obtains from the company anything by way of remuneration whether as salary, fees, commission perquisite or otherwise, approval of the company is not required where the monthly remuneration is less than Rs. 10,000/. Accordingly, if a director is holding the place of chartered accountants for the company he would be covered by Section 314(3) irrespective of the fact that office or place of profit carries a total monthly remuneration less than Rs.10,000/-. 3.10 LIABILITIES OF DIRECTORS The liability of a director should be considered from the following stand points (i) Directors may become liable to shareholders in multifarious ways. (ii) They may also become liable to third parties in certain cases: the liability may be civil and/or criminal. (1) Liability to Shareholders (a) Negligence: A director may become liable to shareholders for negligence. Where the directors acting within their powers, fail to exercise as much reasonable skill and diligence as may be expected from persons with their knowledge and experience in the management of the affairs of the company, they can be held liable for negligence (Re: City Equitable Fire Insurance Co. 1925 Ch.407). They are, however, not liable for errors of judgement as a result of which a loss might have been caused to the company provided they acted bonafide for the benefit of the company and with such a care as may be reasonably expected of them. The burden of proving bad faith in such a case lies on the person who challenges the act of the directors. (b) Misfeasance and breach of trust: “Misfeasance” and “breach of trust” are allied heads of liability. The former is defined as any breach of duty in the conduct of the company’s affairs, which causes loss to the company: the latter is confined to any misapplication of the funds of the company (Palmer-P.190). Thus, the payment of dividend out of capital (Filicroft’s case). is a breach of trust. On the other hand,

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allotment of shares to an infant or giving a fraudulent preference to a creditor, or to commit any breach of articles would be misfeasance. (c) Ultra vires acts: Where directors do any act which is in excess of their powers, e.g. borrow money or create a mortgage which is beyond their authority as defined by the articles such an act is called ultra vires the directors. If, however, it is not beyond the powers of the company as laid down by the memorandum, the shareholders may, by subsequent ratification, make the act, which is ultra vires the directors but intra vires the company, valid and binding on the company. (d) Act of co-directors: A director is not responsible for the acts and defaults of codirector, unless he has expressly or impliedly authorised the same [Cargil vs. Bower 10 Ch.D.502]. The directors are jointly and severally liable for a breach of trust. (2) Liability to third parties (a) Insofar as contracts entered into by directors on the company’s behalf are concerned, the directors cannot be generally held personally liable for the some, for they act as agents of the company. But they may be personally liable if they act, without the authority of the company, on the ground of a breach of warranty of authority. This personal liability may attach to them when they have expressly or impliedly undertaken to be personally responsible for their act. (b) If the directors commit or authorise a tortious act, they are personally liable therefore even if they have been acting as agents of the company. Likewise they would be personally liable for commitment or authorisation of fraud, e.g., issue of a fraudulent prospectus. But a director would not be liable for the fraud of his co-director, unless it has been authorised by him, or he has participated therein. (c) Certain liabilities have also been imposed by the Act as regards director qua third parties, e.g., for misstatement in prospectus under Section 62 to prospective subscribers; for irregular allotment under Section 71: for failure to return application moneys where minimum subscription has not been raised within the prescribed period, under Section 69; for similar failure mentioned under Section 73 etc. ♦ Directors’ rights and liabilities for their ultra vires acts: The acts of directors which may be regarded as ultra vires are two-fold in nature, namely, (a) the acts which are beyond their authority but within the company’s powers (i.e. intra vires the company) and (b) the acts which are beyond the director’s authority as well as the company’s. The rights and duties which emanate from ultra vires acts, we shall discuss here under: (i) Under the Act, the funds of a company can be applied in carrying out its permitted objects. Therefore, if the directors of the company make an ultra vires payment, e.g., payment of the interest out of capital they may be compelled to

3.40

Corporate and Allied Laws repay the money to the company even after it goes into liquidation [In re-Sharpe (1982 1 Ch. 154)]. But the directors so compelled to refund the money to the company could claim to be indemnified by the payees who received the money from the directors with the knowledge that the payment to them was ultra vires. The reason for this rule of indemnification is that in such a case, the payees would be constructive trustees of that money (Russel vs. Wakefield Water Works Co. I R. 20 Eq 474). (ii) The directors are the agents of the company. That’s why they cannot do anything, which the company itself cannot do under its memorandum. But if they make a contract within the powers of the company (i.e. intra vires the memorandum) but ultra vires the powers which the company by its articles has conferred upon them, then the company may ratify the contract in general meeting and be bound by it (Grant vs. United Kingdom Switchback Railway (1888) 40 Ch. D. 135). If, however the company does not ratify such contract then the company will not be bound by the contract. Consequently, the directors will remain liable to the other party to the contract for the breach of an implied warranty of their authority (Weeks vs. Propert (1873) L.R. 8 C P. 427; Starkey vs. Bank of England 1903.A.C.114).

♦ Directors with unlimited liability: In a company with limited liability, the liability of the directors, like that of any other members, is limited to the amount remaining unpaid on their shares. However, a limited company may, if the memorandum permits, have directors with an unlimited liability. If a limited company has the powers under its articles it may also alter its memorandum by a special resolution so as to make the liability of its directors unlimited (Sections 322 and 323). ♦ Director’s reports: According to Section 217, the directors are under an obligation to make out and attach to every balance sheet laid before a company; in general meeting a report with regard to the state of affairs of the company-, the amount (if any) which they recommend as dividends, the amount if any, which they propose to carry any reserves in such balance sheet and the material changes and commitments (if any) affecting the financial position of the company which have occurred between the end of financial year to which the balance sheet relates and the date of the report. The report shall deal with any changes, which have occurred during the financial year (i) to the nature of the company’s business, (ii) in the company’s subsidiaries or in the nature of the business carried on by them and (iii) generally in the class of business in which the company has an interest. However, such matters are to be disclosed so far as these are material for the application of the state of the company’s affairs by its members and will not, in the board’s opinion be harmful to the business of the company or any of its subsidiaries. The Board must also give the fullest information and explanation in its report or in case falling under the proviso to Section 222, in an addendum to the report, on every

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reservation, qualification or adverse remark contained in the auditor’s report. The report and any addendum thereto must be signed by the chairman of the Board if he is authorised by the Board; otherwise, it is to be signed by such number of directors as are required to sign the balance sheet and profit and loss account of the company by virtue of Section 215. In default of compliance with these provisions, each of the directors and chairman signing the report without the Board’s authority shall be punishable with imprisonment for a term extending up to six months or with fine up to Rs.20,000 or with both. But no person is to be sentenced to imprisonment for such offence unless it was committed willfully. DIRECTOR’S RESPONSIBILITY STATEMENT [SECTION 217] This section deals with the Report of Board of Directors to be placed before the general meeting. A new sub-section (2AA) has now been inserted [by the Companies (Amendment) Act, 200] to provide that the Report of Board of Directors shall also include a Directors’ Responsibility Statement as under: (i) That the applicable accounting standards have been followed in preparing the annual accounts. If there is material departure, explanation for the same should be given. (ii) That the directors have selected such accounting policies and applied them consistently and made judgements and estimates that are reasonable and prudent so as to give a true and fair view of the state of affairs of the company while preparing the annual accounts. (iii) That the Directors have taken proper and sufficient care (a) for maintenance of adequate accounting records as required by the Act, (b) for safeguarding the assets of the company and (c) for preventing and detecting fraud and other irregularities. (iv) That the Directors have prepared the annual accounts on a going concern basis. 3.11 LOANS TO DIRECTORS [SECTION 295] We will presently see from our discussion hereunder that a company’s power of lending money to its directors is strictly regulated by the Act. A company without obtaining prior approval of the Central Government in that behalf, cannot directly or indirectly lend moneys or guarantee or secure the loans advanced by the other person to: (a) a director of the lending company or that of its holding company or partner or relative of any such director (b) any firm in which any such director or relative is a partner; (c) any private company of which any director is a director or member; (d) any body corporate 25% or more of whose total voting power may be exercised or controlled by any such or by two or more such directors together (e) any body corporate the Board of Directors, managing director or manager whereof is accustomed to act in accordance with the directions or instructions of the board or of any director or directors of the lending company [Section

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295(1)]. The impact of the aforesaid provision is that it prohibits the company not only from directly lending money to its directors but also from giving any guarantee for a loan taken by a director from any other person and providing any security for such loan. The Section too prohibits the providing of any guarantee or security for a loan advanced by a director to any person. The above provisions do not apply to loans, etc. advanced by a private company (unless it is a subsidiary of a public company) or by a holding company to its subsidiary. Similarly, any guarantee or security provided by the holding company in respect of any loans made to its subsidiary does not attract the provisions referred to above. It is thus clear from the foregoing discussion that under Section 295, a company cannot give loan or advance to its directors without obtaining the prior sanctions of the Central Government in that behalf. Now suppose that the directors of a public company have to travel often for company’s business. The company makes some advances to them for this purpose, which sometimes exceeds the actual requirements. In such a case can the company be deemed to have, contravened the provision of Section 295? It seems that advances pertaining to travelling expenses are outside the ambit of Section 295, because such advances are not in the nature of loans, and are meant to meet expenses on behalf of the company. Therefore, the provisions of Section 295(I) are not contravened, but the directors are bound to keep the advances in excess in trust for the company. In case a director of a public company has take a loan from the company without the approval of the Central Government, (i) is it possible to avoid prosecution by applying to the central Government for approval or by refunding the loan? And (ii) whether the offence is compoundable before or after institution of prosecution and the authority can compound the offence? (i) According to Section 295 of the Companies Act, no public company shall make any loan to any of its directors either directly or indirectly without obtaining the previous approval of the Central Government. As the Act envisages prior approval, Central Government will not entertain any application from the company seeking approval for a loan already given to its director. The company has, therefore, contravened the provisions of Section 295(1) and for this offence every person who is knowingly a party to this contravention including the person to whom the loan is made shall be punishable either with fine which may extend to Rs. 50,000 or with simple imprisonment for a term which may extend to six months [Section 255(4)]. Where any such loan has been repaid in full, no punishment by way of imprisonment shall be imposed and where the loan has been repaid in part, the maximum punishment, which may be imposed by way of imprisonment, shall be

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proportionately reduced. So, by refunding the loan in full, it is possible to avoid punishment in the form of imprisonment, but it is not possible to a avoid prosecution and punishment in the form of fine. (ii) All offences other than an offence which is punishable under the Companies Act with imprisonment only or with imprisonment and also with fine are compoundable under Section 621A. As the offence under Section 295 is punishable with fine or imprisonment, it is compoundable but with the permission of the Court [Section 621A(2)]. The offence may be compounded either before or after the institution of prosecution. If the offence is compounded before the institution of any prosecution, no prosecution shall be instituted in relation to such offence, either by the Registrar or by any shareholder or by any person authorised by the Central Government. Where the composition of any offence is made after the institution of any prosecution, such composition shall be brought to the notice of the court by the Registrar in writing and on such notice of the composition of the offence being given, the company or its officer in relation to whom the offence is so compounded shall be discharged [Section 621A(4)]. The offence may be compounded by the Regional Director where the maximum amount of fine, which may impose for such offence, does not exceed Rs. 50,000 and in other cases by the company Law Board. In this case, Regional Director may compound the offence, as the maximum fine is only Rs. 50,000. On receipt of applications from the persons liable for penalty under Section 295(4) along with the comments of the Registrar, the Regional Director may specify the amount no exceeding the maximum fine which shall be paid to the Central Government for compounding of the offence. 3.12 DIRECTORIAL REGISTERS ♦ Register of contracts, companies and firms in which directors are interested: Every company shall keep one or more registers in which particulars of all contracts, or arrangements to which Section 297 or Section 299 applies shall be entered. These particulars should include the following to the extent they are applicable in each case: (a) date of the contract or arrangement; (b) names of the parties thereto; (c) the principal terms and conditions thereof; (d) in the case of contract to which Section 297 applies or in the case of a contract or arrangement to which Section 299(2) applies, the date on which it was placed before the Board; (e) the names of the directors voting for or against the contract or arrangement and the name of those remaining neutral. The particulars of every such contract or arrangement to which either of the above mentioned Sections applies must be entered in the register within 7 days of the receipt at the registered office of the particulars of contract other than the one requiring the Board’s approval or within 30 days of date of that contract whichever is later; in the case of

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contract requiring the Board approval within 7 days (exclusive of public holidays) of the meeting of the Board at which the contract is approved. On these entries being made, the register is required to be placed before the next meeting of the Board, whereupon it shall be signed by all the directors present at the meeting. The register must also specify, in relation to each director of the company, the names of the firms or bodies corporate of which he has given notice under Section 299(3). However, the particular as regards contracts the value of which does not exceed Rs.1,000 in the aggregate in any year or as regards contracts entered into by a banking company for collection of bills or as regards any transactions referred to in Section 297(2)(c) are not required to be entered in the register. Violation of the aforementioned provision would render the company and every officer thereof (in respect of each default) punishable with fine up to Rs.5000 (Section 301). ♦ Register of directors, managing director, manager and secretary (Section 303): Every company must keep at its registered office a register of directors, managing director, manager and secretary, and send to the Registrar in the prescribed form within 30 days of the appointment of the first directors, a return in duplicate containing particulars specified in the register and must notify the Registrar of any subsequent changes within 30 days of the happening thereof. This notification also must be submitted in duplicate in the prescribed form. The above-mentioned register must contain the following particulars: (i) In the case of an individual, his present (and former) name and surname in full; his father’s name and surname in full or where the individual is a married woman the husband’s name and surname in full; his usual residential address, nationality, business, occupation, if any particulars of office (if any e.g., that of director, managing director, manager or secretary in any other body corporate), the date of birth; (ii) In the case of a body, corporate its corporate name and registered or principal office, etc. (iii) In the case of a firm, the name of the firm etc.; (iv) If any director or directors have been nominated by a body corporate, its corporate name and all the particulars mentioned (i) and (ii); (v) If any directors have been nominated by a firm, the firm name and all the particulars mentioned in (i) and (ii) above. For the purpose of the aforesaid provision any person in accordance with whose directions, or instructions the Board of Directors of a company is accustomed to act shall be deemed to be a director of the company. [Explanation to Section 303]. ♦ Inspection of the Register (Section 304): The register mentioned in Section 303 must be open to inspection by any member of the company free of charge. But a

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person other than the member can inspect it on payment of one rupee for each inspection. If the inspection is refused, the company and every officer thereof who are in default are punishable with fine extending upto Rs.50. Also the Company Law Board may, by order, compel an immediate inspection of the register. ♦ Register to be kept by Registrar (Section 306): The Registrar shall maintain a separate register wherein he shall enter the particulars received by him under Section 303(2) in respect of companies, so however that all entries in respect of each such company shall be together. This register shall be open to inspection by any member of the public at any time during office hours, on payment of the prescribed fee. The register should be in Form No. 34 of the Companies (Central Government’s) General Rules and Forms 1956. According to a decision of the Punjab High Court (Jullundur Dist. Registered Factory owners’ Association vs. Registrar of Companies 1961, Comp. Cas, 673), where returns under Section 303(2) have been made by rival claimants, the registrar should wait for the decision of the Court on the conflicting claims before making entries in his separate register of the particulars furnished by either party. ♦ Register or directors’ shareholding etc. (Section 307): A company must maintain a register showing, as regards each director, the number, description and the amount of shares in or debentures of the company or any other body corporate, being the company’s subsidiary or holding company, or a subsidiary of the company’s holding company, which are held by him, or in trust for him, or of which he has any right to become the holder whether on payment or not. Apart from these entries, there must be an indication in the register of the nature and extent of any interest or right in or any shares or debentures recorded in relation to a director. The register must also show the date of each transfer of shares or debentures and the price or other consideration therefore if the transaction has been entered into after the commencement of the Act (i.e., April 1, 1956). The register shall be kept at the registered office of the company. During the period beginning 14 days before the date of company’s annual meeting, and ending 3 days after the date of its conclusion, any member or holder of the debentures may inspect it; but during this period or any other period, any person acting on behalf of the Central Government or the Registrar may inspect it. Further the Central Government or the Registrar may at any time, require a copy of the register or any part thereof. Furthermore, it must be produced at the commencement of every annual general meeting and kept open and accessible during the continuance of the meeting the any person having the right to attend the meeting. Any default in the matter or the entries referred to in Sections 307(1) and (2) is punishable with the extending to Rs. 50,000 and also with a further fine extending to Rs.200 for every day during which default continues. Similar punishment is leviable in case a copy required under this Section is not sent within a reasonable time. In the case of refusal, the Company Law Board may compel an immediate inspection of the

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register. The provisions of Sections 307 and 308 shall apply to managers as they apply to directors. 3.13 POLITICAL CONTRIBUTIONS Prior to the amendment of Section 293A, by the Companies (Amendment) Act, 1985, there was a blanket ban on political contributions by companies. The amended Section seeks to continue the existing blanket ban against political contributions in the case of government companies and companies which have been in existence for less than three financial years. The new Section seeks to permit any other company to make political contributions not exceeding five per cent of the average net profits if a resolution authorising such contributions is passed at a meeting of the Board of Directors. The New Section also seeks to impose an obligation on every company to disclose in its profit and loss account any amount or amounts contributed by it to any political party or for any political purpose. Under the new Section, if a company makes any political contribution in contravention of the provisions thereof, the company would be liable to fine which may extend to three times the amount so contributed. Further every officer of the company in default, would be liable to imprisonment for a term, which may extend to three years and also to fine. The detailed provision of Section 293A, as amended, are reproduced below: (1) Notwithstanding anything contained in any other provision of this act: (a) no Government company; and (b) no other company which has been in existence for less than three financial years, shall contribute any amount or amounts directly or indirectly: (i) to any political party; or (ii) for any political purpose to any person. (2) A company, not being a company referred to in clause (a) or clause (b) of sub-section (1), may contribute any amount or amounts, directly or indirectly: (a) to any political party, or (b) for any political purpose to any person. Provided that the amount or, as the case may be, the aggregate of the amount which may be so contributed by a company in any financial year shall not exceed five per cent of its average net profits determined in accordance with the provisions of Sections 349 and 350 during the three immediately preceding financial years. Explanation: Where a portion of a financial year of the company falls before the commencement, of the Companies Act (Amendment) Act, 1985 and a portion falls after the amendment, the latter portion shall be deemed to be a financial year within

Directors – Powers, Managerial Remuneration the meaning, and for the purposes, of this sub-section.

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Provided further that no such contribution shall be made by a company unless a resolution authorising the making of such contribution is passed at a meeting of the Board of Directors and such resolution shall, subject to the other provision of this Section, be deemed to be justification in law for the making and the acceptance of the contribution authorised by it. (3) Without prejudice to the generality of the provisions of sub-sections (1) and (2): (a) a donation or subscription or payment caused to be given by a company on its behalf or on its account to a person who, to its knowledge, is carrying on any activity which, at the time at which such donation or subscription or payment was given or made, can reasonably be regarded as likely to affect public support for a political party shall also be deemed to be contribution of the amount of such donation, subscription or payment to such person for a political purpose: (b) the amount of expenditure incurred, directly or indirectly, by a company on advertisement in any publication being a publication in the nature of a souvenir, brochure, tract, pamphlet or the like, by or on behalf of a political party or for its advantage shall be deemed: (i) where such publication is by or on behalf of a political party, to a contribution of such amount to such political party, and

(ii) where such publication is not by or on behalf of but for the advantage of a political party to be a contribution for a political purpose to the person publishing it. (4) Every company shall disclose in its profit and loss account any amount or amounts contributed by it to any political party or for any political purpose to any person during the financial year to which that account relates, giving particulars of the total amount contributed and the name of the party or person to which or to whom such amount has been contributed. (5) If a company makes any contribution in contravention of the provisions of this Section: (a) the company shall be punishable with fine which may extend to three time the amount so contributed, and (b) every officer of the company who is in default shall be punishable with imprisonment for a term, which may extend to three year and shall also be liable to fine. 3.14 MANAGERIAL REMUNERATION

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Corporate and Allied Laws

A director is not a servant of the company but he is the incharge of its management and controls its affairs. He has no implied rights to remuneration for his services as a director. However, there may be a specific provision for providing remuneration to him in the articles or the shareholders may resolve for the same in the General Meeting. The articles, however, generally provide for director’s remuneration, which is in the nature of honorarium. Sections 198, 309, 310, 311, 387, 200 and Schedule XIII of the Companies Act, 1956 provide the relevant provision relating to managerial remuneration, which may be summarised as under: (1) For the purpose of the above-mentioned Sections, the term ‘remuneration’ includes: (i) Any expenditure incurred by the company in providing any rent free accommodation or any other benefit or amenity in respect of accommodation free of charge;

(ii) Any expenditure incurred by the company in providing any other benefit or amenity free of charge or at a concessional rate; (iii) Any expenditure incurred by the company in respect of any such obligation or service which but for such expenditure by the company would have been paid by the person himself; and (iv) Any expenditure incurred by the company to effect any insurance of the life of, or to provide any pension, annuity or gratuity for the person or his spouse or child. (Section 198) The term ‘remuneration’ however, does not include: (i) any sitting or attendance fees payable to directors for attending each meeting of the Board or a Committee there of [Section 198(2)]. However, in case of a managing director and whole time director, the payment of sitting fee forms a part of managerial remuneration and if the amounts is payable in accordance with Schedule XIII, no such sitting fee is payable to them.

(ii) remuneration payable for acting as technical expert. [Section 309(1)] (iii) if the articles do not provide for the payment of travelling expenses to the directors, travelling expenses incurred in attending meeting of the Board or Committee thereof or General Meeting. (2) The remuneration of the directors must be fixed: (i) by the articles or (ii) by a resolution or if the articles so require by a special resolution of the company [Section 309(1)] (3) The director may be paid remuneration in one of the following modes:

Directors – Powers, Managerial Remuneration (i)

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A director may receive remuneration by way of fee for each meeting of the Board or a Committee thereof attended by him.

(ii) A director who is either in the whole time employment of the company or a managing director may be paid remuneration either by way of a monthly payment or as a specific percentage of the net profits of the company or partly by one way and partly by the other. (iii) A director who is neither in the whole time employment of the company nor a managing director may be paid remuneration either by way of a monthly, quarterly or annual payment with the approval of the Central Government or by way of commission if the company by a special resolution authorised such payment. (4) According to Section 198, total managerial remuneration payable to directors, managing director(s) or manager or whole time director(s) in respect of any financial year should not exceed 11% of the net profits of that company for that financial year. The approval of the Central Government is required to pay the remuneration to a whole time director/managing director of a company if such remuneration exceeds 5% of the net profits for one such director, and 10% of net profits for all of them together. (Section 309) In case of a director who is neither in the whole time employment of the company nor a managing director, the approval of the Central Government for their remuneration is required if it exceeds 1% of the net profits of the company, if a company has a managing or a whole time director or a manager, and 3% of the net profits of the company in any other case. (Section 309) In case of a manager the need for approval of the Central Government arises when the remuneration exceeds 5% of the net profits (Section 387) (5) Under sub-section (4) of Section 198 in case of loss or inadequacy of profits, the approval of the Central Government is required for payment of minimum remuneration to managerial personnel. Section 269 has dispensed with the requirement of prior approval of Central Government for appointment of managerial personnel so long as the appointment and remuneration are in accordance with Schedule XIII. Section II Part II of the Schedule specifies minimum remuneration (varying from Rs. 75,000 per month to Rs.2,00,000 per month and Rs. 1,50,000 to Rs. 4,00,000 as the case may be depending on the effective capital of the company). It may be inferred that no separate approval of the Central Government would be required under Sections 198(4) and 309(3) provided the remuneration paid to a managerial person in the event of absence or inadequacy of net profits in any financial year is in accordance with the provisions of Section II of Part II of Schedule XIII.

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Corporate and Allied Laws Note: Earlier provision for 10 per cent reduction in salary of a managerial person has been deleted from the revised Schedule XIII effective from 14 th July, 1993. In fact the remuneration specified in Part II of the Schedule as amended on 1 st February, 1994 is itself the ‘minimum remuneration’. Hence, where a managerial person had been appointed (with or without Central Government approval) on a specified salary with a provision for 10% reduction in salary in the event of loss or inadequacy of net profits in any financial year, the company may, if it so wishes, delete the said condition, without obtaining central Government’s approval in accordance with the provisions of Section 310.

(6) Remuneration payable by a company having adequate net profits to its managerial; personnel is governed by Section 1 of Part II of Schedule XIII, according to which, there would be no restriction on the nature or quantum of remuneration paid by a company to its managerial personnel as long as the remuneration paid during any financial year is within 5 per cent or 10 per cent of the net profits, as the case may be, of that financial year. It may be further noted that where a profit making company fixes remuneration for all its managerial personnel in accordance with the provisions of Section 1 of Part II of the Schedule but in incurred losses or earns inadequate profits in any subsequent financial year, it would be required to confirm to the provisions of Section II of Part II of the Schedule during such subsequent financial year unless it obtains the approval of the Central Government for payment of remuneration to its managerial personnel in excess of the limits specified in Section II of Part II of the Schedule. (7) Section 310 prohibits any increase in the remuneration of any director, except with the approval of the Central Government. However, increase in remuneration effected by an increase in the sitting fee for each meeting of the Board or Committee thereof it such fee after the increase, does not exceed the limits prescribed by the Central Government [presently the amount of remuneration by way of fee for each meeting of the Board of Directors or a committee thereof is [(a) For companies with a paid up share capital and free reserves of Rs 10 crore and above or turnover of Rs.50 crore and above not to exceed Rs.20,000/- and (b) For other companies not to exceed Rs.10,000/-] do not require the Central Government’s approval. The Amendment Act, 1998, provided that so long the increase in remuneration is in accordance with Schedule XIII, approval of the Central Government will not be required. (8) In the case of an appointment or reappointment of a managing or whole-time director at a remuneration higher than the remuneration which that office previously carried with it, the approval of Central Government is required except the cases where such increase is in accordance with the conditions specified in the Schedule XIII (Section 311). Schedule XIII provides that in regard to such managerial personnel who are already

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in position on the date of the amendment in the Schedule, companies may themselves raise their remuneration, from a date not earlier than 1 st February 1994, i.e., the date of the notification of the revised Schedule, without the approval of the Central Government. This may be done even where the earlier appointment/remuneration had been approved by the Central Government in accordance with the provisions of Schedule XIII save and except in those cases where the Central Government had given conditional approval to the appointment/remuneration. For example, in some cases the Central Government approves appointment of a person subject to the condition that the company would not increase or vary his remuneration without obtaining approval of the Central Government or that the remuneration of a managerial person shall not exceed a specified ceiling if he has been permitted to work as managerial person in more than one company and draw remuneration from both the companies. Where such specific or special conditions have been imposed by the Central Government while approving appointment/remuneration, these conditions would still have to be complied with unless varied by the Central Government. Any increase in the remuneration of managerial personnel in accordance with the revised Schedule shall be subject to the approval of the shareholders in a general meeting, when held, in specific terms so as to comply with Part III of the Schedule. (10) Under Section 200, a company cannot pay its officer or employee any tax-free remuneration. Since, under Section 2(30), the term ‘officer’ includes a director, the payment of tax-free remuneration to a director is also forbidden. It may, however be noted that despite Section 200 of the Companies Act, Section 10(6)(vii)(a)(ii) of the Income-Tax Act, 1961, provides that in the case of a foreign technician of the class specified therein and employed by a company, the tax on his income chargeable under the head ‘salaries’ may be paid by the company for a period of twenty-four months following the expiry of a tax-free period of thirty-six months from the date of his arrival in India. (11) The Companies (Amendment) Act, 1974 introduced a new Section 637-AA empowering the Central Government while according approval to the appointment or remuneration of a managing or whole-time director or manager to fix the remuneration, within the statutory ceilings, at such amount or percentage of profits of the company, as it may deem fit and while fixing the remuneration, the Central Government shall have regard to: (a) the financial of the position of the company; (b) the remuneration or commission drawn by the individual concerned in any other capacity, including his capacity as a sole selling agent; (c) the remuneration or commission drawn by him from any other company;

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Corporate and Allied Laws (d) professional qualifications and experience of the individual concerned; (e) public policy relating to the removal of disparities in income.

♦ Compensation for loss of office: Sections 318 to 321 lay-down elaborate provisions for regulating payment of compensation to directors for loss of office or in consideration of retirement from office or in connection with such losses or retirement. These provisions apply to all companies, i.e. public companies, private subsidiary of public companies and to private companies. Under Section 318 such compensation can be paid only to managing director, director holding the office of the manager and to a whole time employee director and to no others. The compensation payable shall be on the basis of average remuneration actually earned by such persons for three years (or such shorter period as may be the case) immediately proceeding the ceasing of holding of such office, and shall be for the unexpired portion of his term or for three years (whichever is shorter). No such payment however can be made at all if winding up of the company is commenced before or commences within 12 months after he ceases to hold office if the assets or winding up (after deducting expenses on winding up) are not sufficient to repay the shareholders the capital contributed by them (inclusive of premium, if any). No payment of such compensation can also be made in the following cases: (a) Where the director resigns office due to reconstruction or amalgamation of the company with another body or body corporate and such director is appointed manager or managing director or other office in the resulting new body. (b) Where a director resigns otherwise that as on reconstruction or amalgamation as stated above. (c) Where the director vacates office under Section 203 (acting-fraudently as director or manager) or Section 283(1) Clauses (a) to (1) (vacation-of office by director). (d) Where winding up (compulsory, voluntary or under supervision) has been due to the negligence or default of the director in question. Where the winding up is not due to negligency or default of the director, he can be paid compensation for loss of office, even in the winding up. Termination of his services will not be wrongful if the winding up was due to his default. [Rajagopal vs. Salem Provident Society (1963)] (e) Where the director has been guilty of any fraud or breach of trust in relation to or gross negligency or gross mismanagement of the affairs of the company or any subsidiary or holding company thereof. This also includes a breach of fiduciary obligations because that constitutes a breach of trust. In Bell vs. Lever Brothers, (1932), Lever Brothers removed their managing director of a

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subsidiary by paying him compensation. It was afterwards discovered that during his tenure of office he had been guilty of so many breaches of duty and corrupt practices that he could have been removed without compensation. An action was then commenced to recover back the compensation money. It was held that Bell was not bound to refund the compensation money and to disclose any breach of his fiduciary obligation so as to give the company an opportunity to dismiss him. 3.15 MANAGING DIRECTOR

A managing director is a person entrusted with any powers of management, which would not otherwise be exercisable, by him (Section 226). He exercises some or all of the director’s powers and functions of managing which are delegated to him upon some terms and conditions and subject to such restrictions as are set-out in the agreement, resolution or other document appointing him. He may be appointed by: (i) An agreement with the company, or (ii) The resolution of the Board of Directors, or (iii) A resolution passed by the company in Annual General Meeting, or (iv) By the memorandum, or (v) By the articles. Normally, the articles empowers the Board of Directors to appoint one of their body to the office of the managing director, by a resolution passed at the Board Meeting in separate service contract stating his powers and his duties and terms of employment. As such a managing director is a service director and he is to act under the control and supervision of the Board. As a managing director must necessarily be a director, his appointment is automatically terminated if he ceases to act as a director either because of any disqualification, e.g., not purchasing qualification shares within two months of his appointment as director or because of his retirement by rotation. Before the Amendment Act of 1988, it was not obligatory for a public company (including a deemed public company) or a private company, which is subsidiary of a public company to appoint managerial personnel, that is, a managing or whole time director or a manager. As per the amended section, it is obligatory for every public company or a subsidiary of a public limited company having a paid-up share-capital of such sum as may be prescribed (Rs. 5 crores or more w.e.f. August 18, 1990) to appoint either a managing or whole time director or a manager. There can be more than one managing director in a company on functional basis. But usually there is only one managing director in a company of moderate size in which he is the chief executive official of the company.

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Corporate and Allied Laws

♦ Appointment of managing or whole time director or manager to require Government approval in certain cases only: In the case of a public company (including a deemed public company), or a private company which is subsidiary of a public company, the Companies Act imposes certain restrictions on managing or whole time director’s appointment, removal etc. which are discussed below: If the condition specified in Schedule XIII are fulfilled, a managing or whole time director or manager in public company (including a deemed public company) or a private company which has a subsidiary thereof can be appointed, reappointed without the approval of the Central Government. A return in the prescribed form no. 25-C is, however, required to be filed within 90 days of appointment [Section 269(2)]. If the conditions specified Schedule XIII is not complied with, an application seeking approval of the appointment must be made to the Central Government within 90 days from the date of such appointment/re-appointment [Sections 269(2) and (3)]. The Central Government shall not accord its approval unless it is satisfied that: (a) The proposed managing or whole time director of the company is a fit and proper person and the appointment of the such an individual as managing or whole time director is not against public interest; (b) The terms and conditions of the appointment of the proposed managing or whole time director of the company are fair and reasonable [Section 269(4)]. The Central Government is also empowered to accord approval to the appointment for a period less than the period for which the person is proposed to be appointed by the company [Section 269(5)]. If the appointment re-appointment is not approved by the Central Government the appointee shall vacate office immediately on communication of the decision by the Central Government, otherwise he shall be punishable with fine up to Rs. 5,000/- for every day during which he fails to vacate such office [Section 269(6)]. When the Central Government is, prima-facie, of the opinion that any appointment made without its approval has been made in contravention of the requirement of Schedule XIII, the Central Government may render the letter to the Company Law Board for decision. The Company Law Board after giving reasonable opportunity of hearing to the company and the appointee may make an order declaring whether contravention of the requirements of Schedule XIII has or has not taken place. If the Company Law Board comes to he conclusion that such contravention has occurred, the appointment shall be deemed to have come to an end on the date of such declaration and the person so appointed shall, in addition to being liable to pay a fine of Rs. 1,00,000 refund to the company the entire amount of salaries and perquisites etc., received by him. However, all the acts of the managerial personnel, whose appointment is invalidated, will be deemed to

Directors – Powers, Managerial Remuneration be valid [Sections 269(7), (8), (9), (10), (12)].

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♦ Restrictions on Appointment: An individual cannot be managing director or manager of more than two companies, public or private, where out of two companies at least one is a public company or private company, which is a subsidiary of a public company. An individual may hold the office of managing director or manager in any number of private companies, which are not subsidiaries of public company. But if the office is hold in a public company or a private company which is subsidiary of a public company, the same individual can not, in addition thereto, hold the office of managing director in more than one another company whether such every company is a public company or private company which is subsidiary of public company or any private company. (Section 316) ♦ Terms of Office: The term of office of a managing director must not exceed 5 years at a time. The term, however, may be extended for further period not exceeding 5 years at a time. (Section 317) It is important to note that the person ceases to be managing director with a ceasure of directorship on account of his retirement by rotation at the Annual General Meeting. But if such a person is re-elected as director at the AGM and thereby he continues as the director of the company, he shall continue as a managing director also for the period for which he is so elected by the AGM and for the unexpired period of present term of appointment as managing director. ♦ Disqualifications for appointment: A managing director has necessary to be a director and therefore, all the disqualifications rendering impossibilities for the appointment of a person as director (Section 274) will apply in the case of appointment of a managing director. Section 267 specifically provide that company must appoint or continue the appointment of a person as managing or whole time director who is: (a) An undischarged insolvent or has at any time been adjudged insolvent; (b) Suspends or has at any time suspended payment to his creditor or has made a composition with them or (c) Has at any time been convicted of an offence involving moral turpitude. The term moral turpitude needs a little elaboration. According to American encyclopedia of Law, it comprises anything contrary to justice, honesty, and principle of good morals, an act of baseness, vileness or depravity in the private and social duties, which a man owes to his fellowmen or society in general. The term also comprises anything contrary to the accepted and customary rule of right and duty between man and man. 3.16 INTER-CORPORATE LOANS AND INVESTMENTS (SECTION 372A)

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Corporate and Allied Laws

(a) Overall ceiling limits: No company shall directly or indirectly make (i) make any loan to any other body corporate; (ii) give any guarantee or provide security in connection with a loan made by any other person to, or to any other person by, any body corporate; and (iii) acquire by way of subscription, purchase or otherwise the securities of any other body corporate, exceeding 60% of its paid-up share capital and free reserves or 100% of its free-reserves whichever is more. [sub-section (1)] Explanation: 1. 3. “Loan” includes debentures, or any deposit of money made by one company with another company, not being a banking company. “Free Reserves” means those reserves which, as per latest audited balance sheet of the company, are free for distribution as dividend and shall include balance to the credit of the securities premium account but shall not include share application money.

(b) Loans, Investments and guarantees in excess of prescribed limits: Where the aggregate of the loans and investments so far made, the amounts for which guarantee or security so far provided to or in all other bodies corporate, along with the investment, loan, guarantee or security proposed to be made or given by the Board, exceeds the aforesaid limits, no investment or loan shall be made or guarantee shall be given or security shall be provided unless previously authorised by a special resolution passed in a general meeting. However, the Board may give guarantee, without being previously authorised by a special resolution if: 1. 3. a resolution is passed in the meeting of the board authorising to give guarantee in accordance with the provisions of this section; there exists exceptional circumstances which prevent the company from obtaining previous authorisation by a special resolution passed in a general meeting for giving a guarantee; the resolution of the Board under (1) as above is confirmed within twelve months, in a general meeting of the company or the annual general meeting held immediately after passing of the Board resolution, whichever is earlier.

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(c) Matter to be specified in special resolution: The notice of special resolution shall indicate clearly the specific limits, the particulars of the body corporate in which the investment is proposed to be made or loan or security or guarantee to be given, the purpose of the investment, loan or security or guarantee, specific sources of funding and such other details.

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(d) Other Steps: No loan or investment shall be made or guarantee or security given by the company in pursuance of sub-section (1) of Section 372A unless the resolution sanctioning it is passed at a meeting of the Board with the consent of all the directors present at the meeting and the prior approval of the public financial institution referred to in Section 4A where any term loan is subsisting, is obtained. The prior approval of a public financial institution shall not be required where the aggregate of the loans and investments so far made, the amounts for which guarantee or security so far provided to or in all other bodies corporate, along with the investments, loans guarantee or security proposed to be made or given does not exceed the limit of sixty per cent specified in sub-section (1) as referred above, if there is no default in repayment of loan instalment or payment of interest thereon as per the terms and conditions of such loan to the public financial institution. [subsection (2)]. (e) Rate of interest: No loan to any body corporate shall be made at a rate of interest lower than the prevailing bank rate, being the standard rate made public under Section 49 of the Reserve Bank of India Act, 1934. [sub-section (3)]. (f) Default under Section 58A: No company which has defaulted in complying with the provision of Section 58A, shall directly or indirectly make any loan to any body corporate; give any guarantee, or provide security, in connection with a loan made by any other person to, or to any other person by, any body corporate and acquire, by subscription, purchase or otherwise the securities of any other body corporate till such default is subsisting. [sub-section (4)] (g) Register of Investments and Loans: (i) Every company shall keep a register showing the following particulars in respect of every investment or loan made, guarantee given or security provided by it in relation to any body corporate under subsection (1), namely: — — — — the name of the body corporate; the amount, terms and purpose of the investment or loan or security or guarantee; the date on which the investment or loan has been made; and the date on which the guarantee has been given or security has been provided in connection with a loan.

(ii) The particulars of investment, loan, guarantee referred to in sub-section (1) shall be entered chronologically in the register aforesaid within seven days of the making of such investment or loan, or the giving of such guarantee or the provision of such security. [sub-section (5)]

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(iii) The register referred to in sub-section (5) shall be kept at the registered office of the company concerned and shall be open to inspection at such office and the extracts may be taken therefrom and copies thereof may be required, by any member of the company to the same extent, in the same manner, and on payment of the same fees as in the case of the register of members of the company; and the provisions of Section 163 shall apply accordingly. [sub-section (6)] (h) Guidelines: The Central Government may prescribe guidelines for the purposes of Section 372A. [sub-section (7)] (i) Exemptions: Nothing contained in Section 372A shall apply, (a) to any loan made, guarantee given or any security provided or any investment made by (1) a banking company or an insurance company, or a housing finance company in the ordinary course of its business, or a company established with the object of financing industrial enterprise or of providing infrastructural facilities; (2) a company whose principal business is the acquisition of shares, stock, debentures or other securities; (3) a private company, unless it is a subsidiary of a public company; (b) to investment made in shares allotted in pursuance of clause (a) of sub-section (1) of Section 81; (c) to any loan made by a holding company to its wholly owned subsidiary; (d) to any guarantee given or any security provided by a holding company in respect of loan made to its wholly owned subsidiary; (e) to acquisition by a holding company by way of subscription, purchases or otherwise, the securities of its wholly owned subsidiary [sub-section (8)] (j) Penalty for default: If default is made in complying with the provisions of this section, other than sub-section (5), the company and every officer of the company who is in default shall be punishable with imprisonment which may extend to two years or with fine which may extend to fifty thousand rupees. However where any such loan or any loan in connection with which any such guarantee or security has been given, or provided by the company, has been repaid in full, no punishment by way of imprisonment shall be imposed under this sub-section and where such loan has been repaid in part, the maximum punishment which may be imposed under this sub-section by way of imprisonment shall appropriately be reduced. Further that all persons who are knowingly parties to any such contravention shall be liable, jointly and severally, to the company for the repayment of the loan or for making good the same which the company may have been called upon to pay by

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virtue of the guarantee given or the securities provided by such company. [subsection (9)]. If default is made in complying with the provisions of sub-section (5), the company and every officer of the company who is in default shall be punishable with fine which may extend to five thousand rupees and also with a further fine which may extend to five hundred rupees for every day after the first day during which the default continues. [sub-section (10)]. 3.17 SELF-EXAMINATION QUESTIONS 1. It is admitted that a body corporate is a juridical person. But how can an abstract body function or carry on business? 2. What are the functionaries called both individually and collectively in the field of Company Law? 3. Are these functionaries nominated or elected and by whom? 4. Of the propositions comprised in the following statements, state which is correct? (a) Directors (i) are not trustees as conceived by the Indian Trusts Act (ii) are trustees of the company’s assets, which are or come under the director’s control and they must act in the interests of the company only. (b) Directors are trustees (i) for the company (ii) for the shareholders (iii) for the creditors (iv) for the individual shareholder (v) for outsiders. (c) The law of agency (i) governs (ii) does not govern the relationship between the company and it directors. (d) Directors are (i) agents of the company (ii) agents of the shareholders. (e) Where the directors exceed their powers, the company can ratify their acts (i) if the acts are ultra vires the company, (ii) if the acts are intra vires the company. (f) Directors (i) do stand (ii) do not stand, in a fiduciary position towards the company in regard to powers conferred on them by the articles.

5. What is the maximum number or directors, prescribed by the Act that a company might have? 6. What is the minimum number of directors that a company must have? (a) When it is a public company; (b) When it is a private company; and (c) When it is a “deemed public” company? 7. State whether the following statements are true or false: (a) A body corporate or a firm or an association of persons can be a director of another company.

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Corporate and Allied Laws (b) Generally articles cannot name the first directors. (c) Articles may provide that both the number and the names of the first directors must be determined in writing by the subscribers to memorandum. (d) The tenure of office of the first directors ends on the last date of the first annual general meeting of a company. (e) In the case of a public company subsequent directors can be appointed in an extraordinary general meeting. (f) Out of the total number of directors of a public company or its private subsidiary, only 2/3 rd of them can be given permanent appointments.

(g) The rest of the directors i.e., 1/3rd of them, are liable to retire by rotation. (h) The object of the provisions as regards rotation of directors is to do way with the mischief done by self-perpetuating managements. (i) (j) Of the 2/3 rd rotational directors, only 1/3 rd shall go out at one general meeting. Those who are longest in office will retire last because their long experience is beneficial to the company.

(k) When two directors are appointed on the same day, their retirement will be determined by a lottery. (l) The vacancies caused by such retirement must be filled in the same meeting in which the directors retire.

8. Where the vacancies caused by rotational retirement have not been filled in or any decision not to fill them up has not been taken either, then what will be the effect of this issue? 9. In the context of your answer to Q.8, if no fresh appointment is made or if no decision against appointment is taken, can the retiring directors be deemed to have been reappointed? 10. The articles of a company fix the maximum number of directors at 12 whereas the company actually has 6 directors: What type of resolution will be necessary if the number is proposed to be increased to (a) 12, (b) 15, (c) is the approval of the Central Government necessary in both the cases? 11. Can the Board of Directors appoint additional directors? 13. Can the Board fill a casual vacancy by a resolution passed by circulation? 13. A director of a company has gone out of the State for 2 months, and the Board desires to appoint an alternate director in his stead, can it do so? 14. Can a minor become a director? 15. Is it necessary that a person must be a graduate of a University if he wants to become a director of a company? 16. What are the disqualifications for directorship?

Directors – Powers, Managerial Remuneration 17. In how many companies can a person hold directorship at a time? 18. A public company appoints three directors by a single resolution. (a) Will the appointment be valid?

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(b) Would there be any difference in your answer if the meeting had first unanimously agreed that the appointment would be made by a single resolution? 19. (a) Does the Act prescribe any share qualification for a director? (b) Can the articles provide for it? 20. Can you be compelled to take the said qualification shares: (a) Before your appointment as director; (b) Any time after your appointment which is shorter than 2 months? 21. The nominal value of the qualification shares must not exceed Rs. 5,000. But if it does exceed this amount what would then constitute the share qualification for directorship? 23. Does the Act provide for situations for automatic vacation of the office of director? 23. An ordinary director can resign verbally, or in writing informing the company of his resignation and leave the office forthwith; but a managing or whole-time director cannot vacate his office in this manner and his resignation has to be formally accepted. Can you account for this distinction? 24. The articles of a company provide that a person shall be a director for life or until he resigns. In terms of the articles the director was so appointed. When the company went into liquidation his service were terminated. Could he claim compensation against the company for his termination? 25. K and C were directors. At a board meeting of directors S was appointed as a director and C and S purported to remove K from the Board. Later, C and S acting as directors allotted shares to M. Before the allotment M had notice that K was contesting the validity of the appointment of S. Would the allotment be valid? 26. A director whose term of office has expired continues to act as a director. Can his act regarded as valid in the circumstances? 27. Can a director act individually? 28. The law requires that the Board must meet at least once in every three months. The last meeting of the Board was held on January 5. The next meeting cannot be held on April 4 as most of the directors would remain out of India till 29 th April. Would it be proper if the meeting were held on 30 th April? 29. Has the Act prescribed the maximum number of meetings per year for Board of Directors? 30. What is the quorum necessary for a Board meeting in the following circumstances? (a) Where the total number of directors is 9.

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Corporate and Allied Laws (b) Where it is 11. (c) Where it is 3. (d) Where the total number is 12, all are present but 10 are “interested directors” within the meaning of the Act.

31. When a meeting cannot be held for want of quorum, does it stand dissolved? 33. Can the Board pass a resolution by circulation? 33. Can a company in general meeting override the Board’s power of carrying on business by prescribing a regulation or passing a resolution, taking away the powers, which have been conferred upon the Board by the articles of the company? 34. What are the acts that can be performed by the Board of public company only with the consent of the company in general meeting? 35. The power (i) to make calls; (ii) to issue debenture; (iii) to borrow moneys otherwise than on debentures; (iv) to invest the funds of the company; and (v) to make loans can be exercised by the Board only by means of resolution passed at the general meeting of the company. Is it a correct statement? 36. The Board has the requisite sanctions through resolution to borrow otherwise than on debentures, to invest the funds of the company and to make loan. Can the Board delegate any of these powers on the basis of the said sanction? 37. A public company wants to make loans to its directors. Can it do so? 38. Can a private company make loans to any firm in which one of the relatives of its director is partner, without the previous approval of the Central Government? 39. According to law, a director who is director or indirectly interested in any contract or arrangement – whether actual or proposed – made by or on behalf of a company must disclose his interest. (a) Where should it be disclosed if it is an “actual” contract? (b) Where should it be disclosed it is a “proposed” contract? 40. (a) Can an interested director vote on, participate in the discussion of, any contract into? (b) Will he be counted for purpose of quorum? 41. The sanction of the Board of Directors is a ‘must’ for certain contracts in which particular directors are interested. (a) What are those contracts? (b) Can this consent be obtained by a resolution by circulation? 43. What will be the effect of the contract referred to in Q.41, if the sanction of the Board has not been obtained within 3 months after entering into the contract? 43. Will the said transaction be in order, if the Board accords its sanction to the said

Directors – Powers, Managerial Remuneration contract says 4 months after it is entered into? 44. Is the maintenance of the following compulsory? (a) Register of contracts, companies and firms in which directors are interested. (b) Register of directors, managing director, manager and secretary. (c) Register of director’s shareholdings?

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45. If a director assigns his office, what will be the consequence of such an assignment? 46. The managing director of a company, while exercising his power under the articles appointed by his will one as the managing director to hold the office after his death. (a) Was the exercise of the power legal? (b) Didn’t it offend the provision of the Act that any assignment of office by a director would be void? 47. Is compensation payable for the loss of his office to the following personnel? (a) To a director; (b) To a director who has resigned; (c) To a director whose directorship has been vacated in terms of the specific provisions of the Act; (d) To a director where the company was being wound up for reasons for which such director was not at all responsible in any way. (e) To a managing or whole-time director or to a manager. 48. The directors of an insurance company left the management of the company’s affairs almost entirely to B, the g director. On account of B’s fraud, a large quantity of the assets of the company disappears and in the balance sheet, items appeared under captions ‘loans at call or short notice’, and “cash at bank or hand”. But the directors never enquired how these items were made up. Had they done so, they would have discovered that the loans were chiefly made to B and to the company’s general manager and that the “cash at bank or in hand” included pounds 93,000/- in the hands of the company’s stock brokers, in which B was the partner. Could the directors be held culpably negligent in the circumstances? [iii re-City Equitable Fire Insurance Co. (1925) Ch. 4071]. 49. The Directors left all the management of a bank’s affairs in the hands of a manager and never cared to enquire whether the loans were made by the manager on securities or whether the securities were good or worthless. The manager advanced large amounts to his relatives and friends without security or on securities, which were obviously, fakes. Decide [Re-Union Bank of Allahabad Ltd.]. 50. The entire management of a cotton mill was vested in the manager. The balance sheet of the mail showed stocks of yarn. As a matter of fume, mill did not possess the stocks shown and the directors had never made any physical checking of yarn. The

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shareholders brought an @ contended that they could not be, of yarn; the responsibility in this man. Would this contention of the 51. “Where an agent is liable, the directors would be liable; where the liability would attach to the principal only; the liability is a liability of the company’s [Ferguson vs. Wilson (1866) per Lord cairns] APPLY THIS test to the following cases and state if the directors are liable: (a) Where the directors make themselves personally liable to a third party. (b) Where the contract and the surrounding circumstances indicate that they are personally liable. (c) Where the directors contract without purporting to bind the company. (d) Where the directors say, “We the directors of X Co. Ltd. hereby agree”. 53. How shall the remuneration payable to directors be determined? 53. Can the remuneration payable to directors be determined at a meeting of the directors themselves? [Raditey Siiyatyi vs. The Official Liquidation A.LR. 1968 Raj. 226]. 54. The remuneration payable to directors: (a) shall be. (b) shall not be, subject to the provisions of Sections 198 and 309. 55. The Explanation to Section 198 includes certain items within the purview of the word “remuneration”. Can you account for this inclusion? 56. What is the overall maximum limit of managerial remuneration? 57. Does the said overall maximum limit include any fee payable to directors for attending the Board or its Committee? 58. What is the basis on which a managing or whole-time director may be paid his remuneration? 59. Can the remuneration of directors of public company or its subsidiary be increased? 60. (a) If any director gets any amount in excess of its statutory limit, can be forced to turn the excess amount to the company. (b) Can the company waive the recovery of any such sum? 3.18 ANSWERS TO THE SELF-EXAMINATION QUESTIONS 1. Through human agency; 3. Directors and Board of Directors respectively; 3. Elected by shareholders; 4. (a) Both; (b) (i)&(ii); (c) (iii); (d) (i); (e) (ii); (f); 5. The act prescribed none-article, prescription prevails;

Directors – Powers, Managerial Remuneration 6. (a) 3; (b) 2; (c); 7. (a) False; (c) True; (d) True; (e) False; (f) False; 8. Meeting to stand adjourned for a week; 9. Yes subject to the exceptions in Section 256(4)(b);

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10. (a) Ordinary resolution; (b) Special resolution; (c) No-necessary only in case of (b); 11. Yes, if the articles permit; 13. No; 13. No; 14. No; 15. No; 16. Those mentioned in Section 274; 17. 20 companies only; 18. (a) No; (b) Yes; 19. (a) No; (b) Yes; 20. No; 21. Value of one share; 23. Yes, in Section 233; 23. Because the latter, being an employee cannot give up office at his pleasure-his resignation must be approved or accepted; 24. No, because articles operates as long as the company is a going concern; 25. No; 26. No; 27. No, unless so delegated; 28. Yes; 29. No; 30. (a) 3; (b) 4; (c) 2; (d) 2 non-interested directors; 31. No; 33. Yes; 33. No; 34. Those prescribed by Section 293, Sections 294(3), 314, 370, 149(2A) etc.; 35. No; 36. No, further resolution to be passed for delegation;

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37. Yes, only with the previous approval of the Central Government; 38. Yes, if the private company is not a subsidiary of public company; 39. (a) At the first meeting of the Board held after the director becomes interested; (b) At the Board’s meeting at which the question of entering into it is first considered of interest has arisen by that time or at the first board meeting after the arising of the interest; 40. (a) No; (b) No; 41. (a) For the sale, purchase or supply of goods or services for underwriting shares or debentures; (b) No; 43. Voidable at Board’s option; 43. Yes, provided the Board has not repudiated the contract after the expiry of 3 months; 44. Yes; 45. Void; 46. (a) Yes; (b) No; 47. (a) No; (c) No; (d) Yes; 48. Yes; 49. Directors liable for misfeasance could not be said to have acted personally and hence non-exonerable from their liability; 50. Yes; 51. Yes; 53. Either by the articles or a share holder resolution a general meeting; 53. Yes; If there is a clear provision to that effect in the articles; 54. (a); 55. To prevent directors from drawing more money than that they are statutory entitled to, in the guise of collateral benefits; 56. 11%; 57. No; 58. Monthly basis or fixed percentage of net profits basis or in combination of both the basis; 59. Yes; 60. (a) Yes; (b) No.

4
(D) MEETINGS, POWERS OF THE BOARD AND RELATED PARTY TRANSACTIONS

4.0 INTRODUCTION A company is a corporate body or corporation, which is an artificial person, recognised as such by Law and capable of doing many of things a natural person can do. For example, a company can own property, enter into contracts, and even be guilty of certain offences. It does all these things on its own accounts, quite apart from the persons who compose it. Unlike a natural person, a company cannot however think and express its will or make a decision except through resolutions passed at properly convened and constituted meetings of its members. They must act collectively, not individually and an act or decision of individual members while not duly assembled as body is not a valid act of the company. A company, i.e. its members collectively may delegate most (but not all) of their functions to directors, who must ordinarily meet together to perform them. Two main organs members or shareholders in general meetings and directors acting as a Board conduct the affairs of a company. ♦ CLASSIFICATION OF MEETINGS Meetings held the Companies Act might be classified as follows: 4. Meetings of shareholders or members: (a) Statutory meeting. (b) Annual general meeting. (c) Extraordinary general meeting. (d) Class meetings. 2. Meeting of debenture holders. 3. Meetings of creditors and contributories in winding up. 4. Meeting of creditors otherwise than in winding up.

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5. Meeting of directors: (a) Board meeting (b) Committee meeting. 4.1 MEETINGS OF DIRECTORS Two main organs, the shareholders in general meeting and the directors acting as a Board conduct the affairs of a company. The modern practice is to confer on the directors the right to exercise all company’s powers except for those matters, which are by law required to be exercised by the company in general meeting. This practice has also been given statutory acknowledgment in Section 291, which read as follows: (1) Subject to the provisions of this Act, the Board of Directors of a company shall be entitled to exercise all such powers, and to do all such acts and things, as the company is authorised to exercise and do: Provided that the Board shall not exercise any power or do any act or thing which is directed or required, whether by this or any other Act or by the memorandum or articles of the company or otherwise, to be exercised done by the company in general meeting: Provided further that in exercising any such power or doing any such act or thing, the Board shall be subject to the provision contained in that behalf in this or any other Act, or in the memorandum or articles of the company, or in any regulations not inconsistent therewith and duly made there under, including regulations made by the company in general meeting. (2) No regulation made by the company in general meeting shall invalidate any prior act of the Board, which would have been valid, if that regulation had not been made. The powers of the directors are, therefore, restricted in two ways: First being agents of the company, the directors can do nothing which the company itself, their principal, cannot do under its memorandum of association and any purported act by them, which is ultra virus the company, will be void and of no effect. Secondly when acting within the power of the company, the directors cannot exercise any power of the company which is required by the Companies Act or any other Act or by the memorandum or articles of the company or otherwise, to be exercised by which the company in general meeting. How directors exercise their powers? : Subject to any special provisions in the articles, powers delegated by a company to its directors must be exercised at properly convened meeting generally referred to as Board meetings. Only acts done at duly constituted meetings are therefore valid, unless the articles provide otherwise, and an individual director has no power to bind the company unless duly authorised so to act at a Board meeting although subsequent acquiescence by a properly convened Board

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meeting of invalid act of some directors may have the effect of ratifying the act [Southern Countries Deposit Bank Ltd. vs. Rider and Kirkwood (1895) 73 LT 374, CA]. 4.1.1 Board Meeting: Frequency of Board Meetings: Section 285 required the Board to meet at least once in every three months irrespective of whether it is the Board of a public company or a private company. And at least four such meetings must be held in every year. However, the Central Government may by notification in the official Gazette, direct that these provisions will not apply in relation to any class of companies or will apply in relation thereto subject to such exceptions, modifications or conditions as may be specified in the notification. It will be worthwhile to consider the question here. Is a director bound to attend the meeting of the Board? No, he is not so bound. But nonetheless he will be guilty of breach of duty if he fails to attend the Board meetings with reasonable regularity without sufficient cause being shown for non-attendance. Willful non-attendance on his part may give rise to his liability of ground of negligence if it is patently prejudicial either to the company or to the general body of shareholders. Fairly frequent absence from the Board meting may however, be excused if the entire control is exercised by a single director or if the Board is pretty large in number [Re. Denham & Co. D 25 Ch. D. 752; Marquis of Bute’s case (1892) 2 Ch. 100]. The fewer the directors, the more onerous is the duty to attend. Although a director need not attend each Board meeting unless the articles provide otherwise, yet his continuous non-attendance say two attendances followed by two nonattendances, again followed by one attendance and so forth just by way of a guard against infringement of provision of Section 283(1)(g) may render him guilty of breach of trust which may be committed by other directors [Charitable Corporation vs. Sultan 2 Atk. 400]. For example, the other director or directors take the advantage of the aforesaid nonattendance by the director and dissipate the company’s assets through wasteful and other improper expenses. The absenting director would be responsible for the loss caused to the company, if his presence could otherwise stop their wrongful acts resulting in the said dissipation of assets. It is true that Section 285 does not prescribe any penalty for non-compliance with the requirements of the Section. Nevertheless, Section 622A may be invoked to deal with such a situation. If a director is improperly excluded from meeting by the Board, he has an equitable remedy by way of injunction through a suit [Hayes vs. Bristol Plant hire Ltd., (1957) I.A.E.R 685; Pulbrook vs. Richmond Mining Co. (1878) 9 Ch. D. 610]. But he will be deprived of this remedy by Court’s injunction if has been excluded by the general meeting itself [Read vs. Astoria Garage Streatham Ltd. (1952) Ch. 637 (CA)-(1952) 3 All. E.R. 252]. But even if he remains aggrieved by the said general meting resolution, shall he be left out without any remedy whatsoever? It seems more appropriate that he should not be

4.4

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debarred from seeking other remedies like damages. Suppose, A claims to be director of X & Co. (P) Ltd. but the company’s records prima facie reveal that A was not appointed as such. In such a case according to a Supreme Court decision in [Jalan Ram Autar vs. Coal Producers (P) Ltd. (1970) 40 Comp. Cas. 715 (S.C.)] the onus lies on A to prove his claim of directorship before any interim relief can be granted to him by way of injunction. According to decision in Burden vs. Sinclair 105 S.J. 586, where there is a suit for a declaration that a director has been validly removed from his office, an interim injunction will not be granted. In the context of Section 285, let us consider another intricate issue. Suppose a meeting of the Board has been convened within the prescribed period in strict conformity with the said Section but for want of quorum, the said meeting could not take place. In such a situation, the meeting automatically stands adjourned by virtue of Section 288(1) till the same day in the next week, at the same time and place. And if that “same day” is a public holiday, then the meeting stands adjourned till the next succeeding day, which is not a public holiday, at the same time and place. And because of this adjournment the meeting is obviously held after the period specified in Section 285. In terms of Section 288(2), which in not clearly couched, a company shall not be deemed to have contravened the provisions of Section 285 where the meeting does not take place for want of quorum. In view of these legal provisions, a pertinent question for our consideration comes up. For holding the next Board meeting, which date should we take into account for the purpose of calculating the statutory period of once in every three months. Whether the date of the original meeting, which was adjourned, for want of quorum or the adjourned date on which the meeting was actually held? A practical difficulty arises in this regard owing to the silence of the Act on this point. Our confusion gets worse confounded when we come across Section 191 which states that where a resolution is passed at an adjourned meeting inter alia, of the Board of Directors of a company, it must “for all purposes” be deemed to have been passed at the date of the adjourned meeting and not on an earlier (i.e., the original) meeting. For resolving our question indicated in italics above, should we take the indirect provisions of Section 191 and conclude, by correlating the phrase ‘for all purposes’ with the expression ‘be treated as having been passed on the date on which it was in fact passed, and shall not be deemed to have been passed on any earlier date’ appearing in Section 191, that for holding the next meeting for the Board, the statutory period should be calculated from the date at which the adjourned meeting was held? There is no judicial decision to warrant this conclusion. However, according to Buckely’s Companies Act, (p.339, 12 th Edition), except as regards the meetings of the three classes referred to in Section 144 of the English Companies Act (corresponding to our Section 191 which is a verbatim copy of the English Section), the

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4.5

legal fiction of continuity of the original meeting and all adjournments or any legal consequence emanating therefrom remains unaffected by Section 144 of the English Act. This is so notwithstanding the phrase “for all purposes”, appearing in Section 144, in as much as our Section 191 is the verbatim copy of Section 144, we can rely on this treatise. And relying thereon, we may conclude that the continuity of the original meeting will remain unhampered and therefore for the purpose of holding the next Board meeting the statutory period of “every three months” should be computed from the date when the original meeting was adjourned for want of quorum. ♦ Notice of meeting: Notice of every Board meeting has to be served in writing on each director for the time being in India, and at his usual address in India to every other director. Every officer of the company whose duty is to serve the notice as aforesaid and who fails to do so shall be punishable with fine extending to Rs. 100 (Section 286). It is usually the secretary of the company on whom it casts the duty to serve the notice as aforesaid. It should be noted that the company is not liable for the default in the service of the said notice; it is only the officer in default who is subject to the said penalty. Where a director goes abroad for a period of more than 3 months and an alternate director has been appointed in his stead under Section 313(1), to whom should the notice of Board meeting be given-to the “original director” or to the “alternate director”? Although there is no legal precedence in this regard, it would be a prudent practice on strictly construing Section 286 that the notice should be served to the alternate director as well as on the original director who is outside India for the time being. In the post-Independence period, there is an upsurge of foreign consortia. Articles of foreign collaborations frequently provide that notice of Board meetings should be sent by Air Mail to foreign directors so that they may be able to attend the statutorily prescribed minimum number of meetings (i.e. 3 consecutive meeting without obtaining the leave of absence from the Board) so as to prevent the vacation of their office due to continuous non-attendance under Section 283(1) (g) of the Act. Now a vital question crops up as to whether such a provision in the articles of foreign collaborations is valid, because of the provisions of Section 286(1) which, as we have already stated earlier, requires the service of the said notice on a director out of India at his usual address in India. Such a question in not free from doubt. In England, such a notice is required to be given to a director abroad, only when he is within easy reach, else not. But a moot point arises whether a foreign director falls within the purview of the expression “a director other than a director for the time being in India.” On a scrutiny of the act we find that whereas Section 53 provides for service of documents like notices, etc. on members by a company there in no such or similar Section providing for services of notice on directors. No particular form has been prescribed for the above-mentioned notice of Board meetings. It has been held in Arunachalam Chettiar vs. Kaleshwarar Mills Ltd. (1957)

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Corporate and Allied Laws

I.M.L.J.254-A.I.R. 1957 Mad. 309 that where articles of the company provide that there will be a meeting on the first Saturday of every month, there will not be no necessity of the service of the notice under Section 286(1) in as much as a provision in the articles is sufficient compliance of Section 286(1). Suppose, the above-mentioned notice, as required by Section 286(1) has not been served. In such a situation the proceedings at the meeting shall not become invalid provided (i) all the directors attend the meeting and do not raise any objection to the nonservice of notice; or (ii) where the absent directors make no complaint about the want of notice, particularly when the proceedings are ratified at a subsequent meeting whereat the absentee directors are present [Re State of Wyoming Syndicate (1901) 2 Ch. 431]. Let us consider another situation. Suppose, a director states that he will not be able to attend the next Board meeting. In the circumstances is there any necessity to give the notice under Section 286(1)? As per the decision in Re. Portuguese Consolidated Coffee Mines Steel’s Case 42 Ch. D. 160, the answer is ‘yes’. If the articles are silent, the notice of Board meeting is not required to specify the nature of business to be transacted thereat [Compagnia de Mayville vs. Whitley, (1861) 1 Ch. 788]. If, however, the articles provided otherwise, then the notice must specify the nature of the business to be transacted. All said and done, a better course seems to be that the notice should specify the purpose of the meeting, it is an extraordinary or special meeting. ♦ Time and Place of Board Meeting: Whether or not the Board meeting can be held on a public holiday and out of business hours is a question open to conflict. As already state earlier, under Section 288, the adjourned Board meeting is to be held on a day which is not a holiday but no such restriction has been levied on the matter of holding the original Board meeting. On the basis of the provision of Section 288, one set of arguments may be that like the adjourned meeting, the holding of the original Board meeting is equally a normal and usual work of a company and that is why it should be held during usual business hours and on a day, which is not a public holiday. On this analogy, a similar inference may be drawn form the provision of Section 166(2) as well, because it prescribes only for each annual general meeting that it held on a day which is not a public holiday and during the business hours and also because annual general meeting is normal work of the company. Another set of arguments is that a meeting of the board can take place even on a public holiday and out of business hours because there is not such restriction as contemplated either by Section 166(2) or by Section 288. We are rather inclined to subscribe to latter set of arguments. This is because if the Legislature could think of imposing similar restrictions twice-once at the time of drafting Section 166(2) in respect of only annual general meeting and the other at the time of drafting Section 288 in respect of adjourned Board meetings-it could rationally think of similar restrictions for the third time in respect of original Board meetings. If the human element of forgetfulness on the part of the draftsmen is

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to be given any consideration, even then it can be upheld on the first occasion when Section 166(2) was drafted. But definitely such forgetfulness is not tenable on second occasion when Section 288 was enacted especially in respect of adjourned Board meeting. Had it been the intention of the legislature, it could easily enact a provision and add it as a sub-section to Section 288. It, therefore, seems that the legislature did not deliberately think it necessary to provide for original board meeting to be held on a day other than a public holiday and during usual business hours. The law will take its course, however the course may sound irrational. Therefore, in the absence of any specific provisions in Act it seems that the original Board meeting can be held even on a holiday and out of the business hours. ♦ Quorum: A quorum is the prescribed minimum number of qualified persons authorised to transact the business at a meeting. In relation to a Board meeting quorum implies fully qualified and disinterested directors who must be present at the meeting so as to enable the Board of which they are the constituents to legally transact the business thereat. Can the articles of a company fix such a quorum? No, in view of Section 287 which has fixed the quorum of the Board meeting. Accordingly such a quorum is one third of the total strength of Board (any fraction contained in the said one third being rounded of as one) or two directors whichever is higher. The total strength is to be derived after deducting the number of directors whose offices are vacant. Therefore, the Quorum = 1/3 (of the total strength vacancies). Where total number of directors are 9 and 2 offices of the directors have fallen vacant, we find: 1/3 of (9-2) = 1/3 of 7 = 21/3 directors. If the fraction of 3 rd were to be rounded off as one then 3, i.e. 2+1 directors would constitute the quorum for the Board meetings. If at any time the number of the remaining directors exceeds or is equal to two thirds of the total strength, the number of the remaining directors who are non-interested but present at the meeting, not being less than two shall constitute the quorum. For example, there are in all 15 directors and the Board meeting commences with all the 15 directors. During the currency of the meeting, an item comes up for discussion in respect of which 13 happen to be “interested” directors. In this case, in spite of the excess of the interested directors being more than two-thirds, the prescribed minimum number of non-interested directors constituting the quorum, namely, 2 present at the meeting are to transact the particular item of business. Now suppose all the 15 directors cited in the above illustration are equally interested in that particular item of business and the time is so vital that but for a decision thereon, the business of the company will be greatly hampered. How to resolve this impasse? The act has not made any direct provision to take with such a situation, but the Article 48 of Table A of Schedule 1 of the Act, provides a remedy. According to the said article, the Board may, whenever it thinks fit, call an extraordinary general meeting. By invoking this Article, the Board should get the aforesaid impasse resolved by the shareholders at the

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general meeting. Since according to Section 173(1) (b), all business in the case of any other meeting than the annual general meeting is to be deemed special, by virtue of subsection (2) the notice of the extraordinary meeting must annex to it a statement setting out all the material facts concerning the item of business, including, in particular, the nature of the concern or interest there in of every director. We have seen that interested directors are excluded from the computation of the quorum under Section 300(1). However, in the terms of Section 300(2), the interested directors can be counted for the purpose of quorum in the following cases, namely – (a) where the company is a private company which is neither a subsidiary nor a holding company of a public company; (b) where the company is a private company which is a subsidiary of a public company, in respect of any contract or arrangement thereof; (c) where there is any contract of indemnity against any loss which the directors or any one or more of them may suffer by reason of becoming or being sureties or surety for the company; (d) in respect of any contract or arrangement entered or to be entered into with a public company, or a private company, which is a subsidiary of a public company in which the director’s interest consist solely (i) in his being a director holding shares of such number or value as to be just enough and not more than enough to qualify him for appointment as director, or (ii) in his being a member holding not more than 20% of the paid-up share capital of the company; (e) where it is a public company in respect of which the Central government has, through a notification in the official Gazette, waived the necessity to comply with the requirements of Section 300(1) on considerations of establishing or promoting any industry, business or trade in the public interest. Inability to hold a Board meeting for want of quorum results, as has already been stated in the automatic adjournment thereof under Section 288. It has also been stated earlier that according to Section 191, a resolution passed at an adjourned meeting is deemed as having been passed thereat itself; it does not date back to an earlier date, i.e., the date of the original meeting. It would be worthwhile to recapitulate here the provisions of Sections 174(2) to (5), which deal with adjournment of the general meeting for want of quorum so as to compare them with the provisions relating to adjournment of board meetings. Unless the article of a company whether public or private – provide otherwise, if the quorum is not present within half an hour from the time fixed for the general meeting, it shall stand dissolved in case the meeting has been convened, under Section 169, on the requisition of members; in regard to any other class of meeting, it shall stand adjourned to the same day in the next week at the same time and place of to such other day and at such other time and place as the board may determine. If again at the adjourned meeting the quorum is not present within half an hour of the scheduled time then the members present shall constitute the quorum. According to Article 53 of Table A of Schedule I to the Act, where a meeting is adjourned for 30 days or more, a fresh notice of the adjourned meeting has to be served. Thus, Section 288 does not throw any light on what happens if the quorum is not there at the adjourned meeting as well whether the Board meeting is to be adjourned

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4.9

over and over again till the quorum is procured. Secondly, for want of quorum, the Board meeting automatically stands adjourned to the same day in the next week and at the same time and place. But the Board has no power to fix any other day or place or time for such adjourned meeting: where as in the case of general meeting, the Board can adjourn it to any other day or other time and place. Thirdly Section 288 implies that a Board meeting can be called on a public holiday, though not the adjourned meeting. Under Section 166(2) annual general meeting cannot be held on a public holiday. But in the absence of any specific prohibitions by the Act, a statutory and an extraordinary meeting can be held on a public holiday. The term “public holiday” in this context should be understood. According to the proviso to Section 2 (38) no day declared by the Central Government to be a public holiday shall be deemed to be a public holiday unless the declaration was notified before the issue of the notice of the meeting. Suppose, the notice of a meeting was issued on April 1 st where by it was to be held on May 3. If on April 2, the Central Government declares the 3 rd day of May as a public holiday, there is on bar to the holding of the meeting on May 3 in spite of its being declared as a public holiday. If, however, the declaration is notified before the issue of the notice convening the meeting, say on 31 st March, the meeting cannot be held on May 3. ♦ Resolutions: The resolutions of the Board fall into the following three categories: (a) Those passed at board meeting: Some specific resolutions are covered by Section 292 which we have already discussed in the Study Paper relating to the directors. Besides those, there are other resolutions, which must be passed only at a Board meeting. These are; (i) Resolution for filling casual vacancies under Section 262; (ii) Resolution for giving consent to contracts with directors as required by Section 297; (iii) Resolution for appointing managing director or manager of a company of a person who is already holding such a post in another company [unanimous consent being necessary under the proviso to Section 316 (2)]; (iv) Resolution for making investments in companies under the same management/group (unanimous sanction being necessary under Section 372). As regards the form of aforesaid resolutions, it would be sufficient if the substance thereof were entered in the minutes. A formal resolution is not necessary. Board resolutions may be implied from conduct as well [Freeman vs. Buckhurst (1964) 2 Comp. L.J. 36 (49)]. (b) Those passed by circulation: According to Section 289 of the Act, a resolution shall not be deemed to have been passed by the board of directors or by a committee thereof by circulation, unless (i) the resolution has been circulated in draft, together with the necessary papers (if any) to all the directors or to all the members of the committee then in India (not being less in number than the

4.10

Corporate and Allied Laws quorum fixed for a meeting of the Board or committee, as the case may be; (ii) the resolution has been approved by such of the directors as they are then in India, or by a majority of such of them as they are entitled to vote on the resolution. A resolution, passed by circulation as aforesaid, should be recorded in the minutes of the next Board meeting in order to ensure its authority. (c) Those signed by all the members of the Board entitled to receive notice of Board meeting under Article 81 of Table A Scheduled I to the Act: Accordingly a resolution in writing signed by all the members of the Board entitled to receive notice of a Board meeting shall be as valid and effectual as if it had been passed at a meeting of the Board. However, the matter mentioned in Section 292 cannot be dealt with by a resolution under the said Article 81, because of mandatory character of the Section 292.

♦ Chairman of the Board: According the Article 76 of Table A, the board may elect a chairman of its meeting and determine the period for which he is to hold office. If no such chairman is elected, or if at any meeting the chairman is not present within five minutes from the schedule time for the meeting then the directors present may choose one from amongst them to be chairman of the meeting. ♦ Directors, attendance book: It is important that a careful record of the attendance of directors at Board meetings be kept. The Articles may or may not contain a provision on the subject, but reg. 71 of Table A states that “every director present at any meeting of the Board or of a committee shall sign his name in a book to be kept for that purpose”. Each director should sign the book before or soon after the signing of the minutes, as a director may leave before the conclusion of the business; and unless he has previously signed the attendance book, the secretary has no formal evidence of this presence. ♦ Voting at Board meetings: Questions at Board meetings are almost invariably decided by a simple majority of votes, each director having one vote and the chairman, if the articles so provide but not otherwise, having a casting vote. Reg. 74 of Table A provides that: (1) Save as otherwise expressly provided in the Act, questions arising at any meeting of the Board shall be decided by a majority of votes. (2) In case of an equality of votes, the chairman of the Board shall have a second or casting vote.

Meetings, Powers of the Board and Related Party Transaction The Articles of most companies usually contain the above provisions.

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The Act expressly provides that certain Board decisions must be made by resolutions passed at board meetings with the consent of all the directors present at such meetings, e.g. under Section 316(2), for appointing a person as managing director of a public company or a private company which is a subsidiary of a public company, if he is either the managing director or the manager of any other company; under Section 386(2), for appointing a person as manager, if he is either the manager or the managing director of any other company, or under Section 372, for investing in any shares of any other body corporate. Articles may also require more than a bare majority in case of certain resolutions. If there is such a requirement, it is usually restricted by the articles to resolutions of a particular kind, e.g. resolutions to borrow money. In some “one-man” companies (invariably very small private companies), the articles name the chairman and provide that no resolution is to be passed by the Board without his concurrence. ♦ Minutes of Board Meeting: The procedures for writing out the minutes of the Board meetings are the same as those applicable to general meetings of the company. These are Govern by Sections 193-196, which we have already discussed earlier. It may, however, be noted that the decision of the Board need not in all cases be formally recorded in writing and their intention may be implied from conduct [H.L. Bolton (Engineering) Co. Ltd. vs. T.J. Graham & Sons (1956) 3, All E.R. 624]. 4.1.2 Committees of Directors and their meetings: Subject to the provisions of the Act, the Board may delegate any of its power to the committees consisting of such members of its body as its things fit. A committee so formed shall, in exercise of the powers so delegated, conform to any regulations that may be imposed on it by the Board (Article 77 of Table A). A committee may elect a chairman of its meeting. If no chairman is elected, or if at any meeting the chairman does not turn up within five minutes from the time scheduled for the meeting, the members present may choose one from amongst themselves to be the chairman of the meeting (Article 78). A committee may meet and adjourned and it thinks proper, Questions arising at any meeting of a committee shall be determined by a majority of votes of the members present. And in case of equality of votes, the chairman shall have a second or casting vote (Article 79). All Acts done by the Board meeting by its committee meeting or by any person acting as a director shall be as valid as if every such director or such person had been duly appointed and was qualified to be a director. The validity of all such acts done is not affected even if it discovered later on that there was some defect in the appointment of any one or more of such directors or of any person acting as a director. The said acts will also remain

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unaffected even the directors are later on discovered to be disqualified (Article 80). This provision has been intended to prevent the validity of transactions from being questioned where there has been a slip in the appointment of a director. But the provision cannot be utilized to ignore or override the substantive provisions pertaining to such appointment. It is applicable only to acts of directors whose appointment or qualification is later on discovered to be faulty. Where, however, their appointments have not taken place at all but they merely choose to act on the company’s behalf, the protection prescribed by either Article 80 or Section 290 cannot be invoked [Morris vs. Danssen (1964) I, A.E.R. 586 (H, L.)] This is because the said subsequent discovery must be a discovery of the defect; it must not be discovery of facts which go to constitute the defect [British Asbestos Co. vs. Body (1903) 2 Ch. 439]. Suppose a regulation like Articles 80 is included in the Article of association of a company. What would be the possible impact of this? The impact has been summed up in Halsbury’s Laws of England (vide p. 277, 3 rd Edition, Vol. VI) thus: “An Article validating the acts of persons acting as directors, though it is a afterwards discovered that there was a defect in their appointment or qualification, operates not only between the company and outsiders but also as between the company and its members; as where defecto directors make a call, summon meetings of the company, elect other directors or allot shares, A defecto director may be ordered to furnish a statement of affairs in winding up. Directors can not take advantage of any infirmity in their proceedings in which they have themselves participated; they are stopped as between themselves and the company; they are also stopped from saying they have been improperly appointed if, they have acted after appointment, persons dealing with them who know of the invalidity are likewise stopped.” It should also be noted that Section 290 applies to act of an individual director, whereas Article 80 covers Act of the Board and of its committee. 4.2 PROTECTION AGAINST ABUSE OF FIDUCIARY CAPACITY OF DIRECTORS By now, you know that the position of a director vis-a-vis the company is that of an agent who may not himself contract with his principal; also that it is similar to that of a trustee who, however fair a proposal may be, is debarred from letting a position arise where his interest and that of the trust may conflict. To ensure that the authority vested in the directors is not abused, a number of provisions have been included in the Companies Act. For instance, in the absence of provisions in the articles, a director is precluded from entering into a contract with the company. If in such a case he does enter into a contract then the company is entitled to have the contract set aside or to sue, at its option, the director for breach of duty. That is why the articles of almost all companies contain a provision authorising the directors to enter into a contract with the company. In order to restrain the directors from entering into contracts, which are prejudicial to the companies,

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the Act has enacted a number of provisions. These provisions have the effect either of invalidating contracts entered into by directors unless they have been sanctioned by the Board of Directors, or of disqualifying the director who is interested in a contract from continuing as a director unless he has made a disclosure of his interest therein. These provisions are contained in Sections 297, 299, 300, 301 and 303. 4.3 DISCLOSURE OF INTEREST IN CONTRACTS A director who is directly or indirectly interested in any contract or arrangement – whether actual or proposed – made by or on behalf of a company must disclose his interest at a meeting of the Board of Directors. Regarding a proposed contract or arrangement, a disclosure must be made at the Board’s meeting at which the question of entering into it is first taken into consideration. If at the date of that meeting, the director was not concerned or interested therein then the disclosure is to be made at the first board’s meeting held after he becomes so concerned or interested. As regards any other contract or must arrangement, the disclosure must be made at the first Board’s meeting held after the director becomes concerned or interested. Every director who fails to comply with the aforementioned provisions shall be punishable with the fine extending up to Rs.5,000. For example, P is one of the 5 directors of X & Co. Ltd. At a meeting of the Board of directors, a resolution with all the 5 votes in favour is passed approving a proposal to enter into a binding contract with Y and Co. Ltd. in which P has the majority shareholding. In the circumstances, P should have made the disclosure of the nature of his concern or interest at the stated meeting of the Board of Directors whereas the resolution was passed unanimously; otherwise P would be punishable with fine as aforesaid. For the purpose of the above mentioned disclosure, a director may give a general notice to the Board that he is a director or a member of a specified body corporate or is a member of a specified firm and therefore is to be regarded as concerned or interested in any contract which may, after the date of the service of the notice, be entered into with that body corporate or firm. Such a notice shall be deemed to be a sufficient disclosure of interest or concern in relation to any contract or arrangement so made. Such a general notice shall automatically expire at the end of the financial year in which it is given, but it may be renewed for further period of one financial year at a time by a fresh notice given in the last month of the financial year in which it would otherwise have expired. Such a general notice or renewal thereof is to be given at the [Board’s] meeting or the director concerned must take reasonable steps to ensure that it is brought up and read at the first meeting of the directors held after the said notice is given. But as regards any contract or arrangement entered into or to be entered into between two companies where any of the directors of one company (or two or more of them together) holds or (hold) not more than 2% of the paid-up share capital in the other company, no disclosure is needed (Section

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299). Therefore, if P in our illustration cited earlier does not hold more than 2% of the paid up share capital of Y & Co. Ltd. he need not make any disclosure. The resolution passed at the Board meeting of X & Co. Ltd. in respect of the contract with Y & Co. Ltd. would be valid even if P did not disclose his interest. Under Section 300(I), a director is forbidden from taking part in the discussion of or voting on any contract or arrangement (or any proposed contract or arrangement) entered into by or on behalf of the company, when he is directly or indirectly interested in it. Although he may be present at the meeting, his presence will not count for the purpose of quorum at the time of any such discussion or vote. If the interested director votes, his vote shall be void. In this connection it may be noted that the voting on the contract or arrangement by the interested director, of itself does not invalidate the contract or arrangement; only the vote of interested director is to be excluded. If, as a result of such exclusion there is no quorum, the resolution sanctioning the contract would be void, i.e., a nullity and as such the contract would be incapable of subsequent ratification. [Firestone Tyre & Rubber Co. vs. Synthetics and Chemicals (1972) 2 Com. L.J. 200] Consider the following situation: (a) A Limited had four directors. At one of its convened Board meeting only two of them attended and they appointed two additional directors who were their relatives. Is the appointment of those additional directors valid? Section 300 provides that a director shall not take part in the discussion of or vote on any contract or arrangement entered into or to be entered into by or on behalf of the company if he is in anyway whether directly or in directly concerned or interested in the contract or arrangement. The Department of Company Affairs has clarified that the word interested as used in the section should be given a restrictive interpretation and thus excludes a director who has no pecuniary interest. Accordingly, the relationship of the director with the contracting party will not per se make the director concerned or interested in the contract or arrangement. The scope of the expression ‘contract’ or ‘arrangement’ was examined by the Madras High Court in Madras Tube Co. Ltd. vs. Hari Krishan Somani, (1985) I Comp LJ 195 (Mad). The question before the court was whether the appointment of an additional director would come within the scope of the word ‘contract’ or ‘arrangement’. The company had four directors. Only two of them attended the meeting. They appointed two additional directors who were related to them as brother and wife, respectively. The court came to the conclusion that although appointment as director does not come within the scope of the expression ‘contract’ because the position of a director may be conferred on a person by any method other than contract, became interested directors. Without them there was no independent quorum. Consequently the appointments were a nullity. The Bombay High Court re-examined the matter in Shailesh Harilal Shah vs. Matushree

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Textiles Ltd., (1994) and after giving due consideration to the authorities which influenced the Madras decision nevertheless came to the conclusion that the appointment as an additional director of a person who is related to a director does not violate the requirement of Section 300(1) because the position of a director may be conferred on a person by any method other than contract buy that it would amount to an arrangement. The attending directors, therefore, became interested directors. Without them there was no independent quorum. Consequently the appointments were nullity. The provisions mentioned above shall not apply to: (i) a private company, which is neither a subsidiary nor a holding company of a public company (ii) a private company, which is a subsidiary of a public company in respect of a contract or an arrangement, entered into by the private company with the holding company: (iii) any contract of indemnity against any loss, which the director may suffer by reason of becoming surety for the company; (iv) any contract or arrangement entered into (or proposed contract or arrangement) with a public company or a private company which is subsidiary of a public company in which the interest of the director consists a) in his being a director of such company and the holder of not more than the requisite qualification shares and he having been nominated as such director, or (b) in his being member holding of more than 2% of its paid up-share capital (v) a public company or a private company which is subsidiary of a public company in respect of which the Central Government in the public interest issues a notification thereof having regard to the desirability of establishing or promoting any industry, business or trade. However, the Central Government may direct that the provision of Section 300(1) shall apply to these companies subject to such exceptions, modifications and conditions as it may specify in the notification in the foregoing circumstances. [Sections 300(2) and (3)]. According to Section 297, a director of the company or his relative, a firm in which such a director or relative is a partner, any other partner in such a firm or a private company of which the director is a member or director, must not enter into contracts with company for the sale, purchase, or supply of goods, materials or services or for underwriting shares or debentures except with the consent of the Board of Directors [sub-section (1)]. According to the provision to sub-section (1) in the case of a company having a paid-up capital of Rs.1 crore or more no such contract shall be entered into except with previous approval of the Central Government The consent of the Board is deemed to have been given only if it is accorded by a resolution of the Board and not otherwise, either before or within three months of the date of entering into the contract [sub-section (4)].

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If the consent is not accorded to any contract under Section 297, anything done in pursuance of the contract shall be voidable at the option of the Board. [sub-section (5)]. Before we proceed on to discuss the other provisions contained in Sections 297(2) and (3) let us examine a situation. (b) X Ltd., recently went in for public issue of shares and for this purpose it paid brokerage to a share broking firm in which one of the Directors of the company is a partner in that firm. State in this connection: (i) Whether the concerned interested director should disclose his interest in the firm to the company. If so, When? (ii) Should he still disclose, if the company already knew of this fact. (iii) What would be your answer, if the concerned director merely acted as a broker between the firm and the company? (i) According to Section 297, a director of the company or his relative, a firm in which such a director or relative is a partner, any other partner in such a firm or a private company of which the director is a member or director, must not enter into contracts with company for the sale, purchase, or supply of goods, materials or services or for underwriting shares or debentures except with the consent of the Board of Directors. If the company is having a paid-up capital of Rs.1 crore or more no such contract shall be entered into except with the previous approval of the Central Government. The consent of the Board is deemed to have been given only if it is accorded by a resolution of the Board and not otherwise, either before or within three months of the date of entering into the contract. [sub-section (4)]. In view of the legal position as states above, the appropriate brokerage can be paid to the broking firm if the contract had been entered into with the consent of the Board of Directors of X & Co. Ltd. the director in question is to disclose his concern or interest at the first meeting of the Board meeting held after the director becomes concerned or interested in the contract. A general notice given in this regard to the Board is deemed to be sufficient disclosure of his concern or interest, if either it is given at the meeting of the Board of Directors concerned or he takes reasonable steps to ensure that it is brought up and read at the first meeting of the board after it is given. The condition under which the sanction of the Board of Directors in respect of contracts by directors or persons connected therewith would not be required [as contained in sub-section (2) of Section 297] have been liberalised. The restrictions do not apply to: (a) the purchase of goods and materials from, or sales thereof to, the company for cash at prevailing market prices; (b) any contract or contracts between the company and directors or persons

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4.17

connected therewith in respect of sale, purchase or supply of goods in which the parties to the contract regularly trade or do business in; provided they are in respect of goods and materials or services the value whereof or the cost of service would not exceed Rs.5,000 in aggregate in any year comprised in the period of the contract; (c) the transactions by banking or insurance company entered into with any director, relative, firm, partner, etc. in the ordinary course of his business. Section 297(3) provides that a director or persons connected with him may enter into a contract in the circumstances of urgent necessity without obtaining consent of the Board, even if the value of such a contract exceeds Rs. 5,000 in the aggregate, but in such a case the consent of the Board must be obtained at meeting within three months of the date of entering into the contract. (ii) The term ‘disclosure’ means to make others aware of something, which they are not aware. The disclosure of interest by a director has been provided in Section 299 only with a view to know that the director occupies fiduciary position in the company should disclose his interest in any arrangement or contract either directly or indirectly so that the company is in a position to know whether he is acting in any way prejudicial to the interest of the company or for his own benefit. When board is aware of the fact of the interest of a director in a particular transaction, it would not be necessary for such a director to formerly disclose his interest. (Ramakrishna Rao vs. Bangalore Race Club, 40 Comp. Case 674 (Mysore). A. Sivasailam vs. Registrar of Companies {C.A. No. 11/621A/SRB/94 decided on 31.5.94 (CLB)}). (iii) A contract to act as broker where the duty of the broker is merely to bring together the two contracting parties, namely, the company, on the one hand, and the purchaser of shares or debentures, on the other, does not seem to be covered either by clause (b) or by clause (a) of sub-section (1) of Section 297. It is not covered by clause (b) for two reasons: First, clause (b) specifically refers to underwriting and importing into that clause the act of broking is not permissible. Secondly, there is a good deal of difference between underwriting and broking. In the case of the former, the obligation extends far beyond the mere bringing together the two contracting parties together, while in the case of latter, the broker earns his commission only when he succeeds in bringing the two parties together and not otherwise. To act as a broker is also not covered by clause (a) because commission earned as a broker is not earned by supplying services. The Madras High Court has rightly held that “rendering of services should consist of the doing of an act for the benefit of another which is more than the mere making of a contract and which goes beyond the performance of an obligation undertaken in the course of an ordinary commercial contract”. (Radhakrishna Rao vs. Province of Madras AIR 1952 Mad. 718)

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Having read the provisions of Sections 297 and 299, let us now test for ourselves how far we have been able to grasp them with particular reference to the following problem: A & Co. Ltd. wants to sell its products to its following customers: (a) A partnership firm in which two of the directors of the company are partners; (b) A private company in which one of the directors of the company is a member; (c) A public company in which one of the directors of the company is a director. In these three cases what steps are required to be taken by A & Co. Ltd.? (a) & (b) According to Section 297, except with the consent of the Board of Directors of a company, firm in which the director or directors of the company is/are partners or a private company of which such director or directors is or are a member or members shall not enter into any contract with the company for the sale, purchase or supply of any goods, materials or services. Therefore, the public company in the instant two cases should obtain the consent of its Board of Directors. This consent shall have to be taken by a resolution passed at the Board meeting and not otherwise. The resolution according the consent must be passed before the contract to sell the product is entered into or within 5 months of the date on which it was entered into; otherwise consent shall not be deemed to have been given. If the consent is not accorded, anything done in pursuance of the contract shall be voidable at the option of the Board. Care should be taken to ensure that the interested directors do not vote on the motions and their presence is not counted for the purpose of quorum for the meeting. Also it is to be seen that such directors have disclosed their interests in the contract pursuant to Section 299 of the Companies Act unless any of them is enjoying the exemption under sub-section (6) of the above section. The consent contemplated above is not a general consent but consent referable to each particular or specific contract or contracts. Consent requires knowledge of the necessary facts and material, which lead to the consent and cannot be given in general or abstract manner (Watchand Nagar Industries Ltd. vs. Ratanchand, A.I.R. Bom. 256). Therefore, the Board of the public company should take appropriate steps in this regard. (c) The point of the case in question relates to disclosure of interest by directors. According to Section 299(6), nothing in Section 299 shall apply to any contracts entered into or to be entered between two companies where one of the directors of the one company or two or more of them together holds or hold not more than 2% of the paid up share capital in the other company. This point is not clear from the facts in the problem. This is a contract to be entered into between two companies. And if the director of the first company holds 2% or less of the paid-up share capital in the second public company, the provisions of Section 299 will not apply to this case. If, however, the said director holds more than the aforesaid 2% then the Board of Directors should see that the director, pursuant to Section 299, discloses his interest or concern at the meeting of the Board. This disclosure has to be made at the Board meeting at which the contract is considered. If the interest is acquired subsequent to the meeting

Meetings, Powers of the Board and Related Party Transaction then it is to be disclosed at the immediately next meeting.

4.19

The Board of the first-mentioned public company should ascertain whether the interest of director aforesaid consists solely (i) in his being a director of such company and the holder of not more shares of such number and value therein as is requisite to qualify him for appointment as a director thereof, he having been nominated as such director by the company or (ii) in his being a member holding not more than 2% of its paid-up share capital. Also, there is no restriction on voting, etc. by an interested director if a notification had been issued by the Central Government under Section 300(3) exempting the company from the purview of Section 300. If, on such assertion, the interest is not found to be so consisting as aforesaid, the Board of the company should see that interested director does not participate in the discussion or vote on the contract and that his presence is excluded from the computation of quorum. 4.4 SOLE SELLING AGENTS A company cannot appoint a sole selling agent of any area for a term exceeding 5 years at a time. But it can re-appoint, or extend the term of office by further period not exceeding 5 years on each occasion. The Board “shall not appoint a sole selling agent for any area except subject to the condition that the appointment shall cease to be valid if it is not approved by the company in the first general meeting held after the date on which the appointment is made” [Section 294(2)]. It has been held that the appointment of a sole selling agent must be made by the company in its general meeting; and such clause must be inserted as a mandatory condition in all appointments of sole selling agent: an appointment without a such a clause being inserted is void ab initio (Arante Manufacturing Corp. vs. Bright Bolts Private Ltd. 1967 Comp. Cas. 759; Shelagram Jhaijharia vs. National Co. Ltd. 1965 Comp. Cas. 706). If the company in the general meeting disapproves the appointment it shall become invalid from the date of the general meeting [Section 294(2A)]. Where a company has a sole selling agent, the Central Government may require the company to furnish to it such information regarding the terms and conditions of the appointment as it considers necessary for determining whether or not such terms and conditions are prejudicial to the interest of the company. If the company refuses or neglects to furnish any such information, the Central Government may appoint a suitable person to investigate and report on the terms and conditions contained in the appointment of the sole selling agent. After perusal of the information furnished either by the company or by investigator (as the case may be); if the Central Government is of the opinion that the terms and conditions of the appointment are prejudicial to the interest of the company, it may make the necessary modifications so that they are not longer prejudicial to the interests of the company. The appointment of sole selling agent shall be regulated by the terms and conditions as varied by the Central Government from the date as may be

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specified by the Central Government [Section 294(5)]. It has been provided that where the company has more selling agents than one, the Central Government may exercise similar powers referred to above – only for the purpose of determining whether any of those selling agents should be declared to be the sole selling agent, and if so, for which area or areas. A company may have more selling agents than one in any area or areas. The Central Government may, if it reasonably feels so, ask the company for such information regarding the terms and conditions of appointment of all the selling agents as it considers necessary. The purpose of calling for such information is to determine whether any of those selling agents should be declared to be the sole selling agent for such area or any of such areas of the company refuses or neglects to furnish any such information, then the Central Government may appoint a suitable person to investigate and report on the terms and conditions of appointment of all the selling agents. On the basis of the information thus obtained directly or through the investigator, the Central Government may reasonably form an opinion that any of the selling agents shall to all intents and purposes be the sole selling agents for such area. If it so forms an opinion, it may by order declare that selling agent to be the sole selling agent for that area with effect from such date as may be specified in the order. From the date so specified in the order, his appointment as the sole selling agent shall be regulated by the terms and conditions as varied by the Central Government [sub-section (6)]. It shall be the duty of the company (a) to produce to the person under clause (b) of subsection (5) or clause (b) of sub-section (6) all books and papers of, or relating to, the company which are in its custody or power, and (b) otherwise to give to that person all assistance in connection with the investigation which the company is reasonably able to give [sub-section (7)]. If the company refuses or neglects to perform these two duties, then the company and every officer thereof who is in default shall be punished with fine extending to Rs. 5,000 and with a further fine of not less than Rs. 50 for every day after the first during which such refusal or neglect continues [sub-section (8)]. Prohibition of payment of compensation to sole selling agents for the loss of office: Section 294A prohibits payment of compensation to the sole selling agent for the loss of his office in the following cases: (i) where the appointment of the sole selling agent ceases to be valid by virtue of Section 294(2A); (ii) where he resigns his office as a result of reconstruction or amalgamation of the company, and is appointed as the sole selling agent of the reconstructed company or the body corporate resulting from the amalgamation; (iii) where he resigns his office otherwise than in the circumstances envisaged in the foregoing clause (ii);

Meetings, Powers of the Board and Related Party Transaction

4.21

(iv) where he has been guilty of fraud or breach of trust in relation to, or of gross negligence in the conduct of his duty as the sole selling agent; and (v) where he has instigated or taken part directly or indirectly in bringing about the termination of the sole selling agency. The amount of compensation payable for the loss of office must in no case exceed the remuneration which he would have earned, had he been in office for the unexpired residue of his term, or for 3 years, whichever is shorter. The amount thereof is to be calculated on the basis of the average remuneration actually earned by him during a period of 3 years immediately preceding the date on which he had ceased to be in office or his appointment was terminated. In case he had held his office for a period lesser than 3 years, the basis would be the average remuneration that he had earned during such shorter period. ♦ Power of the Central Government to prohibit the appointment of sole selling agents in certain cases: Section 294AA inserted by the 1974 Amendment Act has vested the Central Government with this power. It may be of the opinion that the demand of goods of any category to be specified by that Government – substantially exceeds the production or supply of such goods and that the services of sole selling agents will not be necessary to create a market for such goods. If it actually forms this opinion, then it may, by notification in the Official Gazette, declare that the sole selling agents shall not be appointed by a company for the sale of such goods for such period as may be specified in the declaration [sub-section (1)]. A Company cannot appoint any individual, firm or body corporate who or which has a substantial interest in the company, as sole selling agent of that company, unless such appointment, has been previously approved by the Central Government [sub-section (2)]. If a company has a paid up share capital of Rs. 50 lakhs or more, then it cannot appoint sole selling agents without the consent of the company given by a special resolution and the approval of the Central Government [sub-section (1)]. In Ramesh B. Desai vs. Union of India (1990), it was held that the Central Government may refuse to grant approval inspite of the fact that the company has accorded its sanction by passing a special resolution, when the appointment of a sole selling agent is found to be prejudicial to the interests of the company. Read the provisions of Sections 294(5), (6) & (7) above and note that these provisions shall so far as may be applicable to the sole selling or the sole purchasing or buying agents of a company [sub-section (4)]. A company seeking approval under Section 294AA is required to furnish such particulars as may be prescribed [sub-section (5)].

4.22

Corporate and Allied Laws

It may so happen that an appointment has been made of sole selling agent by a company before the commencement of 1974 Amendment Act; also that the appointment is such that it could not have been made except on the authority of a special resolution passed by the company on the approval of the Central Government if sub-sections (2), (3) & (8), were in force at the time of such appointment. In such circumstances, the company shall obtain the aforesaid authority and approval within 5 months from such commencement. If it does not do so, then the appointment shall stand terminated on the expiry of 6 months from such commencement [sub-section (6)]. If the company in general meeting disapproves the appointment in sub-section (3), then such appointment shall cease to be effective notwithstanding anything contained in sub-section (6) [sub-section (7)]. All the provisions of Section 294AA but those of sub-section (1) shall apply so far as may be, to the appointment by a company of a sole selling agent for the buying or purchasing of goods on behalf of the company [sub-section (8)]. The Central Government has extended the ban on appointing sole selling agents for a further period of three more years from the date of publication of this notification in the Official Gazette in respect of every category of public drugs, drugs and formulations as defined in the Drugs (Price Control) Order, 1987, excluding bona fide preparation including in Ayurvedic, Siddha or Homeopathic systems of medicine. (vide F.N. 3/7/87 CL.Vs 18.4.94). The Explanation to Section 294AA explains the expression “appointment” and “substantial interest” and provides that Appointment include re-appointment and “Substantial interest” means: In relation to an individual, the beneficial interest held by such individual or any of his relatives singly or together, in the shares of the company, the aggregate amount paid up on which exceeds Rs. 5 lakhs or 5% of the paid-up share capital of the company, whichever is lesser. In relation to a firm, or a body corporate, “substantial interest” means the beneficial interest held by such individual or any of his relative singly or together one or more partners of the firm or any relative of such partner singly or together such body corporate or one or more of its directors or any relative of such director singly or together, in the shares of the company the aggregate amount paid up on which exceeds Rs. 5 lakhs or 5% of the paid-up share capital of the company, whichever is lesser.

5
(E) INSPECTION AND INVESTIGATION
5.0 INSPECTION According to Section 209A, the books of account and other books and papers of every company shall be open to inspection during business hours by the Registrar or by such officer of the Government as may be authorised by the Central Government in this behalf and by such officers of the Securities and Exchange Board of India as may be authorised by it: Such inspection may be made without giving any previous notice to the company or any officer thereof. The inspection by the Securities and Exchange Board of India shall be made in respect of matters covered under sections referred to in section 55A. It shall be the duty of every director, other officer or employee of the company to produce to the person making inspection,, all such books of account and other books and papers of the company in his custody or control and to furnish him with any statement, information or explanation relating to the affairs of the company . Further, it shall be the duty of every director, other officer or employee of the company to give to the person making inspection all assistance in connection with the inspection and shall have the same powers as are vested in a civil court under the Code of Civil Procedure, 1908. Besides any officer authorised to make an inspection shall have all the powers that a Registrar of Companies (ROC) in relation to the making of inquiries. 5.1 INVESTIGATION 5.1.1 Who can apply for investigation? (a) Report of the Registrar: Where a report has been made by the Registrar under subsection (6) or sub-section (7) of section 234, the Central government may appoint one or more competent persons as inspectors to investigate the affairs of a company and to report thereon in such manner as it may direct. (b) On application by the members: In the case of a company having a share capital, an application by not less than two hundred members or from members holding not less than one-tenth of the total voting power therein and in the case of a company having no share capital, an application by not less than one-fifth of the persons on the company’s register of members has been received the Tribunal may, after giving the parties an opportunity of being heard, by order, declare that the affairs of the

5.2

Corporate and Allied Laws company ought to be investigated by an inspector or inspectors, and on such a declaration being made, the Central Government shall appoint one or more competent persons as inspectors to investigate the affairs of the company and to report thereon in such manner as it may direct.. The application by members of a company under section 235 (2) shall be supported by such evidence as the Tribunal may require for the purpose of showing that the applicants have good reason for requiring the investigation. The Central Government may, before appointing an inspector, require the applicants to give security, for such amount not exceeding one thousand rupees as it may think fit, for payment of the costs of the investigation. (c) By the company on passing the special resolution or by the Order of the Court, the Central Government shall appoint one or more competent persons as inspectors to investigate the affairs of a company (d) By the Central Government, if there are circumstances suggesting (i) that the business of the company is being conducted with intend to defraud its creditors, members or any other persons, or otherwise for a fraudulent or unlawful purpose, or in a manner oppressive of any of its members, or that the company was formed for any fraudulent or unlawful purpose; (ii) that persons concerned in the formation of the company or the management of its affairs have in connection therewith been guilty of fraud, misfeasance or other misconduct towards the company or towards any of its members; or (iii) that the members of the company have not been given all the information with respect to its affairs which they might reasonably expect, including information relating to the calculation of the commission payable to a managing or other director, or the manager, of the company.

5.1.2 Firm, body corporate or association not to be appointed as inspector: As per section 238 no firm, body corporate or other association shall be appointed as an inspector under section 235 or 237. 5.2 POWER OF INSPECTORS

(a) To carry investigation into affairs of related companies (Section 239) For the purposes of his investigation, the inspector shall investigate the affairs of— (a) any other body corporate which is, or has at any relevant time been the company’s subsidiary or holding company, or a subsidiary of its holding company, or a holding company of its subsidiary; or (b) any other body corporate which is, or has at any relevant time been managed by any person as managing director or as manager, who is, or was, at the relevant time, the managing director or the manager of the company; or (c) any other body corporate which is, or has at any relevant time been, managed by the company or whose Board of directors comprises of nominees of the company or is accustomed to act in accordance with the directions or instructions of—

Inspection and Investigation (i) (ii) the company, or any of the directors of the company, or

5.3

(iii) any company, any of whose directorships is held by the employees or nominees of those having the control and management of the first-mentioned company; or (d) any person who is or has at any relevant time been the company’s managing director or manager, (b) Production of documents and evidence The inspector may, with the previous approval of the Central Government, require any body corporate other than a body corporate to furnish such information to, or produce such books and papers before, him or any person authorised by him. (c) The inspector may keep in his custody any books and papers for six months and thereafter shall return the same to the company, body corporate, firm or individual by whom or on whose behalf the books and papers are produced. (d) An inspector may examine on oath— (a) any of the persons referred to as above (b) with the previous approval of the Central Government, any other person in relation to the affairs of the company, (e) He may administer an oath accordingly and for that purpose may require any of those persons to appear before him personally. (c) any reference to officers and other employees, agents or partners shall be construed as a reference to past as well as present officers and other employees, agents or partners, as the case may be. 5.3 INVESTIGATION OF OWNERSHIP OF COMPANY (SECTION 247)

(1) If it appears to the Central Government that there is good reason so to do, it may appoint one or more inspectors to investigate and report on the membership of any company and other matters relating to the company, for the purpose of determining the true persons— (a) who are or have been financially interested in the success or failure, whether real or apparent, of the company; or (b) who are or have been able to control or materially to influence the policy of the company. (2) The Central Government shall appoint one or more inspectors under sub-section (1), if the Tribunal, in the course of any proceedings before it, declares by an order that the affairs of the company ought to be investigated as regards the membership of the company and other matters relating to the company, for the purpose of determining the true persons— (a) who are or have been financially interested in the success or failure, whether real or apparent, of the company; or (b) who are or have been able to control or materially to influence the policy of the company.

5.4

Corporate and Allied Laws

(11) A prosecution shall not be instituted under this section except by, or with the consent of, the Central Government. (12) This section shall apply in relation to debentures as it applies in relation to shares. 5.4 VOLUNTARY WINDING UP OF COMPANY, ETC., NOT TO STOP INVESTIGATION PROCEEDINGS (SECTION 250A)

An investigation may be initiated under section 235, 237, 239 or 247 notwithstanding that— (a) an application has been made for an order under section 397 or section 398; or (b) the company has passed a special resolution for voluntary winding up, and no investigation so initiated shall be stopped or suspended by reason only of the fact that an application referred to in clause (a) has been made or a special resolution referred to in clause (b) has been passed.

6
COMPROMISE, ARRANGEMENTS AND RECONSTRUCTIONS
6.0 COMPROMISE AND ARRANGEMENT Though Companies Act defines “arrangement”, it does not define “compromise”. These terms have no definite legal connotation. ‘Compromise’ means an amicable agreement between parties to a controversy to settle their differences by making mutual concessions, as distinguished from adjudication on the basis of an exact ascertainment of the opposing rights. In a compromise, “the parties agree to try to settle it between themselves by a give-and-take arrangement”. For the purpose of a compromise, it has been held that it is but essential that each party thereto should be empowered to make the necessary concessions. [Dani Chand & Co. vs. Narain Das & Co. (1947) 7 Comp. Case 195 F.B.]. Thus, compromise envisages the existence of a dispute, e.g. one relating to rights. But the word “arrangement” is of wide import and its meaning should not be limited to something analogous to a compromise. Section 390(b) provides that the expression ‘arrangement’ includes a reorganisation of the share capital of the company by the consolidation of shares of different classes or by the division of shares into shares of different classes or by division of shares into shares of different classes or by both these methods. An arrangement also may involve debenture holders being given an extension of time for payment, releasing their security in whole or in part or exchanging their debentures for the claims and the balance in shares or debentures of the company; preference shareholders giving up their rights to arrears of dividends, further agreeing to accept a reduced rate of dividend in the future, etc. 6.1 RECONSTRUCTION Reorganisation or arrangement is said to have taken place only when one company is involved, Amalgamation, on the other hand, is of two or more companies. The term “reconstruction” includes reorganisation, arrangement, amalgamation, etc., and thus is a term of wide import. A reconstruction is commonly said to have taken place when a company resolves to wind up its business and it is proposed to form a new company, with only the old shareholders as its members to take over its undertaking, the rights of shareholders in the old company

6.2

Corporate and Allied Laws

being satisfied by their being allotted shares in the new company. In that case, the old company ceases to exist in point of law, and its assets are transferred to the new company. It would be, nonetheless, a reconstruction even if all the assets might not pass to the company, or all the shareholders of the transferor company might not be shareholders in the transferee company, or all the liabilities of the transferor company might not be taken over by the transferee company. A reconstruction, in such a case, would imply that substantially the same persons would carry on the same business substantially. [Re South African Supply and Cold Storage Co. (1904) 2 Ch. 286]. 6.1.1 Why Reconstruction? A reconstruction may be necessary for the following purposes: (1) To extend the operations of the company: If the shares are fully paid up and further capital is desired to be raised, the shareholders in the old company may be issued only partly paid shares in the new company so that by calling up the uncalled amount the company would have the funds it would require for carrying on its business. (2) As a method for altering the Memorandum of Association: When such an alteration cannot be undertaken under Section 17 i.e., in a case where the new company desires to have “objects”, in its memorandum, over and above those in the old company. Although the companies Act permits companies to alter their objects by a special resolution, with the confirmation of the Company Law Board, it is not possible to radically alter the ‘objects clause’ of the Memorandum of Association, e.g., a company incorporated to manufacture rayon yarn cannot switch over to the business of manufacturing jams. It may, therefore, be necessary for a company to go into voluntary liquidation to carry on an activity totally unrelated to those for which it was originally formed. (3) For purpose of Reorganisation: The term “reorganisation” is usually applied to an arrangement to alter or modify the rights of shareholders or creditors, or both. (4) In order to amalgamate with one or more companies: Amalgamation is the blending of two or more companies into a single undertaking, the shareholders of each such company becoming substantially the shareholders in the new company which is to carry on the blended undertaking. To achieve this objective, either a new company may be formed to take over the business of the existing companies or the business of one or more existing companies be taken over by one of the existing companies. (5) Reconstruction or Arrangement undertaken for bringing the capital structure of companies into line with the requirements of the Act: The Act requires that the capital of a company must consist only of equity and preference shares. Companies having deferred or other forms of capital, therefore, are obliged to conform to the legal requirement as to their capital structure by a scheme of reconstruction.

Compromise, Arrangements and Reconstruction 6.1.2 How Reconstruction is effected? Reconstruction may be carried out:

6.3

(a) by sale of the company under the powers contained in its Memorandum of Association; (b) by a scheme of arrangement under Section 391; (c) by acquiring all or a majority of the shares in another company under Section 395; (d) by a compulsory amalgamation of companies in the public interest by an order of the Central Government under Section 396; (e) by a sale under Section 494 (members voluntarily winding up); or under Section 507 (creditor’s voluntarily winding up); in the former case a special resolution and in the latter case the sanction either of the Court or of the Committee of Inspection is necessary. (f) by a scheme of arrangement with creditors only; under Section 517 (voluntary winding up both by members and creditors, a special resolution and consent of three-fourths in value of creditors are necessary. (a) Sale powers in the Memorandum: Where a company has power in the objects clause of memorandum, it may dispose of the whole of its undertaking to another company. After the sale, the company will be wound up and the shares in the new company will be distributed among the members in proportion to their holdings in the old company. When a company is not in a position to raise further capital and it cannot otherwise carry on its business or when the carrying on of the company is considered not necessary, the company may resort to such a course. “Sale of the whole undertaking and division of the proceeds cannot be a corporate object. Under its Memorandum of Association, a single steamship company may no doubt sell its only steamship with whole of its equipment to another. But under a clause in its Memorandum of Association it cannot, in my opinion, sell its only steamship and all its undertaking and divide the proceeds. Distribution of capital (except in reduction of capital) can only be made in a winding up” [Buckley L.J., in Bisgood vs. Henderson’s Transval Estate, (1908) I Ch. 743]. That is to say, it can only be effected in liquidation of the company under the power conferred by Section 287 of the English Companies Act, which corresponds to Section 494 of Indian Companies Act. (b) Reconstruction under Section 391: In order to facilitate a reconstruction or amalgamation, it is frequently desirable or necessary for the company first to effect a compromise or arrangement with its creditors or any class of them or/and members or any class of them. Section 391 lays down the procedure by which the court’s assistance may be invoked in this respect. It must be noted

6.4

Corporate and Allied Laws that the meeting should be conducted in such a manner as the court directs and that Section 170(2) dealing with class meetings will not apply to meetings held under where a company is not being wound up, provisions of the Act apply to such meeting unless the Court orders otherwise [Madras Companies: Rules, (RR 41, 55)]. Under the Calcutta High Court Rules, (RR.41, 55) notice of petition under Section 391 has to be given to members and creditors. They should send notice to the petition to the effect that they intend to appear on the hearing of the petition.

When a compromise or arrangement between parties aforesaid is proposed the following persons may apply to the Court: (i) the company; (ii) any creditor; (iii) any member; or (iv) in the case of company which is being wound up, the liquidator. On such an application, the Court may order a meeting of the creditors or class of creditors or the members or class of members, as the case may be, to be called, held and conducted in such manner as the Court directs. If at the meeting, a majority in number representing three-fourths in the value of the creditors or members (or any class of them), as the case may be, present and voting either in person or by proxy, where proxies are allowed under the Rules made under Section 643, agree to any compromise or arrangement, it is, if sanctioned by the Court, binding on all the creditors or class of creditors or on the members or class of members, as the case may be. The compromise or arrangement is also binding on the company or, if the company is being wound up, on the liquidator and on the contributories [sub-section (2)]. But, before according the aforesaid sanction, the Court must satisfy itself that the company or any other person which or who has made the application, has disclosed to the Court by an affidavit or otherwise all the material facts relating to the company, e.g., latest financial position of the company, the latest auditor’s report on the accounts of the company, the pendency of any investigation proceedings in relation to the company under Sections 235 to 251, etc. [Proviso to Section 391(2)]. You have observed above that if the requisite three-fourths majority is obtained in favour of a scheme of reconstruction, the same shall bind the creditors, members, liquidators and contributories “if sanctioned by the Court”. This implies that the Court may not sanction, i.e. its power is discretionary and not obligatory. Moreover, under proviso to Section 391(2), the Court is under an obligation not to sanction any compromise or arrangement until a full disclosure of all material facts relating to the company have been made. This proviso is designed as a safeguard against any compromise placed by consideration of

Compromise, Arrangements and Reconstruction

6.5

the shareholders or creditors. Therefore, the claim of minority, on proof that directors had failed to disclose materials facts regarding a company’s financial position, would succeed and the Court would not accept the contention if there be any, that the scheme has been duly approved by the majority if it is satisfied that full disclosure of all material facts had not been made at the meeting convened by the Court under sub-section (1) of Section 391. An order of the Court, made as aforesaid shall not be effective until a certified copy of the same has been filed with the Registrar. A copy of the order is also required to be annexed to every copy of the memorandum or instrument which defines the constitution of the company issued after the certified copy of the order has been filed with Registrar; in default thereof the company and any of its officers at fault shall be punished with fine. An appeal lies against the order under the Section to the Court, empowered to hear appeals from the decisions of the original court, or if more than one court is empowered, to the Court of inferior jurisdiction. [Sections 391(3), (4), (5) & (7)]. Before giving its sanction, the Court must be satisfied that the statutory provisions have been complied with that the class of creditors or members have been fairly represented by those who attended, and that the statutory majority in approving the scheme is acting bonafide in the interest of the class if professes to represent. The arrangement must also be such as a man of business would reasonably approve, as fair and reasonable as regards the different classes, if any [Re. Alabama, New Orleans, Texas and Pacific in Junction Rail Co. 1819 I. Ch. 213 CA; Re. Hindustan General Electric Corporation Ltd. AIR 1959 Cal 679; Nand Prasad vs. Arjun Prasad (1959) Pat (293)]. The Court cannot sanction any scheme, which involves the doing of an act, which is ultra vires the company [Re. Oceanic Steam Navigation Co. Ltd. (1939), Ch. 4]. But the memorandum can be changed if members consent. It should be noted that a scheme, not certified by the Reserve Bank, cannot be sanctioned by the Court in respect of banking companies (See Section 45 of the Banking Regulation Act, 1949). Powers of Courts: Apart from the power of sanctioning a compromise or arrangement the Court has inter alia the following powers: (i) to stay, while application under Section 391 is pending the commencement or continuation or any suit or proceeding against the company [Section 391(6)]; (ii) to supervise the carrying out of the compromise or arrangement [Section 392(1)(a)]. Only the High Court has this power when it makes an order under Section 391; a District Court has no such power. It may be noted that under Section 10(2)(b) the Central Government can confer jurisdiction under Section 391 on District Courts in respect of companies with a paid up capital of less than Rs. 1 lakh; (iii) to modify the compromise or arrangement for the proper working thereof [Section 392(1)]; and

6.6

Corporate and Allied Laws

(iv) to order winding up of the company, if it is satisfied that the compromise or arrangement is unworkable [Section 392(2)]. It may be noted that only High Courts have powers (iii) and (iv). (a) Circulation of information to creditors or members: Section 393 provides for the circulation of a statement, which must explain the objects of the proposed compromise or arrangement scheme. The statement should accompany the notice of the meeting to be called to consider the scheme. The statement should accompany the notice of the compromise or arrangement and explain its effect. In particular, the statement must state any material interest of the directors, managing director or manager of the company whether in their capacity as such or as members or creditors and the effect on those interests of the compromise or arrangement if and in so far as the effect is different from the effect thereof on the like interests of other persons. If the notice calling the meeting is given by an advertisement, a statement, it must be furnished to such creditor or member free of charge on an application being made in the manner indicated in the notice. In the event of a default, the company and the officers responsible thereof would be liable to be penalised. It is the duty of every director, managing director, manager and trustee for debentureholders to serve notice on the company of such matters relating to himself as may be necessary for the purpose of the Section; a default is punishable with a fine. (b) Facilitating reconstruction and amalgamation: In order to facilitate schemes of reconstruction and amalgamation when application is made to the Court under Section 391 for sanction of an arrangement which involves the transfer of the whole or part of the property of one company (called “transferor company”) to another company (called “the transferee company”), the Court may make an order under Section 394 dealing with the following matters: (i) the transfer to the transferee company of the whole or part of the undertaking, property or liabilities of any transferor company;

(ii) the allotment or appropriation by the transferee company of any shares or debentures, policies, etc. to or for any person; (iii) the continuation by or against the transferee company of any legal proceedings pending by or against the transferor company; (iv) the dissolution, without winding up, of any transferor company; (v) the provision to be made for persons who dissent from the scheme, and (vi) any other incidental matter. The first proviso, to Section 394(1) restraints the Court from accepting a compromise or arrangement in connection with the scheme of amalgamation, before receiving a report

Compromise, Arrangements and Reconstruction

6.7

from the Company Law Board or the Registrar that the affairs of the transferor company have not been conducted in a manner prejudicial to the interest of its members or to public interest. Further, under the second proviso, the order for the dissolution of the transferor company cannot be made until the official liquidator, on the scrutiny of the books and papers, has reported to the Court that the affairs of the company had not been conducted prejudicially to the interest of the members or to public interest. Note: A transferor company includes any body corporate whether or not a company under the Companies Act, while a ‘transferee company’ comprises only a company within the meaning of this Act. This distinction is presumably designed to facilitate transfer of foreign companies to Indian companies by schemes of reconstruction or amalgamation. Where, an order is made under Section 394, every company in relation to which the order is made must file a certified copy thereof with the Register for registration with 20 days after the order is made. In the event of the whole or any part of the undertaking of the company being transferred, the directors cannot receive from the transferor company any compensation for loss of the office or by way of consideration for retirement. They may, however, receive such compensation from the transferee company or from any other person provided the particulars with respect to the payment proposed, have been disclosed to the members of the company and have been approved by them in general meeting. (Section 319) An order under Section 394 does not transfer automatically a contract of personal services, which are in their nature incapable of being transferred (previously existing between an individual and the transferor company) to the transferee company. [Noxes vs. Daneaster Amalgamated Collieries Ltd., (1940) 3 All. ER. 549 (HL)]. Section 394A makes it obligatory on the part of the Court to serve notice of every application made to it under Section 391 upon the Central Government and to take into consideration the representations, if any, made to it by the Government before passing any order under any of these Sections. The objective is to “enable the Government to study the proposal and to raise such objections thereto as it thinks fit in the light of the facts and information available with it and also to place the Court in possession of certain facts which might not have been disclosed by those who appear before it so that the interests of the investing public at large may be fully taken into account by the Court before passing its order.” It may be noted that Section 394A, which provides for notice to the Central Government does not apply to proceedings under Section 392 [Mehtab Chand Golcha vs. Official Liquidator, Golcha Properties (P) Ltd. (1981) Comp. Cas. 103 at p. 104]. (c) Acquisition or Amalgamation by Shares Purchase: Of the various methods of

6.8

Corporate and Allied Laws amalgamation, this is the simplest method. A company may acquire business and control of another company not by amalgamation but by acquisition of a majority of shares in that company. The consideration for acquisition may be paid either in cash or shares or both. Section 395 provides a means for the compulsory acquisition of the shares of a dissenting minority to prevent such a minority from extracting unreasonably high price for its shares.

Under the aforesaid Section, a scheme of contract involving the transfer of shares or any class of shares in a company has first to be offered for approval of the holders of such shares by the company seeking to acquire the shares. The scheme or contract must then be approved by the holders of not less than 90% in value of the shares concerned within four months from the date of the offer (by the transferee company). Where, however, such shares which are to be transferred are already held by the offeror (i.e. transferee company) or its nominee or its subsidiary to value greater than 10% of the aggregate of values of all the shares of the transferor company, the terms of the offer must be the same for the holders of all other shares and the scheme or contract must not only be approved by 9/10th in value of such holders but they must also be not less than 3/4ths in number. When these conditions have been satisfied, the transferee company may give notice in the prescribed manner to any dissenting shareholder, expressing its desire to acquire his shares. This notice, if decided to be given, must be served within 2 months after the expiry of the period of 4 months. If such notice is given, the transferee company is entitled and bound to acquire these shares on the terms approved by the majority, unless the dissenting shareholder applies to the Court within one month from the date of the notice, and the Court orders otherwise. But, if the transferee company has served the aforesaid notice upon the dissenting shareholders and they made no application to the Court or, if the application has been made, but the Court has not ordered to the contrary, the transferee company must within the prescribed period, send a copy of the notice to the transferor together with an instrument of transfer executed by the transferee company and on behalf of the shareholders, by a person appointed by the transferee company. The transferee company must pay or transfer to the transferor company and on behalf of the shareholders, by a person appointed by the transferee company. The transferee company must pay or transfer to the transferor company the amount or other consideration representing the price payable for the shares, which the transferee company is entitled to acquire. The transferor company must thereupon register the transferee company as the holder of those shares, and within one month of the date of such registration and of the receipt of the money or other consideration representing the price payable to them by the transferee company [Section 395(3)]. All sums of money and any other consideration received by the transferor company from

Compromise, Arrangements and Reconstruction

6.9

the transferee company are to be held in trust for the several persons entitled to the shares in respect of which they have been received and until disbursed, these are to be kept in a separate bank account. These are to be paid to the shareholders against the deposit of relevant share certificates. [Section 395(4)] In relation every offer of a scheme or contract involving the transfer of shares or any class of shares in the transferor company to the transferee company, the following provisions are applicable: (1) Every such offer of every circular containing such offer or every recommendation to the member of the transferor company by its directors to accept offer must be accompanied by such information as may be prescribed. (2) Every offer must contain a statement by or on behalf of the transferee company, disclosing the steps it has taken to ensure that the necessary cash will be available. (3) Every circular containing or recommending acceptance of such an offer should be first presented to the Registrar for registration and it should not be circularised until it has been registered. (4) The Registrar may refuse to Register any such circular which does not contain the information required to be given under paragraph (1) above or which sets out such information in a manner likely to give a false impression. (5) Against as order of the registrar refusing to register any such circular, an appeal lies to the Court. (6) Whosoever issues a circular mentioned in paragraph (3) above, which has not been registered, shall be punishable with fine extending to Rs. 500 [Section 395(4A)]. Further, to safeguard the interest of dissenting shareholders, sub-section (3) of Section 395 imposes an obligation on the transferor company to advise the shareholders, whose shares have been taken over, as to the price payable to them within one month of the date of registration of the shares in favour of the transferee company and of the receipt of the amount or other consideration representing the price. When all the shares of the company have been agreed to be transferred, the directors, qualification shares will not be transferred till new directors, properly qualified to act as directors, have been appointed [Briess vs. Wolley (1954) 2 W.L.K. 832; (1954) I. A.I.R. 909]. The directors of the transferor company cannot receive compensation for the loss of office or as consideration for retirement from office or in connection with retirement from the transferor company. But they may receive it from the transferee company or any other person if the particulars of the payments, proposed to be made, are stated in the notice of the offer sent to the shareholders of the transferor company and the proposal is approved by the company in general meeting. (Section 320)

6.10

Corporate and Allied Laws

It may be noted that payments received by directors in contravention of Sections 319 and 320 are to be held in trust for the company. (d) Power of the Central Government to provide for amalgamation of companies in the public interest: Section 396(1) provides that where in the “Public” interest it appears to the Central Government that amalgamation of two companies is essential, it may, through notification in the Official Gazette, provide for the amalgamation of the two companies into a single company with such constitution, property, powers, rights, interests, authorities and privileges and with such liabilities, duties and obligations as may be specified in the notification. Under Section 396(2) [as amended by the Companies (Amendment) Act, 1985] the order aforesaid may provide for the continuation by or against the transferee company of any legal proceedings pending by or against any transferor company; also incidental, consequential and supplemental provisions necessary to give affect to the amalgamation may be included therein. Every member or creditor (including a debentureholder) of each of the companies before the amalgamation shall have, as nearly as may be, the same interests in and rights against the amalgamated company as he has in the company of which he was originally a member or creditor. If his interests in or rights against the amalgamated company are less than his original interests etc., in the original company, he shall be entitled or receive compensation from the amalgamated company to the extent these have been reduced. [Section 396(2)] The prescribed authority would assess the amount of compensation receivable. Any person aggrieved by any assessment of compensation made by the prescribed authority under sub-section (3) may, within thirty days from the date of publication of such assessment in the Official Gazette, prefer an appeal to the Company Law Board and thereupon the assessment of the compensation shall be made by the Company Law Board. [Section 396(3A), added in 1985]. But the Central Government would not make such an order for amalgamation unless: (a) the draft copy of the proposed order has been sent to each of the companies concerned. (b) the time for preferring an appeal under sub-section (3A) has expired, or where any such appeal has been preferred, the appeal has been finally disposed of (Added by the Amendment Act of 1985); and (c) the Central Government has considered the suggestion, objection or modification to the same made by the said companies or any class of shareholders thereof or any creditor or class of creditors thereof, within a period fixed by the Central Government. The expression “public interest” has not been defined either by this Act, or by the General

Compromise, Arrangements and Reconstruction

6.11

Clauses Act. It is a very wide expression and comprehends inter alia, (i) economic welfare of the community [Shri Kishan vs. State of Rajasthan 1955 2 SCR 53]; (ii) welfare of labour [Basti Sagar Mills vs. Ram Ujagar AIR (1964) S.C. 355]. The concept of public interest has been discussed in detail at the end of this Study paper. (e) Reconstruction under Section 494: The Section gives complete power of a special type for sale of business in winding up. A company which is proposed to be, or in the course of being wound up, voluntarily, may sell its business to another company and the compensation received, whether in the form of shares, policies or other like interest in the transferee company, may be distributed among the shareholders of the company that is being wound up, or the members of the transferor company may receive any other benefit from transferee company. To give effect to it the following condition must exist: (i) the transferor company should be in process of being wound up as a members’ voluntary winding up.

(ii) there should be a proposal to transfer or sell the whole or part of its business or property to another company (i.e. the transferee company); and (iii) the transferor company should approve, by a special resolution, the proposal to confer authority, whether general or particular on the liquidator to put the above scheme or arrangement into effect. The liquidator usually gives notice to the shareholders of the transferor company as regards the number of shares to which they are entitled, the amount payable by them thereon and the time within which they must apply for the shares. The sale or arrangement under this provision is binding on all the members whether they agree to it or not. If any member does not vote in favour of the special resolution, he may address to the liquidator his dissent in writing even 7 days subsequent to the passing of the special resolution and require him: (a) to abstain from carrying the resolution into effect; or (b) to purchase his interest at a price to be determined by agreement or arbitration in the manner provided by Section 494. The liquidator has the right to exercise either of the above options. Should he elect to purchase, he must raise the money in such a manner as determined by the company. It must be paid prior to the company being dissolved. It is common practice to make a provision in the scheme, enabling the liquidator to sell the shares of those who neither agree nor apply within the prescribed time and to distribute the sale proceeds among them. The transferor company may pass such a special resolution either before or concurrently

6.12

Corporate and Allied Laws

with the resolution for voluntary winding up or for the appointment of a liquidator. After an order for winding up of the company by or subject to the supervision of the court has been passed within a year, the special resolution would not be valid unless sanctioned by the Court. The Arbitration Act, 1940, will govern arbitration, under this Section for determining the purchase price of shares of the dissentient member. Section 494 makes no provision as regards the rights of creditors who felt that they have been affected by the scheme of transfer. As such the only remedy available to them is to present a petition either for compulsory winding up or for winding up under the supervision of the Court within a year of the making of the order. The impact of Section 494 on the sale of the whole or part of the business or property is that a sale under such scheme can be made even to a foreign company. Under Section 507, it is provided that the procedure under Section 494 would apply to a creditors, voluntary winding up as well as to a members’ voluntary winding up. The liquidator in the former case will have to exercise the power only with the sanction of the Court or that of the Committee of inspection. At times an existing company may require further capital to make up the deficiency caused by losses or otherwise but the usual methods of raising capital may not be available to it. In such a case, it may resort to reconstruction under Section 494 by constituting a new company to take over the undertaking. The members of the existing company will be allotted partly paid shares in the new company in lieu of assets transferred. Fresh capital after wards will be raised by calling the unpaid amount of the shares. The shareholders of the existing company however will not be bound to take the partly paid shares and they may not assent to the scheme; they may call for the purchase of their interest or for giving up the scheme. The shareholders concurring in the scheme, however, shall have to pay whenever the call is made for raising further capital. (f) Reconstruction under Section 517: It is another form of reconstruction pursuant to an arrangement with the creditors when the company is being voluntarily wound up. Under this Section, any arrangement entered into between a company about to be wound up or in the course of winding-up and its creditors is binding on the company and its creditors provided it has been: (a) approved by a special resolution of the company; and (b) agreed to by three fourths in number and value of the creditors. Any creditor or contributory may, however, within three weeks from the completion of arrangement, appeal to the Court and the court may amend, vary, confirm or set aside the arrangement.

Compromise, Arrangements and Reconstruction

6.13

Note: Students may note that reconstruction under Section 517 is not commonly resorted to in as much as it might be difficult to secure the 3/4 the majority referred to in paragraph (b) above. ♦ Compensation for loss of office on amalgamation or reconstruction: Section 318(3) of the Act prohibits the payment of compensation to a managing director, or other director for the loss of office when he resign his office in consequence of the reconstruction of the company or its amalgamation and he is appointed as a managing director, manager or other officer of the reconstructed or amalgamated company. ♦ Conditions prohibiting reconstruction or amalgamation of company: Where any provision in the memorandum or articles of a company, or in any resolution passed in general meeting by, or by the Board of Directors of, the company, or in an agreement between the company and any other person, whether made before or after the commencement of this Act, prohibits the reconstruction of the company or its amalgamation with any body corporate or bodies corporate, either absolutely or except on the condition that the managing director or manager of the company is appointed or reappointed as managing director or manager of the reconstructed company or of the body resulting from amalgamation, as the case may be shall become void with effect from the commencement of this Act, or be void, as the case may be. (Section 376) Preservation of books and papers of amalgamated company (Section 396A): The books and papers of a company which has been amalgamated with or whose shares have been acquired by another company under Chapter V of Part VI cannot be disposed of without the prior permission of the Central Government which may appoint a person the examine the books and papers in order to ascertain whether they contain any evidence of commission of an offence in connection with promotion or formation or the management of the affairs of the first-mentioned company or its amalgamation or the acquisition of its shares. It is a measure introduced to prevent accounts and records of a company being disposed of following amalgamation with a view to destroying incriminating evidence. 6.2 AMALGAMATION OF TWO COMPANIES-STEPS TO BE TAKEN BY BOTH

Procedures for amalgamation of the Companies: Proceedings for an amalgamation by the transferor and transferee companies should be carried out simultaneously. These are as follows: In The Transferee Company 1. To check up whether the memorandum contains the power of amalgamation; if not, then to carry In The Transferor Company 1. The same as in the case of transferee Company.

6.14

Corporate and Allied Laws out the proceedings for its alteration and to obtain Company Law Board’s Confirmation.

2. 6.

To Prepare the draft scheme including exchange ratio and get it approved by the Board’s meeting. To apply to the Court for directions to convene the general meeting by way of Judge’s Summons [Rule 67 of the Companies (Court) Rules, 1959]; such directions would be in respect of matters set out in Rule 69. To send notice for general meeting to every member along with a statement setting forth the terms of the compromise or arrangement and explaining its effect and particularly stating any material interests of the directors, managing director or manager, whether in their capacity as such or as members or creditor, or otherwise and the effect on those interests on the amalgamation and insofar as it is different from the effect on the like interests, of other persons [Section 393(1)(a)]. In case of the said notice being given through advertisement, to either include the aforesaid statement or to notify the place for obtaining the copies of such statement [Section (1)(b)]; these can be obtained free of charge on making an application therefore in the manner indicated in the notice [Section 393(3)]. In case of debenture holders’ rights being affected by amalgamation, the said statement to give like information and explanation regarding the trustees under the deed [Section 393(2)]. [Rules 69 to 76 of the Companies (Court) Rules to be noted in this connection.]

2. 6.

–do– –do–

4.

4.

–do–

5.

To hold the general meeting and pass the resolution approving the draft scheme of amalgamation subject to the confirmation of the high Court, resolution to be passed by a majority in number representing 3/4ths in value of the members as required by Section 391.

5.

The same as in the case of transferee company.

Compromise, Arrangements and Reconstruction 6. To move the High Court for approval of the scheme, and for the purpose to supply it with material facts as required by the proviso to Section 391(2). 6.

6.15

To move the High Court jointly with the transferee company, and also to supply the court with all material facts. Further the court would need a satisfactory report from the Company Law Board or the Registrar that the affairs of the Company have not been conducted in a manner prejudicial to the interests of its members or to public interest, because it is a scheme for the amalgamation of it, with the transferee company which is being wound up. [Proviso to Section 394(1)].

7.

On receipt of the Court’s order, to file the certified copy thereof with the registrar within 30 days after the making of the order [Section 394(3)]; otherwise it would not be effective. A copy of the Court’s order also to be annexed to every copy of the memorandum or instrument, which defines the constitution of the company, issued after the certified copy of the order has been filed with the Registrar under a pain of penalty [Section 39(4)]. To proceed to effect the scheme of amalgamation as per the scheme approved and the directions given by the High Court by issuing suitable notices to shareholders and persons concerned and to allot shares and take over the business as per the scheme. SELF-EXAMINATION QUESTIONS

7.

The same as in the case of transferee company.

8.

8.

The same as in the case of transferee company.

9.

9.

To do the same in the case of the transferee company, except of allotment of shares and taking over business, because no question of these arises in this case.

6.3 1.

(a) Can a compromise or arrangement be proposed between a company and a class of its creditors or members? (b) Can a shipping company with only one steamship, under a clause in its

6.16

Corporate and Allied Laws memorandum, sell it with the whole of its equipment and with the proceeds buy another ship? (c) Can the said company, under a clause in its memorandum, sell the ship and its entire undertaking divide the proceeds amongst its shareholders?

2.

(a) Is it necessary to apply to the Court for the above-mentioned proposed compromise or arrangement? (b) Who can apply therefor when the company is a going concern? (c) Can the liquidator do so, when the company goes into liquidation?

3. Suppose, in the said creditors’ meeting convened by the Court a numerical majority agrees to the arrangement, which is also sanctioned by the Court. Will it be binding on all the creditors? 4. Before sanctioning the agreement, the Court (a) may (b) may not (must, satisfy itself that the application has disclosed to the Court all the material facts relating to the company. Which is correct? 5. An appeal (a) does lie, (b) does not lie against the order of the Court under Section 391. Which is correct? 6. In the matter of sanctioning the scheme of arrangement, say whether the following statements are correct: (a) The Court must be satisfied that the statutory provision has been complied with. (b) It is not necessary for it to see that the members or creditors (as the case may be) have been fairly represented by those who attended the meeting. (c) The Court is bound to see that the statutory majority approves the scheme, but it is not bound to see that the statutory majority was acting bonafide in the interest of the members or the creditors (as the case may be). (d) The Court can sanction a scheme even if it involves the doing of an act, which is ultra vires the company. (e) While the application for compromise or arrangement is pending with the Court, it can stay the commencement or continuation of any suit against the company. (f) A District Court can supervise the carrying out of the compromise or arrangement.

7. Suppose the compromise or the arrangement is found to be unworkable. What should the Court do in the circumstances? 8. Suppose, that, application has been made to the court under Section 391 for the sanction of an arrangement and that the arrangement involves the reconstruction and

Compromise, Arrangements and Reconstruction

6.17

amalgamation and the transfer of the whole or the part of the property or liabilities of one company to another company: (a) Can the Court accord the sanction? (b) When? 9. In the circumstances, mentioned in Q.3, the Act empowers the Court to make provision for the dissolution of the transferor company. Is this power of the Court absolute or contingent? 10. Can the aforesaid directors in the like circumstances claim compensation from the transferee company? 11. Of the propositions comprised in the following statements, state which is correct: (a) A company (i) can, (ii) cannot, acquire the business and control of another company by the acquisition of shares in that other company. (b) The scheme of the acquisition offered by the transferee company to the transferor company requires approval (i) by the holders of at least 75% in value of shares concerned (ii) by the holders of not less than 90% in value of the shares concerned. (c) The above-mentioned approval of the shareholders may be accorded within (i) 30 days, (ii) 60 days, (iii) one month, (iv) 2 months, (v) 120 days, (vi) 4 months, from the date of offer for acquisition. 12. It is said that in the matter of acquisition of shares aforementioned 9/10ths in value of the shareholders of the transferor company must approve the transferee company’s proposed acquisition. Now suppose, the transferee company already holds shares in the transferor company to a value greater then 1/10ths of aggregate values of all the shares concerned: (a) How would you compute the aforesaid 9/10ths for the purpose of approval? (b) In such a situation, will the approval by the shareholders holding 9/10ths in value of the shares be sufficient? (c) Will your answer be different, if more than its nominee or its subsidiary holds not by the transferee company but 1/10 of the aggregate value of all the shares in the transferee company? 13. There are two public limited companies. It is felt that these should be amalgamated into a single company in the interest of the public. Who is to decide the question of public interest and order for their amalgamation? 14. Can the Central Government straightaway order, without parliamentary approval, the amalgamation of two or more companies on ground of public interest? 15. You have noticed that arrangement, reconstruction or amalgamation is possible in the case of a going company. Is reconstruction also possible of a company, which is in

6.18

Corporate and Allied Laws

the process of being wound up voluntarily? 16. A company is proposed to be completely wound up as a member’s voluntary windingup. There is a proposal to transfer or sell part of its business or property to another company. The transferor company approves by an ordinary resolution of the proposal to confer authority on the liquidator to put the scheme into effect. Can the liquidator do so in the circumstances? 17. In the case of members’ voluntary winding-up, how is the authority to sell the business or property to another company given to the liquidator? 18. Do you find any distinction between reconstruction and amalgamation under Sections 391 to 395 and reconstruction or amalgamation under Sections 494 or 517? 6.4 ANSWERS TO THE SELF-EXAMINATION QUESTIONS

1. Yes; 2. (a) Yes; (b) Company or creditor members; (c) Yes; 3. No, unless the majority represents 3/4ths in value of the creditors; 4. (c); 5. (a); 6. (a) Yes; (b) No; (c) Yes; only regarding the first part of the statement: (d) No; (e) Yes; (f) No; 7. Order the winding up of the company; 8. (a) Yes; (b) On the receipt of a report from the Company Law Board or Registrar that transferor company’s affairs have not been conducted prejudicially to its members’ interest or public interest. 9. Contingent; 10. Yes; provided the conditions prescribed by Section 319 are fulfilled; 11. (a) (i); (b) (ii); (c) (vi); 12. (a) Transferee company’s shareholding in the transferor company be included for the purpose; (b) Yes, only if they constitute at least 3/4ths in number; (c) No; 13. 14. 15. 16. 17. 18. Central Government; Yes; Yes, it is a member’s voluntary winding-up; No; By a special resolution; The former is in respect of a company, which is going concern, and the latter is in respect of company in liquidator.

7
(G) PREVENTION OF OPPRESSION AND MISMANAGEMENT
7.0 “MAJORITY RULE” AS APPLIED IN THE MANAGEMENT OF A COMPANY The Companies Act, 1956, together with the protection granted to minority under the Common Law, attempts to maintain a balance between the rights of majority and the minority shareholders by admitting in the rule of the majority but limiting it at the same time by a number of well-defined minority rights, and thus protecting the minority shareholders. Minority shareholders are protected by: 1. the Common Law; and 2. the provisions of the Companies Act, 1956. 7.1 Protection at Common Law: It is a well-known principle, enunciated in Foss vs. Harbottle, which the rule of majority shall prevail. But there are certain exceptions to this rule where the majority rule does not prevail. These are as under: (a) Where the act complained of is illegal or ultra vires the company; (b) Where the act done by the majority constitutes fraud on the minority; (c) Where a resolution is passed by a simple majority for any act, which requires special resolution for it to be effective; (d) Where the act infringes the personal rights of an individual member; (e) Where any act amounts to oppression of minority or mismanagement of the affairs of the company. In all these cases a minority shareholder is entitled to bring an action for a declaration that the resolution complained of is void, or for an injunction to restrain the company from passing it. All these principles have been followed in a few leading cases in India as well. 7.2 Protection under the Companies Act, 1956: Various rights are given to minority

7.2

Corporate and Allied Laws

shareholders by the Companies Act, 1956. These relate to: (a) The variation of class rights (Section 107) (b) Schemes of reconstruction and amalgamation (Section 391) (c) Prevention of oppression of minority and of mismanagement under Sections 397 and 398. (d) The rights to apply to the Central Government to have the affairs of the company investigated. (Section 235) There are some other Sections of the Companies Act, which protect the minority shareholders’ rights. These are: 1. S-17: Consent of the Company Law Board is necessary before certain acts can be validly done by a company, e.g., an alteration of the objects of a company.

2. S-101: Consent of the Court is necessary in case of reduction of share capital. 7. S-111: Rights to appeal to the Central Government against the arbitrary action of the Board of Directors in refusing to register a transfer of shares. 4. S-408: Right of the Central Government to appoint on an order from the Company Law Board (C.L.B.) such number of persons as directors as considered necessary to effectively safeguard the interests of the company or its shareholders or the public interests. Such an order may be made by C.L.B. on a reference made to it by the Central Govt. or on an application of not less than 100 members of company or by such members holding not less than 1/10th of the total voting power. 5. S-439: A contributory is entitled to present a petition to the Court for the winding up of the company on just and equitable grounds. 6. S-517: An arrangement between a company and its creditors may be amended, varied, confirmed or set aside by the Court on the application of any creditor or contributory. 7.3 OPPRESSION AND MISMANAGEMENT The management of companies is based on the principle of majority rule ordinarily; decision of the majority is the rule for the minority. This sound principle has, occasionally, been abused and the whip of the majority has often produced sullen effects, prejudicial to the best interests of the shareholders. Until the commencement of the Companies Act, 1956 the only remedy available (under the Indian Companies Act, 1913) to an oppressed minority was to petition to the Court to wind up the company on the ground that it was

Prevention of Oppression and Mismanagement

7.3

“just and equitable” so to do. The winding up remedy is, however, not always advantageous to the petitioning shareholder, or shareholders because the very persons whose conduct is complained of, may be the only persons capable of buying up the shares of the dissentients. Nevertheless, the oppression or mis-management calls for some remedial action. Sections 397 to 409 of the Companies Act, 1956 empower (i) the Company Law Board and (ii) the Central Government to deal with such situations. Section 397 provides that the members of a company who complain that the affairs of the company are being conducted in a manner oppressive to any member or members may apply to the Company Law Board for appropriate relief subject to Section 399. Under Section 398 too, members of a company may apply to the Company are being conducted in a manner prejudicial to the interest of the company as a whole, subject to Section 399. Section 399 provides, however, that a single member is not entitled to make an application under either of the Section, viz., Sections 397 and 398. 7.4 Who may apply to the Company Law Board when oppression or mis-management is complained of? The application can be made only by: (a) In the case of a company having a share capital: (i) not less than one hundred members or not less than one tenth of the total number of members whichever is less; or

(ii) a member or members holding not less than one-tenth of the issued share capital of company provided that the applicants have paid all calls and other sums due on their respective share [Section 399(1)(a)]. It may be noted that joint members are counted as one member. (b) In the case of a company not having a share capital: not less than one-fifth of the total number of members [Section 399(1)(b)]. (c) The Central Government: The Central Government can also apply or authorise a member or members to make an application under Section 397 or 398, though the requisite conditions under [a] and [b] are not satisfied [Section 399(4)]. An application under Section 399(4) must contain the names and addresses of the applicants, the total numbers of applicants, etc., it must be verified by an affidavit. The Central Government may require the applicant to produce documentary evidence in support of the complaint [Section 399(4); Rule 13 of the Companies (Central Govt.’s) General Rules and Forms, 1956]. It may also require the members to give security for costs [Section 399(5)]. 7.5 Difference between Sections 397 and 398: Under Section 397, the existence of

7.4

Corporate and Allied Laws

conditions justifying the making of winding up order on the ground that it is just and equitable that the company should be wound up, is a condition precedent to the interference by the Company Law Board. On the other hand, under Section 398, the C.L.B. would interfere on its being satisfied that by reason of any material changes in the management or control of the company, it is likely that the affairs of the company will be conducted in a manner prejudicial to the interest of the company. The two positions are distinct. Whereas in the first case, the C.L.B. acts to prevent injustice being done to a member or members in his or their individual capacity, in the second case the C.L.B. acts in order to prevent injury being inflicted to the interest of the company as a whole. The material change in the management or control contemplated in the preceding paragraph will be deemed to have taken place in any of the following circumstances, viz.: (i) when there has been alteration in the Board of Directors; (ii) when a replacement of its manager has taken place; (iii) when a change has occurred in the ownership of the shares of the company; (iv) when there has been a change in the membership of a company having no share capital; (v) when a change has taken place in any other manner whatsoever; (vi) by reason of any of the aforesaid changes, the affairs of the company are likely to be conducted in manner prejudicial to public interest or to the interest of the company [Section 398(1)(b)]. Thus on an application made in the foregoing circumstances, the Company Law Board will interfere only if it is of the opinion: (1) When it is made under Section 397: (a) that the company’s affairs are being conducted in a manner oppressive to any member or members [Section 397(2)] or in a manner prejudicial to public interest; and (b) that to wind up the company would unfairly prejudice such member or members but that otherwise the facts would justify the making of a winding up order on “just and equitable” ground. (2) when it is made under Section 398: (a) that affairs of the company are being conducted in a manner prejudicial to the interests of the company [Section 398(1)(a)]; or (b) that a material change has taken place in the management or control of the company and as a consequence the affairs of the company may be conducted in a manner prejudicial to the public interest or in a manner prejudicial to the

Prevention of Oppression and Mismanagement interests of the company [Section 398(1)(b)].

7.5

The Company Law Board may make such order it thinks fit with a view to bringing to an end, or preventing the matters complained or apprehended, as the case may be. (3) Under Section 397, the Company Law Board can end the oppression complained of whereas, under Section 398, it can prevent the matters complained of or apprehended. In other words, only Section 398 is preventive; Section 397 is not. A complaint under Section 398 can be made only by a member or members and not by officers or directors who might be oppressed in these capacities [Elder vs. Elder & Weston Ltd. (1952) 102 Law J. 91; (1952) S.C. 49]. In the aforementioned case, the interpretation of Section 210 of the English Companies Act, 1948, corresponding to Section 397 of our Act, was considered. There it was alleged that the majority of the shareholders of a private company had removed two minority shareholders from their directorship and employment but there was no suggestion of mismanagement to the detriment of the share holders. The Court held that these allegations could not support an application under the Section, which required oppressive conduct to members in their character as members. Such conduct towards a member in any other capacity, e.g., as a director or creditor could not per se justify an application. The “conduct complained of should at the lowest involve a visible departure from the standards of fair dealing and a violation of the conditions of fair play on which every shareholder who entrusts his money to a company, is entitled to rely” (ibid) (per Lord Cooper). 7.6 Powers of the Company Law Board on application under Sections 397 or 398: Without prejudice to the generality of the powers of making any order as it thinks fit under Section 397 or 398 the C.L.B. has, in particular under Section 402, the following powers: (a) to regulate by order the conduct of the company’s affairs in the future; (b) to order the purchase of shares or interest of any member or members of the company by the other members thereof or by the company; (c) in the case of a purchase of shares by the company as aforesaid, to order the consequent reduction of its share capital; (d) to terminate, set aside for modify any agreement, howsoever, arrived at, between the company on the one hand and any of the following persons on the other, namely: (i) the managing director; (ii) any other director; (iii) the manager upon such terms and conditions as may, in the opinion of the Company Law Board be just and equitable in all the circumstances of the case;

7.6

Corporate and Allied Laws

(e) to terminate, set aside or modify any arrangement between the company and any person not referred to above, after giving due notice to, and obtaining the consent of the party concerned; (f) to set aside any transfer, delivery of goods, payment, execution of other act, relating to property made or done by or against the company within 3 months before the date of the application under Section 397 or 398 which would in the case of an individual be deemed in his insolvency to be fraudulent preference; and (g) to deal with any other matter for which, in the opinion of the C.L.B., it is just and equitable that provision should be made. The C.L.B. may make an interim order for regulating the conduct of the company’s affairs, pending the passing by it of a final order under Section 397 or 398 (Section 403). Where an order made under Section 397 or 398 involves an alteration of the memorandum or articles of association of the company, the company shall not have the right to make any alteration therein, subsequently, in a manner which is inconsistent with the order passed by the C.L.B. without its leave (Section 404). Certified copies of the alteration must be filed with the Registrar. Where, an order of the Court under the foregoing Section involves the termination of any of the agreement mentioned herein before, such termination shall not give rise to any claim for damages against the company for loss of office or in any other respect either under the agreement or otherwise. Further, no managing or other directors or manager whose agreement has been terminated or set aside shall, without leave of the C.L.B. be appointed in any of the above capacity in respect of the company for a period of five years from the date of the order. Any contravention of this provision is punishable with imprisonment for a term, which may extend to one year, or with a fine up to Rs. 50,000 or with both. Before leave is granted, the Central Government must be notified and heard (Section 407). 7.7 Powers of the Central Government: Section 408 has vested some powers in the Central Government to prevent oppression or mismanagement. It can exercise these powers on an order of the Company Law Board which is turn will so order on the application of at least 100 members of the company or of members holding at least one tenth of the total voting power therein. But before exercising such powers, it must make such enquiry as it deems fit and be satisfied that it is necessary to exercise its powers in order to prevent the affairs of the company being conducted either in a manner oppressive to any members of the company or in a manner prejudicial to the interests of the company or to public interest. Being thus satisfied, it may appoint such number of persons as the Company Law Board may, by order in writing, specify as being necessary to effectively safeguard the interest of the company, or its shareholders or the public interest, as

Prevention of Oppression and Mismanagement

7.7

directors thereof for such period not exceeding three years at one time as it may think fit [Section 408(1)]. In the alternative, the company may be asked to elect its directors by the system of proportional representation by means of a single transferable vote so that the minority may also have representation in the Board of Directors of the company [Proviso to Section 408]. If the Company Law Board has passed an order the proviso to Section 408(1), it may, should it deem fit, direct that until new directors are appointed pursuant to the aforesaid order, such number of persons as the Company Law Board may, by order in writing, specify as being necessary to effectively safeguard the interest of the company, or its shareholders or the public interest will hold office as additional directors. The Central Government shall appoint such Additional Directors. The director or directors appointed under sub-section (1) or (2) or Section 408 are not liable to retire by rotation as contemplated by Section 255 [Section 408(3)]. These directors are not required to hold any qualification shares; nor are their tenure of office liable to termination by retirement of directors by rotation. These directors may, however, be replaced by some others by the Central Government [Section 408(4)]. No change in the Board of Directors, after a person has been appointed or directed to hold office of a director or additional director under Section 408 shall so long as such director or additional director holds office, be effective unless confirmed by the Company Law Board [Section 408(5)]. On appointing directors or additional directors referred to in the first two sub-sections above, the Central Government may issue such directions to the company as it may consider necessary or appropriate in regard to its affairs. Such directions can be issued notwithstanding anything contained in this Act or in any other law for the time being in force [Section 408(6)]. The Central Government may require these directors or additional directors to report to it from time to time with regard to the affairs of the company [Section 408(5)]. On a complaint being lodged by the managing or any other director or the manager, the Company Law Board is empowered under Section 409 to prevent any change in the Board of Directors, which is likely to affect the company prejudicially. The power conferred by this Section, however, cannot be exercised in relation to a private company, unless it is a subsidiary of a public company. 7.8 General observations on remedy for oppression under Sections 397 and 398: The remedy available under Section 397 of the Companies Act, 1956, can be invoked only when the affairs of the company are being conducted in a manner oppressive to a shareholder or shareholders. Likewise, the remedy available under Section 398 can be

7.8

Corporate and Allied Laws

invoked only when the affairs of the company are being conducted in a manner prejudicial to the interest of the company. These two Sections clearly postulate that at the time application is made, there must be a continuing course or conduct of the affairs the company, which is oppressive to any shareholder or shareholders or prejudicial to the interest of the company. It is this course of oppressive or prejudicial conduct, which can be made the subject matter of a complaint in the application. The forgoing provisions of law do not confer any power on the Company Law Board to set aside or interfere with past and concluded transactions between the company and the shareholders or third parties which are no longer continuing wrongs or to award a compensation to the company for the aggrieved shareholders in respect of such transactions [Seth Mohanlal Ganpatram vs. Shri Satyaji Jubilee Cotton and Jute Mills Co. Ltd. (1964) 34 Comp. Cas 777]. There are only two cases in which, on the application under Section 397 or 398 of the Companies Act, 1956 the Company Law Board is empowered to give relief in respect of past and concluded transactions which are no longer continuing wrongs; they are really in the nature of exceptions to the general principles as stated above. Firstly, Section 402(f) enables the Company Law Board to set at naught transactions amounting to fraudulent preference, effected within three months before the date of the application under Section 397 or 398 even though they are no longer continuing wrongs. Secondly, Section 406 of the Companies Act, 1956, read with Section 543 of that Act set forth in Schedule XI enables Company Law Board on an application under Section 397 or 398 to bring to book delinquent directors, managers and other office-bearers of the company and to enforce the company’s claim against them if they have misapplied or retained company’s money or have committed any misfeasance or breach of trust in relation to the company [Seth Mohanlal Ganpatram vs. Shri Satyaji Jubilee Cotton and Jute Mills Co. Ltd. and others, ibid]. Persons who hold majority of beneficial interest but minority of voting power, can complain of oppression which term includes not merely obtaining unfair pecuniary advantage but also an over whelming desire for power (re Hammer Ltd. 109 L.J. 24 C.A.). The remedy available is analogous to that of winding up and, consequently, Section 406 provides that Sections 439 to 544 shall only apply to companies in respect of which application has been made under Section 397 or 398 in form set forth in Schedule XI. Before seeking a winding up, a member must exhaust his remedy under Section 397 [See Section 433(f)]. 7.9 Distinction between various remedies for oppressions: The remedies available are: (i) suit for injunction and declaration by the minority shareholders who have been oppressed by an infringement of class rights, etc. This is an exception to the rule in Foss vs. Harbottle, 2 Hare 461 that in respect of wrong done to the company, only company can sue; (ii) winding-up petition; (iii) relief under Section 397 or 398. Remedy (i) applies

Prevention of Oppression and Mismanagement

7.9

where wrong consists of single act or acts and it has not been the course of a conduct. Remedies (ii) and (iii) apply where wrong is the outcome of a course of conduct and not due to an individual act. The oppressed shareholder must act reasonably exhausting the remedy (iii) before remedy (ii) can be availed of. 7.10 POWERS OF CENTRAL GOVERNMENT PERSONNEL ON THE RECOMMENDATION OF CLB TO REMOVE MANAGERIAL

The powers of the Company Law Board to remove a director of a company are contained in Sections 388B to 388E of Companies Act. The Central Government may state a case against any of the managerial personnel of a company and refer the case to the Company Law Board with a request that the Company Law Board may inquire into the case and record a finding whether or not he is fit and proper person to hold the office of director or any other office connected with the conduct and management of the company. The Central Government may exercise this power where in its opinion there are circumstances suggesting: (i) that any person concerned in the conduct and management of the affairs of a company is or has been in connection there with guilty of fraud, misfeasance, persistent negligence or default in carrying out his obligations and functions under the law, or (ii) that the business of a company is not or has not been conducted and managed by such person in accordance with sound business principles or prudent commercial practices; or (iii) that a company is or has been conducted and managed by such person in a manner which is likely to cause, or has caused, serious injury or damage to the interest of the trade, industry or business to which such company pertains; or (iv) that the business of a company is or has been conducted and managed by such person with intent to defraud its creditors, members or any other person or otherwise for a fraudulent or unlawful purpose or in a manner prejudicial to public interest [Section 388B(1)]. Every case under sub-section (1) shall be stated in the form of an application which shall be presented to the Company Law Board or such officer thereof as it may appoint in this behalf [Section 338B(2)]. The person against whom a case is referred to the Company Law Board under this section shall be joined as a respondent to the application [Section 388B(3)]. The application made to the C.L.B. must contain a concise statement of the circumstances and material as the Central Government may consider necessary for the purpose of the enquiry, and be

7.10

Corporate and Allied Laws

signed and verified in the manner laid down in the Civil Procedure Code, for the signature and verification of a plaint in a suit by the Central Government [Section 388B(4)]. The Company Law Board may, on the application of the Central Government, or on its own motion, by an interim order direct that the respondent shall not discharge any of the duties of his office until further orders of the Company Law Board; and appoint a suitable person in place of the respondent [Section 388C(1)]. Such appointee shall be deemed to be a public servant within the meaning of Section 21 of the Indian Penal Code [Section 388C(2)]. At the conclusion of the hearing of the case the Company Law Board must record its findings (Section 388D). If the finding of the Company Law Board is against the respondent the Central Government, by order, shall remove him from office [Section 388(1)]. The person against whom order of removal from office is made must not hold the office of a director or any other office connected with the conduct and management of affairs of the company for a period of 5 years from the date of the order of removal. The Central Government may, with the previous concurrence of the Company Law Board, remit or relax this period of 5 years [Section 388E(3)]. On the removal of a person from office in the above manner, no compensation in any circumstance whatever is payable to him for the loss or termination of office [Section 388E(4)]. The company may, with the previous approval of the Government, appoint another person to the office in place of the person removed [Section 388E(5)]. 7.11 CONCEPT OF PUBLIC INTEREST AND ITS IMPINGEMENT ON COMPANY LAW The expression “public interest” is an elusive abstraction; it means general welfare of the society or “regard for social good” and predicates interest of the general public in matters where regard for the social good is of the first moment. A thing is said to be in public interest where it is or can made to appear to be contributive to the general welfare rather than to the special privileges of a class, group or individual. In common parlance, it is assumed to denote the interest to the community or nation as a whole as well as the State Government, which represents it. “The expression is not capable of precise definition and has not a rigid meaning, and is elastic and takes its colours from the statute in which it occurs, the concept varying with the time and state of society and its needs. Thus, what is ‘public interest’ today may not be so considered a decade later. In any case, the expression cannot be considered in vacuum but must be decided on the facts and circumstance”. [Per Chief Justice Mahajan in State of Bihar vs. Kameshwar, A.I.R. 1952 SC 252]. Since the concept of public interest is bound to undergo frequent changes with a change

Prevention of Oppression and Mismanagement

7.11

in our social, political and economic values, no hard and fast definition can be and actually has been, laid down by the Act. Whatever furthers the general interests of the community as opposed to the particular interest of the individual (a company formed and registered under the Act is a legal person) is to be considered as “public interest”, i.e., an interest in which the community is directly and vitally concerned. A survey of the provisions of the Act would reveal the truth of the statement that the concept of public interest has been making rapid in-roads into the Indian Company Law, e.g., Sections 396, 397, 398, 408, 637A etc.; Schedule VI also being intended to safeguard public interest. A survey of the provisions of the Act would reveal the truth of the statement that concept of “public interest” has been making rapid in roads into the Indian Company Law: (i) Section 396, as you have seen earlier, empowers the Central Government to provide for compulsory amalgamation of companies (notwithstanding anything contained in Sections 394 and 395) into a single company in the public interest. It may be noted that the expression “national interest” was used in 1956. The Amendment Act of 1960 brought the substitution of ‘public interests’ for ‘national interest’ into effect. The Indian Companies Act, 1913 contained no provisions akin to those of Section 396. Therefore, the Companies Act, 1956, made such provision in the Company Law for the first time. You have read in your Study Paper on Auditing that Section 211(3) empowers the Central Government to exempt any class of companies from compliance with any of the requirements in Schedule VI pertaining to form and contents of balance sheet and profit and loss account if, in its opinion, it is necessary to grant the exemption in the “public interest”. [The Amendment Act, 1960 has substituted the expression “public interest” for “national interest”]. The annual statements of account (in the form set out in Schedule VI) of a public company and its subsidiary companies are public documents (In the case of a private company, the profit and loss account is not a public document). The Companies Act, 1956 has laid down minimum information, which is to be disclosed in these statements along with general principle that it must exhibit a true and fair picture. The information now required to be given is much more than under the Indian Companies Act, 1917. The purpose behind this is, undoubtedly, the safeguarding of the public interest. There may be a case where a transfer of shares in a company has taken place or is likely to take place and, as a result thereof a change in the composition of the Board of directors is likely to take place; and further such a situation (in the Govt’s opinion) may be prejudicial to the public interest. In such a case, the Central Government is

(ii)

(iii)

(iv)

7.12

Corporate and Allied Laws empowered, under Sections 250(3) and (4) to impose restrictions on such transfers e.g. the voting rights in respect of such shares shall not be exercisable for the period specified not exceeding three years the resolution approving the transfer of such shares should first be sanctioned by the Government in order to be effective. Thus, the Amendment Act of 1960 has extended the provisions of Section 250 in public interest also. Mention of ‘public interest’ in the context of restriction on transfer of shares is also made in Sections 108B, 108C and 108D.

(v)

Under Section 397, the member of a company has given the right to file an application to the Company Law Board for appropriate relief where the affairs of the company are being conducted, inter alia, in a manner prejudicial to public interest provided the requirements of Section 399 are fulfilled. Under Section 398, the shareholder company can file an application to the Company Law Board for relief in cases (a) where the affairs of the company are being conducted in a manner prejudicial to interest.

(vi)

(vii) Under Section 408, the Central Government is empowered to appoint such number of persons as the Company Law Board may, by order in writing specify being necessary to hold office as directors in the company to effectively safeguard public interest (besides the interest of the company or its shareholders). Such an order may be made on a reference made to it by the Central Government or on an application of not less than 100 members of the company or of the members holding 1/10th of the total voting power therein. (viii) Under Section 394(1) of the Companies Act, 1956, the Court has been empowered: (a) to refuse its sanction to any compromise or arrangement in connection with a scheme for the amalgamation of a company which is being wound up, with another company where it receives a report from the Company Law Board or the Registrar that the affairs of the company have been conducted inter alia in a manner prejudicial to public interest; and (b) to refuse the dissolution of any transferor company under clause (iv) of Section 394(1) where it receives a report from the Official Liquidator (on security of the books and papers of the company) that the affairs of the company have been conducted, inter alia in a manner prejudicial to public interest. (ix) The office of public trustee has been set up so as to enable him to take over the voting rights of shares and debentures held in trust from their trustees to be exercised in such manner as he may determine (Sections 153A and 158B). The object of this was to ensure that voting powers attaching to funds held in trust for

Prevention of Oppression and Mismanagement

7.13

the company or the public were exercised to promote the public interest and not to further those of private individuals who had formed tax-free trusts ostensibly for ‘public motives’. (x) The object of Sections 13(c) and (d) (as amended in 1965 on the recommendation of the Vivian Bose Enquiry Commission and endorsement of the recommendation by the Daftary Shastri Committee is to enable shareholders and others interested to form a clear idea of the main object and other objects. This amendment, in combination with Section 149(2A) which requires that whenever a company embarks on any kind of business activity regarding “other objects” the sanction of the company by special resolution must be obtained, will give the shareholders an opportunity to know for themselves the actual business which the company is carrying on or proposes to carry on. This is likely to put a positive check on the public money being jeopardised. The evasion of income-tax or super tax is a matter of public interest, benami shareholding and shareholding in the names of fictitious or non-existing persons were once very common because in such cases tax might be evaded and the revenue could be defrauded in cases where the super-tax limit was reached. To check such practice, Section 68A has been incorporated in the Act, rendering it a punishable offence for a person to apply for or get an allotment of share or get a transfer of shares registered in the names of fictitious or non-existing persons of benamidars. Further, to check such practice, both the benamidars and the holder of beneficial interest in a share have to make declarations under Section 187C (introduced by the Amendment Act, 1974).

(xi)

The Central Government is empowered to state a case against managerial personnel to the Company Law Board under Section 388B where the circumstances suggest the company is or has been conducted and managed by such person in a manner which is likely to cause or has caused serious injury or damage to the interests of trade, industry or business to which such company pertains {vide} Amendment Act of 1988. 7.12 SELF-EXAMINATION QUESTIONS 1. (a) When oppression or mismanagement is complained of, can the Central Government apply to the Company Law Board for redress? (b) Can it also authorise a person or a member to make an application? 2. Answer the following questions: (a) In the case of application for oppression, can the Company Law Board interfere, if the conditions, warranting a winding up order on just and equitable ground, do

7.14

Corporate and Allied Laws not exist? (b) If the conditions referred to in (a) exist and the winding up of the company would not unfairly prejudice the member or members, can the Company Law Board interfere? (c) Can the Company Law Board make an interim order for regulating the conduct of the company’s affairs, pending the final order under Section 397 or 398? (d) Can the Company Law Board, in the case of oppression and mismanagement, set aside or interfere with past and conclude transactions between the company and the shareholders or third parties which are no longer continuing wrong? (e) Are there any exceptions to rule underlying (b) above?

7.13 ANSWERS TO SELF-EXAMINATION QUESTIONS 1. (a) Yes; (b) Yes; 2. (a) No; (b) No; (c) Yes; (d) No; (e) Yes; 406 Section 402(f) read with Section 543 in the modified form set forth in Schedule XI.

8
(H) REVIVAL AND REHABILITATION OF SICK INDUSTRIAL COMPANIES
8.0 DEFINITIONS

Sick Industrial Company Sick Industrial Company means an industrial undertaking which has (i) (ii) the accumulated losses in any financial year equal to fifty per cent or more of its average net worth during four years immediately preceding such financial year; or failed to repay its debts within any three consecutive quarters on demand made in writing for its repayment by a creditor or creditors of such company.

Industrial undertaking “industrial undertaking” means any undertaking, pertaining to any industry carried on in one or more factories or units by any company, as defined in clause (aa) of section 3 of the Industries (Development and Regulation) Act, 1951 (65 of 1951) but does not include a small-scale industrial undertaking as defined in clause (j) of that section [Section 2 (19AB)] Net Worth “Net worth” means the sum total of the paid-up capital and free reserves after deducting the provisions or expenses as may be prescribed. Explanation.—For the purposes of this clause, “free reserves” means all reserves created out of the profits and share premium account but does not include reserves created out of revaluation of assets, write back of depreciation provisions and amalgamation [Section 2 (29A)]. Operating Agency “operating agency” means any group of experts consisting of persons having special knowledge of business or industry in which the sick industrial company is engaged and

8.2

Corporate and Allied Laws

includes public financial institution, State level institution, scheduled bank or any other person as may be specified as the operating agency by the Tribunal [Section 2 (31AA)] Industrial Company “industrial company” means a company which owns one or more industrial undertakings [Section 2 (19AA)] 8.1 8.1.1 PROCEDURE FOR REVIVAL AND REHABILITATION Reference to Tribunal

(a) The Board of directors of a sick industrial company shall make a reference to the Tribunal and prepare a scheme of its revival and rehabilitation. (b) Such a reference shall be made to the Tribunal along with an application containing such particulars as may be prescribed, for determination of the measures which may be adopted with respect to such company: (c) The application shall be accompanied by a certificate from an auditor or from a panel of auditors prepared by the Tribunal indicating— (a) the reasons of the net worth of such company being fifty per cent or less than fifty per cent; or (b) the default in repayment of its debt making such company a sick industrial company, as the case may be. (d) The provisions of Section 424A (i) shall not apply to a Government company:

(e) However a Government company may, with the prior approval of the Central Government or a State Government, as the case may be, make a reference to the Tribunal in accordance with the provisions of this sub-section and thereafter all the provisions of this Act shall apply to such Government company: (f) In case any reference had been made before the Tribunal and a scheme for revival and rehabilitation submitted before the commencement of the Enforcement of Security Interest and Recovery of Debts Laws (Amendment) Act, 2004, such reference shall abate if the secured creditors representing three-fourth in value of the amount outstanding against financial assistance disbursed to the borrower have taken measures to recover their secured debt under sub-section (4) of section 13 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (54 of 2002) : (g) No reference shall be made to the Tribunal under Section 424A (i) if the secured creditors representing three-fourth in value of the amount outstanding against financial assistance disbursed to the borrower have taken measures to recover their secured debt

Revival and Rehabilitation of Sick Industrial Companies

8.3

under sub-section (4) of section 13 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (54 of 2002). (h) The Central Government or the Reserve Bank or a State Government or a public financial institution or a State level institution or a scheduled bank without prejudice to the provisions contained in Section 424A (1), may if it has sufficient reasons to believe that any industrial company has become, for the purposes of this Act, a sick industrial company, make a reference in respect of such company to the Tribunal for determination of the measures which may be adopted with respect to such company: (i) A reference shall not be made under Section 424A (1) in respect of any industrial company by— (a) the Government of any State unless all or any of the industrial undertakings belonging to such company are situated in such State; (b) a public financial institution or a State level institution or a scheduled bank unless it has, by reason of any financial assistance or obligation rendered by it, or undertaken by it, with respect to such company, an interest in such company. (j) A reference under Section 424A (1) or (3) shall be made to the Tribunal within a period of one hundred and eighty days from the date on which the Board of directors of the company or the Central Government or the Reserve Bank of India or a State Government or a public financial institution or a State level institution or a scheduled bank, as the case may be, come to know, of the relevant facts giving rise to causes of such reference or within sixty days of final adoption of accounts, whichever is earlier. (k) The Tribunal may, on receipt of a reference, pass an order as to whether a company in respect of which a reference has been made has become a sick industrial company and such order shall be final. 8.2 INQUIRY INTO WORKING OF SICK INDUSTRIAL COMPANIES (SECTION 424B)

(a) The Tribunal may make such inquiry as it may deem fit for determining whether any industrial company has become a sick industrial company— (a)upon receipt of a reference with respect to such company under section 424A; or (b)upon information received with respect to such company or upon its own knowledge as to the financial condition of the company. (b) The Tribunal may, if it deems necessary or expedient so to do for the expeditious disposal of an inquiry, require by order any operating agency to enquire into the scheme for revival and make a report with respect to such matters as may be specified in the order.

8.4

Corporate and Allied Laws

(c) The operating agency shall complete its inquiry as expeditiously as possible and submit its report to the Tribunal within twenty-one days (extendable to forty days with reasons with reasons to be recorded in writing) from the date of such order: (d) The Tribunal shall conclude its enquiry as expeditiously as possible and pass final orders in the proceedings within sixty days extendable to ninety days with reasons with reasons to be recorded in writing) from the commencement of the inquiry. An inquiry shall be deemed to have commenced upon the receipt by the Tribunal of any reference or information or upon its own knowledge reduced to writing by the Tribunal. (e) Where the Tribunal deems it fit to make an enquiry or to cause an inquiry to be made into any industrial company, as the case may be, it may appoint one or more persons who possess knowledge, experience and expertise in management and control of the affairs of any other company to be a special director or special directors on the board of such industrial company on such terms and conditions as may be prescribed for safeguarding its financial and other interests or in the public interest. (f) The special director or special directors appointed for the purpose shall submit a report to the Tribunal within sixty days from the date of appointment of such director or directors about the state of affairs of the company in respect of which reference has been made and such special director or directors shall have all the powers of a director of a company under this Act, necessary for discharge of his or their duties. (g) The Tribunal may issue such directions to a special director appointed as it may deem necessary or expedient for proper discharge of his duties. (h) The appointment of a special director shall be valid and effective notwithstanding anything to the contrary contained in any other provision of this Act or in any other law for the time being in force or in the memorandum and articles of association or any other instrument relating to the industrial company, and any provision regarding share qualification, age limit, number of directorships, removal from office of directors and such like conditions contained in any such law or instrument aforesaid, shall not apply to any special director or directors appointed by the Tribunal. (i) Any special director appointed, shall—

(a)hold office during the pleasure of the Tribunal and may be removed or substituted by any person by order of the Tribunal; (b)not incur any obligation or liability by reason only of his being a director or for anything done or omitted to be done in good faith in the discharge of his duties as a director or anything in relation thereto;

Revival and Rehabilitation of Sick Industrial Companies

8.5

(c)not be liable to retirement by rotation and shall not be taken into account for computing the number of directors liable to such retirement; (d)not be liable to be prosecuted under any law for anything done or omitted to be done in good faith in the discharge of his duties in relation to the sick industrial company. 8.3 POWERS OF TRIBUNAL TO MAKE SUITABLE ORDER ON COMPLETION OF INQUIRY (SECTION 424C) (a) If after making an inquiry under section 424B, the Tribunal is satisfied that a company has become a sick industrial company, the Tribunal shall, after considering all the relevant facts and circumstances of the case, decide, as soon as may be, by an order in writing, whether it is practicable for the company to make its net worth exceed the accumulated losses or make the repayment of its debts referred to in clause (b) of sub-section (2) of section 424A within a reasonable time. (b) If the Tribunal decides that it is practicable for a sick industrial company to make its net worth exceed the accumulated losses or pay its debt referred to in that sub-section within a reasonable time, the Tribunal shall, by order in writing and subject to such restrictions or conditions as may be specified in the order, give such time to the company as it may deem fit to make its net worth exceed the accumulated losses or make repayment of the debts. (c) If the Tribunal decides that it is not practicable for a sick industrial company to make its net worth exceed the accumulated losses or make the repayment of its debts within a reasonable time and that it is necessary or expedient in the public interest to adopt all or any of the measures specified in section 424D in relation to the said company it may, as soon as may be, by order in writing, direct any operating agency specified in the order to prepare, having regard to such guidelines as may be specified in the order, a scheme providing for such measures in relation to such company. (d) The Tribunal may, if any of the restrictions or conditions specified in an order made under sub-section (2) are not complied with by the company concerned, or if the company fails to revive in pursuance of the said order, review such order on a reference in that behalf from any agency referred to in sub-section (3) of section 424A or on its own motion and pass a fresh order in respect of such company under sub-section (3) and if the operating agency specified in an order made under sub-section (3) makes a submission in that behalf, review such order and modify the order in such manner as it may deem appropriate. 8.4 PREPARATION AND SANCTION OF SCHEMES (SECTION 424D)

(a) Where an order is made under sub-section (3) of section 424C in relation to any sick industrial company, the operating agency specified in the order shall prepare as expeditiously

8.6

Corporate and Allied Laws

as possible and ordinarily within a period of sixty days (extendable to ninety days with reasons with reasons to be recorded in writing) from the date of such order, having regard to the guidelines framed by the Reserve Bank of India in this behalf, a scheme with respect to such company providing for any one or more of the following measures, namely:— (a) the financial reconstruction of such industrial company; (b) the proper management of such industrial company by change in, or take over of, the management of such industrial company; (c) the amalgamation of— (i) (ii) such industrial company with any other company; or any other company with such industrial company (hereafter in this section, in the case of sub-clause (i), the other company, and in the case of sub-clause (ii), such industrial company, referred to as “transferee company”);

(d) the sale or lease of a part or whole of any industrial undertaking of such industrial company; (e) the rationalisation of managerial personnel, supervisory staff and workmen in accordance with law; (f) such other preventive, ameliorative and remedial measures as may be appropriate; (g) repayment of debt; (h) such incidental, consequential or supplemental measures as may be necessary or expedient in connection with or for the purposes of the measures specified in clauses (a) to (g): (b) The scheme may provide for any one or more of the following, namely:— (a) the constitution, name and registered office, the capital, assets, powers, rights, interests, authorities and privileges, duties and obligations of the sick industrial company or, as the case may be, of the transferee company; (b) the transfer to the transferee company of the business, properties, assets and liabilities of the sick industrial company on such terms and conditions as may be specified in the scheme; (c) any change in the Board of directors, or the appointment of a new Board of directors, of the sick industrial company and the authority by whom, the manner in which and the other terms and conditions on which, such change or appointment shall be made and in the case of appointment of a new Board of directors or of any director, the period for which such appointment shall be made;

Revival and Rehabilitation of Sick Industrial Companies

8.7

(d) the alteration of the memorandum or articles of association of the sick industrial company or, as the case may be, of the transferee company for the purpose of altering the capital structure thereof, or for such other purposes as may be necessary to give effect to the reconstruction or amalgamation; (e) the continuation by or against the sick industrial company or, as the case may be, the transferee company of any action or other legal proceeding pending against the sick industrial company immediately before the date of the order made under sub-section (3) of section 424C; (f) the reduction of the interest or rights which the shareholders have in the sick industrial company to such extent as the Tribunal considers necessary in the interests of the reconstruction, revival or rehabilitation or repayment of debts of such sick industrial company or for the maintenance of the business of such industrial company;

(g) the allotment to the shareholders of the sick industrial company, of shares in such company or, as the case may be, in the transferee company and where any shareholder claims payment in cash and not allotment of shares or where it is not possible to allot shares to any shareholder, the payment of cash to those shareholders in full satisfaction of their claims— (i) (ii) in respect of their interest in shares in the sick industrial company before its reconstruction or amalgamation; or where such interest has been reduced under clause (f) in respect of their interest in shares as so reduced;

(h) any other terms and conditions for the reconstruction or amalgamation of the sick industrial company; (i) sale of the industrial undertaking of the sick industrial company free from all encumbrances and all liabilities of the company or other such encumbrances and liabilities as may be specified, to any person, including a co-operative society formed by the employees of such undertaking and fixing of reserve price for such sale; lease of the industrial undertaking of the sick industrial company to any person, including a co-operative society formed by the employees of such undertaking;

(j)

(k) method of sale of assets of the industrial undertaking of the sick industrial company such as by public auction or by inviting tenders or in any other manner as may be specified and for the manner of publicity therefor; (l) issue of the shares in the sick industrial company at the face value or at the intrinsic value which may be at discount value or such other value as may be specified to any

8.8

Corporate and Allied Laws industrial company or any person including the executives and employees of such sick industrial company;

(m) such incidental, consequential and supplemental matters as may be necessary to secure that the reconstruction or amalgamation or other measures mentioned in the scheme are fully and effectively carried out. (c) (i) Scrutiny of the Scheme The scheme prepared by the operating agency shall be examined by the Tribunal and a copy of the scheme with modification, if any, made by the Tribunal shall be sent, in draft, to the sick industrial company and the operating agency and in the case of amalgamation, also to any other company concerned, and the Tribunal may publish or cause to be published the draft scheme in brief in such daily newspapers as the Tribunal may consider necessary, for suggestions and objections, if any, within such period as the Tribunal may specify.

(ii) The complete draft scheme shall be kept at the place where registered office of the company is situated or at such places as mentioned in the advertisement. (iii) The Tribunal may make such modifications, if any, in the draft scheme as it may consider necessary in the light of the suggestions and objections received from the sick industrial company and the operating agency and also from the transferee company and any other company concerned in the amalgamation and from any shareholder or any creditors or employees of such companies: Where the scheme relates to amalgamation, the said scheme shall be laid before the company other than the sick industrial company in the general meeting for the approval of the scheme by its shareholders and no such scheme shall be proceeded with unless it has been approved, with or without modification, by a special resolution passed by the shareholders of the transferee company. (iv) The sanctioned scheme may thereafter be sanctioned, within sixty days (extendable to ninety days with reasons with reasons to be recorded in writing) by the Tribunal and shall come into force on such date as the Tribunal may specify in this behalf: Different dates may be specified for different provisions of the scheme. (v) The Tribunal may, on the recommendations of the operating agency or otherwise, review any sanctioned scheme and make such modifications as it may deem fit or may by order in writing direct any operating agency specified in the order, having regard to such guidelines including the guidelines framed by the Reserve Bank of India in this behalf in order to prepare a fresh scheme providing for such measures as the operating agency may consider necessary.

Revival and Rehabilitation of Sick Industrial Companies

8.9

(vi) When a fresh scheme is prepared, the provisions of sub-sections (3) and (4) of Section 424D shall apply in relation thereto as they apply to in relation to a scheme prepared under section 424D(1). (vii) Where a sanctioned scheme provides for the transfer of any property or liability of the sick industrial company in favour of any other company or person or where such scheme provides for the transfer of any property or liability of any other company or person in favour of the sick industrial company, then, by virtue of, and to the extent provided in, the scheme, on and from the date of coming into operation of the sanctioned scheme or any provision thereof, the property shall be transferred to, and vest in, and the liability shall become the liability of, such other company or person or, as the case may be, the sick industrial company. (viii) The sanction accorded by the Tribunal shall be conclusive evidence that all the requirements of this scheme relating to the reconstruction or amalgamation, or any other measure specified therein have been complied with and a copy of the sanctioned scheme certified in writing by an officer of the Tribunal to be a true copy thereof, shall, in all legal proceedings (whether in appeal or otherwise), be admitted as evidence. (ix) A copy of the sanctioned scheme shall be filed with the Registrar within the prescribed time by the company in respect of which such scheme relates. (x) On and from the date of the coming into operation of the sanctioned scheme or any provision thereof, the scheme or such provision shall be binding on the sick industrial company and the transferee company or, as the case may be, the other company and also on the shareholders, creditors and guarantors and employees of the said companies. (xi) The creditors of a sick industrial company may also prepare a scheme for revival or rehabilitation of such sick industrial company and submit the same to the Tribunal for its sanction: No scheme shall be submitted by the creditors to the Tribunal unless such scheme has been approved by at least three-fourth in value of creditors of the sick industrial company. (xii) All the provisions relating to the preparation of scheme by the operating agency and sanction of such scheme by the Tribunal shall, as far as may be, apply to the scheme referred to in sub-section (11) of Section 424D. (xiii) The scheme referred to in sub-section (11) if sanctioned by the Tribunal shall be binding on all the creditors and on other concerned. (xiv) If any difficulty arises in giving effect to the provisions of the sanctioned scheme, the Tribunal may, on the recommendation of the operating agency or otherwise, by order, do

8.10

Corporate and Allied Laws anything, not inconsistent with such provisions, which appears to it to be necessary or expedient for the purpose of removing the difficulty.

(xv) The Tribunal may, if it deems necessary or expedient so to do, by order in writing, direct any operating agency specified in the order to implement a sanctioned scheme with such terms and conditions and in relation to the sick industrial company as may be specified in the order. (xvi) Where the whole of the undertaking of the sick industrial company is sold under a sanctioned scheme, the Tribunal may distribute the sale proceeds to the parties entitled thereto in accordance with the provisions of section 529A and other provisions of this Act. (xvii) 8.5 The Tribunal may monitor periodically the implementation of the sanctioned scheme. REHABILITATION BY GIVING FINANCIAL ASSISTANCE (SECTION 424E)

(1) Where the scheme relates to preventive, ameliorative, remedial and other measures with respect to the sick industrial company, the scheme may provide for financial assistance by way of loans, advances or guarantees or reliefs or concessions or sacrifices from the Central Government, a State Government, any scheduled bank or other bank, a public financial institution or State level institution or any institution or other authority (any Government, bank, institution or other authority required by a scheme to provide for such financial assistance being hereafter in this section referred to as the person required by the scheme to provide financial assistance) to the sick industrial company. (2) Every scheme shall be circulated to every person required by the scheme to provide financial assistance for his consent within a period of sixty days from the date of such circulation or within such further period, not exceeding sixty days, as may be allowed by the Tribunal and if no consent is received within such period or further period, it shall be deemed that consent has been given. (3) Where in respect of any scheme the consent is given by every person required by the scheme to provide financial assistance, the Tribunal may, as soon as may be, sanction the scheme and on and from the date of such sanction the scheme shall be binding on all concerned. (4) On the sanction of the scheme, the financial institutions and the banks required to provide financial assistance, shall designate by mutual agreement a financial institution and a bank from amongst themselves which shall be responsible to disburse financial assistance by way of loans or advances or guarantees or reliefs or concessions or sacrifices agreed to be provided or granted under the scheme on behalf of all financial institutions and banks concerned.

Revival and Rehabilitation of Sick Industrial Companies

8.11

(5) The financial institution and the bank designated shall forthwith proceed to release the financial assistance to the sick industrial company in fulfilment of the requirement in this regard. (6) Where in respect of any scheme consent is not given by any person required by the scheme to provide financial assistance, the Tribunal may adopt such other measures, including the winding up of the sick industrial company, as it may deem fit. 8.6 ARRANGEMENT FOR CONTINUING OPERATIONS, ETC., DURING INQUIRY (SECTION 424F)

(1) At any time before completion of the inquiry under section 424B, the sick industrial company or the Central Government or the Reserve Bank of India or a State Government or a public financial institution or a State level institution or a scheduled bank or any other institution, bank or authority providing or intending to provide any financial assistance by way of loans or advances or guarantees or reliefs, or concessions to such industrial company may make an application to the Tribunal— (a) agreeing to an arrangement for continuing the operations of the sick industrial company; or (b) suggesting a scheme for the financial reconstruction of the sick industrial company. (2) The Tribunal may, within sixty days of the receipt of the application, pass such orders thereon as it may deem fit. 8.7 WINDING UP OF SICK INDUSTRIAL COMPANY (SECTION 424G)

(1) Where the Tribunal after making inquiry under section 424B and after consideration of all the relevant facts and circumstances and after giving an opportunity of being heard to all concerned parties, is of the opinion that the sick industrial company is not likely to make its net worth exceed the accumulated losses within a reasonable time while meeting all its financial obligations and that the company as a result thereof is not likely to become viable in future and that it is just and equitable that the company should be wound up, it may record its findings and order winding up of the company. (2) For the purpose of winding up of the sick industrial company, the Tribunal may appoint any officer of the operating agency, if the operating agency gives its consent, as the liquidator of such industrial company and the officer so appointed shall for the purpose of the winding up of such sick industrial company, be deemed to be, and have all the powers of, the official liquidator under this Act.

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Corporate and Allied Laws

(3) The Tribunal may cause to be sold the assets of the sick industrial company in such manner as it may deem fit and pass orders for distribution in accordance with the provisions of section 529A, and other provisions of this Act. (4) Without prejudice to the other provisions contained in the Companies Act, 1956 the winding up of a company shall, as far as may be, concluded within one year from the date of the order. 8.8 OPERATING AGENCY TO PREPARE COMPLETE INVENTORY, ETC. (SECTION 424H)

(1) For the proper discharge of the functions of the Tribunal under this Part, the circumstances so require, the Tribunal may, through any operating agency, cause to be prepared— (a) with respect to a company a complete inventory of— (i) (ii) all assets and liabilities of whatever nature; all books of account, registers, maps, plans, records, documents of title or ownership of property and all other documents of whatever nature relating thereto;

(b) a list of shareholders and a list of creditors showing separately in the list of creditors, the secured creditors and unsecured creditors; (c) a valuation report in respect of the shares and assets in order to arrive at the reserve price for the sale of a part or whole of the industrial undertaking of the company or for fixation of the lease rent or share exchange ratio; (d) an estimate of reserve price, lease rent or share exchange ratio; (e) proforma accounts, where no up-to-date audited accounts are available. 8.9 DIRECTION NOT TO DISPOSE OF ASSETS (SECTION 424I)

The Tribunal may, if it is of opinion, that any direction is necessary in the interest of the sick industrial company or creditors or shareholders or in the public interest, by order, direct such company not to dispose of, except with the prior approval of the Tribunal any of its assets during the period of inquiry under section 424B or during the period of preparation or consideration of the scheme under section 424C. 8.10 POWER OF TRIBUNAL TO CALL FOR PERIODIC INFORMATION (SECTION 424J)

On receipt of reference under section 424A, the Tribunal may call for any periodic information from the company as to the steps taken by the company to make its net worth exceed the accumulated losses or to make repayment of its debts referred to in that section, as the case may be, and the company shall furnish such information.

Revival and Rehabilitation of Sick Industrial Companies 8.11 MISFEASANCE PROCEEDINGS SECTION (424K)

8.13

(1) If, in the course of scrutiny or implementation of any scheme or proposal, it appears to the Tribunal that any person who has taken part in the promotion, formation or management of the sick industrial company or its undertaking, including any past or present director, manager or officer or employee of the sick industrial company— (a) (b) has misapplied or retained, or become liable or accountable for, any money or property of the sick industrial company; or has been guilty of any misfeasance, malfeasance or non-feasance or breach of trust in relation to the sick industrial company,

the Tribunal may, by order, direct him to repay or restore the money or property or any part thereof, with or without interest, as it thinks just, or to contribute such sum to the assets of the sick industrial company or the other person, entitled thereto by way of compensation in respect of the misapplication, retainer, misfeasance or breach of trust as the Tribunal thinks just, and also report the matter to the Central Government for any other action which that Government may deem fit. (2) If the Tribunal is satisfied on the basis of the information and evidence in its possession with respect to any person who is or was a director or an officer or other employee of the sick industrial company, that such person by himself or along with others had diverted the funds or other property of such company for any purpose other than a bona fide purpose of the company or had managed the affairs of the company in a manner highly detrimental to the interests of the company, the Tribunal shall by order, direct the public financial institutions, scheduled banks and State level institutions not to provide, during a period of ten years from the date of the order, any financial assistance to such person or any firm of which such person is a partner or any company or other body corporate of which such person is a director (by whatever name called). (3) No order shall be made by the Tribunal against any person unless such person has been given an opportunity for making his submissions. (4) The provisions of Section 424K shall apply notwithstanding that the matter is one for which the person may be criminally liable. 8.12 PENALTY FOR CERTAIN OFFENCES (SECTION 424L) (1) Whoever violates provisions of this Part or any scheme, or any order, of the Tribunal or the Appellate Tribunal or makes a false statement or gives false evidence to the Tribunal or the Appellate Tribunal and attempts to tamper the records of reference or appeal filed under this Act, shall be punishable with simple imprisonment for a term which may extend to three

8.14

Corporate and Allied Laws

years or shall be liable to fine not exceeding ten lakh rupees. (2) No court shall take cognizance of any offence except on a complaint in writing of an officer of the Tribunal or the Appellate Tribunal or any officer of the Central Government authorised by it or any officer of an operating agency as may be authorised in this behalf by the Tribunal or the Appellate Tribunal as the case may be.

9
(I) CORPORATE WINDING UP AND DISSOLUTION
9.0 INTRODUCTION Clarification on Companies (Second Amendment) Act, 2002 [Notification issued by Ministry of Finance and Company Affairs (Department of Company Affairs) vide F. No. 1/1/2003-CL.V dated 9.9.2003]. The Companies (Second Amendment) Act, 2002 (11 of 2003) received the assent of the President of India on 13.1.2003. Government has decided to bring into force the provisions of section 2 and 6 of the Companies (Second Amendment) Act, 2002 (11 of 2003) with effect from 1.9.2003. Notification has been published in the Official Gazette dated 31 st March, 2003 as S.O.344 (E). This has been notified to enable the Government to initiate necessary steps to establish National Company Law Tribunal and make it operational. For the sake of clarity it is stated that this Notification bringing into effect section 6 of the Companies (Second Amendment) Act, 2002 (11 of 2003) will only set in motion all preliminary steps required for establishment of National Company Law Tribunal. Upon establishment of the same a separate Notification regarding constitution of NCLT will be issued. Till such time, jurisdiction of Company Law Board will continue to remain unchanged.” We bring to the attention of students that though the Companies (Second Amendment) Act, 2002 has been passed by the Parliament, only a few provisions (Section 2 and 6) have been notified so far. In other words, despite, the Sick Industrial (Special Provisions) Act, 1985 [SICA] has been repealed, all the provisions of the said Amendment Act, 2002 have not come into force. The reason being though the Government has constituted the National Company Law Tribunal (NCLT) which shall deal with winding-up and rehabilitation of sick companies it has not yet become operational. In view of the above situation, the provisions relating to winding-up of companies as contained in the legislation prior to the amendment are still having relevance and in view of the fact that entire provisions of the Companies (Second Amendment) Act, 2002 have

9.2

Corporate and Allied Laws

not come into force. Yet the new law has been incorporated in this study material to the extent possible. 9.1 DISSOLUTION OF COMPANY 9.1.1 How dissolution is brought about: A company, being a body corporate, continues in existence until it is dissolved according to law. Dissolution can be brought about in the following ways. a. By removal of the company’s name from the register by the Registrar (without winding-up order) (Section 560): A defunct company is a company which has not been legally dissolved, and the name of which continues on the Register of Companies maintained in the Registrar’s office. Where the Registrar has a reasonable ground to believe that a company is not carrying on business or is not in operation he must send to the company a letter through post enquiring if it is carrying on business or is in operation. If no reply is received by him within one month, the Registrar, within 14 days after the expiry of the period of one month, must send to the company a registered letter referring to the first letter and state that no answer thereto has been received and further stating that if no answer is received to the second letter within one month of the date thereof, a notice will be published in the Official Gazette with a view to striking the companies name off the register. If the Registrar either gets a reply to the effect that it is not carrying on business or is not in operation, or does not within one month, after the second letter, receive any reply, he may publish in the Official Gazette and send to the company by registered post a notice that at the expiry of a period of three months from the date of the notice, the name of the company will, unless cause is shown to the contrary, be struck off the Register and the company will be dissolved. If the Registrar has reason to believe either that no liquidator is acting or that the affairs of the company have been completely wound up, and any returns required to be made by the liquidator have not been made for consecutive six months, the Registrar must publish in the Official Gazette and send to the company a similar notice. When the time stipulated in such notice expires, the Registrar may, unless cause to the contrary is previously shown, strike its name off the Register and publish notice thereof in the Official Gazette, whereupon the company shall stand dissolved. But the liability (if any) of every director, manager or other officer who was exercising and power of management and of every member of the company, shall continue, This liability may be enforced as if the company had not been dissolved. Also, the aforesaid provisions will not affect the power of the Tribunal to wind up a company the name of which has been struck off the register. b. By order of the Tribunal or the order of the Central Government under Section 396: A company whose undertaking is being transferred to another company under a scheme in accordance with Section 394 may be dissolved by an order of the Tribunal [Section 394 (1) (iv)].

Corporate Winding-up and Dissolution

9.3

The dissolution of existing two or more companies may take place when the Central Government, by virtue of Section 396, orders the amalgamation of the said existing companies in to a new single company in the public interest. c. By winding- up : This method is by far the most common one and is followed when for any reason other than those mentioned above, the company’s existence is not desired or cought to be terminated e.g., because the object for which the company had been formed has been accomplished, or because the company is insolvent. Effect of dissolution: “The dissolution puts an end to the existence of the company. Unless and until it has been set aside, it prevents any proceeding being taken against promoters, directors, or officers of the company to recover money or property due or belonging to the company, or to prove a debt due from the company. Where, the company is dissolved, the statutory duty of the liquidator towards the creditors and contributories is gone; but if he has committed a breach of his duty to any creditor by distributing the assets without complying with the requirements of the Act, he is liable to damages to the creditor”. (Halsbery’s Laws of England, 3rd Edn. Vol. VI, Page, 370); Kanhaiya Lal Bhargava vs. Official Liquidator (1965) 35 Comp. Cas. 340) Revival of company after dissolution: Where a company has been struck off the register, the company, or any member or creditor who feels aggrieved, may, within 20 years from the gazetting of the notice, apply to the Tribunal to have the company restored to the register. If the Tribunal is satisfied that the company was carrying on business or was in operation when struck off or that it is otherwise just that it be restored to the register, it may make an order accordingly. When a certified company of this order is delivered to the Registrar for registration, the company would be deemed to have continued in existence as if its name had not been struck off. A letter or notice referred to above may be addressed to the company at its registered office. If there is no such office, it may be addressed to the company to the care of some director or other officer of the company. If there is no such director or officer whose name and address is known to the Registrar, it may be sent to each of the persons who subscribed to the memorandum at the address mentioned in the memorandum [Section 560]. f. Revival of defunct company under Section 560 and dissolved company under Section 559 : Section 559 (i) Application for revival must be presented by the liquidator or other person who appears to the Tribunal to be interested. Section 560

d.

e.

(ii) Limitation period for application is 2 years of the date of the dissolution.

9.4

Corporate and Allied Laws (iii) Acts done after dissolution and before revival are not validated by order of revival.

9.1.2 Distinction between winding-up and dissolution: These two situations differ from each other in following respects: (i) Winding- up precedes dissolution. In the former case, the company still remains in existence, while the latter implies that the company is not extant any more (Employer’s Liabilities Assurance Corporation vs. Sedwitck........ Co., 1927 A.G.95).

(ii) Winding-up denotes and involves the liquidator’s acts of realising and collecting the assets of the company, satisfying its debts and obligations, distributing its capital and surplus assets among the members of the company. But dissolution comes after the liquidator has done all this in the winding-up; ordinarily it implies that the company’s affairs have been completely wound-up and that the company is no longer in existence [Kanhaiya Lal Bhargava’s, Case / (1965) /35 Comp. Cas. 340]. (iii) The Liquidator, in the case of a winding- up, is the representative of the company on behalf of which he in appointed, but on dissolution he cannot nay more represent a person not in existence. In the first case any creditor can prove a debt due to him from the company, while it is not possible to do so after dissolution (Kanhaiya Lal’s Case Supra). 9.1.3 Implications of Winding-up: Winding- up more popularly known as liquidation of a company, relate to the proceedings by which (a) all its affairs are wound up, (b) its rights and liabilities are discerned, and (c) the claims of its creditors are settled either fully or to such an extent as may be warranted by the assets of the company. Having met all the obligations of the company out of the assets realised, the surplus assets of the company, if there be any, are distributed among its members in proportion to their rights laid down by the articles of association. On this being done and on compliance with certain other statutory requirements, the company is said to have been dissolved. The term ‘winding-up’ should not be construed as synonymous with ‘bankruptcy’. In the matter of winding-up, the general rule is that a company may be wound if its members so desire or if it cannot pay its debts or if its extinction is considered desirable on any account. It thus follows that a company may be wound up even if it is otherwise solvent, for instance, winding- up for purposes of reconstruction. Where a solvent company is being wound up, all debts payable on a contingency and claims against the company, present or future, certain or contingent, ascertained or sounding only in, damages, are admissible to proof against the company, a just estimate being made, as far as possible, of the value of such debts or claims as may be subject to any contingency, or may sound only in damages, or for some other reason may not bear a certain value [Section )(528)]. As regards the right of the creditors of the company which is being wound up for its inability to pay its debts, the same rules prevail as in the case of insolvency law in respect of debts provable, the valuation of annuities and future and contingent liabilities and the respective rights of secured and unsecured creditors (Section 529).

Corporate Winding-up and Dissolution

9.5

Secured creditors may rely on the security and ignore the liquidation altogether, or value their security and prove for the balance of their debt, or give up their security and prove for the whole amount, Unsecured creditors are paid in the order prescribed by Section 530. Preferential creditors are paid first; liability for dividends is satisfied only if the claims of outsiders are fully met. So far as the employees are concerned, a winding- up order by a Tribunal operates as a notice of discharge to the employees and officers of the company except when the business of the company is continued [Section 445 (3)]. A voluntary winding- up which involves a discontinuation of the business also operates as a notice of discharge, and may also raise a claim for damage where there is an agreement for employment for a fixed time (Reigate vs. Union Manufacturing Co. (1918) 1KB). 9.1.4 Modes of winding-up : Part VII of the Act deals with the winding-up of a company. Under Section 425, a company may be winding-up either: (i) by a Tribunal (compulsory winding- up) or (ii) voluntarily. Whichever method is adopted, a liquidator or liquidators must be appointed to administer the property of the company, and they first apply the assets of the company towards the payment of debts which have statutory priority in a winding up, next to the payment of creditors in their order of precedence and then distribute the surplus, if any, among the shareholders according to their rights inter se. In respect of companies with a paid- up capital of less than Rs. I lakh, winding-up jurisdiction can be conferred on the Tribunals, In other cases, only the Tribunal has jurisdiction in windingup matters (Section 10) 9.1.5 Contributories: In a winding up, the term ‘’contributory” means a past or present member. Strictly, it means every person liable to contribute to the assets of a company in the event of its being wound up, and includes holders of shares which are fully paid; for the purposes of all proceedings for determining, and all proceedings prior to the final determination of the persons who are to be deemed contributories; the term ‘contributory’ includes any person alleged to be contributory (Section 428). If a member is once placed on the list of contributories, he is liable to the extent of original shares that remain unpaid, unless he proves that he should not have been placed on the list. For instance, some applicants consented to become shareholders of a company on the condition that their suggestions should be included in the memorandum and articles of association. Their suggestions, however, were not carried out by the promoters but the applicants signed usual applications for shares which were allotted to them and thereby became shareholders of the company. It was held that it was not open to them to object subsequently to their being shareholders of the company on the ground that the condition had not been fulfilled (East Bengal Sugar Mills Ltd., In re. (1941) 11 Comp. Cas 169). Liability of contributories as present and past members (Section 426): When a company goes into liquidation, every member, whether past or present, has to contribute to the assets of the company. However, a past member will not be required to contribute in the following circumstances:

9.6

Corporate and Allied Laws

(a) If he had ceased to be a member for a period of one year or upwards before the commencement of winding up; (b) If the debt or liability of the company was contracted or incurred after he ceased to be a member; (c) If the present members are able to satisfy the contributions required to be made by them under the Act. There is, however, a limitation on the amount the members may be required to contribute. In the case of a company limited by shares, any past or present member is not required to contribute in excess of the amount, if any, unpaid on the shares in respect of which he is liable as such member. In the case of a company limited by guarantee, a past or present member is not required to contribute an amount which is in excess of the amount undertaken to be contributed by him to the assets of the company in the event of its being wound up. In the case of a company limited by guarantee but having a share capital, every member (present or past) of the company is liable, in addition to the guaranteed amount, to contribute to the extent of any sum unpaid on any shares held by him as if the company were a company limited by shares. When any provisions are contained in a policy of insurance or other contract whereby the liability of individual members on the policy or contract is restricted whereby the funds of the company and alone made payable, the liability of the contributory will be subject to such a provision. Dividends, profits or other sums due to a past or present member, must not be treated as debts due from the company payable to that member for setting off the rights of members as against creditors claiming otherwise than in the character of past or present members. But such sums shall be taken in to account for finally adjusting the rights of the contributories per se [Section 426(f) and (g)]. According to Section 426 (g), any debt due to a past member in respect of unclaimed dividends cannot be admitted to rank in competition with the debts due to ordinary creditors [Re. Consolidated Goldfields of New Zealand Ltd. (1953) Ch. 689.] The liability of a member to be included in the list of contributories is not ex contraactu but ex lege. This is borne out by Section 426. It provides that the liability of a contributory shall create a debt accruing due from him at the time when his liability commenced, but payable at the time specified in the calls made on him by liquidator. In other words, the liability of a contributory though commencing at the date when he entered into the contract with the company under which he became a member, is only contingent upon the company being wound up, in as much as it is, until a call is made, nothing more than a mere liability to contribute, if necessary, to the assets of the company for payment of the debts due to its creditors and expenses of the winding up. Thus, the liability of a contributory arises ex lege and not ex contractu. The effect of this provision is to give to the liquidator a new cause of action which a company itself might not have. For instance, if the claim of a company for the realisation of any call from a member is barred by limitation, such member becomes liable to pay all that has remained unpaid on his shares including the unpaid calls when the company goes into liquidation [In re East Bengal Sugar Mills Ltd. Supra]. This statutory liability of the contributory is a new liability which arises

Corporate Winding-up and Dissolution

9.7

after the winding-up of a company has started. Therefore it is no answer to a liquidator’s claim against any person whose name appears on the register of members that there was an agreement with the directors to exclude this statutory liability [Hansraj Gupta vs. Asthana (1932) P.C. 240]. A director or manager-whether past or present- whose liability under the provisions of the Act is unlimited shall, apart from his liability to contribute as an ordinary member, be liable to make a further contribution as if he were a member of an unlimited company. No further contribution is required of him. (a) if he has ceased to hold office for a year or more before the commencement of the winding-up; (b) if the debt was one which the company had contracted after he had ceased to hold office; (c) subject to the articles, the director or manager shall not be liable to contribute so as to satisfy his debt or liability of the company and the costs, charges and expenses of the winding- up unless the Tribunal deems it necessary (Section 427). Contributories in case of death or insolvency of member or winding- up of a body corporate which is a member : In the case of death of a member, his legal representative will be liable as contributories whether the death took place before or after his name had been placed on the list of contributories. The assignees of insolvent members are liable as contributories subject, however, to their power of disclaimer. When a body corporate which is a contributory is in the process of a winding-up, it will be represented by its liquidator in regard to its own liability, and the liquidator shall be a contributory subject, however, to his power of disclaimer (Sections 430, 431 and 432). 9.1.6 Official Liquidator a. Appointment of Official Liquidator: In order that the debts and obligations of a company in liquidation may be satisfied, and the surplus assets distributed amongst the members according to their right to share in such surplus assets, there must be some person to discharge these duties. The person who does all these is called the liquidator. For the purpose of the Companies Act and in so far as it relates to the winding- up of a company by the Tribunal, there must be attached to each Tribunal an Official Liquidator. He is appointed by the Central Government and is a whole time officer, unless the Central Government thinks that there will not be sufficient word to justify a full-time appointment in which case a part- time officer may be appointed. The Official Receiver attached to a District Tribunal for insolvency purposes, or if there is no such Official Receiver then such person as the Central Government may, by notification in the Official Gazette, appoint for the purpose shall be the Official Liquidator attached to the District Tribunal [Section 448 (1). Also one or more Deputy or Assistant Official Liquidators may be appointed by the Central Government so as to assist the Official Liquidator in discharging his function [Section 448 (1-A)]. On a winding- up order being made in respect of a company, the Official Liquidator ex-officio shall become the liquidator of the company [Section 449].

9.8

Corporate and Allied Laws The legal position of an Official Liquidator is that he is pubic servant and an officer of the Tribunal. Such a position requires him to be honest and impartial and to act in the interests of all concerned [Ripon Press vs. Cheti 55 Mad 180]. He has such powers as are prescribed by Section 457. Section 462 requires him to render account to the Tribunal. In the case of government company the liquidator shall forward a copy to the Central Government if that Government is a member or to the Central Government and State Government if both are members, of the Government company. He is not ‘trustee’, in the sense of the term; although he is sometimes described as such [ex-parte Watkin 1857. I Dh. E. 130]. He stands in fiduciary relationship with the company he is appointed for [Black and Co., 1872, 8 Ch. 254]. He is debarred from making any secret profit. If he abuses his power and betrays his position, he shall be liable to make good any secret profits that he may have made as well as be liable to be removed by the Tribunal. Thus, he is a trustee in the sense that he must act in the interest of the company, the creditors and the contributories. He should not act in his own interest [Silk Stone & Haigh Moor Co. 1900, 1 Ch. 167].

b.

Appointment of Provisional Liquidator : After a winding-up petition has been presented, but before a winding-up order has been issued, the Tribunal may appoint the Official Liquidator as the provisional liquidator. But prior to such an appointment being made, the Tribunal is bound to give notice to the company and also a reasonable opportunity to make its representation. The Tribunal may, however, raise this notice for special reasons which must be recorded in writing. The provisional liquidator will be vested with powers of liquidator, unless they are limited or restricted to any extent by the appointing Tribunal. On winding-up order having been made, the Official Liquidator ceases to be provisional liquidator and becomes the liquidator [Section 450]. Generally, a provisional liquidator will not be appointed unless a strong case is made out by showing the necessity for such an appointment and unless it is proved that the property of the company needs be taken possession of immediately [In re-Dry Docks Corporation of London, 1888 39 Ch. D. 309; East Punjab Pictures vs. Jhabar Mal 1940 East Punjab 139]. His appointment is temporary and continues till the appointment of the Official Liquidator. The reason for his temporary appointment is that there must be some persons to take proper custody of the company’s property so that it debts and obligations are met with equitably and in accordance with the provisions of the Act and fraudulent preference is prevented (In re-Dry Docks Corporation, supra]. As against an order of the Tribunal by which a provisional liquidator is either appointed or not, an application for permission to move the Supreme Tribunal cannot lie, as this order, being only an interlocutory order, is not a final order [Jhabar Mal, vs. The Punjab Pictures Ltd., 1949, 99 Comp. Cas. 172]. A liquidator may be removed and replaced by another, if the Tribunal is satisfied that it is for the general advantage of those interested in the assets of the company [Re Adom Eyton Ltd. (1887) 36 Ch. D. 209].

c.

Powers of Liquidator : A liquidator has the following powers which he must exercise with the sanction of the Tribunal;

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9.9

to institute or defend any suit, prosecution or legal proceeding, civil or criminal, in the name and on behalf of the company

(ii) to carry on the business of the company, so far as may be necessary for its beneficial winding-up, (iii) to sell movable and immovable property and actionable claims of the company by public auction or private contract in whole or in parcels, (iii) (a) to sell whole of the undertaking of the company as a going concern (iv) to raise any money required, on the security of the assets of the company (v) to do such other things as may be necessary for the winding -up of a company and the distribution of its assets [Section 457 (1)]. The Tribunal may order that the liquidator can exercise the above powers without the sanction or intervention of the Tribunal. However, in such cases, the liquidator, in exercising the aforementioned powers, will be subject to the control of the Tribunal (Section 458). The following is a list of powers which he can exercise without the consent of the Tribunal (i) do all acts and to execute deeds, receipt and other documents for and on behalf of the company and use for this purpose the company’s seal;

(ii) to inspect the records and returns of the company on the files of the Registrar without payment of any fee; (iii) to prove rank and claim of the insolvency of any contributory for any balance against his estate and to receive dividends in his insolvency, in respect of that balance, as a separate debt from the insolvent, and rateably with the other separate creditors; (iv) to draw, accept, make and endorse bills of exchange, hundi or promissory note in the name and on behalf of the company as if these have been drawn, accepted, made or endorsed by or on behalf of the company in the course of its business; (v) to take out in his official name, letters of administration to any deceased contributory and do any other acts needed for obtaining payment of money due from the contributory or his estate and (vi) to appoint an agent to do any business which he himself is unable to do [Section 457 (2)]. All the above-mentioned powers, exercisable by the liquidator are subject to the control of the Tribunal. Any contributory or creditor may apply to the Tribunal in regard to the exercise of the powers conferred on the liquidator [Section 457 (2)]. A liquidator in a voluntary winding-up, with the sanction of a special resolution in case of member’s winding-up, and, or Tribunal or Committee of Inspection or (if there is no such committee) of a meeting of the creditors in creditor’s voluntary winding-up, can exercise powers specified under clauses (a) to (d) of Section 457 (1) [i.e., powers (i) to (iv) aforementioned which are exercisable with the sanction of the Tribunal [Section 512 (1) (a)]. The exercise of these powers, however, will be subject to the control of the Tribunal [Section 512 (2)]. The liquidator may

9.10 (i)

Corporate and Allied Laws without the sanction referred to in Section 512 (1) (a) exercise any of the other powers given by the Act to the liquidator in a winding-up by the Tribunal;

(ii) exercise the power of the Tribunal, under the Act, of settling a list of contributories which shall be prima facie evidence of the liability of the person named therein to be contributories (iii) exercise the powers of the Tribunal of making calls: (iv) call general meetings of the company to obtain the sanction of the company by ordinary or special resolution as the case may require, or for any other purpose he may think fit [Section 512 (1) (b) to (c)]. A liquidator may (a) with the sanction of the Tribunal when the Company is being wound up by or subject to the supervision of the Tribunal and (b) with the sanction of a special resolution of the company in the case of the voluntary winding-up; (i) pay any class of creditors in full; (ii) make any compromise or arrangement with creditors or persons claiming to be creditors or having or alleging themselves to have any claim, present or future, certain or contingent; ascertained or sounding only in damages against the company or whereby the company may be rendered liable or (iii) compromise any call or liability to call, debt and liability capable of resulting in a debt, and all claims, present or future, certain or contingent, subsisting or alleged to subsist between the company and a contributory or alleged contributory or other debtor or person apprehending liability to the company, and all questions in any way concerning or affecting the assets or liabilities or the winding-up on such terms and conditions as may be agreed, and take any security for the discharge of any such call, debts, liability or claim and give a complete discharge in respect thereof. In the case of voluntary winding-up, the powers aforementioned exercisable by the liquidator are subject to the control of the Tribunal. Any creditor or contributory may apply to the Tribunal with respect to the exercise or proposed exercise of any such power [Section 546 (2) and (3)]. The Supreme Tribunal may make rules under Section 643 as regards the manner in which the liquidator should exercise power under clauses (ii) and (iii) of Section 546 (1) without the sanction of the Tribunal. d. Duties of Liquidators: The following are the main duties of a liquidator or provisional liquidator, as the case may be, as contemplated by the Act.

(1) To take into custody or under his control, all the property, effects and actionable claims to which the company is or appears to be entitled (Section 456). For this purpose, the liquidator, or provisional liquidator as the case may be, may in writing request the Chief Presidency Magistrate or the District Magistrate within whose jurisdiction such property, effect or actionable claims or any books of account or other documents of the company may be found to take possession thereof. Thereupon, the Chief Presidency Magistrate or the District Magistrate may after having given to any party such notice as he may think fit, take possession of them and deliver the same to the liquidator or the provisional liquidator [Section 456 (1A)].

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For securing compliance with the provisions of Section 456 (1A), the Magistrate aforementioned may take or cause to be taken such steps and use or cause to be used such force as he considers necessary [Section 456 (1B). All the property and the effects of the company shall be deemed to be in the custody of the Tribunal as from the date of the winding-up [Section 456 (2)]. (2) To submit a preliminary report to the Tribunal giving the particulars mentioned in Section 455. (3) To keep, in the manner prescribed, proper books in which he shall cause entries or minutes to be made of proceedings at meeting and of such matters as may be prescribed (Section 461). Rule 286 of the Companies (Tribunal) Rules 1956 prescribes that the liquidator should maintain different books for various purposes. The forms of the books have also been prescribed. In addition the rule requires that registers should be maintained to keep a record of several routine matters, e.g., receipt and despatch of letters, remittances received, etc. Where the liquidator finds that the books of account as have been maintained by the company are incomplete, it is obligatory for him to have the same completed and brought up-to-date. (4) To summon meeting of the creditors and contributories in the manner hereinafter stated under the head “Committee of Inspection” [Section 464]. (5) To pay the moneys, received by him as liquidator, or any company into the Public Account of India in the Reserve Bank of India (Section 552) and not into his private bank account (Section 554). But the voluntary liquidator is to pay the moneys into a scheduled bank to the credit of “Liquidation Account of X & Co. Ltd./X & Co. Private Ltd/X & Co.” (Section 553). (6) To pay forthwith dividends payable to creditors, which had remained unpaid for 6 months after the date on which they were declared and assets refundable to any contributory, which have remained undistributed for six months after the date on which they become refundable into the Public Account of India Companies Liquidation Account in the Reserve Bank of India in a separate account called “Company’s Liquidation Account” [Section 555 (1)]. (7) To summon meetings at such times as the contributories, by resolution, direct, or whenever requested to do so by not less than one-tenth in value of creditors or contributories, as the case may be [Section 460 (3) (b)]. (8) To obey directions given by resolutions of creditors or contributories or by the Committee of Inspection in the administration of the assets of the company and the distribution thereof among its creditors [Section 460 (1)]. Note that any directions given by the creditors or contributories at any general meeting shall in case of conflict, be deemed to override any direction given by the committee of inspection [Section 460 (2)]. (9) To submit the accounts for inspection to Committee of Inspection [Section 465 (2)]. (10) To account for secret profit made by him. (11) To be impartial between creditors, members, etc.

9.12

Corporate and Allied Laws

(12) To obey the directions of the Tribunal with regard to disposal of books of the company (Section 550). (13) To file periodical report with the Tribunal (Section 551). (14) To notify on invoices that the company is in liquidation (Section 547) (15) To duly observe all the requirements of the Act [Section 463 (1)]. (16) To participate in public examination of directors, etc. (Section 481). (17) To forward dissolution order to Registrar within 30 days from the date thereof [Section 481 (2)]. e. Information as to pending liquidations: Section 551 (1) prescribes that when the winding-up of a company is not concluded within one year after its commencement the liquidator shall, unless exempted from so doing by the Central Government, within two months of the expiry of such year and thereafter, until the winding-up is concluded, at intervals of not more than one year or at such shorter interval, if any, as may be prescribed, file a statement in Form No. 148 (Rule 311 of Companies (Tribunal) Rules). The statement shall contain necessary particulars and be audited by a Chartered Accountant. These particulars must be with respect to the proceedings in and position of the liquidation. In the case of a winding-up being carried on by or under the supervision of the Tribunal, the aforesaid statement is to be filed in the Tribunal but in the case of a voluntary winding-up, it is to be filed with the Registrar. But an audit is not necessary in case of winding-up by the Tribunal, where provisions of Section 462 apply. Simultaneously with the filing of a copy of the statements of account in the Tribunal, a copy shall be filed with a Registrar [Section 551 (2)]. In the case of a government company, the copy of the Statement of account shall be filed with the Central Government if that Government is a member, or to the State Government if both are members of the Government Company. [551 (2A)]. Any person stating himself in writing to be a creditor or contributory is entitled all reasonable times on payment of the prescribed fee to inspect the foregoing statements of account and to receive a copy thereof or an extract therefrom [Section 551 (3)]. f. Audit of Liquidator’s Accounts: As has been stated earlier, Section 462 (1) prescribes that the liquidator shall, during his tenure of office, present to the Tribunal an account of his receipts and payments, Rule 98 of the Companies (Tribunal) Rules requires the Official Liquidator to file his accounts with the Tribunal twice a year, one made up to 31st March and the second up to 30th September, within 3 months of the closing of the accounts. The accounts should be drawn up in Form 144 of the Companies Tribunal Rules. Section 462 (3) prescribes that the Tribunal shall cause the accounts to be audited as it thinks fit. In consonance there with, Rule 302 of the Companies Rules provides that the accounts shall be audited by one or more Chartered Accountants appointed by the Tribunal or, if the Tribunal so directs, by the Examiner of the Local Fund Accounts of the State concerned. The audit shall be complete check of the accounts of the Official Liquidator and of each of the companies in liquidation in his charge. Though the

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9.13

certificate to be appended to this account has not been prescribed it has been mentioned that the auditor shall check them with reference to books of account and give his observations and comments on the accounts. He also must forward a certificate of audit as well as a copy thereof to the Registrar and another copy to Official Liquidator (Rule 303). A copy of the accounts must be filed and kept by the Tribunal and the same be open to inspection by any creditor, contributory or any person interested [Section 462 (4)]. In the case of a government company, the liquidator shall forward a copy to the Central Government if that Government is a member of the Government company or to any State Government if that Government is a member or to the Central Government and State Government if both are members of the Government company. [462 (4A)] Section 462 (5) provides that the liquidator shall cause the account when audited, or summary thereof to be printed and shall send a printed copy of the accounts or summary by post to every creditor or to every contributory. But the Tribunal is empowered to dispense with the compliance of this provision. g. Control exercisable by Central Government over Liquidator: The Central Government, according to the provisions contained in Section 463, is empowered to take cognisance of the conduct of the liquidator of companies which are being wound-up by the Tribunal. If, on the application of any creditor or contributory, it is found that a liquidator is not faithfully performing the duties and fully observing the requirements imposed on him by the Act, rules or otherwise the Central Government must enquire into the matter and take such action as it may think expedient. Also, the Central Government may at any time (a) require any liquidator to answer any enquiry in relation to any winding-up in which he is engaged; or (b) direct a local investigation to be made into the books and vouchers of the liquidator; or (c) apply to the Tribunal to have him examined on oath concerning the winding-up.

9.2 WINDING-UP BY TRIBUNAL 9.2.1 Circumstances : Section 433 deals with the circumstances in which a company may be wound up by the Tribunal. These are as follows: (a) If the company has by a special resolution resolved that it shall be wound up by the Tribunal; (b) if the company defaults in delivering the statutory report to the Registrar or in holding the statutory meeting. But instead of ordering such a company to be wound up, the Tribunal may direct the report to be filed or the meeting to be held; (c) if the company does not commence its business within a year from its incorporation or suspends its business for a whole year. It should be noted that the power of the Tribunal to wind up, when the company has not carried on business for a year, is discretionary and it will not be exercised unless there are indications that the company has no intention to start or to continue its business. However, the Tribunal would not grant an order against the wishes of a majority of the contributories if the delay in commencing, or the interruption of, the business is explained and if it is satisfied that business would be

9.14

Corporate and Allied Laws commenced or resumed. [Murlidhar vs. Bengal Steam Co. Ltd., (1921) I.L.R. 47 Cal. 654];

(d) if the number of members is reduced below seven in the case of a public company or below two in the case of a private company, the Tribunal would, however, permit the company to wind up itself voluntarily. In this connection, it is necessary to recall that according to the provisions contained in Section 45 of the Act a member is personally liable for the debts of the company if the membership falls below the statutory minimum and the business is carried on for more than six months after the number has been so reduced and such a fact is within the knowledge of the shareholders; (e) if the company is unable to pay its debts. Under Section 434, a company is deemed unable to pay its debts in any of the following circumstances : (i) If a creditor of the company, to whom the company by assignment or otherwise owes a sum exceeding Rs.500, has demanded the same in writing, and the company has for 3 weeks thereafter neglected to pay the amount or to secure or compound for it to the reasonable satisfaction of the creditor. The above-mentioned letter of demand may be delivered by registered post or otherwise at the registered office of the company. The meaning of the word “delivered in respect of a registered letter cannot be limited to cases when the registered letter is accepted by the addressee. A tender of such a letter, even if it is refused by the assessee, is a good delivery. The refusal to take the delivery of the letter precludes the addressee from pleading ignorance of its contents. Prior to an order for winding-up of a company being made, it is required to be shown that the debt due from the company is presently payable and that the title of the petitioner is complete. A petition cannot be supported on the allegation that some debt is due, unless it was debt for which a statutory demand was made. [In Re. Jambad Coal Syndicate Ltd. I.L.R. 62 Col 294]. The demand under clause (i) above is called statutory notice and ly form. Notice served at some place other than the registered office of the company will be invalid [Ankhtiarpur Bihar Light Railway Co. Ltd. vs. Union of India [1954] 93 Cal. L.J. 271]. But if the company has no registered office, then the notice of demand for the payment of the debt may be given at the place where the company carries on business [British & Foreign Apparatus Co., 1865), 12L.T. 368]. Where the debt is bona fide disputed, clause (i) does not apply: (ii) If execution or other process issued on a decree or order of a Tribunal in favour of the creditor of the company is returned unsatisfied in whole or in part; or (iii) If it is proved to the satisfaction of the Tribunal that the company is unable to pay its debts. A company may be wound up even when its assets are valuable, if they are locked up in investments and the company is carried on at a loss. In considering whether a company is able to pay its debts, the company’s contingent and prospective liabilities have to be taken into account, and, therefore it may be unable to pay its debts, although it has paid its debts as

Corporate Winding-up and Dissolution

9.15

they become due, if its existing and probable assets will be insufficient to meet its prospective liabilities. To justify the application of clause (i) above, the company may be, in the words of Sir William James, V.C. “commercially insolvent”. Insolvency may be proved easily by notice under clause (i); under clause (ii), it is more difficult to prove to the satisfaction to the Tribunal. For instance the fact that the liabilities of a company far exceed its assets does not ipso facto mean that the company is unable to pay its debts and does not give rise to a ground for compulsory winding up under Section 433. It is rather the “commercial insolvency” (i.e., the circumstances in which the existing assets and liabilities” are such as to make the Tribunal feel satisfied that the existing and probable assets would be insufficient to meet the existing liability”) which affords an occasion for compulsory winding-up on the ground of inability to pay off its debts. A particular company may have the capacity to meet the demands of its creditors; in that case, a winding up order would be unjustified [Krishnaswamy vs. Stressed Concrete Construction (Pvt) Ltd. AIR. 1964 Mad. 191]. In the Registrar of Companies, Punjab vs. Ajanta Lucky Scheme and Investment Co. Private Ltd. and Others (1973), 43 Comp Cas. 314, the Registrar of Companies filed petition for the winding-up of the respondent company under Section 433 (e) read with Section 439 (5) of the Act on the ground that the company was unable to pay debts and that its liabilities exceeded its assets. The two issues that emerged therefrom were as follows, viz. (a) whether the company was unable to pay its debts and meet its liability; and (b) whether it was a proper case for winding-up. Held: (a) That for determining the company’s ability or otherwise to pay its debts, it was to be considered whether the company was able to meet its liability as and when they accrued due. Section 434 of the Act prescribes the circumstances in which a company was to be treated as unable to pay its debts. Admittedly, none of these circumstances was present in the case in question and no complaint had even been received by the company from its creditors as regards non-fulfilment of any of their claims against the company. In a case where no debt had been due, a demand therefore could not be made. The mere fact that certain liabilities might accrue due in future, which could exceed the existing assets of the company, would not necessarily lead to the conclusion that the company would be unable to meet its liabilities when they accrued due. The mere fact of the company’s liabilities being in excess of its assets could not ipso facto be a ground for putting the company into liquidation. The test would be that the company should be commercially solvent, i.e., the company ought to be on a position to meet its liabilities as and when they arose: (b) that there was no ground for winding-up, because it was shown that (i) the paid-up capital had augmented, every year the business flourished, there were additions to list profit and the subscribers’ claims on maturity had been met; and (ii) any creditor or contributory or even the Reserve Bank had never lodged any complaint against the financial stability of the company. (f) “just and equitable” rule: Where there is a petition of the Tribunal to wind up a company on the ground that it is “just and equitable”, the Tribunal has power to make a winding-up order in any case where the special circumstances are such that it appears just to make such an order. Such orders have been made by the Tribunals in the following circumstances.

9.16

Corporate and Allied Laws (i) Where the substratum of the company has disappeared, e.g., where the main object of the company was to acquire and work a mine or patent or concession which could not be obtained or where the mine was worthless or the patent was invalid or the concession has lapsed [Re, German Date Coffee Co. (1882) 20 Ch. D. 169].

A company will not be wound up because it has ceased to carry on one of several businesses authorised by its memorandum unless, upon a fair construction of the memorandum, that business is regarded as the main object of the company [Re. Amalgamated Syndicate (1897) 2 Ch. 600]. Similarly, a company which has amalgamated with another company cannot be wound up on the ground that it has ceased to carry on business as a separate company. Thus the substratum of a company is deemed to have disappeared or gone, if the main object for which the company was formed has become impracticable, i.e., permanently impracticable. “Usual tests for determining whether the substratum of the company has disappeared are whether: (a) the subject-matter of the company is gone, or (b) the object for which it was incorporated has substantially failed, or (c) it is impossible to carry on the business of the company except at a loss, which means that there is no reasonable hope that the object of trading at a profit can be attained or (d) the existing and probable assets are insufficient to meet the existing liabilities” [In re Kaithal and General mills Co. Ltd., 1951,31, Comp. Cas. 461]. Where the substratum has gone, the Tribunal can wind-up the company, even though the majority of shareholders oppose the winding-up order. But before the Tribunal can wind-up on this account, it must be proved that the whole of the business of the company has become impossible of being carried on. The question whether the substratum has gone or not would depend not on the intention of the Board of Directors or of the shareholders, but would depend upon, and should be decided by the Tribunal, on a true and accurate construction of the memorandum of association and the actual facts of the case [Mohan Lal Mehta vs. Chunilal Mehta (1962) 32 Comp. Cas. 970]. If there are two or more main objects and some are frustrated and some are pursued, the company cannot be wound up. All the main objects must be destroyed in order to justify winding-up [Kitson & Co. (1946) I.A.E.R. 435 (C.A.)]. It should be noted that even if the substratum is gone, if the members do not ask for winding-up, carrying on of the other objects of the memorandum will not be ultra vires. (ii) Where there is a deadlock or a crisis in the management of a company, e.g., where the two sole shareholders, who were also directors, were not on speaking term owing to disagreement [Re, Yenidje Tobacco Co. 1916, 2 Ch. 426]; Where there is a deteriorating state of management and control of business owing to sharp differences between the members as reflected in their resolutions at their meetings [Vijayalakshmi Talkies vs. Rao. A.I.R. 966 Andh.Pr.285]; where the mismanagement is such that there is no practicability of remedying it [Rajamundry Electric Corporation vs. Rao, A.I.R. 1955 S.C. 213]. However, factions, quarrels; etc., among shareholders are not sufficient grounds [S.S. Raj Kumar vs. Project Castings Private Ltd. (1968) I Comp. L.J. 41]. (iii) Where the company has been formed to carry on a fraudulent or an illegal business. (iv) If the company is a “bubble”, i.e., if it never had any business to carry on [Re London & Country Coal Co. 1867, 3 Eq. 355].

Corporate Winding-up and Dissolution

9.17

(v) Where the company is insolvent and is being carried on for the benefit of the debenture holders [Re. Clandown Colliery Co. (1915), I Ch.369]. (vi) Where the petitioner was excluded from all participation in the business. (vii) Where preponderance of voting power was permanently vested in a Board in which minority shareholders had justifiable no confidence [Loch vs. John Blackwood Ltd. (1924) A.C. 783]. Clause (f) of Section 433 should not be construed as ejusdem generis [i.e. of the same kind or natural with the other clauses [a] to [c] of that Section. The ground need not at all be similar to any of the other grounds mentioned in Sectioned in Section 433. 9.2.2 Alternative remedy to winding-up in cases of Oppression: Cases have arisen from time to time where minority shareholders have found it difficult to resist oppression by the majority. Section 397 provided that where the affairs of a company are being conducted in a manner oppressive to some members the Company Law Board may, with a view to bringing to an end the matters complained of make such order as it think fit to remedy the position, when the winding-up of the company would unfairly prejudice the complaining members. A similar relief can be applied for in the case of mismanagement, where the affairs of the company are being conducted in a manner prejudicial to the interests of the company, or when a material change in the management or control of the company or in its constitution is likely to prejudice the interest of members of the company [Section 398]. 9.2.3 Who may petition for winding-up? [Section 439]: The various persons who can make an application for the winding-up a company through Tribunal are : (1) (2) (3) (4) (5) (6) the company; any creditor or creditors, including any contingent or prospective creditor or creditors; any contributory or contributories; all or any of the above parties, together or separately; the registrar; and any person authorised by the Central Government in a case falling under Section 234 of the Act (i.e., when the Central government is satisfied that it is just and equitable that the company should be wound up on the ground that the business of the company is being conducted in a fraudulent or unlawful or oppressive manner or that the company was formed for any fraudulent or unlawful purpose, etc.

A creditor has a right ex debito justitiae [i.e., a remedy which the applicant gets as a right] to a winding- up order if he can prove that he claimed an undisputed debt and that the company has failed to discharge it. Under Section 439 (8), a contingent or prospective creditor, however, must obtain leave of the Tribunal, give security for costs and the Tribunal must be satisfied that there is a prima facie case for winding- up of the company. The Central Government or any State Government or Municipal or other local authority to whom any tax or other public charge is due is also an entity comprised in the term creditor. It has been held in [Hari Nagar Sugar Mills Co. Ltd. vs. M.W. Pradhan (1962), 2 Com. LJ. 17 S.C] that a receiver of creditors, properties is also a creditor and as such he has a right to present a petition. He

9.18

Corporate and Allied Laws

is creditor by statutory assignment. A secured creditor, the holder of any debentures [including debentured stock] whether or not trustees have been appointed in respect of such and other like debentures and also the trustee for the debenture-holders are creditors and hence entitled to present a petition for winding- up [Section 439 (2)]. A contributory can present a petition only when: (i) the number of members falls below 7 or below 2 in the case of a public or private company respectively or (ii) he holds shares which were originally allotted to him or has held shares for six out of the eighteen months prior to the commencement of winding- up or the shares have devolved on him through the death of a former holder [Section 439 (4)]. A holder of fully paid- up shares is also entitled to present a petition. This right of his as a contributory cannot be excluded on the ground that the company has no assets at all or that it may not have any surplus assets left for distribution among the shareholders after the satisfaction of its liabilities [Section 439 (3)]. The Registrar may present a petition for winding -up only on the ground that default has been made in delivering that statutory report to him or in holding the statutory meeting, or that the company has not commenced its business within a year from its incorporation, or that from the financial condition of the company as disclosed in its balance sheet or from an inspectors, S report under Section 235 or 237, or the report of a special auditor appointed under Section 233 A it appears that the company is unable to pay its debts. But such a partition can be made only with the previous approval of the Central Government [Section 439 (5)]. The Official Liquidator may also present a petition for winding- up by the Tribunal, where the company is being wound up either voluntarily or subject to the supervision of the Tribunal. And the Tribunal, before making a winding- up order on such petition, must be satisfied that in the circumstances such a winding- up cannot be continued, due regard being had to the interest of the creditors or contributories or both (Section 440). 9.2.4 Powers of Tribunal on hearing petition (Section 443): The winding- up petition and its hearing are governed by Rules 95-123 of the Companies (Tribunal) Rules, 1959. Such a petition is required to be made in Form No. 45, (General form of petition 46 (viz., petition by creditors), or 47 (viz., petition by company), as the case may be, with such variations as the circumstances may require, and shall be presented in duplicate. The Registrar shall note on the petition the date of its presentation. After the Tribunal hears the petition, it may (i) dismiss it with or without costs, (ii) adjourn the hearing conditionally, or (iii) make an interim order, or (iv) make an order for winding- up of the company. It must not refuse to make a winding -up order on the ground only that the company’s assets have been mortgaged to an amount equal to or in excess of those assets, or that the company has no assets. If a petition for winding-up is presented on ‘’just and equitable” ground the Tribunal may refuse to make an order of winding-up if it is of the opinion that some other remedy is available to the petitioners and that they are acting unreasonably in seeking winding-up instead of pursuing that other remedy. Where the petition is presented on the ground of default in delivering the statutory report or in holding the statutory meeting, the Tribunal may direct that the report be delivered or the

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9.19

meeting be held instead of making the winding-up order. The person considered responsible for the default may be charged with the costs involved. 9.2.5 Date of commencement of winding-up by Tribunal (Section 441): Where, before the presentation of a petition for the winding-up of a company by the Tribunal, a resolution has been passed by the company for voluntary winding-up, the winding- up of the company shall be deemed to have commenced at the time the resolution was passed. Unless the Tribunal, on proof of fraud or mistake, thinks fit to direct otherwise, all proceedings taken in the voluntary winding- up shall be deemed to have been validly taken. In any other case, the winding- up of the company by the Tribunal is deemed to commence at the time of the presentation of the petition for the winding-up. This date is important for several reasons. Some of the immediate effects are that the Official Liquidator becomes the liquidator of the company (Section 449). A statement as to the affairs of the company has to be submitted to him and he has to report thereon to the Tribunal (Section 454 and 455). The winding-up order constitutes a notice of discharge to the officers and employees of the company except when the business of the company is continued [Section 445 (3). The Tribunal has to communicate winding- up order forthwith to the Official Liquidator and the Registrar (Section 444). Within 30 days from the date of the making of a winding- up order, a certified copy of the order must be filed with the Registrar by the petitioner and the company [Section 445 (1)]. In computing this period of 30 days, the time required for obtaining a certified copy of the order is to be excluded. Then the Registrar shall make a minute thereof of in his book relating to the company and shall notify in the Official Gazette that a winding- up order has been made. When the winding-up order has been made or the Official Liquidator has been appointed as provisional liquidator no suit or other legal proceeding can be commenced or if pending at the date of the order, shall be proceeded with against the company except by leave of the Tribunal and subject to terms imposed by it [Section 445 (1)]. The expression : ‘’or other legal proceeding”, in Section 446 does not mean a legal proceeding analogous to a suit (Shaikh Mansoor vs. Government A.I.R. 1952 T.C. 14). An award under the Industrial Disputes Act is not a legal proceeding (Price vs. Chandrashekharan A.I.R. 1951 Mad 987). Leave of Tribunal will be granted where a shareholder applies for rescission or the suit is for specific performance. A regards the ‘Leave of the Tribunal’ appearing in Section 446 (1) the Supreme Tribunal decision is that the Tribunal has the jurisdiction to grant leave to proceed with a suit or other proceedings against a company in liquidation, even if such leave was not obtained for the commencement of the suit or proceeding. ‘’ The proceedings may at best be regarded as instituted on the date on which the leave was obtained from the Tribunal” [Hansidhar Shankarlal vs. Mohammed Ibrahim (1971) Comp. Cas. 21]. But the Tribunal does not grant this leave as a matter of course. The facts and circumstances of each case have to be probed into by the Tribunal. The discretion of the Tribunal must be exercised judicially but not capriciously or arbitrarily. Usually, leave is granted where outsiders get linked up with some dispute with the company and the Tribunal thinks it fit that the dispute should be settled in an action by the ordinary Civil Tribunal. It has been held that against an order refusing leave to

9.20

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institute a suit, an appeal lies under Section 483 (Balakrishan vs. Indian Association Chemical Industries Ltd. A.I.R. (1959) Bom. 41 Suppose, RC, a labourer of GD & Co. Ltd. which is in liquidation, prays for permission of the Tribunal to implead the Official Liquidators as the party respondent in a claim petition made before the Labour Tribunal subsequent to the winding- up order. Should the leave be granted in this case? It has been held [R. Chidambaranathan vs. Gannon Dunkerly& Co. (Madras) Ltd. (1973) 43, Comp. Cas. 500] that the prayer for leave under Section 446 (1) was misconceived. In the event of such leave being granted, a flood gate of litigation would be opened before the Laboru Tribunal and every labourer would be filing petitions and drawing the Official Liquidator to the Labour Tribunals for defending the case of the company. The purpose and the intention of the Act was that all such claims against the company which has been wound up would have to be filed before the Official Liquidator who was empowered to decide such claims. The petition was,. therefore, dismissed. It has, however, been held that RC could withdraw the proceedings before the labour Tribunal and file the same before the Official Liquidator for appropriate reliefs. It has been held that the following proceedings are not affected by [Section 446]: (a) a private sale autside the Tribunal by public auction by a mortgagees [Ranganathan vs. Govt. or Madras 1955, S.C. 604 ;]. (b) a defendants plea of set- off or counted claim in defence [Andhra paper Mills Co. Ltd. vs. Anand Bros. (1951) I.M.L.T. 340]: (c) proceeding by persons out of jurisdiction on a foreign country [Re. Voclain (Foreign) Ltd. (1932) 2, Ch. 196]; (d) a claim petition by a third party where a company in winding-up has attached the property of a judgement debtor [Seiva Lyer vs. Mathura Mercantile bank (1962) 32, Comp Cas. 47] It may be noted that the proceedings for assessing a company to income tax under the Income tax Act are not legal proceedings and hence are not affected by Section 446. Until the I.T.O. makes an assessment order, he is not a creditor, and as such can not prove his claim in the winding-up [Tilk Ram and Sons (Private) Ltd. vs. Commissioner of Income- tax (1964) 4 Comp. Cas. 151]. However, it has been held in [Rele vs. Deshpande, (1967) Comp, L.J. 210] that the re-assessment proceedings by the Income-tax authorities cannot be commenced or continued without the leave of the Tribunal. It may further be noted that if a secured creditor realises his security without intervention of the Tribunal, he will be outside the jurisdiction of the Tribunal in the winding up. But where the secured creditor invokes the aid of the Tribunal and takes any legal proceeding against the company within the meaning of Section 446, it will be necessary for him to seek leave of the Tribunal [Ranganathan vs. Government of Madras, Supra]. In the winding-up, the Tribunal shall have the jurisdiction to entertain or dispose of; (i) any suit or proceeding by or against the company; (ii) any claim made by or against the company including claims by or against any of its branches in India; (iii) any application made under Sections 391 by or in respect of the company; (iv) any question of priorities or any other question of law or fact which may relate to or arise in the course of the winding-up of the company [Section 446 (2)]. Any such suit or proceeding pending in any other Tribunal may be transferred to or disposed of by the Tribunal in which the winding-up proceedings are taken [Section 446 (3)]. The provisions contained in sub-section (1) or (3) as aforementioned, shall

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9.21

not be applicable to any proceeding in appeal either before the Supreme Tribunal or the Tribunal [Section 446 (4)]. Section 446 is designed to safeguard the assets of the company in winding-up against wasteful or expensive litigation in regard to matters capable of being determined expeditiously and cheaply by the winding-up Tribunal itself ‘’An even- handed justice requires that the Tribunal should have power to intervene at an early stage for the protection of the assets, and this power is given by Section 446.” The winding- up order operates in favour of all the creditors and contributories of the company as if it had been made on the joint petition of a creditor and of a contributory [Section 477]. 9.2.6 Statement of Affairs: Where winding- up order has been made or the Official Liquidator has been appointed as provisional liquidator by the Tribunal, a statement as regards the affairs of the company in the prescribed form [57, Companies (Tribunal) Rules, 1959] shall be delivered to the Official Liquidator. Such a statement shall have to be verified by an affidavit and shall contain particulars of (i) the assets of the company stating separately the cash balance in hand and at the bank, negotiable securities; (ii) its debts and liabilities; (iii) the names, residence and occupations of the creditors (secured debts being segregated from those considered unsecured) and in the case of secured debts the particulars of the securities given whether by the company or an officer there of, their value and the dates on which they were given; (iv) the debts due to the company and the names, and residences, and occupations of the persons from whom they are due (also estimated amount to be realised); and (v) such further or other information as may be prescribed or as the Official Liquidator may required [Section 454 (1)]. The aforementioned statement is required to be made and verified by one of more of the directors and by a person who, at the date of winding-up order or the appointment of the provisional liquidator, as the case may be, the manager, secretary or other chief officer of the company. Also, it may be made by the following persons if the Official Liquidator so requires, subject to the directions of the Tribunal; (i) who are have been officers of the company; (ii) who have participated in the formation of the company at any time within one year before the relevant date; (iii) who are in the employment of the company or have been so within the said year and are in the opinion of the Official Liquidator, capable of giving the information required; (iv) so are or have been within the said year, officers of, or in the employment of a company which is, or within the said year was, an officer of the company to which the statement related [Section 454(2)]. The above mentioned statement is required to be submitted within 21 days of the winding- up order of the appointment of the provisional liquidator, as the case may be, or within such extended time, not exceeding three months, as may be fixed by the Official Liquidator or the Tribunal for special reasons. The persons, preparing the statement and affidavit shall be allowed such costs and expenses incurred in connection therewith as the Official Liquidator may deem reasonable, subject to an appeal to the Tribunal [Section 454] (3) and (4). Non-compliance with any of the requirements of Section 454, without a reasonable excuse, shall render the defaulter liable to be punished with imprisonment to the extent of two years or

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with a fine extending upto Rs. 100 per day during which the default continues or with both [Section 454 (5)]. The Tribunal concerned may take cognizance of an offence, mentioned above, upon receiving a complaint of facts constituting such an offence and try the offence i itself in accordance with the procedure laid down in the Criminal Procedure Code 1898 for the trial of summons cases by Magistrates) 454 (5A0]. The Statement of affairs must be open to inspection by any one stating himself in writing to be a creditor or contributory. Also he is entitled to a copy thereof or as extract there from. For both inspection and copy or extract, the prescribed fee is to be paid [Section 454 (6)]. (Note: The expression ‘the relevant date’ in a case where a provisional liquidator is appointed, is the date of his appointment and in a case where no such appointment is made, the date of the winding-up) Section 511A extends the provisions of Section 454 to every voluntary winding-up in the same way as they are applicable to a winding-up by the Tribunal. For construing these provisions, references in the Section to (a) the Tribunal shall be omitted; (b) the Official Liquidator or the provisional liquidator shall be construed as references to the liquidator; (c) the ‘relevant date’ shall be construed as references to the date of commencement of the winding-up. The afore-mentioned provisions of Section 454 are intended to enable the liquidator to have information as regards the affairs of a company, so that the liquidator may know something about the property and the assets of the company, the names, addresses and occupations of the creditors, the debts due to the company and the persons from whom they ard due. The statement of affairs of the company is intended to afford facility to the liquidator in his management of the company’s affairs in discharging the company’s obligations, realising its assets, and distributing surplus assets (if any) among its members. 9.2.7 Official Liquidators report (Section 445): The Official Liquidator must, as soon as practicable after the receipt of the statement of affairs under Section 454 but, not later than six months from the date of the winding- up order or such extended period as may be allowed by the Tribunal, or where the Tribunal orders that no statement of affairs need be submitted as soon as practicable, after the date of the order, submit a preliminary report to the Tribunal : (a) as to the amount of capital issued, subscribed, and paid-up and the estimated amount of assets and liabilities, giving separately under the heading of assets: particulars of, (i) cash and negotiable securities; (ii) debts due from contributories (iii) debts due to the company and securities (if any) available in respect thereof; (iv) movable and immovable properties belonging to the company; and (v) unpaid calls; (b) if the company has failed, as to the causes of the failure; and (c) whether a further inquiry is desirable as to the company’s failure, promotions or formation or the conduct of the business thereof. If the Official Liquidator thinks fit, he may make a further report or report, stating the manner in which the company was promoted or formed and whether in his opinion any fraud has been committed by any person in its formation or promotion or by any officer of the company in

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9.23

relation to the company since the formation and any other matters which, in his opinion, it is desirable to bring to the notice of the Tribunal. Such further report may lead to the public examination of a person or officer in accordance with Section 478 (Section 455). A person ordered by the Tribunal to be examined will be entitled to obtain a copy of the report of the Official Liquidator at his cost and to employ an advocate to enable him to explain or qualify any answer given by him. The person so charged may apply to the Tribunal to be exculpated from any charges made or suggested against him and, if he does so, it shall be the duty of the Official Liquidator to appear on the hearing of the application and call the attention of the Tribunal to any matters which appears to the Official Liquidator to be relevant [Section 478 (6) & (7) ]. The Preliminary Report mentioned above shall be in Form No. 60 with such variations as may be necessary [Rule 135, the Companies (Tribunal) Rules]. 9.2.8 Final Winding- up: Under Rules 281 of the Companies (Tribunal) Rules, 1959, as soon as the affairs of the company have been fully wound-up, the Official Liquidator in a winding- up by the Tribunal shall file his final account (in Form No. 146) in to the Tribunal and apply for order as to dissolution of the company subject to his final account being passed. The application must be set down for hearing until the auditor completes the audit of the final account and files his certificate in relation thereto. Rules 282 provides that upon the hearing of the application, the Tribunal may, after hearing the Official Liquidator and any other person on whom notice may have been served by the Tribunal, and upon pursuing the account, as audited, make such orders as it may think fit as to the dissolution of the company, the application (subject to the provision of the Act) of the balance in the hands of the Official Liquidator or the payment thereof into Companies Liquidator Account in the public account of the Reserve bank and the disposal of books and papers of the company and of the Liquidator. After the liquidator has filed the statement as aforementioned, showing the affairs of the company to have been completely wound up or when the Tribunal is of the opinion that the liquidator cannot proceed with the winding-up of the company for funds and assets or for any other reason whatsoever and it is just and reasonable in the circumstances of the case that an order of dissolution should be made, then the Tribunal shall make an order that the company be dissolved from the date of the order [Section 481 (1)]. A copy of the order must be forwarded within 30 days from the date of the order by the liquidator to the Registrar who shall enter in his books a minute of the dissolution of the company and the company shall be dissolved accordingly [Section 481 (2)]. 9.2.9 Committee of Inspection: Either at the time of making an order of the winding- up of a company or at any time thereafter, the Tribunal may direct that a Committee of Inspection shall be appointed in order to act with the liquidator. In the event of such a direction being given, the liquidator is bound to convene a meeting within 2 months from the date of such direction, of the creditor (ascertained form the company’s books and documents) with a view to determine who are to be members of the committee (Section 464 (1). Within 14 days from the date of the creditor’s meeting or such further time as extended by the Tribunal, the liquidator shall convene a meeting of the contributories so as to consider the decision taken at

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Corporate and Allied Laws

the creditor’s meeting in regard to the membership of the committee. This decision may either be altogether rejected with or without any modifications [Sub- Section (2) If the decision taken at the first meeting is either rejected or accepted with modification, the liquidator shall be duly bound to seek the Tribunal’s, direction as regards the composition [sub-section (3)] A committee of inspection shall consist of not more than 12 members, being the creditors and contributories or their attorneys. The proportions of the members of the committee; if not decided upon by the creditors and contributories themselves, shall be determined by the Tribunal. Its function is to assist the liquidator and to inspect his accounts. The committee must meet at such times as and may from time to time appoint; the liquidator or any member may also summon a meeting as an when he thinks necessary. The quorum is 1/3rd of total numbers of member or two, whichever is er. The committee acts only if there is a quorum and by a majority of members present. A member of the committee ceases to act; (i) when he resigns by notice in writing signed by him and delivered to the liquidator; (ii) when he is adjudged an insolvent or compounds or arranges with his creditors; (iii) when he is absent from five consecutive meetings of the committee without leave of those members who together with himself, represent the creditors or contributories; (iv) when he is removed by ordinary resolution of which 7 day’s notice has been given by the creditors, if he represents the creditors, or by the contributories, if he represents the contributories. If any vacancy occurs in the committee, the liquidator must immediately summon a meeting of the creditors or contributories, as the case may be, to fill the vacancy unless he thinks it unnecessary to fill in the vacancy and obtains the leave of the Tribunal in regard thereto (Section 465). A member of the committee of inspecting is in fiduciary position and cannot buy any of the company’s property from the liquidator (In re Blumer (1937) Ch. 489). Similarly, where a member of the committee purchases the property of a company, such as purchase was held to be bad, inasmuch as he occupied a fiduciary position in relation to the company (Durga Prasad vs. Official Liquidator, Benaras Bank Ltd. A.I.R. 1959 All. 196). 9.3 VOLUNTARY WINDING UP 9.3.0 Introduction : The object of a voluntary winding-up is to enable the members and creditors to settle their affairs among themselves without seeking assistance of the Tribunal but they may apply to the Tribunal for any directions or orders if and when necessary (Section 518). A voluntary winding-up does not necessarily, imply that the company’s business has ceased since such a winding-up may also be necessary in the case of reconstruction or an amalgamation of a company. 9.3.1 Procedure for voluntary winding-up : A company may be wound-up voluntarily under Section 484, according to the following procedures: (a) By passing an ordinary resolution at a general meeting in any of the following circumstances: (i) When the period (if any) fixed for the duration of the company by its Articles has expired. (ii) When the Articles provide for the dissolution of the company on occurrence of an event and the event has occurred e.g. if a company is formed to construct a particular bridge and tile same has been built.

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(b) By a special resolution : When the company for any reason which need not be disclosed, decides that it should be wound-up voluntarily. A company may be prosperous, yet it may desire to wind-up its affairs as a matter of convenience. It can do so if it passes a special resolution to that effect. The members of a company can not be divested of their right to pass a resolution calling for a voluntary winding-up by including in the Articles, a special provision in this regard because such a provision would be repugnant to the express provisions of this Act. Notices of the meeting where it is intended to propose an ordinary or a special resolution as the case may be, must be given, and the meeting should be held in the manner laid down by the Act and the articles of the company. Upon the passing of a resolution for voluntary winding-up, the company must within 14 days thereof, give notice of the resolution by an advertisement in the Official Gazette and also in some newspapers circulating in the district where the Registered Office of the company is situated (Section 485). A printed or typewritten copy of every winding-up resolution passed in pursuance of Section 484 (duly certified under the signature of an officer of the company must within thirty days after the passing thereof be riled with the Registrar who shall record the same (Section 192). 9.3.2 Commencement of voluntary winding-up: Voluntary winding-up is deemed to have commenced at the time when the resolution for the voluntary winding-up is passed (Section 486). Even if the company is subsequently wound-up by the Tribunal, the commencement of the winding-up would be taken to be as from the date of the passing of the resolution (Section 441). 9.3.3 Effects of voluntary winding-up: With the commencement of voluntary winding-up, the following situations arise: (1) The company ceases to carry on its business except for the purposes of beneficial winding-up of such business (Section 487). It still maintains its corporate personality and its corporate power, until it is dissolved (Section 487). This is so even if the Articles provide to the contrary [Hari Prasad Jayantilal & Co. vs. I.T.O. Ahmedabad.9.LR. (1966) S.C 148.11. The liquidator represent the company in liquidation and the functions as its agent for purposes of winding-up [Official Liquidator vs. Commissioner of Income Tax (1971) 41 Comp. Cas. 226].. (2) Any transfer of shares made without the sanction of the liquidator is invalid and alteration in the status of the members made after the commencement of the winding-up is void (Section 536). (3) On the appointment of a liquidator under Section 490 or 502, as the case may be, the powers of the directors, or managing or whole time director, or manager cease except in so far as the company in general meeting or liquidator, may sanction that the same be continued or for the purpose of giving notice of liquidator’s appointment to the Registrar under Section 493. In the event of a creditors’ winding-up, the powers of directors cease except in so far as the Committee of Inspection, or if there is no such Committee, the creditors in general meeting may sanction that the same may be continued (Sections 491 & 505).

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(4) Every invoice, order for goods, or business letter issued by or on behalf of the company or a liquidator or a receiver or manager, in which the company’s name appears must contain a Statement that the company is being wound-up (Section 547). (5) As to whether a voluntary winding-up discharges the servants of the company, it would depend upon whether the business of the company has ceased or is being continued. Thus, it would depend on the facts of each case. A voluntary winding-up coupled with immediate cessation of the company’s business has been held to operate as a dismissal of the company’s servants [Reigate vs. Union Mfg. Co. (1981) I.K.B., 592 (Ch.)]. (6) Suits and other legal proceedings against the company are not automatically stayed but an application may be made by the liquidator or any creditor or contributory to the Tribunal to determine any question arising in the winding-up, e.g. enforcing of calls, staying of proceeding or any other matter. Generally, such an application can be made for exercising all or any of the powers which the Tribunal might exercise, if the company was being wound-up by the Tribunal (Section 518). (7) A voluntary winding-up shall not be a bar, enter alia, to the right of any creditor or contributory to have the company wound-up by the Tribunal; but in the case of such an application the Tribunal shall have to be satisfied that the rights of the creditors or contributories or both would be prejudiced by a voluntary winding-up (Section 440). 9.3.4 Position of various parties 9.3.4.1 Shareholders and contributories: A shareholder of a company is liable to pay the full amount on the shares held by him but nothing more. This liability continues even after winding-up, but for the purposes of winding-up, he is described by the Act as a contributory. Prior of a shareholder to the assets of the company is measured by the from membership. However, winding-up creates a new cause of action for the liquidator and the liquidator can demand of him the payment of the unpaid calls even if they had become time-barred before liquidation [Re. East Bengal Sugar Mills Ltd. (1982) 1 Cal. 1321. The liability arises from the fact that his name appears on the register of members [K.L. Goenka vs. S.R. Majumdar (1958) 28 Comp.. Cas. 536]. According to Section 429, the liability of a contributory shall create a debt accruing due from him at the time when his liability commenced, but payable at the time specified in the calls made on him for enforcing that liability (by the liquidator). Thus, the liability of a contributory, though commencing at the date of the winding-up, is only contingent during the winding-up, since until a call is made, it is nothing more then a mere liability to contribute, if necessary, to the company for payment of the debts due to its creditors and expenses of the winding-up. Such liability, however, creates a debt under Section 429 and it does not become payable until a call is made. It may be noted that the liability under this Section stands in striking contrast with the liability of a shareholder under Section 36(2) according to which all moneys payable by any member, to the company under the Memorandum or Articles shall be a debt due from him to the company. The debt under Section 36(2) arises ex-contractu, whereas the debt under Section 429 arises e-x-lege i.e. as a result of the statute on the company going into liquidation. Thus Section 429 gives the liquidator a new cause of action which a company itself might not have.

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The estate of the deceased shareholder is liable to the same extent as, it would have been if he had been alive (Section 430). Section 431 lays down that if a contributory becomes insolvent after the commencement of the winding-up, he becomes a stranger to the company; although his name remains on the list of contributories, his assignee in insolvency represents him for all purposes and is to be deemed a contributory. Under Section 432, where a body corporate which is a contributory in itself is ordered to be wound-up, either before or after it has been placed on the list of contributories, the liquidator of body corporate shall represent it for all the purposes of winding-up of the company and shall be deemed a contributory. A shareholder on the A list of contributories is liable to the extent to which his shares are not fully paid up. But the liability of a member on the B list arises only in certain specific circumstances, mentioned in Section 426. The A list comprises the present members and the B list the past members, who ceased to be members within one year prior to the winding-up. A past member is liable to contribute only when the present members have been unable to satisfy the contribution required from them in respect of their shares. A person who is both a contributory and a creditor of the company (in respect of dividends, profits or otherwise), cannot set off the debt due and owing from the company against his liability for call even if there is an express agreement to do so. In other words, the contributory has to make his contribution to the assets of the company without any right to claim a set-off in regard to the amount due to him from the company [Pure Milk Supply Co. Ltd. vs. Hari Singh A.I.R. (1963) Punj 22]. In addition to the aforesaid liabilities, Section 536 imposes a sort of restriction on the members; namely that in the case of voluntary winding-up, no transfer of share except transfers made to or with the sanction of the liquidator shall be made and that every alteration in the status of the members after the commencement of such winding-up shall be void. In the case of winding-up by or subject to the supervision of the Tribunal, every disposition of the property including actionable claims of the company and every transfer of shares or alteration in the status of its members made after the commencement of the winding-up shall be void unless the Tribunal otherwise directs. 9.3.4.2 Creditors: A company can never be declared insolvent, although it may have become insolvent in the sense that it is unable to pay its debts. Where it solvent company is being wound-up all the debts payable on a contingency and claims against the company, present or future, certain or contingent, ascertained or sounding only in damages, are admissible to proof against the company. A just estimate should be made of the possible value of such debts or claims as may be subject to any contingency or may sound only in damages or for some other reason may not bear a certain value (Section 528). As regards the rights of the creditors, company which is being wound-up for its inability to pay its debt, the same rules prevail as in the case of insolvency law in respect of debts provable, the valuation of annuities and future and contingent liabilities and the respective rights of secured and unsecured creditors (Section 529). The secured creditor may rely on the security and ignore the liquidation altogether, or value his security and prove for the balance of his debt, or give-up his security and prove the whole

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Corporate and Allied Laws

amount. Unsecured creditors are paid in the order prescribed by Section 530. Preferential creditors are paid first; liability for dividends is satisfied only if claims of outsiders are fully met. 9.3.4.3 Employees: A winding-up order by a Tribunal operates as a notice of discharge to employees and officers of the company, except when the business of the company is continued [Section 445(3)]. A voluntary winding-up which involves a discontinuation of the business also operates as a discharge, and may also give rise to a claim for damage where there is an agreement for employment for a fixed time [Reigate vs. Union of Manufacturing Company (1918) I.K.B. 592]. 9.3.5 Types of voluntary winding-up: There are two types of voluntary winding-up, viz. Members’ voluntary winding-up and Creditors’ voluntary winding-up. Where the directors are in a position to make the statutory declaration of solvency required under Section 488 of the Act, the winding-up would be conducted as a Members’ voluntary winding-up and would be controlled by the members themselves, the creditors would have no voice in the proceedings. If the directors do not make such a declaration, the winding-up would be conducted as a creditors voluntary winding-up and the creditors shall have a controlling voice in the procedure. In both the cases, the process of liquidation would be normally conducted without reference to the Tribunal; although the Tribunal shall have the power to determine any matter the liquidator or any creditor or contributory might refer to it. 9.3.5.1 Members’ voluntary winding-up–declaration of solvency: In respect of a members’ voluntary winding-up, two directors, where there are only two directors, and a majority of directors, where there are more than two, should make a declaration, called ‘declaration of solvency’, in Form No. 149 pursuant to Rule 313 of the Companies (Tribunal) Rules, 1959 verified by an affidavit. In the declaration, the following matters are required to be stated, namely, (i) that they have made a full enquiry into the affairs of the company, and (ii) that having made such enquiry, they have formed the opinion that the company has no debts or that it will be able to pay its debts in full within a period not exceeding three years from the commencement of the winding-up. To be effective: (a) it must have been made and filed with the Registrar within the five weeks immediately preceding the date of passing of the winding-up resolution; and (b) it must be accompanied by a copy of the auditor’s report on the profit and loss account of the company for the period commencing from the date of the company for the last account to the latest practicable date immediately before the making of the declaration and the balance sheet of the company made out as on the last-mentioned date and, also, embodies a statement of the company’s assets and liabilities as at that date. The report of the auditor must be prepared, as far as circumstances permit, in the manner laid down by the Act (Section 488). This accompaniment is intended to be an additional safeguard. Unless the above mentioned conditions are complied with, the resolution passed for voluntary winding-up would be invalid and the members’ voluntary winding-up cannot be effected [S.P. Bhargava vs. Rameswar A.I.R. (1952) M.P. 3]

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Where the declaration of solvency is made by the directors without any reasonable grounds that the company will be able to pay its debts in full within the period specified in the declaration, it would render them liable to imprisonment which may extend to 6 months and or to pay a fine exceeding Rs. 50,000. If the company is wound-up in pursuance of such a resolution within a period of 5 weeks after the declaration was made, but its debts are neither paid off nor provided for in full within the period specified in the declaration, it would be presumed, till the contrary is shown, that the directors did not have reasonable ground to form the opinion as to company’s solvency [Section 488(3) & (4)]. 9.3.5.2 Creditors’ voluntary winding-up: Where the declaration of solvency, referred to under members’ voluntary winding-up has not been made by the directors and filed with the Registrar, the winding-up is known as a Creditor’s voluntary winding-up [Section 488(5)]. 9.3.6 Procedure of winding-up: The procedure applicable to the two types of voluntary winding-up is somewhat different. The provisions under Sections 490 to 498 are applicable to a members’ voluntary winding-up, whereas Sections 511 to 521 apply to both types of voluntary winding-up. 9.3.6.1 Procedure of members’ voluntary winding-up: The procedure for a member’s voluntary winding-up of a company is narrated below: (i) At the Board’s meeting, the directors have to make a declaration of solvency under Section 488 of the Companies Act in Form 149 of the Companies (Tribunal) Rules and Forms. If there are more than 2 directors then the said declaration must be made by a majority of them. This declaration has to be filed with the Registrar of Companies together with the auditor’s report on the balance sheet and profit and loss account or income and expenditure account of the company made upto the date of the Board’s meeting, the time limit for such filing being 5 weeks before the passing of the resolution for the winding-up.

(ii) Next, the company has to pass at its general meeting a special resolution called “resolution for voluntary winding-up” (Section 454). At this very meeting or at any meeting subsequent thereto, one or more liquidators are to be appointed by the company; also his or their remuneration, if it is to be given, should be fixed at the said meeting (Section 490). (iii) Under Section 485, the aforesaid resolution to wind-up the company voluntarily has to be published in Official Gazette as also in a newspaper circulating in the district where the Registered Office of the company is situated. This is required to be made within 14 days of the passage of the resolution. (iv) Under Section 493, the company has to give notice of appointment of the liquidator to the Registrar. The notice is to be given in form No. 36(b) of the Companies (Central Government’s) General Rules and Forms. The liquidator has also to separately notify the Registrar, under Section 516, about his appointment. (v) The liquidator is then required to do the following things, namely, speedy realisation of assets, preparation of list of creditors, admission of proof, settlement of lists of

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Corporate and Allied Laws contributories. making of such calls as are necessary, payment to secured creditors of costs including the liquidator’s own remuneration, payment of preferential claims and distribution of the surplus pro rata amongst the contributories after meeting all the claims of creditors and after adjusting all rights and claims. For resolving any doubts and difficulties, application may be made to the Tribunal.

(vi) Duty of liquidator to call general meeting : In the event of a voluntary winding-up being continued for more than a year, the liquidator shall call a general meeting of the company at the end of the first year from the commencement of the winding-up and at the end of each succeeding year within three months from the end of each or such longer period as the Central Government may allow. Also, he shall lay before the meeting an account of his acts and dealings and of the conduct of the winding-up during the preceding year together with a statement in Form No. 153 [pursuant to Rule 328 of the Companies (Tribunal) Rules 1959] containing stipulated particulars in respect of winding-up proceedings and the position of the liquidation. Any failure on the part of the liquidator in complying with these provisions shall render him liable to a fine to the extent of Rs. 100 in respect of each failure (Section 496). The liquidator has to keep all moneys in a scheduled bank; he must strictly adhere to the provisions of Section 553 and Rules 324 to 326 of the Companies (Tribunal) Rules. Where the winding-up of a company is not concluded within one year after its commencement, Section 551 requires that a statement by the liquidator in Form 153 of the Companies (Tribunal) Rules, should be filed with the Registrar within 2 months of the close of such year (if he is not exempted from so doing by the Central Government) and thereafter until the winding-up is concluded, at intervals of not more than one year or such shorter interval as may be prescribed. The statement should be audited by a chartered accountant. (vii) Final meeting and dissolution : When the winding-up is complete, the liquidator shall, subject to the provisions contained in Section 498, make-up an account of the winding-up which must show as to how the winding-up has been conducted and the property of the company has been disposed of, also he shall call a general meeting of the company to place before it the account [Form No. 155, pursuant to Rule 329 of the Companies (Tribunal) Rules]. Such a meeting is required to be called by advertisement which must specify the time, place and subject and published, not less than one month before the meeting, in the Official Gazette as well as some newspapers circulating in the district where the registered office of the company is situated. Besides, he shall, within one week of the meeting, send to the Registrar and the Official Liquidator a copy of the account and also a return to each of them as regards the holding of the meeting and of the date thereof [Section 497(2) & (3)]. Where the meeting is not held for want of quorum, the liquidator shall, instead of the said return, make a return, to the effect that the meeting was duly called but no quorum was present thereat [Section 497(4)]. Upon receiving the account and either of the returns under Sub-section (3) or (4), the Registrar must immediately register them, with a view to ensuring that the winding-up process of

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the companies (which have been voluntarily wound-up should not be conducted in a manner prejudicial to the interest of the shareholders or of the public. On receipt of the final statement of accounts and the returns from the liquidator, the Official Liquidator shall make a scrutiny of the books and papers of the company. For the purpose, he shall be provided with all reasonable facilities by the liquidator and all officers (past and present) of the company. Where the Official Liquidator, after scrutiny of the returns and accounts, reports to the Tribunal that the affairs of the company have not been conducted in a manner prejudicial to the interests of its members to public interest, the company is deemed to have been dissolved from the date of the submission of the report. If the official Liquidator, on such a scrutiny, reports to the Tribunal that the affairs of the company have been conducted in a manner prejudicial to the interest of its members or the public, the Tribunal shall direct the Official Liquidator to make a further investigation into the affairs of the company, and for that purpose, he shall be invested with all such powers as the Tribunal may deem fit [Section 497(6A)I. On receipt of the report as regards further investigation, the Tribunal may either make an order that the company shall stand dissolved with effect from the date which it shall specify or shall make such other order as the circumstances of the case might justify [Section 497(6B)]. 9.3.6.2 Procedure of creditors’ voluntary winding-up: (1) The creditors of a company would be mainly concerned if the company arrives at the decision that it should wind-up itself because of its inability to meet its liabilities. The company in that case must call a meeting of the creditors to be held on the day or the day next following the next date on which there is to be held a general meeting of the company at which the resolution for voluntary winding-up is to be proposed [Section 500 (l)]. (2) Notice of the meeting is to be sent to the creditors and it must also be advertised once at least in the Official Gazette and in two newspapers circulating in the district where the registered office of the company is situated [Section 500(2)]. At the meeting of the creditors, the Board of Directors must cause a full statement of the company’s affairs, and a list of the company’s creditors and the estimated amount of their claims, to be laid before the meeting of the creditors. The Board of directors also must appoint one of their members to preside over the said meeting [Section 500(3)]. If the meeting of the company for passing the winding-up resolution, is adjourned and at the adjourned meeting the resolution is passed, then any resolution passed at the creditors meeting, though prior in date to that for winding-up would nevertheless be valid and effective as if it had been passed after the passing of the winding-up resolution [Section 500(5)1. The resolution passed at the creditors’ meeting shall be notified by the company to the Registrar within ten days of the passing thereof (Section 501). In a creditors voluntary winding-up, the creditors and the members appoint a liquidator in their respective meetings. If different persons are nominated, the creditors’ nominee shall

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Corporate and Allied Laws become the liquidator. However, any director, member or creditor may, within seven days after the nomination has been made by the creditors, apply to the Tribunal for an order that the company’s nominee shall be the liquidator instead of, or jointly with, the nominee on

(3) If a vacancy occurs by death, resignation or otherwise in the office of a liquidator (other than the one appointed by or by the direction of the Tribunal) the creditors in general meeting may fill in the vacancy (Section 306). (4) The creditors at the first meeting under Section 400, or at a subsequent meeting may appoint a Committee of Inspection consisting of not more than five persons [Section 5031. The members of the Committee are to be nominated by the company at a general meeting. If any of the nominees is not acceptable to the creditors, they may by resolution choose any person in his place. However, the Tribunal is empowered to direct otherwise. (5) The Committee of Inspection and, if there is no such Committee the creditors, may fix the remuneration of the liquidator. If they do not fix the remuneration, the Tribunal would do so (Section 504). Section 465(2) to (10) applicable to Committee of Inspection appointed in a compulsory winding-up will also apply to the Committee under Section 503, subject to such rules as may be made by the Central Government [Section 503(5)]. (6) Where the voluntary winding-up continues for more than a year, the liquidator must call a general meeting of the company, as in the case of members’ winding-up as well as meeting of the creditors at the end of the first year of the commencement of winding-up within three months from the end of each year or such longer period as the Central Government may allow, Such a meeting also must be called at the end of each succeeding year in the same manner. The liquidator must lay before the meeting an account of his acts and dealings and of the conduct of the winding-up during the preceding year and also a statement in Form No. 153 pursuant of Rule 327 of Companies (Tribunal) Rules (Section 508). (7) As soon as the affairs of the company have been wound-up, the liquidator shall: (a) make-up an account of the winding-up showing how the winding-up has been conducted and the property of the company has been disposed of, in Form No. 155 [pursuant to Rule 329 of the Companies (Tribunal) Rules] and (b) call a general meeting of the company and a meeting of the creditors for the purpose of laying the account before the meeting and giving any explanation thereof. Note: To provide for the scrutiny of the records of a company which is being wound-up voluntarily by the creditors, provisions have been made in Sub-sections (5), (6), (6A) and (6B) of Section 509 which are identical with those contained in the corresponding Sub-sections of Section 497 which have been discussed earlier in the Study Paper. 9.3.7 Duties and responsibilities of liquidator in creditors’ voluntary winding-up : The liquidator in a creditors’ voluntary winding-up administers the company is very much the same way in which the directors administer it before the commencement of winding-up. To that extent a liquidator can rightly be described as the agent of the company.

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The liquidator owes certain duties towards the creditors and contributories under the statute, including that of administration of the assets of the company. These he holds in trust for them. To this extent he is trustee and he must discharge his fiduciary duties honestly. If he neglects these duties, he may be held personally liable by the party prejudiced or for misfeasance proceedings, under Section 543. Thus the liquidator in a creditor’s voluntary winding-up has a dual status both as agent and trustee.. Like any other liquidator, it is also his duty to take into his custody or under his control all the property, effects and actionable claims to which the company is or appears to be entitled. To discharge this responsibility, it is his duty to take the aid, if need be, if the Chief Presidency Magistrate or the District Magistrate within whose jurisdiction the aforesaid property, etc. are found (Section 456). As regards the distribution, on realisation, of the assets of the company, the liquidator is under an obligation to apply such assets subject to the provisions of the Act as to preferential payment, in satisfaction of its liabilities pan passu. He must thereafter distribute the residue among the members according to their rights and interest in the company (Section 511). For the purpose, the liquidator has to ascertain the assets and liabilities of the company and drawup a scheme of distribution. It is the liquidator’s duty to compel the directors or the officers of the company in liquidation to supply him with a statement as to the affairs of the company verified by an affidavit containing the particulars relating, inter alia, to: (i) the assets of the company, stating separately the cash balance in hand and at banks and the negotiable securities held by the company;

(ii) its debts and liabilities; (iii) names, residence and occupations of all creditors and amounts standing to their credit together with dates and amounts of securities given therefor; and (iv) debts due to the company and the amount likely to be realised on their account (Section 511A read with Section 454). Within 30 days of his appointment, the liquidator is duty-bound to publish his appointment in the Official Gazette and notify the same in the prescribed form to the Registrar (Section 516). On the detection of a fraud having been committed by promoters, directors, etc., it is the liquidator’s responsibility to invoke the aid of Section 519 and apply to the Tribunal for the public examination of them. For the determination of any question arising in the winding-up or for getting the rights and powers of the Tribunal regarding enforcement of calls, staying of proceedings or other matters exercised by it, it is the responsibility of the liquidator to apply to the Tribunal (Section 518). Where the voluntary winding-up continues for more than a year, the liquidator must call a general meeting of the company and a meeting of the creditors at the end of the first year of the commencement of winding-up and at the end of each succeeding year, or as soon thereafter as may be convenient within 3 months from end of year or such longer period as the Central Government may allow. The liquidator must lay before the meetings an account of his

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Corporate and Allied Laws

acts and dealings and of the conduct of the winding-up during the preceding year and also a statement in Form No. 153 pursuant to Rule 327 of Companies (Tribunal) Rules (Section 508).] As soon as the affairs of the company have been wound-up, the liquidator shall: (a) make-up an account of the winding-up showing how the winding-up was been conducted and the property of the company has been disposed of, in Form No. 155 [pursuant to Rule 329 of Companies Tribunal (Rules)]; and (b) call a general meeting of the company and a meeting of the creditors for the purpose of laying the account before the meeting and giving any explanation thereof. Besides, the liquidator, within one week from the date the meeting is held, must send to the Registrar and the Official Liquidator a copy of each of the account and also a return to each of them regarding the holding of the meeting and of the date thereof. Where the meeting is not held for want of quorum, the liquidator shall, instead of the said return, make a return to the effect that the meeting was duly called but no quorum was present thereat. Under Section 512(3), it is the liquidator’s duty to pay the debts of the company and to adjust the rights of the contributories themselves. 9.3.8 Position of a ‘voluntary’ liquidator: It has been held that a voluntary liquidator is not an officer of the Tribunal, [Re. Hills Waterfall etc. Co. (196) Ch. 946, 954].- also that he can more rightly be described as the agent of the company [Knowles Scott (181), I Ch. 717]. The status of a liquidator as an agent of the company can be appreciated if one considers that in a voluntary winding-up the liquidator is appointed by the shareholders, at a general meeting, both in the case of members’ and the creditors’ winding-up, the only difference between the two is that where the person nominated by the creditors at their separate meeting is different from the one proposed by the members, the nominee of the creditors takes the office of the liquidator. Further, under Section 512 of the Companies Act, a liquidator can exercise certain powers, with the sanction of a special resolution of the company, in the case of a members winding-up and in the case of creditors’ winding-up with the sanction of the Tribunal or the Committee of Inspection or (if there is no such committee) of the meeting of the creditors’ be also has the right to exercise a number of powers on his own as the agent of the company’ A company in voluntary winding-up thus is administered by the liquidator in very-much the same way as it is done by the directors, before the commencement of winding-up. It must, how ever, be remembered that the liquidator owes certain duties towards the creditors and contributories under the statute including that of administration of the assets of the company. These he holds in trust for them. In so far as this, he is a trustee. If he neglects these duties, he may be held personally liable by the party prejudiced, or misfeasance proceedings under Section 543 can be taken against him. Thus the liquidator has a dual status both of agent and trustee. 9.3.9 Steps to be taken in a case where the company is solvent but the business for which it was formed has been completed:

Corporate Winding-up and Dissolution (a) Prepare a statement of its assets and-liabilities [Section 488(2)].

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(b) Prepare and file with the Registrar of Companies a statutory declaration by directors that the company will be able to pay its debts in full within such period not exceeding three years from the commencement of the winding-up as may be specified in the declaration. This must be done within five weeks before that date of the passing of the winding-up resolution, and must be delivered to the Registrar before that date. It may be accompanied by a copy of the report of the auditors of the company on the profit and loss account of the company (for the period commencing from the date up to which last such account was prepared and ending with the latest practicable date immediately before the making of the declaration) and the balance sheet of the company (made out as on the last-mentioned date). It must also embody a statement of the company’s assets and liabilities, as at that date [Section 488(3)]. (c) Call a general meeting of the company to pass a resolution for the winding-up of the company (Section 484). As to resolution, it should be in accordance with the provisions of Section 189(1). (d) Hold meeting of shareholders in accordance with notice so as to pass the resolution referred to in (c) above. (e) Appoint liquidator for the purpose of winding-up the affairs and distributing the assets of the company (Section 490). (f) The company must give notice of appointment of liquidator to the Registrar of Companies (Section 493). 9.3.10 Provisions applicable to every voluntary winding-up: These provisions are contained in Sections 510 to 521. These are summarised below: (a) As regards the distribution, on realisation of the assets of the company in liquidation, such assets should be applied subject to the provisions of the Act, as to preferential payment in satisfaction of its liabilities pari passu and the residue will be distributed among the members according to their rights and interests in the company (Section 511). For the purpose the liquidator has to ascertain the assets and liabilities of the company and draw-up a scheme of distribution. (b) The liquidator in all cases is entitled to be supplied with a statement as to the affairs of the company verified by a affidavit containing the particulars relating, inter alia, to: (i) the assets of the company stating separately the balance in hand and at banks, and the negotiable securities held by the company. (ii) its debts and liabilities; (iii) names, residence and occupations of all creditors and amounts standing to their credit together with dates and amounts of securities given therefor; and (iv) debts due to the company and the amount likely to be realized on their accounts. The liquidator can compel one or more directors or other officer of the company to submit such a statement within 21 days from the date of the commencement of the winding-up.

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Corporate and Allied Laws He may also extend the time up to a maximum period of 3 months from that date (Section 511A read with Section 454).

(c) A body corporate cannot be appointed as a liquidator (Section 513). (d) If for any reason whatever there is no liquidator to act, the Tribunal may appoint the Official Liquidator or any other person as a liquidator and appoint in his stead the official Liquidator. The Registrar is also empowered to apply to the Tribunal tot; such appointment or removal so that the liquidation proceedings be accelerated and the proper conduct of the liquidation by a competent liquidator be ensured (Section 515). (e) Within 30 days of his appointment, the liquidator is required to publish his appointment, in the Official Gazette and notify the same in the prescribed form to the Registrar (Secton516). (f) Section 518 empowers the liquidator or any contributory or creditor to apply to the Tribunal to have questions determined or to exercise the powers as specified in the Section. (g) Section 519 empowers the liquidator to apply to the Tribunal for public examination of promoters, directors, etc. on the detection of a fraud having been committed by them. (h) All costs charges and expenses properly incurred in the winding-up are required to be paid, subject to the rights of secured creditors, out of the assets of company in priority to all other claims (Section 520). 9.3.11 Summary procedures for winding-up 9.3.11.1 Members’ voluntary winding-up: (i) Directors (both where 2 directors majority where more than 2 directors) have to make a declaration of solvency under Section 488 at the Board Meeting. This declaration together with the auditors report on the balance sheet and profit and loss account (or income and expenditure account) of the company made-up to the date of the Board Meeting shall be filed with the Registrar, the time-limit for such filing being 5 weeks before the passing of the resolution for winding-up;

(ii) Company has to pass at its meeting a special resolution (Section 484) and appoint one or more Liquidators, at this or at subsequent meeting and fix remuneration if to be paid (Section 490); (iii) Company has to publish the said resolution in the Official Gazette as also in newspaper circulating in the district where its Registered Office is situated, within 14 days of the passage of the resolution (Section 485); (iv) Company is required to give notice of the appointment of Liquidator to the Registrar (Section 493) and the Liquidator to separately communicate his appointment to the Registrar under Section 516; (v) Then the Liquidator has to do the following things e.g., speedy realisation of assets, preparation of list of creditors, admission of proof, settlement of List of contributories,

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making of necessary calls, payment to secured creditors, payment of costs, payment of preferential claim, etc.; (vi) Liquidator has to call general meeting at the end of each year under Section 496; (vii) Liquidator has to file with the Registrar a Statement as required by Section 551, where the winding-up is not concluded within ODC year after its commencement; (viii) Liquidator has to call final meeting for the purpose of dissolution of the company, and for that matter to proceed according to the provisions contained in Sections 497 and 498. 9.3.11.2 Creditors’ voluntary winding-up: The creditors would be mainly concerned if the company arrives at the decision that it should wind-up itself because of the inability to meet its liabilities. Therefore: (i) the company has to call creditors’ meeting to be held on the day or the day next following the date on which there is to be held a general meeting of the company at which the resolution for voluntary winding-up is to be proposed [Section 500(1)];

(ii) the company has to send notice of the meeting to creditors and also advertise the notice in two newspapers circulating in the district of its registered office [Section 500(2)]; (iii) the Board of Directors, in the creditors’ meeting, has to cause a full statement of the position of the company’s affairs and a list of company’s creditors and the estimated amount of their claims to the laid [Section 500(3)]; (iv) the company has to notify the resolution passed thereat to Registrar within 10 days of the passing thereof [Section 501(1)1; (v) creditors’ nominee as Liquidator to call meeting of the company and of creditors at the end of each year in compliance with the requirements of Section 508; (vi) the liquidator has to call the final, meeting in compliance with the provisions of Section 509.

9.4

GENERAL PROVISIONS ON WINDING-UP

Sections 528 to 560 contain provisions applicable to every mode of winding-up. Some of the important provisions are stated below: (1) Section 551 prescribes that information as to the pending liquidation, unless exempted by the Central Government, shall be given by the liquidator within 2 months of the expiry of the first year and thereafter at intervals of not more than one year, by filing a statement in the prescribed form [Form No. 153 Companies (Tribunal) Rules]; also that the statement shall be audited by a chartered accountant. The statement shall have to be riled (a) in the case of a winding-up by or subject to the supervision of the Tribunal, in the Tribunal; and (b) in case of a voluntary winding-up, with the Registrar.

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Corporate and Allied Laws N.B. Students should not that this requirement is over and above the requirements under Sections 497 (in the case of members voluntary winding-up) or 508 and 509 (in the case of creditors voluntary winding-up).

(2) Debts that are provable: Debts of all descriptions in a winding-up are payable only when these have been proved. All debts payable on a contingency and claims against the company, whether present or future, certain or contingent, ascertained or unascertained, can be proved against a company; when the amount of a debt cannot be ascertained, a fair estimate thereof may be made for purposes of proof (Section 528). This Section applies to proof of debts when the company is in a solvent state i.e. when its assets are sufficient to pay all its debts and liabilities and the costs of the winding-up. Where the company is insolvent, Section 528 would be applicable. In the winding-up of an insolvent company, the same rules are applicable as regards: (i) debts provable; (ii) the valuation of annuities and future and contingent liabilities and (iii) the respective rights of secured and unsecured creditors, as those in the case of an estate of person adjudged insolvent under the Insolvent Law. [Section 529(1)]. However, the security of every secured creditor shall be deemed to be subject to a pari passu change in favour of the workmen to the extent of the workmen’s portion therein, and, where a secured creditor instead of relinquishing his security and proving his debt, opts to realise his security, then (a) the liquidator shall be entitled to represent the workmen and enforce such charge; (b) any amount realised by the liquidator by way of enforcement of such charge shall be applied rateably for the discharge of workmen’s dues, and (c) so much of the debt due to such secured creditor as could not be realised by him by virtue of the foregoing provisions of this proviso or the amount of the workmen’s portion in his security, whichever is less shall rank pari passu with the workmen’s dues for the purposes of Section 529A [Proviso added to Sub-section (1) of Section 529 by the Companies (Amendment) Act, 1985]. All persons who in any such case would be entitled to prove for and receive dividends out of the assets of the company may come in under the winding-up, and make such claims against the company as they respectively are entitled to make by virtue of this Section [Sub-section (2)]. If, however, a secured creditor, instead of relinquishing his security and proving for his debts, proceeds to realise his security, then he shall be liable to pay his portion of the expenses incurred by the liquidator (including a provisional liquidator) for the preservation of the of a security before it is realised by the secured creditor for the purpose of sub-section (2), the portion of expenses which the secured creditor shall be liable to pay shall be the expenses less an amount which bears to such expenses the same proportion as the workmen’s portion in relation to the security bears to the value of the security. For the purposes of Section 529, Section 529A and Section 530: (a) [“workmen” in relation to a company, means the employees of the company being

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workmen within the meaning of the Industrial Disputes Act, 1947: i.e., any person (including an apprentice) employed in any industry to do any skilled, manual, supervisory, technical or clerical work for hire or reward, whether the terms of employment be express or implied, but does not include any such person: (i) who is subject to the Army Act, 1950, or the Air Force Act, 1950, or the Navy (Discipline) Act, 1934; or (ii) who is employed in the police service or as an officer or other employee of a prison; or (iii) who is employed mainly in a management or administrative capacity, or (iv) who, being employed in a supervisory capacity, draws wages exceeding one thousand rupees per-mensum or exercise, either by the nature of the duties attached to the office or by reason of the powers vested in him, functions mainly of a managerial nature.]; (b) “workmen’s dues” means the aggregate of the following sums due from the company to its workmen, namely: (i) all wages, salaries including wages payable for time or piece work and salary earned wholly or in part by way of commission of any workmen, in respect of services rendered to the company and any compensation payable to any workman under any of the provisions of the Industrial Disputes Act, 1947; (ii) all accrued holiday remuneration becoming payable to any workman, or in the case of his death to any other person in his right, o the termination of, the winding-up other or resolutions; (iii) unless the company is being wound-up voluntarily merely for the purposes of reconstruction or of amalgamation with another company or unless the company has, at the commencement of the winding-up, under such a contract with insurers as mentioned in Section14 of the Workmen’s Compensation Act, 1923, rights capable of being transferred to and vested in the workman, all amounts due in respect of any compensation or liability for compensation under the said Act in respect of the death or disablement of any workman of the company. In other words, in the absence of alternative circumstances mentioned in the beginning of this clause the provision of this clause will fall within the provision of the phrase “workmen’s dues”; (iv) all sums due to any workman from a provident fund, a gratuity fund or any other fund for the welfare of the workman maintained by the company. (c) “workmen’s portion”, in relation to the security of any secured creditor of a company, means the company which bears to the value of the security the same proportion as the amount of the workmen’s dues bears to the aggregate of (i) the amount of

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Corporate and Allied Laws workmen’s dues, and (ii) the amounts of the debts due to the secured creditors. It has been exemplified by the following statutory illustration.

Illustration The value of the security of a secured creditor of a company is Rs. 1,00,000. The total amount of the workmen’s dues is Rs. 1,00,000. The amount of the debts due from the company to its secured creditors is Rs. 3,00,000. The aggregate of the amount of workmen’s dues and of the amounts of debts due to secured creditors is Rs. 4,00,000. The workmen’s portion of the security is therefore 1/4th of the value of the security, i.e. 25,000, [Sub-section (3) added to Section 529 by the Companies (Amendment) Act, 1985]. Now let us illustrate the significance of the Explanation aforementioned by reference to the statutory illustration stated above. The facts given in the above illustration remain the same. The liquidators incur Rs. 10,000 for the preservation of the security before it is realised by the secured creditor. Now what is the portion of Rs. 10,000 that should be borne by the secured creditors? It is equal to the following equation: Whole of expenses – Whole of expenses × = Rs. 10,000 ×
10,000 × 25,000 1,00,000

Workmen ' s portion Value of the security

= Rs. 10,000 – 2,500 = Rs. 7,500. This is the amount to be borne by the secured creditors. ♦ Overriding preferential payment: Under Section 529A (incorporated by the 1985 Amendment Act), notwithstanding anything contained in other provisions of this Act or any other law for the time being in force in the winding-up of a company – (i) workmen’s dues and (ii) debts due to secured creditors to the extent such debts rank, under clause (c) of the proviso to Sub-section (1) of Section 529, pari passu with such dues, shall be paid in priority to all other debts. These debts payable under (i) and (ii) above shall be paid in full, unless the assets are insufficient to meet them, in which the case they shall be paid in equal proportions. Note: The aforesaid rules of insolvency as contained in Section 529 will be applicable only in respect of the three matters specified under paragraph (i), (ii) and (iii) but no further; and they apply except in so far as special provisions are contained in the Companies Act Italia vs. Free Press Journal (1956) M.L.J. 463. Further Section 529 shall cease to be applicable as soon as it is found that the company in the course of

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winding-up is not insolvent [Re. Fine Industrial Commodities Ltd. (1953) 3 A.E.R. 707]. (3) Preferential payments: Subject to the provisions of Section 529A (discussed earlier), the following debts must, according to provisions contained in Section 530, as amended by the 1996 Amendment Act, be paid in priority to the claims of unsecured creditors: (a) All revenues, taxes, cesses and rates due to the Central or State Government or a local authority, having become due and payable within the twelve months before the relevant date; (b) All wages and salaries of an employee for service rendered for a period not exceeding four months within the preceding 12 months next before the relevant date, but not exceeding Rs. 20,000 in any one case; (c) All accrued holiday remuneration; In case of (b) and (c) where amount is paid out of money advanced by another person for that purpose, that person, is subrogated to rights of employee who has been paid [Section 530(4)]; (d) Unless the winding-up is merely for purposes of amalgamation or of reconstruction employer’s contribution to the State Insurance Scheme under the Employees’ State Insurance Act, 1948 payable during 12 months before the relevant date and all amounts due in respect of any compensation or liability for compensation in respect of death or disablement compensation under the Workmen’s Compensation Act, 1923; (e) All sums due to any employee from any fund including a provident, pension or a gratuity for the welfare of the employees, maintained by the company; and Expenses payable by any company in respect of an investigation held under Section 235 or 237 of the Act. For the purposes of Section 530: (i) Any remuneration in respect of a period of holiday or of absence from work through sickness or other good causes shall be deemed to be wages in respect of services rendered to the company during that period; (ii) The expression “accrued holiday remuneration” includes, in relation to any person, all sums which, by virtue either of his contract of employment or of any enactment (including any order made or direction given under any enactment), are payable on account of the remuneration which would, in the ordinary course, have become payable to him in respect of a period of holiday, had his employment with the company continued until he became entitled to be allowed the holiday; (iii) The expression “employee” does not include a workman (added by the Companies (Amendment) Act, 1985 (w.e.f. 29.5.85); and

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Corporate and Allied Laws (iv) The ‘relevant date’ means in the case of winding-up by the Tribunal: (a) the date of the appointment of first appointment of a provisional liquidator; or (b) if no such appointment was made, the date of the winding-up order, Unless, in either case the company had commenced to be wound-up voluntarily before that date.

In all other cases, it means the date of voluntary winding-up resolution. If the assets are insufficient to pay the foregoing preferential debts in full they abate in equal proportions. If necessary, these debts may be paid out of the proceeds of any assets subject to a floating charge. The order of priority in paying off debts in a winding-up may be roughly worked out as follows: (i) Secured creditors (mortgagees); (ii) costs and charges of winding-up [In a voluntary winding-up automatically this has priority. In a compulsory winding-up. Tribunal has to give it priority by order (See Section 576 and 520); (iii) preferential debts (Section 530); (iv) floating charges [See Section 530(5)(b)]; and (v) unsecured creditors. The above does not affect debts that are secured by a fixed charge which have to be paid up to the value of the property concerned. If there is any surplus, capital is returned to preference shareholders first and then to equity shareholders. If there is still any surplus left, it depends on the articles whether preference shareholders are entitled to share that surplus. Section 530(1) requires that the revenues, taxes, etc. should have become due and payable within the period of 12 months immediately preceding the relevant date. The arrears of sales tax not to be paid preferentially under Section 530 although the same become ‘recoverable’ as arrears of land revenue under the Sales-tax Act. The words ‘recoverable’ arid ‘payable’ have got completely different connotations. The word ‘revenues’ used in Section 530(1)(a) of the Companies Act means revenues which have become due and payable as revenues within the next 12 months before the relevant date, and not revenues which are recoverable as arrears of land revenue. Sales tax, assessed after winding-up, is not revenue, which has become due and payable within 12 months next before the relevant date. Therefore, it cannot be paid preferentially under Section 530. [Sales-tax Officer, Kanpur vs. Official Liquidator (1968) 38 Comp. Case 430]. Advance income tax demanded and due under the Income-tax Act is to be paid preferentially under Section 530(1)(a) of the Companies Act provided it becomes due and payable within the twelve months next before the relevant date. [Joint Official Liquidator vs. Comm. Of Income-tax (1954) I.M.L.J. 282 – AIR 1954 Mad. 858]. But the Calcutta Tribunal has held a contrary view. [Suburban Bank Ltd. AIR (1953) Cal. 487]. Ex-gratia payments to employees of the company are not within the ambit of Section 530(1)(b) [Vijay Card Board Co. Ltd. vs. Collector, District Hyderabad AI (1957) Andhra

Corporate Winding-up and Dissolution Pradesh 725].

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Under Section 530(4), the bank which provided an overdraft for making money available for payment of wages, is entitled to preferential payment for the money so advanced and paid [Re. Rampgill Mill Ltd. (1967) Comp. L.J. 262]. ‘Bonus’ payable to staff appears to be covered by the expression ‘all wages’ occurring in Section 530(1)(b) and therefore, is to be paid preferentially to tile extent laid down in Section 530(1)(b) especially if it is due under the Payment of Bonus Act. The company’s contribution payable to the Employees State Insurance Corporation is, for the purposes of Section 530, a preferential payment [Re. Bihar Bolts Engineering Works Ltd. Air 1959 Pat. 417]. In the winding-up of a company, an advocate is entitled to preferential payment of his fees and expenses out of the fruits of a litigation which he had successfully conducted for the company which are in the hands of the liquidator [Kutti Krishna Menon vs. Cochin Mercantile Ltd. (1969) 32 Comp. Case 578]. (4) Effect of winding-up on antecedent and other transactions: With a view to affording better protection to the creditors of a company, the principle of fraudulent preference as existent in the insolvency laws, has been extended to companies so as to render void certain categories of transactions entered into within a limited period before the commencement of winding-up. The detailed provisions in this regard are contained in Sections 531 to 537 of the Act, which are summarised below: (i) Fraudulent Preference: All transfers of property, movable or immovable, made by delivery of goods or payment of money etc., if made by an insolvent person within 3 months before the presentation of insolvency petition, would be held to be a fraudulent preference of its creditors and would be invalid. Similarly, in the case of a company all such transfers, if made within 6 months before the commencement of its winding-up, would be deemed to be a fraudulent preference of its creditors, and would be invalid (Section 531). For the purpose of proving a fraudulent preference, two things need be shown, viz.: (a) that in the case of a winding-up by or subject to the supervision of the Tribunal the transaction took place within 6 months before the presentation of the petition and in the case of voluntary winding-up, the transaction took place within 6 months of passing of resolution for winding-up [Section 531(2)]; and (b) that the main motive in the mind of the company, acting through its directors, was to prefer one creditor to the other [In Re. Jackson & Bassford (1906) 2 Ch. 467]. On the basis of the above-mentioned provisions of Section 531, let us examine the following situation: A company has been running into losses. To one of its creditors it gives a mortgage on its immovable property on 1st May, 1985. On October 15, 1985,

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Corporate and Allied Laws a winding-up petition is presented to the Tribunal, which passes an order of windingup on 30th November, 1985. It is clear from this situation that the transaction of mortgage on the company’s immovable property took place within 6 months before the presentation of the petition for winding-up. Now, if it can further be proved that the dominant motive of the company was to prefer one creditor to other creditors, then the transaction would be deemed to be fraudulent preference and hence invalid. The real test is whether the debtor (the company in the said illustration) in making the transfer is doing what he himself felt bound or compelled to do. If so, the case does not fall within the purview of fraudulent preference [Nobin Kishori vs. Jugneshwar AIR (1983) Cal. 809; In re. MIC Trust Ltd. (1933) Ch. 542].

(ii) Avoidance of voluntary transfer: Any transfer of movable or immovable property or any delivery of goods by a company, save and except a transfer or delivery in the course of the company’s business in favour of a purchaser or encumbrancer in goods faith and for valuable consideration, shall be void against the liquidator, if such transfer or delivery is made within one year before the presentation of the winding-up petition by or subject to the supervision of the Tribunal or the passing of a resolution for the voluntary winding-up (Section 531A). (iii) Void transfer: Any transfer or assignments by a company of all the property to trustees for the benefit of its creditors are void (Section 532). (iv) Liabilities of fraudulently preferred persons: If an act done by a company is invalid under Section 531 as a fraudulent preference of a person interested in property mortgaged or charged in his favour to secure the company’s debt, the person so preferred would be liable, as a surety for the debt to the extent of the mortgage (or the charge) on the property or the value of his interest, whichever is less. The value of the said person’s interest shall be determined at the date of the transaction constituting the fraudulent preference and shall be determined as if the interest were free of all encumbrances other than those to which the mortgage or charge the company’s debt was then subject (Section 533). (v) Limitation on rights under a floating charge: There are two major statutory limitations to rights arising out of a floating charge. First, a floating charge created within 12 months of the commencement of winding-up unless it is proved that the company immediately after the creation of the charge was solvent, is invalid except up to the amount of any cash paid to the company at the time or subsequent to the creation of, and in consideration for, the charge together with interest on the amount at 5% per annum or other prescribed rate (Section 534). Secondly, preferential debts have also priority over debts secured by a floating charge (Section 123 and 530) and they must be paid out of the assets covered by a floating charge to the extent that they cannot be met out of assets available for payments of unsecured creditors. (vi) Disclaimer of onerous property: The liquidator may, with the leave of the Tribunal,

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disclaim any onerous property within twelve months of the commencement of the winding-up. If the existence of any disclaimable property does not come to the knowledge of the liquidator within one month after the commencement of the windingup, he can disclaim at any time within 12 months after he has become are fit. The Tribunal may, however, extend the time. An onerous property may consist of: (a) land of any tenure, burdened with onerous covenants (b) shares or stocks in companies; (c) any other property which is unsaleable or is not readily saleable, being onerous, binding the possessor thereof either to perform any onerous act or to pay any sum of money; or (d) unprofitable contracts. His right to disclaim is lost if, within twenty eight days or such extended period as may be, allowed by the Tribunal of receiving a demand from any interested person to make his decision, (he does not give notice that he intends to apply for leave to disclaim). Any person injured by disclaimer is treated as a creditor of the company to the amount of compensation or damages payable in respect of the injury, and may prove in the winding-up to the extent of the injury (Section 535). (vii) Avoidance of transfers etc.: In the case of a voluntary winding-up, any transfer of shares in the company which has not been sanctioned by the liquidator, and any alteration in the status of the members of the company made after the commencement of the winding-up, is void. In the case of a winding-up by or subject to the supervision of the Tribunal, all disposition of properties (including actionable claims) belonging to the company as well as transfer of shares in the company or alteration in the status of its members which are made after the commencement of the winding-up are void unless otherwise ordered by the Tribunal (Section 536). (viii)Avoidance of certain attachment, etc.: In the case of any company which is being wound by or subject to the supervision of the Tribunal, (a) any attachment, distress or execution put in force, without leave of the Tribunal, against the estate or effects of the company, after the commencement of the winding-up or (b) any sale held, without leave of the Tribunal, of any of the properties or effects of the company after such commencement is void. These provisions, however, will not apply to any proceeding for the recovery of any tax or impost or any dues payable to the Government (Section 537). In Rajratna Narabhai Mills Co. Ltd. (In liquidation) by its Official Liquidator vs. New Quality Bobbin Works (1973) 43 Comp. Case 131. Three issues emerged for decision. These are as follows: First, where an attachment of the company’s property under Tribunal’s order takes place

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Corporate and Allied Laws

prior to the filing of the winding-up petition and the sale of the attachment property takes place before the issue of the winding-up order, can the liquidator claim the sale proceeds? It was held that on account of the sale of the property having taken place after the commencement of the winding-up proceedings, Section 537 of the Act would operate and the sale of the shares would be void. Where the respondent had derived benefit under a void contract, he would be under an obligation to return it to the Official Liquidator of the company in liquidation who would be the only claimant of the benefit. Secondly, if the sale proceeds were claimable, would be liquidator being required to file a separate suit? It has been held that the summons for getting the relief under Section 537 by the official liquidator was maintainable and there was necessity for the liquidator to file a separate suit. When the official liquidator, if empowered by Section 457(1) of the Act to institute or defend legal proceedings and in performance of his duty, finds a transaction to be void against him the transaction becoming void because of the winding-up proceedings – it would be a question of fact arising in the course of winding-up and the Tribunal would have the jurisdiction to decide the question. This is the scope and ambit of jurisdiction conferred upon the Tribunal under Section 446(2) of the Act. Therefore, the liquidator would not have to file the suit in the Tribunal. Thirdly, whether the application by the liquidator to the Tribunal for the recovery of the sale proceeds was barred by limitation? Article 137 of the Limitation Act, 1963 would apply only to application not made under the Code of Procedure. The liquidator made this application not under the Code of Procedure but under the Companies Act to the Tribunal on whom jurisdiction is conferred by Section 10 of the Companies Act. It was, therefore, held that the application was not barred by limitation. (5) Offences by officers of companies in liquidation: The Act provides certain punishments to be inflicted on past or present officers of a company which is in the course of winding-up (i) who do not disclose to the liquidator all the property of the company and consideration for which the same has been disposed of, (ii) who conceal or fraudulently remove any part of the property of the company of value of Rs. 100 or more within twelve months next before the commencement of the winding-up, (iii) who make any material omission in their statements about the affairs o the company, (iv) who are guilty of any false representation or fraud obtaining consent of the creditor to the agreement relating to the affairs of the company or to a winding-up. Note: The above is illustrative of offences for which an officer may be punished. For a complete list of such offences read Section 538(1)(a) to (p). The officers may be punished on any one of the aforementioned grounds with imprisonment or with fine or with both. Offences against the Act: No Tribunal shall take cognizance of any offence against the Act, except on the complaint in writing made by the Registrar, or a shareholder or a person authorised by the Central Government in this regard [Section 621(1)]. In spite of

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anything contained in the Code of Criminal Procedure if the complainant is either the Registrar or the Central Government’s deputationist, his personal attendance before the Tribunal trying the offence shall not be necessary, unless the Tribunal for reasons to be recorded in writing requires his personal attendance at the trial [Section 621(IA)]. Notwithstanding anything contained in the Code of Criminal Procedure 1973 any offence punishable under this Act (whether committed by a company or any officer thereof, not being an offence punishable with imprisonment only or with imprisonment and also with fine, may, either before or after the institution of any prosecution be compounded by (a) the Company Law/Board, or (b) where the maximum amount of fine which may be imposed for such offence does not exceed fifty thousand rupees by the Regional Director on payment or credit by the company or the officer, as the case may be, to the Central Government of such sum as that Board or the regional director as the case may be, may specify but in no case the sum so specified shall exceed the maximum amount of fine imposed for the offences so compounded. This provision is not applicable in case of an offence committed by a company or its officer within a period of three years from the date on which a similar offence committed by it or him was compounded. [Section 621A, as added by the Companies (Amendment) Act, 1988]. The amount of fine, imposed under the Act by the Tribunal may be applied, under the direction of the Tribunal in or towards the payment of the costs of proceedings, or rewarding the person on whose information the fine is recovered (Section 626). For false statements made in, as well as omissions intentionally made of, any material fact knowing it to be material, any return, report, certificate, balance sheet, prospectus, statement or other document, Section 628 renders the offence punishable with imprisonment extending-up to 2 years as well as with me. Similarly, under Section 629 an offender is punishable for intentionally giving false evidence in any examination on oath. Falsification of books: If with intent to defraud or deceive, any person, any officer or contributory of a company destroys, mutilates, alters, falsifies, secrets, etc. any books, papers or securities, or is a party to any of these acts, he will be punishable with imprisonment for a period extending up to 7 years and fine. He will also be equally punishable, if he makes or is privy to the making of, any false or fraudulent entry in any register, books of account, etc. belonging to the company (Section 539). An auditor, being an officer of the company, if culpable in the circumstance would be liable to be punished as prescribed. The provisions of this Section can be invoked only when the company is being wound-up. Liabilities where proper accounts not kept: If in a winding-up it is found that proper books of account have not been kept throughout the period of two years preceding the commencement of winding-up (or the period between the incorporation of the company and the commencement of the winding-up whichever is shorter) the officers of the company would be liable to imprisonment for a term extending to one year. They may

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Corporate and Allied Laws

however, escape liability, if they can show that they had acted honestly, and that in view of the circumstances in which the business was carried on, the default was excusable. Proper books of account will be deemed to have been kept if there have been kept (a), such books or accounts as are necessary to exhibit and explain the transactions and financial position of the business of the company, including books containing entries made from day-to-day in sufficient detail of all cash received and all cash paid, and (b) statement of annual stock taking with all necessary particulars, where the business of the company has involved dealings in goods (Section 541). Liabilities for fraudulent trading: If, in the course of a winding-up, it transpires that the business has been carried on with the intent to defraud creditors or others, the Tribunal may, on the application of the Official Liquidator, or the liquidator or any creditor or contributory, declare that any person who was knowingly a party to such a carrying on of the business shall be personally liable to on unlimited extent for all or any of the company’s debts or liabilities, lie may also be called upon to pay fine up to Rs. 50,000 or sentenced to imprisonment up to two years or with both (Section 542). Misfeasance: If, in the course of winding-up of a company, it appears that any person who had taken part in the formation or promotion of the company, or any past or present director, manager, liquidator or other officer of the company has misapplied or retained or become liable or accountable for any money or property of the company, or has been guilty of any misfeasance or breach of trust in relation to the company, the Tribunal may, on the application of the Official Liquidator, or any creditor or contributory, examine into the conduct of such person, and compel him to repay or restore the money or property or make compensation to the company for misfeasance or breach of trust/misapplication etc. (Section 543). Now suppose, the Official Liquidator of a company in liquidation institutes misfeasance proceedings against the director thereof and during the pendency of the proceeding itself the director passes away. Can the legal representatives of the decreased director be impleaded and the proceedings continued against them? This question came up for judicial decision in Official liquidator vs. Pasthasarathi Sinha (1983) 53 Comp. Cases 163 (SC). Held: The misfeasance proceedings initiated under Section 543 against a director of a company in winding-up can be continued on his death against his heirs and legal representatives for the purpose of determining and declaring the loss or damage caused to the company though no compulsive order may be made in those proceedings under Section 543 against the heirs and legal representatives. On conclusion of the proceedings under Section 543 a declaration of liability may be made. Such declaration partakes the character of a decree in a suit and can be enforced under Section 634 and 635. The provisions of Section 50 of CPC have to be applied when the person who is made liable dies and the liability of the legal representatives should be determined accordingly.

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Misfeasance is an act or omission, in relation to the company, which causes loss or injury to the company. Although loss to the company has not been expressly stated in Section 543, nevertheless such ‘loss’ has to be implied in case of misapplication or retainer. Only such an act of misfeasance as results in the loss to the company will fall within the ambit of Section 543. It is essential for the liquidator to establish that the respondents are accountable for some goods or money belonging to the company or that they are guilty of misapplication, retainer or breach of trust (In re. Vijay Laxmi Sugar Mills Ltd. AIR 1963 All 55). For the creation of liability under Section 543, it must be shown that there has been dishonesty or fraud or at least gross and culpable negligence Piliai Central Bank vs. Augusti AIR 196, Ker. 121). An honest mistake, not amounting to culpable negligence or breach of duty, would not be misfeasance (Ayyangar vs. Official Assignee of Madras, 55 Mad. 153). Where the person guilty of the offence is a firm or body corporate, the Tribunal may make the aforesaid order against the individual who was at the relevant time a partner of the firm or a director of the body corporate (Section 544). Notes: (i) For the purpose of Section 543 an auditor is an officer [Section 2(30)]; (ii) Section 543 provides for a summary remedy for bringing erring officers of the company to book and the long-winded remedy by way of suit is always available in addition; (iii) Illustrations of misfeasance are: improper payment of dividends; ultra vires investment; selling his own property to company without disclosure; allotting shares in contravention of Section 69, etc.; and (iv) Misfeasance summons would also lie against directors when they have paid dividend out of capital knowingly allotted shares to infants, etc. Misfeasance lies against the liquidator when he has negligently admitted a claim. Misfeasance proceedings can be taken against the auditors under Section 543 of the Companies Act. If they are found to have been guilty of any misfeasance or breach of trust in relation to the company. Such a liability may arise due to non-performance or unsatisfactory performance of duties by an auditor in relation to the account of the company, as a result of which the company has suffered losses. The liability is a liability and the Tribunal may call upon the auditor to make good the damages suffered by the company. But the action against the auditor under the aforementioned provision of law can be taken only if the business of the company is in the course of being wound up. The directors of a company while it is functioning can also take an action against the auditor for negligence in the circumstances similar to those aforementioned. The application must be made within 5 years from the date of the order of winding-up or the first appointment of liquidator or of the misapplication, retainer, misfeasance or

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Corporate and Allied Laws breach of trust as the case may be, whichever is longer.

(6) Power of Tribunal to grant relief to officers against the liability for misfeasance, breach of duty, etc.: If in any proceedings for misfeasance against an officer of a company it appears to the Tribunal hearing the case that he is or may be liable in respect of the misfeasance, negligence, breach of duty, etc. but that he has acted honestly and reasonably and that having regard to all the circumstances of the case including those connected with his appointment, he ought fairly to be excused the Tribunal may relief him either wholly or partly, from his liability on such terms as it may think fit. But in a criminal proceeding under this Sub-section, the Tribunal is bereft of any power to grant relief from any liability, which may attach to an officer in respect of such misfeasance [Section 633(i)]. Where any such officer has reason to apprehend that any proceeding will or might be brought against him in respect of any misfeasance, etc. he may apply to the Tribunal for relief and the Tribunal on such application has the same power to relieve him as it would have had if it had been a Tribunal before which proceedings against that officer for misfeasance, etc. had been brought under Sub-section 633 [Section 633(2)]. But the relief under Sub-section (1) or Sub-section (2) can be granted to an officer, only if the relevant Tribunal has, by notice served in the manner specified by it, required the Registrar or any other person to show cause why such relief should not be granted [Section 633(1)]. It should be noted that only an officer of the company and not company itself could apply for relief. But it is for the Tribunal before which the proceeding is pending and not for Tribunal to grant relief. The Tribunal can grant relief only under Sub-section (2) against apprehended prosecution. (7) Prosecution of delinquent officers and members of the company (Section 545): If it appears to the Tribunal in a winding-up by or subject to the supervision of the Tribunal that any past or present officer or any member of the company has been guilty of any offence in relation to the company, the Tribunal may, either on the application of any person interested in the winding-up or of its own motion direct the liquidator either himself to prosecute that offender or to refer the matter to the Registrar. In the latter case, if the Registrar considers it to be a fit case for prosecution he shall report the matter to the Central Government, which may, after taking such advice as it thinks fit, direct the Registrar to institute such proceedings for the purpose. No report shall, however, be made by the Registrar unless an opportunity is given to an accused person to make a statement to him in writing and of being heard thereon. Similarly, if in the course of the voluntary winding-up it appears to the liquidator that any such person as stated above has been guilty of criminal offence in relation to the

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company, then he shall forthwith report to the Registrar. The Registrar may, in this case, do any of the three viz. (i) he may refer the matter to the Central Government for further enquiry whereupon they shall investigate the matter and if thought expedient, may apply to the Tribunal for an order conferring on any person designated by them, all the case of compulsory winding-up or (ii) if he is of the opinion that the case is not a fit one for the prosecution, he shall inform the liquidator according and (iii) the liquidator in the last case if he holds a different opinion may himself take proceedings against the offender after securing the sanction of the Tribunal. In case, however, the liquidator does not make a report to the Registrar as he should, the Tribunal may, on an application of any person interested in the winding-up or of its own, motion, direct the liquidator to make such report which, on being made shall dealt with by the Registrar in any one of the three ways mentioned above. In connection with an every prosecution in pursuance of these provisions, it shall be the duty of the liquidator and of every officer and an agent of the company, past and present (other than the defendant in the proceeding) to give to the Registrar all assistance he is reasonably able to give. ‘Agent’ here includes any banker, legal advisor or an auditor of the company. In case of default, the Tribunal may, on the application of the Registrar, direct performance of this duty. Where the liquidator is in default, the Tribunal may order him to pay the cost of the application personally unless it appears that the default was due to the liquidator not having in the hands the sufficient assets of the company. (8) Disposal of books and papers of the company: In a winding-up by the Tribunal or subject to the supervision of the Tribunal, the Tribunal will direct how the books and papers of the company and of the liquidator are to be disposed of. In the case of members’ voluntary winding-up they are disposed of in such manner as the company by a special resolution directs and in the case of creditors’ voluntary winding-up in such a way as the Committee of Inspection and if there is no such Committee as the creditors of the company may direct. After the expiry of five years from the dissolution of the company, no responsibility will rest on the company the liquidator or any person to whom the custody of the books and papers has been committed, by reason of any books or papers not being forthcoming for any person claiming to be interested therein (Section 55). The Central Government may, by rules, prevent for such period (not exceeding 5 years from the dissolution of the company) as the Central Government thinks proper, the destruction of the books and papers of a company, which has been wound-up, and of its liquidator. Also it can similarly enable any creditor or contributory of the company to make representation to the Central Government in respect of the matters aforementioned and to appeal to the Tribunal from any direction, which may be given by the Central Government in the matter [Section 540(3)]. If any person acts in

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Corporate and Allied Laws contravention of any such rules or of any direction of the Central Government thereunder, he shall be punishable with an imprisonment for a term extending to 6 months or with fine extending to Rs. 50,000 or with both [Section 550(4)].

(9) Information as to pending liquidation (Section 551): You may come across a situation where the winding-up of a company has commenced but it has not been possible to conclude it within one year since its commencement. In such a case, the liquidator is required to file in the Tribunal (in case of a winding-up/by or subject to supervision of the Tribunal or with the Registrar in case of a voluntary winding-tip a statement in the prescribed form. The statement is to contain the prescribed particulars and is to be duly audited by a qualified auditor with respect to the proceedings in and the position of the liquidation. This statement is to be filed within two months of expiry of such a year. This statement is to be filed at intervals of not more than one year or such shorter intervals as may be prescribed. The liquidator has to comply with these requirements unless he is exempted from so doing wholly or partly by the Central Government [Sub-section (1)]. A copy of the statement filed in the Tribunal as aforesaid has to be simultaneously filed with the Registrar who shall keep it along with the other records of the company [Sub-section (2)]. In the case of Government Company in liquidation, copy of the statement shall be forwarded to the Central Government if it is a member of the Government Company or to the state Government if that Government is a member or to the Central and the State Government both, if both are the members of the Government Company [55(2A) as added by the Companies (Amendment Act), 1988]. The said statement is open to an inspection by any person stating himself in writing to be a creditor or contributory or his agent at all reasonable times on payment of the prescribed fee. He may also have a copy of or an extract from, the statement if he so wants [Sub-section (3)]. The Section provides for the following penalties namely: (a) fine up to Rs. 5,000 for every day of the liquidator’s failure in complying with the requirement of the Section. (b) imprisonment up to six months or fine up to Rs. 10,000 or both for the liquidators wilful default in causing the statement to be audited by a qualified auditor and (c) sentence provided in Section 182 of the Indian Penal Code for the person untruthfully stating himself to be a creditor or contributory of the company for inspecting the aforementioned statement or receiving copy or an extract thereof [Sub-section (4) & (5)]. (10) Liquidators’ duty as to the payment into a bank: In terms of Section 552, every

Corporate Winding-up and Dissolution

9.53

Official Liquidator is bound to pay all moneys which he receives as the liquidator of the company into the public account of India in the Reserve Bank in such a manner and as at such times as may be prescribed. Under Section 553, every other liquidator than the Official Liquidator shall pay such money into a scheduled bank to the credit of a special bank account. This account is to be described as “the Liquidation Account of Company ‘Company Limited’/Company Private Limited”. He has to make this payment into the bank unless the Tribunal for reasons of an advantage to the creditors or contributories otherwise orders him. However, he cannot retain with himself any sum in excess of Rs. 500 or such other amount as the Tribunal may authorise for more than 10 days. If he fails to give any satisfactory explanation he is obliged to pay interest at 12% per annum and such other penalty as may be prescribed by the Registrar. He shall be further liable to disallowance of all or such of his remuneration as the Tribunal may think fit. For the said stipulated amount and period, he shall also be liable to be out as well as to pay expenses occasioned by reason of his default. According to Section 554, neither, the Official Liquidator nor any other liquidator can pay any money received by him in his capacity as such into any private banking account. (11) Unpaid dividend, and undistributed assets to be paid into Company’s Liquidation Account (Section 555): Where a company is being wound-up, the liquidator shall forthwith may into the public account of India in the Reserve Bank in a separate account described as the “Company’s Liquidation Account” all the money which he has either in his hands or under his control and which represents (a) dividends payable to any creditor which bad remained unpaid for 6 months after the declaration thereof; or (b) assets refundable to any contributory, which have remained undistribution thereof; or (b) assets refundable to any contributory, which have remained undistributed for 6 months after the date on which they became refundable. Similarly, on the dissolution of a company the liquidator must pay any unpaid dividends or undistributed assets in his hands at the date of the dissolution, into the account aforementioned [Sub-section (2) & (3)]. While making the aforesaid payment, the liquidator shall furnish to such officer as appointed by the Central Government with a statement in the prescribed form. Such a statement must set forth the nature of the sums, the names and the last known addresses of thin persons entitled to participate therein, the amount to which each is entitled thereto and nature of the claim thereto, and other prescribed particulars. For the money paid into the Reserve Bank the liquidator is entitled to a receipt from the former a receipt is an effectual discharge of the liquidator’s obligation in this regard [Sub-section (4)].

9.54

Corporate and Allied Laws Where the company is being wound-up by the Tribunal the liquidator shall make the payment mentioned above by transfer from the account referred to in Section 552 [Sub-section (5)]. Visualise situation where the company is being wound-up voluntarily or subject to the supervision of the Tribunal. In such a case, the liquidator shall, when filing a statement pursuant to Section 51(1) indicate the sum of money which is payable to the Reserve Bank under Section 551(1) & (2) as unclaimed dividends or undistributed assets and which he has not in his hands for 6 months preceding the date to which the statement is brought down, and pay that sum into the company’s Liquidation Account within 14 days from the date of filing the statement [Sub-section (6)]. Any person entitled to moneys which had been paid into the company’s Liquidation Account, may apply to the Tribunal for an order for payment thereof. The Tribunal may order payments, if it is satisfied that the money is due to the applicant. Prior to this order being made; the Tribunal shall, however, serve a notice on an officer who might have been appointed by the Central Government in this connection, asking him to show cause why the order should not be made [Sub-section (7)]. This provision clearly shows that the person entitled to participate in the sums so paid up into the Company’s Liquidation Account do not lose their right forever. It should, however, be noted that the person may also apply to the Central Government, instead of the Tribunal as referred to above, for an order for payment of the money. If no application for such a payment has already been made to the Tribunal, the Central Government may make the order for payment to that person or the sum due after taking such security from him as it may think fit) provided it is satisfied with a certificate to be given in this regard by the liquidator or the Official Liquidator or otherwise [Sub-section (7)]. It is necessary that if the moneys paid into the company’s liquidation account have remained unclaimed for fifteen years, those will have to be transferred to the general revenue account of the Central Government. Even thereafter any person entitled thereto may apply to the Central Government [Sub-section (8)]. Should the liquidator, instead of putting the money into the company’s Liquidation Account, retain it, he must: (i) pay interest @ 12% per annum on the sum retained, subject, however to the Central Government’s power to remit wholly or partly the amount of interest; (ii) pay any expenses incurred as a result of his default; and (iii) where the winding-up is by or under the ‘supervision of the Tribunal, be deprived of his remuneration partly or wholly and be removed from his office [Sub-section (9)].

(12) Dissolution declared void: Within two years of the dissolution of a company, the Tribunal may, on an application being made by the liquidator or any other person interested, make an order declaring the dissolution to have been void. A certified copy

Corporate Winding-up and Dissolution

9.55

of the order must be filed with the Registrar by the person on whose application order was made, within 30 days (Section 559). (13) Winding-up unregistered companies: An “unregistered company” includes any partnership, association or company consisting of more than seven members at the time when the petition for winding-up the partnership, etc. is presented before the Tribunal. It does not include, however, a railway company incorporated by an Act of Parliament or other Indian Law or any Act of Parliament of the United Kingdom, or a company registered under the Companies Act, 1956 or under any previous Companies Law (Section 582). An unregistered company may be wound-up under the Act and all the provisions of the Act with respect to winding-up apply to an unregistered company with the following exceptions and additions: (a) To determine a Tribunal’s jurisdiction in the matter of its winding-up, the principal place of business is, for all the purposes of the winding-up deemed to be the Registered Office of the company. [N.B. The Registered Office of a company is the determining factor for the Tribunal’s jurisdiction in this regard]. (b) An unregistered company is not to be wound-up under Act voluntarily or subject to supervision. It is to be wound-up by the Tribunal. (c) The circumstances in which an unregistered company may be wound-up are as follows: (i) if the company has been dissolved, or has ceased to carry on business, or is carrying on business for the purpose of winding-up its affairs; (ii) if the company is unable to pay its debts; or (iii) if the Tribunal is of the opinion that it is just and equitable that the company should be wound-up. An unregistered company is deemed to be unable to pay its debts in the following circumstances: (i) if a creditors (as assignee or otherwise), to whom a sum exceeding Rs. 500 is due, has submitted a demand in writing to the company asking it to pay him the sum due and the company has neglected to pay it or to secure or to compound for it for 3 weeks after the service of the demand; (ii) if any suit or legal proceedings has been instituted against any member for any debt or demand due from the company and a notice thereof has been communicated to the company and the company has not, within 10 days of the service of the notice, paid, secured or compounded for the debt;

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Corporate and Allied Laws

(iii) if the execution or the process against the company has been returned unsatisfied in whose or in part; (iv) if it is otherwise proved to the satisfaction of the Tribunal that the company is unable to pay its debts. Every person, in the event of an unregistered company being wound-up, who is liable to pay or to contribute to the payment of (a) any debt or liability of the company, (b) any sum for the adjustment of the rights of the members among themselves or (c) the costs, charges and expenses of the winding-up, shall be deemed to be a contributory. He will be liable to contribute to the assets of the company all sums due from him in respect of any liability to pay or contribute. If a contributory dies or becomes insolvent, the provision of the Act as regards legal representatives or assignees shall be applicable (Section 585). The provisions of the Act with regard to staying and restraining suits and legal proceeding against a company at any time after the presentation of the petition for winding-up but before a winding up order is made, in the case of an unregistered company where the application to stay or restrain is made by a creditor, extent to suits and legal proceedings against any contributory (Section 586). If, however, a winding-up order has been made, no suit or legal proceedings can be commenced or proceeded with against a contributory for the debt of the company with leave of the Tribunal (Section 587).

10
(J) PRODUCER COMPANIES
10.0 INTRODUCTION (a) Background of the law relating to producer companies The co-operative movement in India is considered as the backbone of the Indian economy. The movement was able to make rapid strides in the rural economy, uplifting the standard of living of the rural masses, which enabled them to sell their produce under an organised structure and form of organisation. The co-operative businesses in India are a time tested and successful form of organisation which enabled wider participation of the member constituting it and today there are many co-operative businesses, which are, not only state oriented but have become multi-state and national co-operatives. With the on set of reforms in the Indian economy, a need was felt that such of those producer co-operatives should be able to corporatise themselves into company form of organisation. In the back drop of corporatisation of businesses, the Central Government had constituted on 1st November, 1999, a high powered committee under the Chairmanship of Dr. Y.K. Alagh to examine and make recommendations with regard to the following agenda: (a) Framing a legislation which would enable incorporation of co-operatives as companies and conversion of co-operatives into companies; (b) Ensuring that proposed legislation accommodates the unique principles of co-operative business within a regulatory framework similar to that of companies. The Committee submitted its report on 15th March, 2000. On the basis of recommendations of the committee, the Government introduced in the Lok Sabha on 31st August, 2001, the Companies (Second Amendment) Bill, 2001. Thereafter, the Bill was renamed as Companies (Amendment) Bill, 2002 passed by the Lok Sabha on 10th December, 2002, and by the Rajya Sabha on 17th December, 2002. The Bill was given assent by the President of India on 31st December, 2002. The Bill finally became an Act, known as the Companies (Amendment) Act, 2002 [No. 1 of 2003]. The Act came into force w.e.f. 6th February, 2003 vide Notification No. 135(E) dated 5th February, 2003. The main objective of the amendment is to facilitate the formation of co-operative businesses

10.2

Corporate and Allied Laws

as companies and to make it possible to convert existing co-operative business into companies. The option of conversion is purely voluntarily. With the Act coming into force, a new part Part-IXA has been included. With this, the Act (Companies Act, 1956) contains new Sections 581A to 581ZT relating to formation of producer companies, their administration and management, conversion of existing co-operative businesses into produce companies and matters connected therewith. (b) Structure of the Companies (Amendment) Act, 2002 Part-IXA introduced by the Amendment Act, 2002 contains the twelve chapters dealing with the respective matters as shown below: Chapter-I Chapter-II Chapter-III Chapter-IV Chapter-V Chapter-VI Chapter-VII Chapter-VIII Chapter-IX Chapter-X Chapter-XI Chapter-XII (c) Over-riding effect The provisions of Part-IXA shall override other laws (Section 581ZQ). In other words, the provisions of this part shall have effect notwithstanding anything inconsistent therewith contained in this Act or any other law for the time being in force or any instrument having effect by virtue of any such law; but the provisions of any such Act or law or instrument in so far as the same are not varied by, or are inconsistent with, the provisions of this part shall apply to the producer company. (d) Application of provisions relating to private companies (Section 581ZR) All the limitations, restrictions and provisions of this Act, other than those specified in this part, applicable to a private company, shall, as far as may be, apply to a producer company, as if it is a private limited company under this Act in so far as they are not in conflict with the provisions of this Part. Although, the status of a producer company shall be that of a private company, strictly speaking, it cannot be construed as a private company in terms of Section 3(1)(iii) of the Companies Act, 1956 which defines a private company. In terms its maximum Definitions Incorporations of producer companies and other matters. Management of producer company. General Meetings. Share Capital and Member Rights. Finance, Accounts and Audit. Loans to Member and Investments. Penalties. Amalgamation, Merger or Division. Resolution of Disputes. Miscellaneous Provisions. Re-Conversion of producer company into Inter-State Co-operative Societies.

Producer Companies

10.3

member as in the case of private company, producer company need not limit the number of members to 50. In terms of restriction on the transfer of shares, a producer company shall be restricted as provided in Sections 581ZD(ii) and (iv). Besides, it need not have a minimum paid up capital of Rs. 1 lakh. It shall also not possible for a producer company to make any invitation to the public for subscription of any shares or debentures of the company or accept any invitation of deposits. (e) Major distinctions between Producer Company and the Private Company All the provisions of Part-IXA (contained in Sections 581A to 581ZT) relating to producer companies shall prevail over all the provision of other laws to the extent they are inconsistent therewith. Similarly, all the limitations, restrictions and prohibitions under Section 3(iii) of the Act applicable to a private company shall not be applicable to producer company as if it is a private company to the extent they are not in conflict with the provisions of this part. Given this contradiction in the formation of producer company, a producer company differ from a private company as a distinct and different class of company. The distinction varies in the matters relating to formation, management, administration, finance, accounts, audit and merger, amalgamation or division of companies. The major distinction between these two classes of companies are as follows: Producer Company 1. Incorporation The producer company can be formed by any 10 or more individuals, each of them being individuals or institutions. Its name shall bear the words “Producer Company Ltd.” and the liability of the members shall be limited by the memorandum. The objects of a producer company should be as specified in 581B, which contain 11 items. There need not be any conditions attached to articles to state that it is a private company. 2. Management The minimum and maximum number of directors of a producer company is 5 and 50. Their tenure is for a minimum period of 1 year and the maximum period of 5 years. The Board can opt one or more directors or additional directors which cannot exceed 1/5th of the total number of directors. The period of such directors may be for any The minimum number of directors of a private company is two and the maximum may be specified by the articles (any increase in the maximum beyond 12 directors requires approval of the Central Government). A tenure of directors is not fixed by the law. The board can appoint additional, alternate director and director to fill up casual vacancy. Private Company Private Company can be formed by two individuals or companies. The name of the private company should bear the words “private limited” and the liability may be limited (by shares or by guarantee) and unlimited by the memorandum. The articles should specifically contain the restrictions as stated in Section 3(iii) and the minimum capital should be Rs. 1 lakh. The objects can be main, incidental or ancillary and other objects.

10.4

Corporate and Allied Laws An additional director shall hold the office upto the date of the next Annual General Meeting. The powers and functions of directors are specified in Section 292. There is no additional liability for directors as provided for directors in a producer company.

period. Vacation of the office of directors is provided in Section 581Q and the powers have been mentioned in 581R. The matters to be transacted by the board only at general meeting are contained in Section 581S. The liability of directors for their acts then in contravention of the provisions of the Act shall be joint concern. Further, this liability shall be in addition to or not in derogation of a liability imposed under any other law. 3. General Meetings The notice of the AGM shall comprise not only the agenda but also to include minutes of the previous AGM and EGM. It shall also contain the names of candidates for elections of office of the director including a statement of their qualifications. The notice of meeting is required to be given not less than14 days and the quorum shall be 1/4th of the total members unless the articles provide for a higher number. The first AGM is required to be held within 90 days from the date of incorporation of the company. 4. Share Capital and Members Rights The share capital of a producer company shall consist of equity shares only and a member shall hold shares in proportion to the patronage of that company. Active members shall have special rights and such shares are transferable to any other active member. The transferability is subject to prior or approval of the board and at par value. Nomination facility by members is mandatory. Circumstances for cession of membership is provided. Irrespective of the shareholding one member shall have only one vote.

The first AGM is required to be held within 18 months from the date of incorporation and notice of the meeting should be given not less than 21 days Notice and the accounts can be sent separately.

Share capital may be equity or preference or any other class. There is no provision for holding of shares according to the patronage and there is no distinction between members. Transfer of shares is restricted and nomination is voluntarily. There is also no provision for cession of membership and their rights. The voting rights shall be generally governed by the manner prescribed by the articles of association.

Producer Companies 5. Loans and Investments Loans to members can be granted only after approval by members in the general meeting. The general reserves of a producer company shall be invested in specified securities. The limit of investment in other companies either by the producer or together with its subsidiaries cannot exceed 30% of the aggregate paid up capital and free reserves. 10. Finance, Accounts and Audit Producer companies shall keep proper books of accounts and internal audit shall be carried out by a chartered accountant. Apart from the matters provided in Section 227, auditor shall report on certain additional matters like debts due with bad debts, verification of cash securities, donations etc. A producer company may donate or subscribe to any institution or individuals for social and economic welfare or for promoting mutual assistance principles. The aggregate amount shall not exceed 3% of the net profit in the financial year immediately proceeding the financial year. It cannot donate directly or indirectly to any political party or purposes. 7. Penalties Penalties for contravention of provisions relating to producer company are specified generally in Section 581ZA. 8. Amalgamation, Merger or Division Registrar of Companies shall have a jurisdiction over the administration of scheme of amalgamation and an appeal can be preferred to High Court. 9. Resolution of Disputes Any dispute relating to formation, management or business of a producer

10.5

Excepting that of loan to directors a private company cannot provide loan or advance to its members. The provisions of Section 372A relating to inter-corporate loans and investments are not applicable to a private company.

Proper books of accounts shall be kept in those companies engaged in industrial activity. Internal audit need not be carried out and auditor’s report shall be subject to the provisions as specified in Section 227. A private company has no restriction for making donations or subscription and it can contribute donation to political party or purpose as specified in Section 293A.

Penalties for contravention of the applicable provisions is specified in appropriate sections. The National Company Law Tribunal shall have the jurisdiction over the matter.

The resolution of disputes (oppression and mis-management are handled by the

10.6

Corporate and Allied Laws Company Law Board under Sections 397, 398 and 399 of the Companies Act, 19510. Striking of name of company are generally regulated by Section 560 or any other scheme as may be notified by the Central Government. There is no provision which specifies that the provisions relating to private company shall have an overriding effect over any other Act or law for the time being inforce.

company shall be settled by the Arbitration and Conciliation Act, 19910. 10. Miscellaneous Provisions Striking off the name of a producer company shall be done by the Registrar of Companies in accordance with Section 560 of the Act. The provisions relating to producer companies shall have an overriding affect over any such Act or law for the time being inforce. 11. Reconversion of Companies

A producer company can be converted into Reconversion is possible by converting a Inter-State Co-operative Society and vice- public company into a private company and vice-versa. versa.

(f) Power to modify Act in its application to producer companies (Section 581ZT) (1) The Central Government may, by notification in the Official Gazette, direct that any of the provisions of this Act (other than those contained in this Part) specified in the said notification: (a) shall not apply to the producer companies or any class or category thereof; or (b) shall apply to the producer companies or any class or category thereof with such exception or adaptation as may be specified in the notification. (2) A copy of every notification proposed to be issued under sub-section (1), shall be laid in draft before each House of Parliament, while it is in session, for a total part of thirty days which may be comprised in one session or in two or more successive sessions, and if, before the expiry of the session immediately following the session or the successive sessions aforesaid, both Houses agree in disapproving the issue of the notification or both Houses agree in making any modification in the notification, the notification shall not be issued or, as the case may be, shall be issued only in such modified form as may be agreed upon by both the Houses. 10.1 DEFINITIONS Section 581A summarises the following definitions: (a) “active member” means a member who fulfils the quantum and part of patronage of the producer company as may be required by the articles;

Producer Companies

10.7

(b) “chief executive” means an individual appointed as such under sub-section (1) of Section 581W; (c) “limited return” means the maximum dividend as may be specified by the articles; (d) “member” means a person or producer institution (whether incorporated or not) admitted as a member of a producer company and who retains the qualifications necessary for continuance as such; (e) “inter-State co-operative society” means a Multi-State co-operative society as defined in clause (p) of Section 3 of the Multi-State Co-operative Societies Act, 2002 (39 of 2002) and includes any co-operative society registered under any other law for the time being in force, which has, subsequent to its formation, extended any of its objects to more than one State by enlisting the participation of persons or by extending any of its activities outside the State, whether directly or indirectly or through an institution of which it is a constituent; (f) “mutual assistance principles” means the principles set out in sub-section (2) of Section 581G; (g) “officer” includes any director or Chief Executive or Secretary or any person in accordance with whose directions or instructions part or whole of the business of the producer company is carried on; (h) “patronage” means the use of services offered by the producer company to its member by participation in its business activities; (i) “patronage bonus” means payments made by a producer company out of its surplus income to the member in proportion to their respective patronage; (j) “primary produce” means— (i) produce of farmers, arising from agriculture (including animal husbandry, horticulture, floriculture, pisciculture, viticulture, forestry, forest products, re-vegetation, bee raising and farming plantation products), or from any other primary activity or service which promotes the interest of the farmers or consumers; or (ii) produce of persons engaged in handloom, handicraft and other cottage industries; (iii) any product resulting from any of the above activities, including by-products of such products; (iv) any product resulting from an ancillary activity that would assist or promote any of the aforesaid activities or anything ancillary thereto; (v) any activity which is intended to increase the production of anything referred to in subclauses (i) to (iv) or improve the quality thereof;

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Corporate and Allied Laws

(k) “producer” means any person engaged in any activity connected with or relatable to any primary produce; (l) “producer company” means a body corporate having objects or activities specified in Section 581B and registered as producer company under this Act; (m) “producer institution” means a producer company or any other institution having only producer or producers or producer company or producer companies as its member whether incorporated or not having any of the objects referred to in Section 581B and which agrees to make use of the services of the producer company or producer companies as provided in its articles. (n) “withheld price” means part of the price due and payable for goods supplied by any member to the producer company; and as withheld by the producer company for payment on a subsequent date. 10.2 OBJECTS AND FORMATION OF A PRODUCER COMPANY Producer company means a body corporate having objects or activities specified in Section 581B and registered as a producer company under Companies Act, 19510. Every producer company should deal basically with the produce of its active member for carrying out any of its objects. The objects of the producer company, as per Section 581B, may be relating to all or any of the following matters, namely: (i) production, harvesting, procurement, grading, pooling, handling, marketing, selling, export of primary produce of the member or import of goods or services for their benefit: The producer company may at its option carry on any of the activities specified in this clause either by itself or through other institution; (ii) processing including preserving, drying, distilling, brewing, vinting, canning and packaging of produce of its member; (iii) manufacture, sale or supply of machinery, equipment or consumables mainly to its member; (iv) providing education on the mutual assistance principles to its members and others; (v) rendering technical services, consultancy services, training, research and development and all other activities for the promotion of the interests of its members; (vi) generation, transmission and distribution of power, revitalisation of land and water resources, their use, conservation and communication relatable to primary produce; (vii) insurance of producers or their primary produce; (viii) promoting techniques of mutuality and mutual assistance;

Producer Companies

10.9

(ix) welfare measures or facilities for the benefit of member as may be decided by the Board; (x) any other activity, ancillary or incidental to any of the activities referred to in clauses (i) to (ix) or other activities which may promote the principles of mutuality and mutual assistance amongst the member in any other manner; (xi) financing of procurement, processing, marketing or other activities specified in clauses (i) to (x) which include extending of credit facilities or any other financial services to its member. (a) Formation and Registration The formalities relating to registration of a producer company are similar as applicable for all companies. However, for registration of a producer company, the requirements of Part-IXA should also be complied with. [Section 581C(i)]. A producer company can be formed by any ten or more individuals, each of them being a producer, or any two or more producer institutions, or a combination of ten or more individuals and producer institutions, desirous of forming a producer company having its objects specified in Section 581B and otherwise complying with the requirements and provisions of this Act in respect of registration, may form Company under this Act. If the Registrar of Companies is satisfied that all the requirements of this Act have been complied with in respect of registration and matters precedent and incidental thereto, he shall, within thirty days of the receipt of the documents required for registration, register the memorandum, the articles and other documents, if any, and issue a certificate of incorporation under this Act. After incorporation producer company so formed shall have the liability of its members limited by the memorandum to the amount, if any, unpaid on the shares respectively held by them and be termed as company limited by shares. It also becomes a body corporate as if it is a private limited company to which the provisions contained in this Part apply, without, however, any limit to the number of members thereof, and the producer company shall not, under any circumstance, whatsoever, become or be deemed to become a public limited company under this Act. The producer company may reimburse to its promoters all other direct costs associated with the promotion and registration of the company including registration, legal fees, printing of a memorandum and articles and the payment thereof shall be subject to the approval at its first general meeting of the member. The producer company should also be required to submit (a) memorandum and (b) its articles duly signed by the subscribers to the memorandum, to the Registrar of the State to which the registered office of the company is to situate [Section 581G(i)].

10.10 Corporate and Allied Laws (b) Effect of incorporation of producer company (Section 581K) Every shareholder of the inter-state co-operative society immediately before the date of registration of producer company (hereafter referred to as the transformation date) shall be deemed to be registered on and from that date as a shareholder of the producer company to the extent of the face value of the shares held by such shareholder. (c) Membership and voting rights of members (Section 581D) A person, who has any business interest which is not conflict with business of the producer company, shall become a member. On the other hand, a member, who acquires any business interest which is in conflict with the business of the producer company, shall cease to be a member and be removed as a member in accordance with articles of the producer company. The articles of any producer company may provide for the conditions, subject to which a member may continue to retain his member, and the manner in which voting rights shall be exercised by the members. These voting’s rights are: (a) In a case where the member consists solely of individual member, the voting rights shall be based on a single vote for every member, irrespective of his shareholding or patronage of the producer company. (b) In a case where the member consists of producer institutions only, the voting rights of such Producer institutions shall be determined on the basis of their participation in the business of the producer company in the previous year, as may be specified by articles. Provided that during the first year of registration of a producer company, the voting rights shall be determined on the basis of the shareholding by such Producer institutions. (c) In a case where the member consists of individuals and producer institutions, the voting rights shall be computed on the basis of a single vote for every member. However, a producer company may, if so authorised by its articles, restrict the voting rights to active member, in any special or general meeting. (d) Benefits to member (Section 581E) The member of the producer company may get benefited in the following ways: (1) Every member of producer company, subject to provisions in the articles, shall initially receive only such value for the produce or products pooled and supplied, as the Board of producer company may determine, and the withheld price may be disbursed later in cash or in kind or by allotment of equity shares, in proportion to the produce supplied to the producer company during the financial year to such extent and in such manner and subject to such conditions as may be decided by the Board.

Producer Companies 10.11 (2) Every member shall, on the share capital contributed, receive only a limited return. However, every such member may be allotted bonus shares in accordance with the provisions contained in Section 581ZJ. (3) The surplus if any, remaining after making provision for payment of limited return and reserves referred to in Section 581ZI, may also be disbursed as patronage bonus, amongst the members, in proportion to their participation in the business of the producer company, either in cash or by way of allotment of equity shares, or both, as may be decided by the members at the general meeting. 10.3 MEMORANDUM OF PRODUCER COMPANY (SECTION 581F) The memorandum of association of every producer company should contain the following: (a) the name of the company with “producer company Limited” as the last words of the name of such Company; (b) the State in which the registered office of the producer company is to situate; (c) the main objects of the producer company shall be one or more of the objects specified in Section 581B; (d) the names and addresses of the persons who have subscribed to the memorandum; (e) the names, addresses and occupations of the subscribers being producers, who shall act as the first directors in accordance with sub-section (2) of Section 58IJ. (f) opposite to the subscriber’s name the number of shares each subscriber takes: Provided that no subscriber shall take less than one share; (g) the amount of share capital with which the producer company is to be registered and division thereof into shares of a fixed amount; (h) that the liability of its member is limited; (i) in case the objects of the producer company are not confined to one State, the States to whose territories the objects extend. 10.4 ARTICLES OF ASSOCIATION (SECTION 581G) The articles should contain the following provisions, namely: (a) the qualifications for member, the conditions for continuance or cancellation of member and the terms, conditions and procedure for transfer of shares; (b) the manner of ascertaining the patronage and voting right based on patronage; (c) subject to the provisions contained in sub-section (1) of Section 581N, the manner of

10.12 Corporate and Allied Laws constitution of the Board, its powers and duties, the minimum and maximum number of directors, manner of election and appointment of directors and retirement by rotation, qualifications for being elected or continuance as such and the terms of office of the said directors, their powers and duties, conditions for election or co-option of directors, method of removal of directors and the filling up of vacancies on the Board, and the manner and the terms of appointment of the Chief Executive; (d) the election of the Chairman, term of office of directors and the Chairman, manner of voting at the general or special meetings of member, procedure for voting, by directors at meetings of the Board, powers of the Chairman and the circumstances under which the Chairman may exercise a casting vote. (e) the circumstances under which, and the manner in which, the withheld price is to be determined and distributed; (f) the manner of disbursement of patronage bonus in cash or by issue of equity shares, or both; (g) the contribution to be shared and related matters referred to in sub-section (2) of Section 581ZI; (h) the matters relating to issue of bonus shares out of general reserves as set out in Section 581ZJ; (i) the basis and manner of allotment of equity shares of the producer company in lieu of the whole or part of the sale proceeds of produce or products supplied by the member; (j) the amount of reserves, sources from which funds may be raised, limitation on raising of funds, restriction on the use of such funds and the extent of debt that may be contracted and the conditions thereof; (k) the credit, loans or advances which may be granted to a member and the conditions for the grant of the same; (l) the right of any member to obtain information relating to general business of the company; (m) the basis and manner of distribution and disposal of funds available after meeting liabilities in the event of dissolution or liquidation of the producer company; (n) the authorisation for division, amalgamation, merger, creation of subsidiaries and the entering into joint ventures and other matters connected therewith; (o) laying of the memorandum and articles of the producer company before a special general meeting to be held within ninety days of its registration; (p) any other provision, which the member may, by special resolution recommend to be included in articles.

Producer Companies 10.13 The articles should also contain the following mutual assistance principles, namely: (a) the member shall be voluntary and available, to all eligible persons who, can participate or avail of the facilities or services of the producer company, and are willing to accept the duties of member; (b) each member shall save as otherwise provided in this Part, have only a single vote irrespective of the share holding; (c) the producer company shall be administered by a Board consisting of persons elected or appointed as directors in the manner consistent with the provisions of this Part and the Board shall be accountable to the member; (d) save as provided in this Part, there shall be limited return on share capital; (e) the surplus arising out of the operations of the producer company shall be distributed in an equitable manner by— (i) providing for the development of the business of the producer company; (ii) providing for common facilities; and (iii) distributing amongst the member, as may be admissible in proportion to their respective participation in the business; (f) provision shall be made for the education of member, employees and others, on the principles of mutuality and techniques of mutual assistance; (g) the producer company shall actively co-operate with other producer companies (and other organisations following similar principles) at local, national or international level so as to best serve the interest of their members and the communities it purports to serve. (a) Amendment of memorandum (Section 581H) A producer company shall not alter the conditions contained in its memorandum except in the cases, by the mode and to the extent for which express provision is made in this Act. However, a producer company may, by special resolution, not inconsistent with Section 581B, alter its objects specified in its memorandum. A copy of the amended memorandum, together with a copy of the special resolution duly certified by two directors, shall be filed with the Registrar within thirty days from the date of adoption of resolution. Where as in case of transfer of the registered office of a producer company from the jurisdiction of one Registrar to another, certified copies of the special resolution certified by two directors shall be filed with both the Registrars within thirty days, and each Registrar shall record the same, and thereupon the Registrar from whose jurisdiction the office is transferred, shall forthwith forward to the other Registrar all documents relating to the producer company.

10.14 Corporate and Allied Laws The alteration of the provisions of memorandum relating to the change of the place of its registered office from one State to another shall not take effect unless it is confirmed by the Company Law Board (Tribunal) on petition. (b) Amendment of articles (Section 581-I) Any amendment to the articles should be proposed by not less than two-third of the elected directors or by not less than one-third of the members of the producer company, and adopted by the members by a special resolution. A copy of the amended articles together with the copy of the special resolution, both duly certified by two directors, should be filed with the Registrar within thirty days from the date of its adoption. 10.5 INTER-STATE CO-OPERATIVE SOCIETIES (a) Conversion of Inter-State Co-operative Societies to become producer companies (Section 581J) Any inter-State co-operative society having objects for multiplicity for states may make an application to the Registrar for registration as producer company. Such application should be accompanied by— (a) a copy of the special resolution, of not less than two-third of total member of inter-State co-operative society, for its incorporation as a producer company, (b) a statement showing— (i) names and addresses or the occupation of the directors and Chief Executive, if any, by whatever name called, of such co-operative; and (ii) list of member of such inter-State co-operative society; (c) a statement indicating that the inter-State co-operative society is engaged in any one or more of the objects specified in Section 581B; (d) a declaration by two or more directors of the inter-State co-operative society certifying that particulars given in clauses (a) to (c) are correct. The word “Producer Company Limited” should form part of its name to show its identity. On compliance with the requirements of the Act, the Registrar shall, within a part of thirty days of the receipt of application, certify under his hand that the inter-State co-operative society applying for registration is registered and thereby incorporated as a producer company. A co-operative society formed by producers, by federation or union of co-operative societies of producers or co-operatives of producers, registered under any law for the time being in force which has extended its objects outside the State, either directly or through a union or

Producer Companies 10.15 federation of co-operatives of which it is a constituent, as the case may be, and any federation or union of such co-operatives, which has so extended any of its objects or activities outside the State, shall be eligible to make an application as above to obtain registration as a producer company under this Part. The Inter-State Co-operative Society upon its registration, under this section transformed into a producer company, and thereafter shall be governed by the provisions of this Part to the exclusion of the law by which it was earlier governed, save in so far as anything done or omitted to be done before its registration as a producer company, and notwithstanding anything contained in any other law for the time being in force, no person shall have any claim against the co-operative institution or the company by reason of such conversion or transformation. Upon registration as a producer company, the Registrar of Companies who registers the company required to intimate the Registrar with whom the erstwhile inter-State co-operative society was earlier registered for appropriate deletion of the society from its register. (b) Vesting of undertaking in producer company (Section 581L) (1) All properties and assets, of, or belonging to, the inter-State co-operative society as on the transformation date, shall vest in the producer company. (2) All the rights, debts, liabilities, interests, privileges and obligations of the inter-State cooperative society as on the transformation date shall stand transferred to, and be the rights, debts, liabilities, interests, privileges and obligations of, the producer company. (3) Without prejudice to the provisions contained in sub-section (2), all debts, liabilities and obligations incurred, all contracts entered into and all matters and things engaged to be done by, with or for, the society as on the transformation date for or in connection with their purposes, shall be deemed to have been incurred, entered into, or engaged to be done by, with or for, the producer company. (4) All sums of money due to the inter-State co-operative society immediately before the transformation date, shall be deemed to be due to the producer company. (5) Every organisation, which was being managed immediately before the transformation date by the inter-State co-operative society shall be managed by the producer company for such part, to such extent and in such manner as the circumstances may require. (6) Every organisation which was getting financial, managerial or technical assistance from the inter-state co-operative society, immediately before the transformation date, may continue to be given financial, managerial or technical assistance, as the case may be, by the producer company, for such part, to such extent and in such manner as that company may deem fit. (7) The amount representing the capital of the erstwhile inter-State co-operative society shall form part of the capital of the producer company.

10.16 Corporate and Allied Laws (8) Any reference to the inter-State co-operative society in any law other than this Act or in any contract or other instrument, shall be deemed to be reference to the producer company. (9) If, on the transformation date, there is pending any suit, arbitration, appeal or other legal proceeding of whatever nature by or against the inter-State co-operative society, the same shall not abate, be discontinued or be in any way prejudicially affected by reason of the incorporation of the producer company under Section 581C or transformation of the inter-State co-operative society as a producer company under Section 581J, as the case may be, but the suit, arbitration, appeal or other proceeding, may be continued, prosecuted and enforced by or against the producer company in the same manner and to the same extent as it would have, or may have been continued, prosecuted and enforced by or against the inter-State cooperative society as if the provisions contained in this Part had not come into force. (c) Concession, etc. to be deemed to have been granted to producer company (Section 581M) With effect from the transformation date, all fiscal and other concessions, licences, benefits, privileges and exemptions granted to the inter-state co-operative society in connection with the affairs and business of the inter-State co-operative society under any law for the time being in force shall be deemed to have been granted to the producer company. (d) Provisions in respect of officers and other employees of Inter-State Co-operative Society (Section 581N) (1) All the directors in the inter-State co-operative society before the incorporation of the producer company shall continue in office for a part of one year from the transformation date and in accordance with the provisions of this Act. (2) Every officer or other employee of the inter-State co-operative society (except a director of the Board, Chairman or Managing Director) serving in its employment immediately before the transformation date shall, in so far as such officer or other employee is employed in connection with the inter-State co-operative society which has vested in the producer company by virtue of this Act, become, as from the transformation date, an officer or, as the case may be, other employee of the producer company and shall hold his office or service therein by the same tenure, at the same remuneration, upon the same terms and conditions, with the same obligations and with the same rights and privileges as to leave, leave travel concession, welfare scheme, medical benefit scheme, insurance, provident fund, other funds, retirement, voluntary retirement, gratuity and other benefits as he would have held under the erstwhile inter-State co-operative society if its undertaking had not vested in the producer company and shall continue to do so as an officer or, as the case may be, other employee of the producer company. (3) Where an officer or other employee of the inter-State co-operative society opts not to be in employment or service of the producer company, such officer or other employee shall be deemed to have resigned.

Producer Companies 10.17 (4) Notwithstanding anything contained in the Industrial Disputes Act, 1947 (14 of 1947) or in any other law for the time being in force, the transfer of the services of any officer or other employee of the inter-State co-operative society to the producer company shall not entitle such officer or other employee to any compensation under this Act or under any other law for the time being in force and no such claim shall be entertained by any court, tribunal or other authority. (5) The officers and other employees who have retired before the transformation date from the service of the inter-State co-operative society and are entitled to any benefits, rights or privileges, shall be entitled to receive the same benefits, rights or privileges from the producer company. (6) The trusts of the provident fund or the gratuity fund of the inter-State co-operative society and any other bodies created for the welfare of officers or employees shall continue to discharge functions in the producer company as was being done hitherto in the inter-State cooperative society and any tax exemption granted to the provident fund or the gratuity fund would continue to be applied to the producer company. (7) Notwithstanding anything contained in this Act or in any other law for the time being in force or in the regulations of the inter-State co-operative society, no director of the Board, Chairman, managing director or any other person entitled to manage the whole or substantial part of the business and affairs of the inter-State co-operative society. The co-operative society shall be entitled to any compensation against the inter-State co-operative society or the producer company for the loss of office or for the premature termination of any contract of management entered into by him with the inter-State co-operative society. 10.6 MANAGEMENT (a) Number of directors Every producer company shall have at least 5 directors and not more than 15 directors. (Section 581O). The proviso to the Section states that in the case of the Inter-State Cooperative Society incorporated as a producer company, such company may have more than 15 directors for a part of one year from the date of its incorporation as a producer company. (b) Appointment of Directors (Section 581P) The members who sign the memorandum and the articles are designated as first directors and shall govern the affairs of the company until the directors are appointed at the Annual General Meeting. The Election of Directors shall be conducted within 90 days from the date of registration of the producer company. In the case of Inter-State Co-operative Society the election shall be held within a period of 360 days. The period of office of a director shall be not less than one year and not exceeding 5 years as may be specified in the articles. The directors retiring by rotation in accordance with the articles shall be eligible for re-appointment as a director. Normally, the Directors of the Board shall be elected are appointed by the

10.18 Corporate and Allied Laws member in the Annual General Meeting. The Board may also co-opt one or more expert directors or an additional director. Such directors cannot exceed 1/5th of the total number of directors. The expert directors shall not have the right to vote in the election of chairman but shall be eligible to be elected as chairman if it is provided by the articles. The maximum period for which such directors shall hold, shall not exceed such period as may be prescribed in the articles. (c) Vacation of office by directors (Section 581Q) The office of the director of a producer company shall become vacant if— (a) he is convicted by a court of any offence involving moral turpitude and sentenced in respect thereof to imprisonment for not less than six months; (b) the Producer Company, in which he is a director, has made a default in repayment of any advances or loans taken from any company or institution or any other person and such default continues for ninety days; (c) he has made a default in repayment of any advances or loans taken from the producer company in which he is a director; (d) the producer company, in which he is a director— (i) has not filed the annual accounts and annual return for any continuous three financial years commencing on or after the 1st day of April, 2002; or (ii) has filed to, repay its deposit or withheld price or patronage bonus or interest thereon on due date, or pay dividend and such failure continues for one year or more; (e) default is made in holding election for the office of director, in the producer company in which he is a director, in accordance with the provisions of this Act and articles; (f) the annual general meeting or extraordinary general meeting of the producer company, in which he is a director, is not called in accordance with the provisions of this Act except due to natural calamity or such other reason. The above provisions may also apply to the director of a Producer institution, which is a member of a producer company. (d) Powers and functions of Board (Section 581R) The Board of directors of a producer company shall exercise, subject to articles, all such powers and to do all such acts and things, as the company is authorised. These powers may include all or any of the following matters, namely: (a) determination of the dividend payable; (b) determination of the quantum of withheld price and recommend patronage to be approved at general meeting;

Producer Companies 10.19 (c) admission of new member; (d) pursue and formulate the organisational policy, objectives, establish specific long-term and annual objectives, and approve corporate strategies and financial plans; (e) appointment of a Chief Executive and such other officers of the producer company, as may be specified in the articles; (f) exercise superintendence, direction and control over Chief Executive and other officers appointed by it; (g) cause proper books of account to be maintained; prepare annual accounts to be placed before the annual general meeting with the auditor’s report and the replies on qualifications, if any, made by the auditors; (h) acquisition or disposal of property of the producer company in its ordinary course of business; (i) investment of the funds of the producer company in the ordinary course of its business; (j) sanction any loan or advance, in connection with the business activities of the producer company to any member, not being a director or his relative; (k) take such other measures or do such other acts as may be required in the discharge of its functions or exercise of its powers. All the above powers may be exercised by the Board, through a resolution passed at its meeting on behalf of the producer company. However, a director or a group of directors, who do not constitute the Board, shall not exercise any of the powers exercisable by it. (e) Liability of directors (Section 581T) When the directors vote for a resolution, or approve by any other means, anything done in contravention of the provisions of this Act or any other law for the time being in force or articles, they shall be jointly and severally liable to make good any loss or damage suffered by the producer company. The producer company is having the right to recover from its director— (a) where such director has made any profit as a result of the contravention of law or articles, an amount equal to the profit so made; (b) where the producer company incurred a loss or damage as a result of the contravention of law or articles, an amount equal to that loss or damage. Where as the liability imposed under this section shall be in addition to and not in derogation of a liability imposed on a director under this Act or any other law for the time being in force.

10.20 Corporate and Allied Laws (f) Committee of directors (Section 581U) The Board may constitute such number of committees as it may deem fit for the purpose of assisting the Board in the efficient discharge of its functions. However, the Board shall not delegate any of its powers or assign the powers of the Chief Executive, to any committee. A committee may, with the approval of the Board, co-opt such number of persons as it deems fit as member of the committee. Whereas that the Chief Executive appointed under Section 581W or a director of the producer company shall be a member of such committee. Every such committee shall function under the general superintendence, direction and control of the Board, for such duration and in such manner as the Board may direct. The fee and allowances to be paid to the member of the committee shall be such as may be determined by the Board. The minutes of each meeting of the committee shall be placed before the Board at its next meeting. (g) Meetings of Board and quorum (Section 581V) A meeting of the Board shall be held not less than once in every three months and at least four such meetings shall be held in every year. Notice of every meeting of the Board of directors shall be given in writing to every director for the time being in India, and at his usual address in India to every other director. The Chief Executive shall give notice as aforesaid not less than seven days prior to the date of the meeting of the Board and if he fails to do so, he shall be punishable with fine which may extend to one thousand rupees. However, a meeting of the Board may be called at shorter notice and the reasons thereof shall be recorded in writing by the Board. The quorum for a meeting of the Board shall be one-third of the total strength of directors, subject to a minimum of three. Subject to provisions in the articles, directors including the co-opted director, may be paid such fees and allowances for attendance at the meetings of the Board, as may be decided by the member in the general meeting. (h) Chief Executive and his functions (Section 581W) (1) Every producer company shall have a full time Chief Executive, appointed by the Board from amongst persons other than member. (2) The Chief Executive shall be ex officio director of the Board and such director shall not retire by rotation. (3) Save as otherwise provided in articles, the qualifications, experience and the terms and conditions of service of the Chief Executive shall be such as may be determined by the Board. (4) The Chief Executive shall be entrusted with substantial powers of management as the Board may determine. The Chief Executive shall manage the affairs of the producer company under the general superintendence, direction and control of the Board and be accountable for the performance of the producer company. Without prejudice to the above the Chief Executive may exercise the

Producer Companies 10.21 powers and discharge the functions, namely: (a) doing administrative acts of a routine nature including managing the day-to-day affairs of the producer company; (b) operating bank accounts or authorise any person, subject to the general or special approval of the Board in this behalf, to operate the bank account. (c) making arrangements for safe custody of cash and other assets of the Producer Company; (d) signing such documents as may be authorised by the Board, for and on behalf of the company; (e) maintaining paper books of account; prepare annual accounts and audit thereof; place the audited accounts before the Board and in the annual general meeting of the member; (f) furnishing member with periodic information to appraise them of the operation and functions of the producer company; (g) making appointments to posts in accordance with the powers delegated to him by the Board; (h) assisting the Board in the formulation of goals, objectives, strategies, plans and policies; (i) advising the Board with respect to legal and regulatory matters concerning the proposed and on going activities and take necessary action in respect thereof; (j) exercising the powers as may be necessary in the ordinary course of business; (k) discharging such other functions, and exercise such other powers, as may be delegated by the Board. (i) Secretary of a producer company (Section 581X) Every producer company having an average annual turnover exceeding five crore rupees in each of three consecutive financial years shall have a whole-time secretary, who possesses membership of the Institute of Company Secretaries of India constituted under the Company Secretaries Act, 1980 (56 of 1980). If a producer company fails to comply with this, the company and every officer of the company who is in default, shall be punishable with fine which may extend to five hundred rupees for every day during which the default continues: Whereas in any proceedings against a person in respect of an offence, under this section shall be a defence to prove that all reasonable efforts to comply with the provisions of section were taken or that the financial position of the company was such that it was beyond its capacity to engage a whole-time secretary.

10.22 Corporate and Allied Laws 10.7 GENERAL MEETINGS (a) Matters to be transacted at general meeting (Section 581S) The Board of directors of a producer company shall exercise the following powers on behalf of the company, and it shall do so only by means of resolutions passed at the annual general meeting of its member, namely: (a) approval of budget and adoption of annual accounts of the producer company; (b) approval of patronage bonus; (c) issue of bonus shares; (d) declaration of limited return and decision on the distribution of patronage; (e) specify the conditions and limits of loans that may be given by the Board to any director; and (f) approval of any transaction of the nature as is to be reserved in the articles for approval by the member. (b) Quorum (Section 581Y) Unless the articles require a large number, one-fourth of the total member shall constitute the quorum at a general meeting. (c) Voting Rights (Section 581Z) Subject to Sections 581D, (1)&(3), every member shall have one vote and in the case of equality of votes, the Chairman or the person presiding shall have a casting vote except in the case of election of the Chairman. (d) Annual general meetings (Section 581ZA) (1) Every producer company shall hold, annual general meeting in a year the time gap between one annual general meeting to another, should not be more than fifteen months. (2) In this regard, the Registrar may, for any special reason, permit extension of the time for holding any annual general meeting (not being the first annual general meeting) by a part not exceeding three months. (i) A producer company shall hold its first annual general meeting within a part of ninety days from the date of its incorporation. (3) The member shall adopt the articles of the producer company and appoint directors of its Board in the annual general meeting. (4) The notice calling the annual general meeting shall be accompanied by the following documents, namely: (a) the agenda of the annual general meeting;

Producer Companies 10.23 (b) the minutes of the previous annual general meeting or the extra-ordinary general meeting; (c) the names of candidates for election, if any, to the office of director including a statement of qualifications in respect of each candidate; (d) the audited balance-sheet and profit and loss accounts of the producer company and its subsidiary, if any, together with a report of the Board of Directors of such Company with respect to— (i) the state of affairs of the producer company; (ii) the amount proposed to be carried to reserve; (iii) the amount to be paid as limited return on share capital; (iv) the amount proposed to be disbursed as patronage bonus; (v) the material changes and commitments, if any, affecting the financial position of the producer company and its subsidiary, which have occurred in between the date of the annual accounts of the producer company to which the balance sheet relates and the date of the report of the Board; (vi) any other matter of importance relating to energy conservation, environmental protection, expenditure or earnings in foreign exchanges; (vii) any other matter which is required to be, or may be, specified by the Board; (e) the text of the draft resolution for appointment of auditors; (f) the text of any draft resolution proposing amendment to the memorandum or articles to be considered at the general meeting, along with the recommendations of the Board. (5) The Board of Directors shall, on the requisition made in writing, duly signed and setting out the matters for the consideration, made by one-third of the member entitled to vote in any general meeting, proceed to call an extraordinary general meeting in accordance with the provisions contained in Sections 169 to 186 of this Act. (6) Every annual general meeting should be held during business hours, on a day that is not a public holiday and shall be held at the registered office or at some other place within the city, town or village in which the registered office of the Company is situate. (7) A general meeting of the producer company shall be called by giving not less than fourteen days prior notice in writing. (8) The notice of the general meeting indicating the date, time and place of the meeting shall be sent to every member and auditor of the producer company. (9) Unless the articles of the producer company provide for a larger number, one-fourth of the total number of member of the producer company shall be the quorum for its annual general meeting.

10.24 Corporate and Allied Laws (10) The proceedings of every annual general meeting along with the Directors’ Report, the audited balance-sheet and the profit and loss account shall be filed with the Registrar within sixty days of the date on which the annual general meeting is held, with an annual return along with the filing fees as applicable under the Act. (11) In the case where a producer company is formed by Producer institutions, such institutions shall be represented in the general body through the Chairman or the Chief Executive thereof who shall be competent to act on its behalf: Provided that a Producer institution shall not be represented if such institution makes a default or failure referred to in clauses (d) to (f) of sub-section (1) of Section 581Q. 10.8 SHARE CAPITAL AND MEMBER RIGHTS (a) Share capital (Section 581ZB) The share capital of a producer company shall consist of equity shares only. The shares held by a member in a producer company, shall as far as may be, be in proportion to the patronage of that company. (b) Special user rights (Section 581ZC) The producers, who are active member may, if so provided in the articles, have special rights and the producer company may issue appropriate instruments to them in respect of such special rights. The instruments shall be issued after obtaining approval of the Board in that behalf, be transferable to any other active member of that producer company. Here special rights means any right relating to supply of additional produce by the active member or any other right relating to his produce which may be conferred upon him by the Board. (c) Transferability of shares and attendant rights (Section 581ZD) The provisions are as follows: (1) Save as otherwise provided in sub-sections (2) to (4), the shares of a member of a producer company shall not be transferable. (2) A member of a producer company may, after obtaining the previous approval of the Board, transfer the whole or part of his shares along with any special rights, to an active member at par value. (3) Every member within three months of his becoming a member, of Producer Company, nominate, as specified in articles, a person to whom his shares in the producer company shall vest in the event of his death. (4) The nominee shall, on the death of the member, become entitled to all the rights in the shares of the producer company and the Board of that Company shall transfer the shares

Producer Companies 10.25 of the deceased member to his nominee: Provided that in a case where such nominee is not a producer, the Board shall direct the surrender of shares together with special rights, if any, to the producer company at par value or such other value as may be determined by the Board. (5) Where the Board of a producer company is satisfied that— (a) any member has ceased to be a primary producer; or (b) any member has failed to retain his qualifications to be a member as specified in articles, the Board shall direct the surrender of shares together with special rights, if any, to the producer company at par value or such other value as may be determined by the Board: Provided that the Board shall not direct such surrender of shares unless the member has been served with a written notice and given an opportunity of being heard. 10.9 FINANCE, ACCOUNTS AND AUDIT (a) Books of accounts (Section 581ZE) Every producer company has to maintain books of account registered office with respect to— (a) all sums of money received and expended by the producer company and the matters in respect of which the receipts and expenditure take place; (b) all sales and purchase of goods by the producer company; (c) the instruments of liability executed by or on behalf of the producer company; (d) the assets and liabilities of the producer company; (e) in case of a producer company engaged in production, processing and manufacturing, the particulars relating to utilisation of materials or labour or other items of costs. The balance sheet and profit and loss account of the producer company shall be prepared, as far as may be, in accordance with the provisions contained in Section 211 of the Companies Act, 19510. (b) Internal audit (Section 581ZF) Every producer company shall have internal audit of its accounts carried out, at such interval and in such manner as may be specified in articles, by a chartered accountant as defined in clause (b) of sub-section (1) of Section 2 of the Institute of Chartered Accountants Act, 1949 (38 of 1949). (c) Duties of auditor under this Part (Section 581ZG) Without prejudice to the provisions contained in Section 227, the auditor shall report on the

10.26 Corporate and Allied Laws following additional matters relating to the producer company, namely:— (a) the amount of debts due along with particulars of bad debts if any; (b) the verification of cash balance and securities; (c) the details of assets and liabilities; (d) all transactions which appear to be contrary to the provisions of this Part; (e) the loans given by the producer company to the directors; (f) the donations or subscriptions given by the producer company; (g) any other matter as may be considered necessary by the auditor. (d) Donations or subscription by producer company (Section 581ZH) A producer company may, by special resolution, make donation or subscription to any institution or individual for the purposes of— (a) promoting the social and economic welfare of producer member or producers or general public; or (b) promoting the mutual assistance principles: Provided that the aggregate amount of all such donation and subscription in any financial year shall not exceed three per cent of the net profit of the producer company not more than 3% of the net profit in the financial year immediately preceding the financial year in which the donation or subscription was made. Further, no producer company shall make directly or indirectly to any political part or for any political purpose to any person any contribution or subscription or make available any facilities including personnel or material. (e) General and other reserves (Section 581ZI) Every producer company shall maintain a general reserve in every financial year, in addition to any reserve maintained by it as may be specified in articles. In a case where the producer company does not have sufficient funds in any financial year for transfer to maintain the reserves as may be specified in articles, the contribution to the reserve shall be shared amongst the member in proportion to their patronage in the business of that company in that year. (f) Issue of bonus shares (Section 581ZJ) Any producer company may, upon recommendation of the Board and passing of resolution in the general meeting, issue bonus shares by capitalisation of amounts from general reserves referred to in Section 581ZI in proportion to the shares held by the member on the date of the issue of such shares.

Producer Companies 10.27 (g) Loan, etc., to member (Section 581ZK) The Board may, subject to the provisions made in articles, provide financial assistance to the member of the producer company by way of— (a) credit facility, to any member, in connection with the business of the Producer Company, for a part not exceeding six months; (b) loans and advances, against security specified in articles to any member, repayable within a part exceeding three months but not exceeding seven years from the date of disbursement of such loan or advances. However, that any loan or advance to any director or his relative shall be granted only after the approval by the member in general meeting. (h) Investment in other companies, formation of subsidiaries, etc. (Section 581ZL) The producer company has to follow the following provisions under this Section. (1) The general reserves of any producer company shall be invested to secure the highest returns available from approved securities, fixed deposits, units, bonds issued by the Government or co-operative or scheduled bank or in such other mode as may be prescribed. (2) Any producer company may, for promotion of its objectives acquire the shares of another producer company. (3) Any producer company may subscribe to the share capital of, or enter into any agreement or other arrangement, whether by way of formation of its subsidiary company, joint venture or in any other manner with any body corporate, for the purpose of promoting the objects of the producer company by special resolution in this behalf. (4) Any producer company, either by itself or together way of subscription, purchase or otherwise, shares producer company, specified under sub-section (2), section (3), for an amount not exceeding thirty per capital and free reserves: with its subsidiaries, may invest, by in any other company, other than a or subscription of capital under subcent of the aggregate of its paid-up

Provided that a producer company may, by special resolution passed in its general meeting and with prior approval of the Central Government, invest in excess of the limits specified in this section. (5) All investments by a producer company may be made if such investment are consistent with the objects of the producer company. (6) The Board of a producer company may, with the previous approval of member by a special resolution, dispose of any of its investments referred to in sub-sections (3) and (4). (7) Every producer company shall maintain a register containing particulars of all the

10.28 Corporate and Allied Laws investments, showing the names of the companies in which shares have been acquired, number and value of shares; the date of acquisition; and the manner and price at which any of the shares have been subsequently disposed of. (8) The register referred to in sub-section (7) shall be kept at the registered office of the producer company and the same shall be open to inspection by any member who may take extracts there from. 10.10 PENALTIES Penalty for contravention (Section 581ZM) (1) If any person, other than a producer company registered under this part, carries on business under any name which contains the words “producer company limited”, he shall be punishable with fine which may extend to ten thousand rupees for every day during which such name has been used by him. (2) If a director or an officer of a producer company, who willfully fails to furnish any information relating to the affairs of the producer company required by a member or a person duly authorised in this behalf, he shall be liable to imprisonment for a term which may extend to six months and with fine equivalent to five per cent of the turnover of that company during preceding financial year. (3) If a director or officer of a producer company— (a) makes a default in handing over the custody of books of account and other documents or property in his custody to the producer company of which he is a director or officer; or (b) fails to convene annual general meeting or other general meetings, he shall be punishable with fine which may extend to one lakh rupees, and in the case of a continuing default or failure, with an additional fine which may extend to ten thousand rupees for every day during which such default or failure continues. 10.11 AMALGAMATION, MERGER OR DIVISION Amalgamation, merger or division, etc., to form new producer companies (Section 581ZN) (1) A producer company may, by a resolution passed at its general meeting,— (a) decide to transfer its assets and liabilities, in whole or in part, to any other producer company, which agrees to such transfer by a resolution passed at its general meeting, for any of the objects specified in Section 581B; (b) divide itself into two or more new producer companies. (2) Any two or more producer companies may, by a resolution passed at any general or

Producer Companies 10.29 special meetings of its members, decide to— (a) amalgamate and form a new producer company; or (b) merge one producer company (hereafter referred to as ‘merging company’) with another producer company (hereafter referred to as ‘merged company’). (3) Every resolution of a producer company under this section shall be passed at its general meeting by a majority of total Members with right of vote or two-thirds of its Members present and voting, whichever is less, and such resolution shall contain all particulars of the case may be. (4) Before passing a resolution under this section, the producer company shall give notice thereof in writing together with a copy of the proposed resolution to all the Members and creditors who may give their consent. (5) Notwithstanding anything contained in articles or in any contract to the contrary, any Member, or any creditor not consenting to the resolution shall, during the period of one month of the date of service of the notice on him, have the option, (a) in the case of any such Member, to transfer his shares with the approval of the Board to any active Member thereby ceasing to continue as a Member of that company; or (b) in the case of a creditor, to withdraw his deposit or loan or advance, as the case may be. (6) Any Member or creditor, who does not exercise his option within the period specified in sub-section (5), shall be deemed to have consented to the resolution. (7) A resolution passed by a producer company under this section shall not take effect until the expiry of one month or until the assent thereto of all the member and creditors has been obtained, whichever is earlier. (8) The resolution referred to in this section shall provide for— (a) the regulation of conduct of the producer company’s affairs in the future; (b) the purchase of shares or interest of any member of the producer company by other member or by the producer company; (c) in the case of purchase of shares of one producer company by another producer company, the consequent reduction of its share capital; (d) termination, setting aside or modification of any agreement, howsoever arrived between the company on the one hand and the directors, secretaries and managers on the other hand, apart from such terms and conditions as may, in the opinion of the majority of shareholders, be just and equitable in the circumstances of the case; (e) termination, setting aside or modification of any agreement between the producer company and any person not referred to in clause (d):

10.30 Corporate and Allied Laws Provided that no such agreement shall be terminated, set aside or modified except after giving due notice to the part concerned and also no such agreement shall be modified except after obtaining the consent of the part concerned; (f) the setting aside of any transfer, delivery of goods, payment, execution or other act relating to property, made or done by or against the producer company within three months before the date of passing of the resolution, which would if made or done against any individual, be deemed in his insolvency to be a fraudulent preference; (g) the transfer to the merged company of the whole or any part of the undertaking property or liability of the producer company; (h) the allotment or appropriation by the merged company of any shares, debentures, policies, or other like interests in the merged company; (i) the continuation by or against the merged company of any legal proceedings pending by or against any producer company; (j) the dissolution, without winding-up, of any producer company; (k) the provision to be made for the member or creditors who make dissent; (l) the taxes if any, to be paid by the producer company; (m) such incidental, consequential and supplemental matters as are necessary to secure that the division, amalgamation or merger shall be fully and effectively carried out. (9) When a resolution passed by a producer company under this section takes effect, the resolution shall be a sufficient conveyance to vest the assets and liabilities in the transferee. (10) The producer company shall make arrangements for meeting in full or otherwise satisfying all claims of the member and the creditors who exercise the option, within the part specified in sub-section (5), not to continue as the member or creditor, as the case may be. (11) Where the whole of the assets and liabilities of a producer company are transferred to another producer company in accordance with the provisions of sub-section (9), or where there is merger under sub-section (2), the registration of the first mentioned Company or the merging company, as the case may be, shall stand cancelled and that Company shall be deemed to have been dissolved and shall cease to exist forthwith as a corporate body. (12) Where two or more producer companies are amalgamated into a new producer company in accordance with the provisions of sub-section (2) and the producer company so formed is duly registered by the Registrar, the registration of each of the amalgamating companies shall stand cancelled forthwith on such registration and each of the Companies shall thereupon cease to exist as a corporate body. (13) Where a producer company divides itself into two or more producer companies in accordance with the provisions of clause (b) of sub-section (1) and the new producer

Producer Companies 10.31 companies are registered in accordance with the provisions of sub-section (8), the registration of the erstwhile producer company shall stand cancelled forthwith and that Company shall be deemed to have been dissolved and cease to exist as a corporate body. (14) The amalgamation, merger or division of companies under the foregoing sub-sections shall not in any manner whatsoever affect the pre-existing rights or obligations and any legal proceedings that might have been continued or commenced by or against any erstwhile company before the amalgamation, merger or division, may be continued or commenced by, or against, the concerned resulting company, or merged company, as the case may be. (15) The Registrar shall strike off the names of every producer company deemed to have been dissolved under sub-sections (11 to 14). (16) Any member or creditor or employee aggrieved by the transfer of assets, division, amalgamation or merger may, within thirty days of the passing of the resolution, prefer an appeal to the High Court. (17) The High Court shall, after giving a reasonable opportunity to the person concerned, pass such orders thereon as it may deem fit. (18) Where an appeal has been filed under sub-section (16), the transfer of assets, division, amalgamation or merger of the producer company shall be subject to the decision of the High Court. 10.12 RESOLUTION OF DISPUTES (a) Disputes (Section 581ZO) Where any dispute relating to the formation, management or business of a producer company arises— (a) amongst member, former member or persons claiming to be member or nominees of deceased member; or (b) between a member, former member or a person claiming to be a member, or nominee of deceased member and the producer company, its Board of directors, office-bearers, or liquidator, past or present; or (c) between the producer company or its Board, and any director, office-bearer or any former director, or the nominee, heir or legal representative of any deceased director of the producer company, such dispute shall be settled by conciliation or by arbitration as provided under the Arbitration and Conciliation Act, 1996 (26 of 1996) as if the parties to the dispute have consented in writing for determination of such disputes by conciliation or by arbitration and the provisions of the said Act shall apply accordingly. Explanation—For the purposes of this section, a dispute shall include— (a) a claim for any debt or other amount due;

10.32 Corporate and Allied Laws (b) a claim by surety against the principal debtor, where the producer company has recovered from the surety amount in respect of any debtor or other amount due to it from the principal debtor as a result of the default of the principal debtor whether such debt or amount due be admitted or not; (c) a claim by producer company against a member for failure to supply produce as required of him; (d) a claim by a member against the producer company for not taking goods supplied by him. If any question arises whether the dispute relates to formation, management or business of the producer company, the question shall be referred to the arbitrator, whose decision thereon shall be final. (b) Striking off name of producer company (Section 581ZP) If a producer company fails to commence business within one year of its registration or ceases to transact business with the member or if the Registrar is satisfied, after making such inquiry as he thinks fit, that the producer company is not carrying any of its objects specified in Section 581B, he shall make an order striking off the name of the producer company, which shall thereupon cease to exist forthwith. No such order cancelling the registration as aforesaid shall be passed until a notice to show cause has been given by the Registrar to the producer company with a copy to all its directors on the proposed action and reasonable opportunity to represent its case has been given. Where the Registrar has reasonable cause to believe that a producer company is not maintaining any of the mutual assistance principles specified, he shall strike its name off the register in accordance with the provisions contained in Section 560 of this Act. Any member of a producer company, who is aggrieved by an order made under this Section, may appeal to the Company Law Board (Tribunal) within sixty days of the order. After disposing the appeal, if any, the order to striking off the name shall take effect. (c) Re-conversion of producer company to inter-state co-operative society (Section 581ZS) The method is as follows: (1) Any producer company, being an erstwhile inter-State co-operative society, formed and registered under this Part, may make an application— (a) after passing a resolution in the general meeting by not less than two-third of its member present and voting; or

Producer Companies 10.33 (b) on request by its creditors representing three-fourth value of its total creditors, to the High Court for its re-conversion to the inter-State co-operative society. (2) The High Court shall, on the application made under sub-section (1), direct holding meeting of its member or such creditors, as the case may be, to be conducted in such manner as it may direct. (3) If a majority in number representing three-fourths in value of the creditors, or member, as the case may be, present and voting in person at the meeting conducted in pursuance of the directions of the High Court under sub-section (2), agree for reconversion, if sanctioned by the High Court, be binding on all the member and all the creditors, as the case may be, and also on the company which is being converted: Provided that no order sanctioning re-conversion shall be made by the Court unless the Court is satisfied that the company or any other person by whom an application has been made under sub-section (1) has disclosed to the Court, by affidavit or otherwise, all material facts relating to the company, such as the latest financial position of the company, the latest auditor’s report on the accounts of the company, the pendency of any investigation proceedings in relation to the company under Sections 235 to 251, and the like. (4) An order made by the Court under sub-section (3) shall have no effect until a certified copy of the order has been filed with the Registrar. (5) A copy of every such order shall be annexed to every copy of the memorandum of the company issued after the certified copy of the order has been filed as aforesaid, or in the case of a company not having a memorandum, to every copy so issued of the instrument constituting or defining the constitution of the company. (6) If default is made in complying with sub-section (4), the company, and every officer of the company who is in default, shall be punishable with fine which may extend to one hundred rupees, for each copy in respect of which default is made. (7) The Court may, at any time after an application has been made to it under this section, stay the commencement or continuation of any suit or proceeding against the company on such terms as the Court thinks fit, until the application is finally disposed of. (8) Every producer company which has been sanctioned re-conversion by the High Court, shall make an application, under the Multi-State Co-operative Societies Act, 2002 (39 of 2002) or any other law for the time being in force for its registration as multi-State co-operative society or co-operative society, as the case may be, within six months of sanction by the High Court and file a report thereof to the High Court and the Registrar of companies and to the Registrar of the co-operative societies under which

10.34 Corporate and Allied Laws it has been registered as a multi-State co-operative society or co-operative society, as the case may be.

11
(K) COMPANIES INCORPORATE OUTSIDE INDIA
11.0 FOREIGN COMPANIES Companies which are incorporated in foreign countries but have offices and places of business in India are described as foreign companies. They have to comply with certain provisions of the Act. 11.1 APPLICATION OF SECTIONS 592 TO 602 TO FOREIGN COMPANIES (SECTION 591)

All these sections will apply to all foreign companies, i.e. companies falling under the following two classes, namely (a) companies incorporated outside India which after the commencement of this Act, establish a place of business within India; and (b) companies incorporated outside India which have, before the commencement of this Act, established a place of business within India and continue to have an established place of business within India at the commencement of the Act [sub-section (1)]. It may so happen, that not less than 50% of the paid-up share capital whether equity or preference or partly equity and partly preference of a foreign company having an established place of business in India is held by one or more citizens of India or one or more bodies corporate incorporated in India, whether singly or in the aggregate. In such a case, the said company shall comply with such of the provisions of the Act as may be prescribed with regard to the business carried on by it in India, as if it were a company incorporated in India [sub-section (2) as inserted by the 1974 Amendment Act]. 11.2 DOCUMENTS, ETC., TO BE DELIVERED TO THE REGISTRAR BY FOREIGN COMPANIES

Foreign companies which after April 1, 1956 established a place of business in India must, within 30 days, from the date, file with the Registrar having jurisdiction over New Delhi (Section 597) and also with the Registrar of the State in which the principal place of business of the company is situated:

11.2

Corporate and Allied Laws

(a) a certified copy of the charter, statutes or memorandum and articles of the company or other instruments constituting or defining the constitution of the company, and if the instrument is not in English language certified translation thereof; (b) the full address of the registered or principal office of the company; (c) a list of the directors and secretary of the company, containing the particulars mentioned in Section 592(2) In respect of each director (when an individual), this list mush contain his present name and surname in full, his former name or names or surname or surnames in full, his usual residential address, his nationality and if that nationality is not the nationality of origin, his nationality of origin and his business occupation (if any), or if he has no business occupation but holds any other directorship or directorships, particulars thereof. If the director is a body corporate, the list must contain its corporate name and registered or principal office and the full name, address, nationality and the nationality of origin if different from that nationality or each of its directors. In respect of the secretary or each of the joint secretaries (if there be any) (when an individual), the list must contain his present name and surname, and former name(s) or surname(s) and his usual residential address if the secretary is a body corporate, its corporate name and registered or principal office; (d) the name and address or the names and addresses of some one or more persons resident in India authorised to accept on behalf of the company service of process and any notices or other documents required to be served on the company, and (e) the full address of the office of the company in India, which is to be deemed its principal place of business in India. Under Rule 16 of the Companies (Central Government’s) General Rules and Forms, 1956, a copy of any charter, statutes, memorandum and articles, or other instrument constituting or defining the constitution of a company must be duly certified to be true copy. It must be certified, in the case of a company incorporated outside the Commonwealth by (a) an official of the Government to whose custody the original of the document is committed or (b) a Notary of such country or (c) an officer of the company. The signature and seal of the official mentioned in (a) or (b) is required to be authenticated by diplomatic and Consular Officer empowered in this behalf under Section 3 of the Diplomatic and Consular Officers (Oaths and Fees) Act, 1948, or, where there is no such officer by any one of the officials mentioned in Section 6 of the Commissioner of Oaths Act, 1889 or in any Act amending the same). The certificate of the officer of the company referred to above is required to be signed before a person having authority to administer an oath as provided

Companies Incorporate Outside India

11.3

by Section 3 of the Diplomatic and Consular Officers (Oath and Fees) Act or as the case may be by Section 3 of the Commissioner of Oaths Act, (the status of the person administering the oath in the latter case being authenticated by any official specified in Section 6 of the Commissioner of Oaths Act, or in any Act amending the same). If the company is incorporated in any part of the Commonwealth, the copy of the above mentioned document must be certified as true copy by: (a) an official of the Government to whose custody the original of the document is committed, (b) a Notary in that part of the Commonwealth, or (c) an officer of the company, on oath before a person having authority to administer oath in that part of the Commonwealth. Under Rule 17 (ibid), the English translation of the document to be filed with the Registrar in pursuance of Sections 592, 593 or 605 must be certified to be correct. If the translation is made outside India it shall be authenticated by the signature and seal (if any) of the official having custody of the original or of a Notary of the country (or part of the country) where the company is incorporated. If the translation is made within India, it shall be authenticated by an advocate, attorney or pleader entitled to appear before High Court or by an affidavit of the person having, in the opinion of the Registrar, an adequate knowledge of the language of the original and of English. The documents pursuant to Section 592 are to be delivered in Form No. 44. 11.3 RETURN TO BE DELIVERED TO REGISTRAR WHERE DOCUMENTS ARE ALTERED: Under Section 593 of the Act, if any alteration is made or occurs in: (a) the charter, statute or memorandum and articles of a foreign company or other instruments constituting or defining the constitution of a foreign company, or (b) the registered principal office of a foreign company; or (c) the name or address of any person authorised to accept service on behalf of a foreign company; or the directors or secretary of a foreign company; or (d) the principal place of business of the company in India; then the company shall within the prescribed time deliver to the Registrar for registration a return containing the prescribed particulars of the alteration. Rule 18 of the Companies (Central Government’s) General Rules and Forms, 1956 prescribe the time, within which the particulars of alteration are to be filed. The notice of alteration in respect of items (a), (b) or (c) above, must be communicated to the Registrar on or before 31 st January of the year following the year in which alteration was made or occurred, that in respect of item (d) or (e) within one month from the date of alteration. 11.4 ACCOUNTS OF FOREIGN COMPANY

11.4

Corporate and Allied Laws

Under Section 594(I), every foreign company in every calendar year must: (a) Make out a balance sheet, and profit and loss account relating to his India Business in such form containing such particulars and including or having annexed thereto such documents (including in particular, document relating to every subsidiary of the foreign company) as under the provisions of the Act it would, it had been a company within the meaning of the Act, have been required to make out and, lay before the company in general meeting; and (b) Deliver three copies of those documents to the Registrar. In regard to foreign company having a branch in India, whose entire or almost the entire business related to India, to avoid preparation of separate balance sheet and, Profit and Loss Account in respect of the Indian Business, it has been agreed to by the Department of Company Law Administration that if the World Balance Sheet, and Profit and Loss Account prepared by it in the country of Incorporation was recast in the form prescribed in Schedule VI to the Companies Act, then such statement of accounts would be accountable in compliance with the provision of Section 594(1). Under Section 594(3), every foreign company shall send to the Registrar along with the documents required to be delivered to him under sub-section (1), three copies of a list in prescribed form of all places of business established by the company in India as at the date with reference to which the balance sheet referred to in sub-section (1) is made out. 11.5 OBLIGATION TO STATE NAME OF FOREIGN COMPANY

It is also obligatory for every foreign company to, (a) exhibit on the outside of its place of business in India its name and the country in which it is incorporated and such an exhibition must be in English as well as in the local language, (b) state, in every prospectus inviting subscriptions in India, for its shares or debentures the country of incorporation, (c) cause the name of the company and its country of incorporation to be stated in legible English characters in all business letters, bill heads, letter papers, notices, advertisements and other official publications thereof. If the liability of the members of the company is limited, the notice of the fact also must be stated in the prospectus, letter heads, letter papers, etc. and to be conspicuously exhibited on outside of every place where it carries on business in India, in legible English characters and also in legible characters of the language of the locality in which the office or place is situated. (Section 595). 11.6 SERVICE ON FOREIGN COMPANY

Companies Incorporate Outside India

11.5

A necessity may arise for serving on a foreign company certain process, notice or other document. These would be deemed to have been sufficiently served if these are addressed to any person (whose name has been delivered to he Registrar under the foregoing provisions relating to foreign companies) and left or sent by post to, the address, which has been so delivered. But if such name and address of a person resident in India has not been given to the Registrar or if at any time all the persons whose names and addresses have been so delivered are dead or have ceased to reside or refuse to accept services on behalf of the foreign company, then the document may be served on the company itself by leaving it at or sending it by post to, any place of business established by the company in India (Section 596). 11.7 PENALTIES

Section 598 prescribes a penalty for the company and every officer or agent of the company for non-compliance with any of the requirements mentioned above, extending to Rs. 10,000 and in the case of a continuing offence, with an additional fine extending to Rs. 1,000 per day, during which the default continues. 11.8 EFFECT OF COMPANY’S FAILURE TO COMPLY WITH THE PROVISIONS OF PART XI OF THE COMPANIES ACT RELATING TO COMPANIES INCORPORATED OUTSIDE INDIA Under Section 599 if a foreign company fails to comply with any of the foregoing provisions of Part XI, such a failure will not affect the validity of any contract, dealing or transaction entered into by the company, it will be liable to be sued in respect thereof. But it cannot bring any suit, claim any set off, make any counter-claim or institute any legal proceeding in respect of any such contract, dealing or transaction until it has complied with the provisions of that Part. 11.9 REGISTRATION OF CHARGES, APPOINTMENT OF RECEIVER AND BOOKS OF ACCOUNT (SECTION 600) The provision of Part V of the Companies Act (Sections 124 to 145 shall apply mutatis mutandis to: (a) charges on properties in India, which were created by foreign company after 15.1.1937; and (b) charges on property in India which is acquired by any foreign company after 15.1.1937. Moreover, where a section is created or the completion of the acquisition of the property takes place outside India, even provisions of Section 125(5) and the proviso to 127(1) shall have effects as if the property (wherever situated) were situated outside India. The provisions of Section 118 (pertaining to the right of debenture holders and members

11.6

Corporate and Allied Laws

to have copies of trust-deed) shall apply mutatis mutandis to a foreign company [subsection (2)]. The provisions of Section 209 (pertaining to books to be kept by a company) shall be applicable to a foreign company to the extent of requiring it to keep at its principal place of business in India, the books of account mentioned in Section 209 with regard to moneys received and spent, sales and purchases made, and assets and liabilities in the course of or in relation to its business in India [sub-section (3)(a)]. On and from the commencement of the Companies (Amendment) Act, 1974 (i.e. 1.2.75), the provisions of Section 159 (relating to Annual Return to be made by company having a share capital) shall, subject to such modifications or additions as may be made therein by the rules made under this Act, apply to a foreign company which has an established place of business in India, as they apply to a company incorporated in India [sub-section (3)(b)(i) as inserted by the aforesaid Amendment Act]. Further, on and from 1.2.1975, the provisions of Sections 209, 209A, 233A and 233B (relating to: books of account to be kept by an indigenous company; inspection of books of account, etc., under Section 209A inserted a new by the 1974 Amendment Act; special audit; audit of cost accounts in certain cases) as well as Sections 234 to 246 (relating to: Registrar’s power to call for information or explanation; seizure of document by Registrar, investigation of company’s affairs on application by members or report by Registrar; application by members to be supported by evidence any power to call for security; investigation of company’s affairs in other cases; prohibition of a firm, body corporate or association from being appointed as inspectors; power of inspectors to carry out investigation into the affairs of related companies or associates, etc., production of documents and evidence; seizure of documents by inspector; Inspector’s report; prosecution, application for winding-up of company or an order under Section 397 or 398; proceedings for recovery of damages or property; expenses of investigation and inspectors’ report to be evidence) shall so far as may apply to the Indian business of a foreign company as they apply to company incorporated in India [sub-section (3)(ii) as inserted anew by the 1974 Amendment Act]. In applying the aforementioned Sections (viz., 124 to 145, 118 & 209), the Registrar and the registered office of the foreign company referred to in those Sections, shall be the Registrar having jurisdiction over New Delhi and its principal place of business in India respectively. N.B. The prescribed form for the purpose of Section 600 is Form No. 55 of the Companies (Central Government’s) Rules and Forms, 1956. 11.10 FEES FOR REGISTRATION OF DOCUMENTS

Companies Incorporate Outside India

11.7

Such fees as may be prescribed have to be paid to the Registrar for registering any documents that are required to be filed with the Registrar (Section 601). Rule 20 of the Companies (Central Government’s) Rules prescribes the fee for registration of any document relating to a foreign company. 11.11 REGISTRATION OF PROSPECTUS

Section 605 declares that no person shall issue, circulate or distribute in India any prospectus offering for subscription the shares in or debentures of, a foreign company incorporated or to be incorporated outside India irrespective of whether or not it has established or will establish place of business in India, unless: (i) before its issue, circulating or distributing of the prospectus in India a copy thereof, certified by the chairman and two other directors of the company as having been approved by a resolution of the Registrar; (ii) the prospectus states on the face of it that a copy thereof has been so delivered; and (iii) there is endorsed on or attached to the copy: (a) the consent of an expert, if any, to the issue of the prospectus as required by Section 604(b) a copy of any contract needed by clause 16 of Schedule II to be stated in the prospectus or, in the case of a contract not reduced into writing, a memorandum giving full particulars thereof; and a statement setting out the adjustments referred to in clause 32 of the same Schedule. Likewise, under sub-section (3) of Section 603, a person is prohibited from issuing to any one in India a form of application for shares in, or debentures of such a company or intended company, unless the form is issued along with the prospectus. Students may note that: (i) a prospectus also comprises the document which according to Section 64, is deemed to be a prospectus and (ii) under Section 608(3) the expression ‘prospectus’, ‘shares’ and debentures, in reference to foreign companies have the same meaning as when used in relation to a company incorporated under the Act. 11.12 REQUIREMENTS AS REGARDS PROSPECTUS

In so far as foreign companies are concerned the provisions as regards prospectus requirements have been brought almost in line with the provisions applicable to companies incorporated in India, subject to minor modifications. Under Section 603, the prospectus to be issued by an existing or intended foreign company in India must be dated and contain the following particulars: (a) the instrument constituting or defining the constitution of the company; (b) the enactments or provisions under which the company was incorporated; (c) the address of the place in India where

11.8

Corporate and Allied Laws

the said instruments, enactments etc., translation thereof in English, if they are in some other foreign language, can be inspected; (d) the date on which and the country in which the company was incorporated; and (e) whether there is a place of business in India, and if so, the address of its principal office. The provisions contained in (a), 9(b) and (c) above, shall not be applicable, if the prospectus is issued more than 2 years after the company had become entitled to commence business. As in the case of the prospectus of a company incorporated in India, the prospectus of a foreign company too, must contain the matters laid down in Part I of Schedule II and set out the report specified in Part II of the Schedule subject always to the provisions of Part III of the Schedule. Furthermore, the penalty prescribed for contravention of any of the provisions contained in Sections 603, 604 and 605 is imprisonment for a term extending up to 6 months, or fine up to Rs. 50,000 or both (Section 606). Section 62 relating to civil liability for misstatement in a prospectus is applicable also to a prospectus issued, circulated or distributed in India by a foreign company, with the substitution for references in Sections 62 to Section 60 of this Act, of reference to Section 604 thereof (Section 607).

12
(I) OFFENCES AND PENALTIES
12.0 TYPES OF PENALTIES There are five types of penalties that have been contemplated under the Companies Act, 1956. They are 1. 2. 3. 4. 5. Fine only Imprisonment or fine Imprisonment or fine or with both Imprisonment and fine and Imprisonment only

Of the above, the offences referred to in 1 to 3 are compoundable and others are not compoundable. The application for compounding has to be made in duplicate on plain paper and there is no filing for it. The application should clearly state the details of offence committed and that the applicant should admit the offence and plead guilty and seek specifically to compound the offence. 12.1 OFFENCES – CONTINUING OR NOT Whether an offence is a continuing offence or not is to be decided by the principles laid down in Section 472 of the Cr. PC. The said section provides that “in case of continuing offence a fresh period of limitation shall begin to run at every moment of time during which the offence continues.” The general understanding of the principle of continuing offence is that if a section in the Companies Act provides for a fine of say Rs. 50/- per day for the offence, then such an offence can be treated as a continuing offence. It may be mentioned incidentally that the offence under Section 159 of the Act though provides for fine per day., the Calcutta High Court decided in National Cotton Mills Case (1984) that the offence under Section 159 is not a continuing offence over-ruling its own decision in Ajit Kumar Sarkar Vs. AROC (1979) that offence under Section 159 is a continuing offence. But what is a continuing offence was decided earlier by Supreme Court in State of Bihar Vs. Deokaran Nenshi (1973). In the case of continuing offence there is thus an ingredient of continuance of the offence which is absent in the case of an offence which takes place when an act or omission is committee once and for all.”

12.2

Corporate and Allied Laws

12.2 NON-COGNIZABLE OFFENCES Notwithstanding anything in the Code of Criminal Procedure, 1898 (V of 1898), every offence against this Act shall be deemed to be non-cognizable within the meaning of the said Code (Section 624). Offences punishable with compulsory imprisonment cannot be compounded. Other offences can be compounded by the Regional Director or Company Law Board. An offence is compoundable by the Regional Director where the maximum a mount of fine is up to Rs,. 5,000/- or by the Company Law Board where the fine exceeds Rs. 5,000/-. Application in Duplicate for compounding of offence should be made to the Registrar of companies who shall forward the same to the Regional Director or to the Company Law Board as the case may be. 12.3 OFFENCES COMPOUNDABLE – SECTION WISE LIST The section-wise list of offences which can be compounded and offences which cannot be compounded are given in Annexure I and II. Part-A [Vide sub-section (1) of section 621A] Section 11(5) 22(2) Nature of offence Being a member of a company, association or partnership consisting more than specified numbers Failure to comply with any direction given by Central Government to change the name of an existing company Failure to remove name of Chambers of Commerce consequent upon revocation of license Failure to send copies of memorandum, articles or agreement to members on demand Failure to issue of altered copy of memorandum, articles, resolutions or agreements Failure to file the prospectus or statement in lieu of prospectus by a private company on ceasing to be private company Failure to comply with the provisions of sub-sections (1) to (8) relating to investments by a company Issue of application form without salient features of prospectus or non -supply of copy of prospectus on demand Penalty Fine upto Rs. 10,000 Fine upto Rs. 1,000 for every day during which default continues Fine upto Rs. 5,000 for every day during which default continues Fine upto Rs. 500 for each offence Fine upto Rs. 100 for each copy Fine upto Rs. 5,000 per day Fine upto Rs. 50,000 Fine upto Rs. 50,000

25(10)

39(2) 40(2) 44(3)

49(9) 56(3)

Offences and Penalties 59(1) 60(5) 69(4) 70(4) 72(3) 73(2B) 73(3) 75(4) 75(4), proviso 76(5) 77(4) Issue of prospectus in contravention of section 57 or 58 Issue of prospectus without the copy thereof being filed with the Registrar Failure to keep application moneys in Scheduled Bank Failure to file statement in lieu of prospectus before allotment of shares Prohibition for allotment of shares unless the conditions as specified in the section are fulfilled Default in repayment of application moneys and interest Failure to keep application moneys in Scheduled Bank Failure to comply with the provisions of section 75 relating to return of allotment Showing in return shares allotted for cash while in actual no cash received for such allotment Failure to comply with the provision relating to commission and discount Contravening provisions on purchase by company or loans by company for purchase of its own or its holding company’s shares Omitting to include in prospectus certain particulars relating to the issue of shares at a discount Non-compliance with the provisions of the section relating to issue of redeemable preference shares Non-compliance with the provisions of the sub-section relating to termination of disproportionately excessive voting rights in existing companies Failure to give to the Registrar notice of consolidation, etc., of share capital in accordance with section 95(1) Failure to file with the Registrar notice of increase of capital or of members within thirty days of passing of resolution Failing to forward to the Registrar a copy of order of the court in regard to variation of shareholders’ rights Non-compliance with the order of CLB/Tribunal relating to registration of transfer/transmission of share/debenture

12.3

Fine upto Rs. 50,000 Fine upto Rs. 50,000 Fine upto Rs. 50,000 Fine upto Rs. 10,000 Fine upto Rs. 50,000 Fine upto Rs. 50,000 Fine upto Rs. 50,000 Fine upto Rs. 5,000 per day Fine upto Rs. 50,000 Fine upto Rs. 5,000 Fine upto Rs. 10,000

79(4) 80(6) 89(3)

Fine upto Rs. 500 Fine upto Rs. 10,000 Fine upto Rs. 10,000

95(3) 97(3)

Fine upto Rs. 500 per day Fine upto Rs. 500 per day Fine upto Rs. 500 Fine upto Rs. 10,000 & further fine of Rs. 1,000 per day

107(5) 111(9)

12.4

Corporate and Allied Laws Fine upto Rs. 500 per day Fine upto Rs. 10,000 & further fine of Rs. 1,000 per day Fine upto Rs. 500 per day Fine upto Rs. 5,000 per day Fine upto Rs. 500 per day Fine upto Rs. 500 per day Fine upto Rs. 500 and further fine upto Rs. 200 per day Fine upto Rs. 5,000

111(12) 111 Default in complying with the provisions of section 111 read with Failure to give effect to orders of CLB/Tribunal 111(9) 111A read Failure in complying with any of the provisions of with 111(12) section 111A 113(2) Failure to complete and having ready for delivery share or debenture certificate within two months of allotment, etc. Non-compliance with the requirements of section 115 relating to entries in the register in respect of share warrants Copy of the trust deed not made available for inspection Failure to forward a copy of debenture trust deed to members or debenture- holders within seven days at their request Failure to deliver to the Registrar for registration particulars of charges on company acquiring property subject to charge Delivering debentures or certificate of debenture stock without endorsing on its certificates of registration Default in complying with the provisions of section 137 regarding appointment of receiver or manager Failure to file with the Registrar for registration particulars of any charge, etc. Not complying with any of the requirements of the Act as to registration with the Registrar of any charge, etc. Failure to make entry in register of charges Refusing to allow inspection of copies of instruments creating charges and company’s register of charges Non-compliance with the requirements of section 146 in regard to registered office Non-compliance with the provisions of section 147(1)(a) or in regard to painting or affixing its name and address of registered office outside office or place of business Non-compliance with the provisions of section 147(1)(b) or (c) in regard to engraving name on seal and mentioning name and registered office in business

115(6)

117A(3) 118(2)

127(2)

133(2) 137(3) 142(1) 142(2) 143(2) 144(3)

Fine upto Rs. 10,000 Fine upto Rs. 500 per day Fine upto Rs. 5,000 per day Fine upto Rs. 10,000 Fine upto Rs. 5,000 Fine upto Rs. 500 and further fine upto Rs. 200 per day Fine upto Rs. 500 per day Fine upto Rs. 500 per day Fine upto Rs. 5,000

146(4) 147(2)

147(3)

Offences and Penalties letters, etc. 147(4) 148(2) Misuse of seal, letterhead, etc. by an Officer Non-compliance with the requirements of section 148(1) regarding publication of authorized as well as subscribed and paid-up capital Fine upto Rs.5,000

12.5

Fine upto Rs.10,000

149(2A) 149(6) 150(2) 151(4) 152(3)

Commencement of any new business in contravention of Fine upto Rs. 5,000 per this sub-section day Commencement of business or exercising borrowing powers in contravention of section 149 Failure to maintain register of members Committing default in complying with the provisions of sub-sections (1) to (3) relating to index of members Fine upto Rs.5,000 per day Fine upto Rs. 500 per day Fine upto Rs. 500

Committing default in complying with the requirements of Fine upto Rs. 500 subsections (1) and (2) regarding register and index of debenture-holders Failure to make a declaration by the trustee Fine upto 5,000 and further fine upto Rs. 100 per day Fine upto Rs. 5,000 per day Fine upto Rs. 500 per day Fine upto Rs. 500

153B(3)(a)

154(2)

Closing register of members or debenture holders otherwise than in compliance with the provisions of section 154(1) Failure to file with the Registrar notice of situation of office where foreign register is kept Not transmitting to registered office in India copies of entries in foreign register and not keeping at registered office in India duplicate of foreign register Non-compliance with the provisions of section 150, 160 or 161 regarding annual return Refusing inspection, making of any extract or sending any copy within specified time, of registers, returns, etc. Non-compliance with the provisions relating Failure to hold annual general meeting in accordance with section 166 or to comply with any directions of Central Government under section 167(1) Omitting to state in notice of meeting that a member is entitled to appoint proxy and that proxy need not be a member Invitation to appoint proxy specified in the invitation

157(3) 158(9)

162(1) 163(5) 165(9) 168

Fine upto Rs. 500 per day Fine upto Rs. 500 per day Fine upto Rs. 5,000 Fine upto Rs. 50,000 and further fine upto Rs. 2,500 per day Fine upto Rs. 5,000

176(2)

176(4)

Fine upto Rs. 10,000

12.6

Corporate and Allied Laws issued at Company's expense

187C(5)(a) 187C(5)(b) 188(8) 192(5) 192(6)

Failure to file declaration not holding beneficial interest in Fine upto Rs 1,000 per any share day Failure to file return by the company Non-compliance with the provisions of section 188 regarding circulation of members' resolutions Failure to file with the Registrar certain resolutions or agreements in accordance with section 192(1) Failure to annex copies of certain resolutions or agreements to articles or not forwarding to members on request copy of certain resolutions or agreements Failure to comply with section 192A(1)to(4) Non-compliance with the provisions of section 193 regarding minutes of proceedings of general meetings and of board and other meetings Fine upto Rs 100 per day Fine upto Rs. 50,000 Fine upto Rs. 200 per day Fine upto Rs. 100 for each copy in respect of which default is made Fine upto Rs. 50,000 Fine upto Rs. 500

192A(6) 193(6)

196(3)

Refusing inspection of minutes book of general meetings Fine upto Rs. 5,000 for or not furnishing to member on request a copy of minutes each default within specified time Circulating or advertising proceedings of general meetings without including certain particulars Failure to transfer the amount of accumulated profits to unpaid dividend account and other provisions of section 205A Fine upto Rs. 5,000 Fine upto Rs. 5,000 per day

197(2) 205A(8)

218 219(3)

Improper issue, circulation or publication of balance sheet Fine upto Rs. 5,000 or profit and loss account Failure to send to members, etc., copies of balancesheet, auditors report, etc., twenty-one days before date of Meeting Fine upto Rs. 5,000

219(4) 220(3) 223(4)

Default in complying with demands for copies of balance Fine upto Rs. 5,000 sheet, etc., within seven days of such demand Failure to file with the Registrar copies of balance sheet, etc. Fine upto Rs. 500 per day

Non-compliance by certain companies with the provisions Fine upto Rs. 500 per of section 223 regarding publication of half-yearly day statement in the specified form Failure to give notice to the Central Government within Fine upto Rs. 5,000 seven days where no auditors are appointed at an annual general meeting Failure of company to comply with the provisions of Fine upto Rs. 5,000

224(4)

232

Offences and Penalties sections 225 to 231 with regard to auditors 233 233A(5) 234(4) Failure of auditor to comply with sections 227 and 229 Failure to provide information to special auditor

12.7

Fine upto Rs. 10,000 Fine upto Rs. 5,000

Failure to furnish information or explanation or production Fine upto Rs. 5,000 and of books and papers further fine of Rs. 500 per day Otherwise contravening the restrictions imposed by the Fine upto Rs. 50,000 Central Government/ during investigation of ownership of shares and debentures Failure to vacate office where not approved by Central Government Order of Tribunal/CLB declaring that contravention of requirement of Schedule XIII has taken place Fine upto Rs. 5,000 per day on officer in default Fine upto Rs. 50,000 against the company and fine of Rs.1,00,000 on the officers in default and fine of Rs.1,00,000 on the person appointed Fine upto Rs. 500 per day Fine upto Rs.50,000 Fine upto Rs. 5,000 per day Fine upto Rs. 1,000

250(10)

269(6) 269(10)

272 279 283(2A) 286(2) 294(8)

Acting as director without holding qualification shares Acting as a director of more than 15 companies Functioning as a director after vacation of office on account of any disqualification Default in giving notice of Board meetings

Neglecting or refusing to furnish information required by Fine upto Rs. 50,000 and Central Government or to produce any books and papers, further fine not less than etc. Rs. 500 per day Failure to disclose interest in a contract by the Director Participation in Board meeting by interested director Fine upto Rs. 50,000 Fine upto Rs. 50,000

299(4) 300(4) 301(4)

Non-compliance with the provisions of section 301(1), (2) Fine upto Rs. 5,000 and (3) in regard to register of contracts, companies and firms in which directors are interested Fine upto Rs. 500 per day Fine upto Rs. 10,000

301(5)/ 163(5) Failure to maintain register of contracts 302(5) 303(3) Failure to disclose the members director's interest in contract appointing manager/managing director

Failure to keep register of directors or to file with the Fine upto Rs. 500 per Registrar return of directors, managing director, manager day and secretary

12.8 304(2) 305(1) 307(7) 307(8)

Corporate and Allied Laws Refusing inspection to any member of register kept under Fine upto Rs. 500 section 303 Failure by a director to inform change of his particulars Failure to produce at annual general meeting register of directors' shareholdings Failure to comply with the provisions of section 307(1) and (2) in regard to register of directors' shareholdings Failure to secure particulars regarding payment to directors stipulated in sub-section (1) Default in giving notice under this section Failure to maintain the Register of inter-corporate loans, investments and guarantees Fine upto Rs. 5,000 Fine upto Rs. 5,000 Fine upto Rs. 50,000 and further fine upto Rs. 200 per day Fine upto Rs. 2,500 Fine upto Rs. 10,000 and damages Fine upto Rs. 5000 and further fine upto Rs. 500 for every day during which default continues

320(3) 322(3) 372A(10)

374

Contravening section 372 [excluding sub-sections (6) and Fine upto Rs. 50,000 (7)] or 373 in regard to investments made in shares and debentures of companies in the same group Failure to appoint whole-time secretary Failing to annex to the copy of memorandum certified copy of court's order sanctioning any compromise or arrangement with creditors and members Fine upto Rs. 500 per day Fine upto Rs. 100 for each copy

383A(1A) 391(5)

393(4)

Failure to comply with the requirements of section 393 in Fine upto Rs. 50,000 regard to compromises or arrangements with creditors and members Failure to give information by directors relating to compromise or arrangement with creditors or members Failure to file with the Registrar a certified copy of the order of the court on application for sanctioning of a compromise or arrangement Fine upto Rs. 5,000 Fine upto Rs. 500

393(5) 394(3)

395(4A)(6)

Issue of circular containing or recommending acceptance Fine upto Rs. 5,000 of offer for transfer of shares which has not been registered Failure to file with the Registrar a certified copy of the altered memorandum of articles Non-compliance with the requirements of section 416 in regard to contract by agents of company in which Fine upto Rs. 50,000 Fine upto Rs. 2,000

404(4) 416(3)(b)

Offences and Penalties company is undisclosed principal 423 441F 445(1) Non-compliance with the requirements of sections 421 and 422 in regard to receivers Non-payment of cess payable under section 441A Fine upto Rs. 2,000 Upto ten times the amount in arrears

12.9

Default by petitioner and the company to file with the Fine upto Rs. 1,000 for Registrar, a certified copy of the order on the making of a each day of default winding up order Default in forwarding to the Registrar a copy of the Court/Tribunal's order dissolving the company within fourteen days of the order Fine upto Rs. 500 for each day of default

481(3)

485(2)

Default in giving notice of the resolution for voluntary Fine upto Rs. 500 for winding up in the Official Gazette, within 14 days and also each day of default in some newspaper, circulating in the district where the registered office of the company is situate Default in giving notice to the Registrar, of the Fine upto Rs. 1,000 for appointment of liquidator or liquidators under section 490, each day of default of every vacancy occurring in the office of liquidator and of the name of the liquidator or liquidators appointed to fill every such vacancy under section 492 within 10 days of the event to which it relates Failure to summon a meeting of the creditors in case of insolvency and to lay before the meeting a statement of the assets and liabilities of the company Fine upto Rs. 5,000

493(3)

495(2)

496(2)

Failure to call a general meeting of the company at the Fine upto Rs. 1,000 in end of the first year from the commencement of the respect of each failure winding up and at the end of each succeeding year or as soon thereafter but within 3 months from the end of the year or such longer period as the Central Government may allow; and to lay before the meeting an account of the liquidator's acts and dealings and of the conduct of the winding up during the preceding year together with the statement containing the requisite particulars relating to the proceedings and the position of the liquidation Default in sending to the Registrar a copy of the accounts Fine upto Rs. 500 for and return within one week of the holding of the meeting each day of default Failure to call a general meeting of the company as required by section 497 Default in complying with the provisions relating to the calling of meeting of creditors, etc., and advertising the notice of the meeting of the creditors in the Official Fine upto Rs. 5,000 Fine upto Rs. 10,000

497(3) 497(7) 500(6)

12.10 Corporate and Allied Laws Gazette and at least in two newspapers 501(2) Default by company in giving notice to the Registrar of any resolution passed at a creditors' meeting under section 500 Fine upto Rs. 500 for each day of default

508(2)

Default by liquidator in calling a general meeting of the Fine upto Rs. 1,000 company and a meeting at the end of the first year from the commencement of winding up and at the end of each succeeding year, and failure to lay before the meeting an account of his acts and dealings with respect to the proceedings and position of the winding up Default by liquidator in sending to the Registrar a copy of Fine upto Rs. 500 for the accounts and returns of the holding of the meetings each day of default and of the date or dates on which they were held Failure of the liquidator to call a final general meeting of the company or creditors Appointment of a body corporate as liquidator Giving, agreeing, or offering to give, to any member or creditor of company any gratification with a view to securing his own appointment or nomination as the company's liquidator, or securing or preventing the appointment or nomination of some person other than himself Fine upto Rs. 5,000 Fine upto Rs. 10,000 Fine upto Rs. 10,000

509(3)

509(7) 513(3) 514

516(2)

Failure by liquidator to publish in the Official Gazette and Fine upto Rs. 500 for deliver to the Registrar for registration a notice of his each day of default appointment in the prescribed Form Default by a company which is being wound up, whether Fine upto Rs. 5,000 by the Court/Tribunal or voluntarily, to make a mention of the fact that the company is being wound up in every invoice, order for goods or business letter, issued by or on behalf of the company or a liquidator of the company or a receiver or manager of the property of the company in which the name of the company appears Default by liquidator to comply with any of the requirements of the section relating to information as to pending liquidations Rs. 5,000 for each day of default

547(2)

551(5)

559(2)

Default by any person, on whose application the Fine upto Rs. 500 for Court/Tribunal passes an order declaring the dissolution each day of default to be void, to file within 21 days after making of the order or such further time as the Court/Tribunal may allow a certified copy of the order with the Registrar Any person, other than a Producer Company registered Fine upto Rs. 10,000 for

581ZM(1)

Offences and Penalties 12.11 under this Part, carries on business under any name which contains the words "Producer Company Limited" 581ZM (3)(a) A director or officer of producer company defaults in handing over the custody of books of account and other documents or property in his custody to the producer company every day during which such name has been used by him Fine upto Rs. 1 lakh and if the default continues an additional fine of Rs. 10,000 for everyday during which such default continues Fine upto Rs. 1 lakh and if the default continues an additional fine of Rs. 10,000 for everyday during which such default continues Fine upto Rs. 10,000 and further fine up to Rs. 1,000 for each day of default

581ZM (3)(b)

A director or officer of producer company fails in convening AGM or other general meeting

598

Failure by any foreign company to comply with sections 591 to 597

630(1)

Wrongfully withholding or wrongfully taking possession of Fine upto Rs. 10,000 property of the company by an officer APPENDIX-II

List of Offences punishable with imprisonment or with fine or both, compound-able with the permission of the Court under section 621 A(6)(a) of the Act Name of offence Filing with the Registrar prospectus or statement in lieu of prospectus containing any untrue statement Issuing a prospectus which includes any untrue statement Fraudulently inducing persons to invest money Delivery to the Registrar statement in lieu of prospectus which includes any untrue statement Penalty Imprisonment upto two years or fine upto Rs. 50,000 or both Imprisonment upto two years or fine upto Rs. 50,000 or both Imprisonment upto five years or fine upto Rs. 1,00,000 or both Imprisonment upto two years or fine upto Rs. 50,000 or both

Section 44(4)

63(1) 68 70(5) 77A(11) 84(3)

Default in complying with the buy-back provisions Imprisonment upto two years or contained in section 77A fine upto Rs. 50,000 or both Fraudulently renewing or issuing of duplicate Company liable to fine upto Rs.

12.12 Corporate and Allied Laws share certificates 10,000 and officer in default liable to imprisonment upto six months or fine up to Rs. 1,00,000 or both Fine upto Rs. 50,000 in case of body corporate and imprisonment upto three years or fine upto Rs. 50,000 or both against officer in default Fine upto Rs. 50,000 in case of body corporate and imprisonment upto three years or fine upto Rs. 50,000 or both against officer in default Fine upto Rs. 50,000 on company and officer in default punishable with imprisonment for a term upto three years and with fine upto Rs. 50,000 or both

108-I(2)

Failure to comply with section 108B

108-I(3)

Failure to comply with section 108C

108-I(4)(b)

Contravention of section 108B or 108D

192A(5) 202(1)

Defacing or destroying postal ballot or declaration Imprisonment upto 6 months or of identity of shareholder fine or both Discharging functions of a director by an undischarged insolvent Imprisonment upto two years or with fine upto Rs. 50,000 or with both

203(7) 209(5)/(7) 210(5) 210(6)

Acting as a director in contravention of an order of Imprisonment upto two years or the Court or the Tribunal fine upto Rs. 50,000 or both Failure to keep proper books of account, etc. Failure to lay balance sheet and profit and loss account at the AGM Person charged with to comply with section 210 Imprisonment upto six months or fine upto Rs. 10,000 or both Imprisonment upto six months or fine upto Rs. 10,000 or both Imprisonment upto 6 months or fine upto Rs. 10,000 or both for each offence Imprisonment upto six months or fine upto Rs. 10,000 or both Imprisonment upto six months or fine upto Rs. 10,000 or both

211(7)/(8) 212(9)/(10) 217(5)/(6) 221(4)

Failure to prepare balance sheet and profit and loss account showing a true and fair view Failure to attach the accounts of subsidiary company, etc.

Failure to take reasonable step relating to Board's Imprisonment upto six months report or fine upto Rs. 20,000 or both Failure to disclose certain payments, to the Imprisonment upto six months

Offences and Penalties 12.13 company 233B(11) Failure to comply with the provisions of section 233B regarding audit of cost accounts or fine upto Rs. 50,000 or both Fine upto Rs. 5,000 on company and imprisonment upto three years; or fine upto Rs. 50,000 or both to officer in default Imprisonment upto six months or fine up to Rs. 20,000 or both and further fine upto Rs. 2,000 per day

240(3)

Disobedience to the order of court directing production of books before inspector

250(9)

Exercise of right in respect of shares and Imprisonment upto six months debentures in violation of restrictions imposed by or fine upto Rs. 50,000 or both CLB/Tribunal Failure to comply with section Loans to directors, etc. without approval of Central Government Failure to make disclosure of shareholdings by a director Contravention of the provisions of section 369, 370 or 370A in regard to loans to companies Default in complying with subsections (1) to (4) and (6) to (8) of section 372A Acting as a director in contravention of section 407(1) Failure to collect provident fund payment of contribution to the trust Imprisonment upto one year or fine upto Rs. 50,000 or both Fine upto Rs. 50,000 or imprisonment upto six months Imprisonment upto two years or fine upto Rs. 50,000 or both Fine upto Rs. 50,000 or imprisonment upto six months Imprisonment upto two years or fine upto Rs. 50,000 Imprisonment upto one year or fine upto Rs. 50,000 or both Imprisonment upto six months and or fine upto Rs. 10,000

292A(11) 295(4) 308(3) 371(1) 372A(9) 407(2) 420 424L

Violation of provisions of Part VI relating to revival Simple imprisonment upto three and rehabilitation of sick industrial companies or years or fine upto Rs.10,00,000 any scheme or any order of the Tribunal/Appellate Tribunal or making a false statement or giving false evidence to the Tribunal/ Appellate Tribunal and attempting to tamper the records of reference or appeal filed under the Act. Default in complying with the provisions of section Imprisonment upto two years or 454 fine upto Rs. 1,000 per day or both Untruthfully stating himself to be a member or a creditor of a company Penalty as provided under section 182 of Indian Penal Code (IPC). Section 182 of IPC imposes imprisonment of either

454(5)

454(7)

12.14 Corporate and Allied Laws description for a term which may extend to 6 months or fine which may extend to Rs. 1,000 or both 488(3) Making of a declaration of solvency under section Imprisonment upto six months 488 without having reasonable grounds for the or fine upto Rs. 50,000, or both opinion that the company will be able to pay its debts in full, within the period specified in the declaration Committing any offences mentioned sub-section (1) of section 538 except those stated in clauses (m),(n),(o) thereof within 12 months before the commencement of the winding up or at any time thereafter Imprisonment upto two years or in fine, or both

538(1)

538(1)(m) (n)and(o)

Obtaining on credit, for and on behalf of the Imprisonment upto five years or company, by any false representation or other fine or both fraud, any property which the company does not subsequently pay for; or obtaining on credit, for or on behalf of the company under the false pretence that the company is carrying on its business, any property which the company does not subsequently pay for; or pawning, pledging or disposing of any property of the company which has been obtained on credit and has not been paid for unless such pawning, pleading or disposing is in the ordinary course of the business of the company, within 12 months before the commencement of the winding up or at any time thereafter Taking in pawn or pledge or otherwise receiving Imprisonment upto three years the property, within 12 months before the or fine, or both commencement of the winding up or at any time thereafter, knowing it to be pawned, pledged or disposed of in circumstances which amount to an offence under clause (o) of sub-section (1)(c) Destroying, mutilating, altering, falsifying or Imprisonment upto seven years secreting any books, papers or securities or being and fine a privy to the commission of such offences or being a privy to the making of any false or fraudulent entry in any register, books of account or document belonging to the company with intent to defraud any officer or contributory of a company or other person when the company is being wound up

538(2)

539

Offences and Penalties 12.15 542(3) Knowingly being a party to the carrying on of any Imprisonment upto two years or business of a company, when it is being wound fine upto Rs. 50,000, or both up with intent to defraud creditors of the company or any other persons or for any fraudulent purpose Acting in contravention of any rule of any direction Imprisonment upto six months of the Central Government under sub-section (1) or or fine upto Rs. 50,000, or concerning the disposal of books and papers of a both company Any person untruthfully stating himself to be a creditor or a contributory for the purpose of the section Penalty as provided under section 182 of Indian Penal Code (IPC). Section 182 of IPC imposes imprisonment of either description for a term which may extend to 6 months or fine which may extend to Rs.1,000orboth

550(4)

551(4)

551(5) 606

Wilful default by liquidator in causing statement to Imprisonment upto six months be audited or fine upto Rs. 10,000 or both Contravention of the provisions of sections 603, 604 and 605 relating to prospectus of foreign companies Failure to file document with the Registrar as directed by the Court Failure to furnish information or statistics, etc., required by the Central Government Failure to comply with order of Central Government for filing any document, return, etc. APPENDIX-III Imprisonment upto six months or fine upto Rs. 50,000 or both Imprisonment upto six months or fine or both Imprisonment upto three months or fine upto Rs. 10,000 or both Imprisonment upto six months or with fine upto Rs. 50,000 or both

614A(2) 615(6) 621A(5)

List of Non-Compoundable Offences punishable with imprisonment only Section 68A(1) 541(1) Offence Personation for acquisition, etc., of shares Failure to maintain proper books of account by a company throughout the period of two years immediately preceding the commencement of the winding up, or the period between the incorporation of the company and the commencement of the winding up, whichever is shorter Failure on the part of a shareholder to pay Prescribed penalty Imprisonment upto 5 years Imprisonment upto one year

625(4)

Imprisonment upto 2

12.16 Corporate and Allied Laws compensation 630(2) Default in delivering or refunding within a time fixed by Court, any property wrongfully withheld or knowingly misapplied by an officer or employee upon trial under this section APPENDIX-IV List of Non-Compoundable Offences, i.e. offences punishable with imprisonment and fine under section 621A(7)(b) of the Act Section 58A(5) Offence Omission to make repayment of deposit or acceptance of deposit in contravention of rules Prescribed penalty Company liable to fine not less than twice the amount of deposit not repaid and officer in default liable for imprisonment upto 5 years and also fine Company liable to fine not less than the amount of deposit and officer in default liable for imprisonment upto 5 years and also fine Company liable to fine upto Rs. 10,00,000 but not less than Rs. 50,000 and officer in default liable for imprisonment up to 5 years and also fine. Imprisonment upto 3 years and also fine not less than Rs. 500 per day Imprisonment upto 3 years and fine not less than Rs. 500 per day Fine upto Rs. 50,000 and also imprisonment upto one year Company shall be liable to fine upto Rs.10,000 per day and officer in default liable to imprisonment upto 3 years and fine Imprisonment upto five years and fine months Imprisonment upto 2 years

58A(6) (a)(i)

Acceptance of deposit in excess of prescribed limits or in contravention of manner of condition prescribed under subsection (1) or in contravention of subsection (2) Invitation of deposits in excess of prescribed limits and contrary to rules

58A(6)(a)(ii)

58A(10)

Failure to comply with the order of CLB/Tribunal Failure to comply with provisions of section 58AA Failure to make repayment of application money within six months from the expiry of the eighth day Failure to comply with section 80A

58AA(9) 73(2B)

80A(3) (a) & (b)

108-1 (4)(a)

Contravention of section 108B or 108D

Offences and Penalties 12.17 116 117C(5) Personation of shareholder Default in complying with order of Tribunal/CLB Declaration by a trustee as stated in section 153(3)(o) Not distributing dividend within thirty days Failure to comply with section 209A Contravention of section 269(10) Political contribution made contrary to section 293A Imprisonment upto 3 years and also fine Imprisonment upto three years and also fine not less than Rs. 500 per day Imprisonment upto 2 years and also fine Imprisonment upto 3 years and also fine upto Rs. 1,000 per day Fine not less than Rs. 50,000 and also imprisonment upto one year Imprisonment upto 3 years and also fine upto 500 rupees per day Company liable to fine upto three times the amount contributed and officer in default liable to imprisonment upto 3 years and also fine Imprisonment upto one year and fine not exceeding one lakh rupees

153B(3)(b) 207 209A(8) 269(11) 293A(5)

446A

Failure of directors and other officers to complete the books of account and get them audited up-to date of winding up order made by Court /Tribunal and submitted to the Court/Tribunal Being an officer of a company which is subsequently ordered to be wound up by the Court/ Tribunal or which later passes a resolution for voluntary winding up by false pretences or by means of any other fraud, inducing any person to give credit to the company, or with intent to defraud creditors of the company, making or causing to be made any gift or transfer of or charges on or causing or conniving at the levying of any execution against the property of the company, or (c) with intent to defraud creditors of the company, concealing or removing any part of the property of the company since the date of any unsatisfied judgment or order for payment of money obtained against the company, within two months before that

540

Imprisonment upto two years and also fine

12.18 Corporate and Allied Laws date

541(1)

Failure to maintain proper books of account by a company throughout the period of two years immediately preceding the commencement of the winding up, or the period between the incorporation of the company and the commencement of the winding up, whichever is shorter A director or an officer of producer pany willfully failing to furnish any information relating to the affairs of the Producer Company required by Member or a person duly authorized in this behalf False statements as mentioned in section 628 False evidence given as stated in section 629

Imprisonment upto one year.

581ZM(2)

Imprisonment upto six months com-and fine equivalent to 5 per cent of the turnover of producer company during preceding financial year Save as otherwise provided in the Act, imprisonment upto 2 years and also fine Imprisonment upto 7 years and also fine

628

629

13
(M) E-GOVERNANCE
13.0 MCA 21 PROJECT This is an innovative project and initiative of the Ministry of Company Affairs carried out under the national e-governance Programme of the Government with a comprehensive online portal to enable e-filing. This project covers all the services provided by the Registrar of Companies (ROC) starting from the incorporation of a new company. The project would provide eservices including names such, registration of new companies, filing of various returns and statutory documents under the Companies Act, 1956. The system would also enable on filing and access for statutory documents like memorandum of association, articles of association, certificate of incorporation etc. The project serves the interest of all the key stake holders and the public at large. Also professionals need no longer to visit the officers of ROC and would be able to interact with the Ministry using MCA 21 portal from their offices or home or going to the facilitation centers which have been set up. The services of the Ministry of Company Affairs with the introduction of MCA 221 will be e-form driven. Form filing will be done using freely downloadable software and it can be done offline. The prerequisite for using the MCA 21 portal will be P-4 computer with printer, windows 2000 / XP, internet explorer 6.0 version, Adobe Acrobat Reader 7.05 version and digital signature certificate. To know better about how MCA 21 will function, one need to know about the set up of the Ministry of Company Affairs 13.1 SET UP OF MCA MCA has a three tier organizational set-up: ♦ Headquarters at New Delhi ♦ Regional Directors (RD) at Mumbai, Kolkata, Chennai and Noida ♦ Registrar of Companies (RoC) in States and Union Territories MCA Headquarters handles cases that require approval of the GoI for citizen related functions. RD supervises the functioning of RoCs and handles the matters delegated by GoI while the RoC offices handle the bulk of citizen facing functions. The Official Liquidators (OL) attached to various High Courts functioning in the country are also under the overall administrative control of the MCA. Its headquarters at Delhi also includes two Directors of Inspection and Investigation and Director of Research and Statistics.

13.2

Corporate and Allied Laws

13.2 MCA 21 PROGRAM Ministry of Company Affairs (MCA), Government of India (GoI) has initiated MCA 21 program, for easy and secure access to MCA services in a manner that best suits the businesses and citizens. The program goals have been set as follows keeping in mind stakeholders' needs: ♦ Business enabled to register a company and file statutory documents quickly and easily ♦ Public to get easy access to relevant records and effective grievances redressal ♦ Professionals to be able to offer efficient services to their client companies ♦ Financial Institutions to easily find charges registration and verification ♦ Employees to ensure proactive and effective compliance of relevant laws and corporate governance MCA 21 is envisioned to provide anytime and anywhere services to businesses. It is a pioneering program being the first mission mode e-governance project being undertaken in the country. This program builds on the GoI vision to introduce a Service Oriented Approach in the design and delivery of Government services, establish a healthy business ecosystem and make the country globally competitive. 13.3 PROGRAM SCOPE MCA 21 program will provide for anytime anywhere electronic services with speed and certainty to all the stakeholders. It will include: Design and development of application system Setting up of IT infrastructure Setting up the Digital Signature/PKI delivery mechanisms and associated security requirements ♦ Setting up of Physical Front Offices (PFOs) ♦ Setting up of temporary FOs for the peak periods to meet with the requirements and subsequent shutdown of temporary FOs at the end of such peak periods ♦ Migrating legacy data and digitization of paper documents to the new system ♦ Providing MCA services to all MCA 21 stakeholders in accordance with the Service Oriented Approach ♦ Providing user training at all levels and all offices (Front and Back Offices) The MCA 21 is designed to automate processes related to the proactive enforcement and compliance of the legal requirements under the Companies Act, 1956. However, it does not include processes related to OL. 13.4 FRONT OFFICE The implementation of Front Offices (FO) is done in two ways. These can be called as Virtual Front Office (VFO) and Physical Front Office (PFO). The VFO is what the citizen has in front while accessing the MCA 21 portal. The PFO will be a replacement to the existing RoC counters. The PFO will also accept paper documents. ♦ ♦ ♦

E-Governance

13.3

However, these will be converted into electronic documents by customer service agents manning PFO. Also, the authorised person(s) will have to sign these documents digitally. Consequently the authorised signatories for a given document will need to appear in person at the PFO for the purpose of digitally signing the document. The user can avail the following services on MCA 21 portal ♦ ♦ ♦ ♦ ♦ eFiling Viewing public document Requesting certified copies Registering investor complaint Tracking transaction status

13.5 BACK OFFICE The back office is what MCA employee has in front which accessing back office portal. The back office process relates to: ♦ ♦ ♦ ♦ ♦ ♦ ♦ ♦ ♦ Dynamic routing of documents that have been electronically filed to the concerned official within MCA based on the type of service request. Electronic workflow systems to support speed and certainty in service delivery Supporting all routine tasks such as registrations and approvals Storing of all approved documents of companies as part of electronic records, including provision of access to electronic records for the stakeholders Enhancing identification of defaulters Increasing efficiency of Technical Scrutiny Ensuring close follow-up on matters related to compliance management including prosecutions Enabling quicker responses to investor grievances Providing alerts when the tasks are not carried out within stipulated period

13.6 KEY BENEFITS MCA 21 seeks to fulfill the requirements of the various stakeholders. The key benefits of MCA 21 project are the back office process relates to: ♦ ♦ ♦ ♦ ♦ ♦ ♦ Expeditious incorporation of companies Simplified and ease of convenience in filing of Forms/ Returns Better compliance management Total transparency through e-Governance Customer centric approach Increased usage of professional certificate for ensuring authenticity and reliability of the Forms / Returns Building up a centralised database repository of corporate operating

13.4 ♦ ♦ ♦ ♦ ♦

Corporate and Allied Laws Enhanced service level fulfillment Inspection of public documents of companies anytime from anywhere Registration as well as verification of charges anytime from anywhere Timely redressal of investor grievances Availability of more time for MCA employees for monitoring and supervision

13.7 SOME FAQ’S ON E-FILING 1. 1. 2. 3. 4. 5. 6. 7. 8. What are the steps for offline eFiling? Select a category to download an eForm from the MyMCA portal (with or with out the instruction kit. At any time, you can read the related instruction kit to uthorized yourself with the procedures (you can download the instruction kit with eform or view it under Help menu). You have to fill the downloaded e-Form. You have to attach the necessary documents as attachments. You can use the Prefill button in eForm to populate the greyed out portion by connecting to the Internet. The applicant or a representative of the applicant needs to sign the document using a digital signature. You need to click the Check Form button available in the eForm. System will check the mandatory fields, mandatory attachment(s) and digital signature(s). You need to upload the eForm for pre-scrutiny. The pre-scrutiny service is available under the Services tab or under the eForms tab by clicking the Upload eForm button. The system will verify (pre-scrutinise) the documents. In case of any inadequacies, the user will be asked to rectify the mistakes before getting the document ready for execution (signature). The system will calculate the fee, including late payment fees based on the due date of filing, if applicable.

9.

10. Payments will have to be made through appropriate mechanisms – electronic (credit card, Internet banking) or traditional means (at the bank counter through challan). (a) Electronic payments can be made at the Virtual Front Office (VFO)or at PFO (b) If the user selects the traditional payment option, the system will generate 3 copies of pre-filled challan in the prescribed format. Traditional payments through cash, cheques can be done at the designated network of banks using the system generated challan. There will be five banks with estimated 200 branches uthorized for accepting challan payments.

E-Governance

13.5

11. The payment will be exclusively confirmed for all online (Internet) payment transactions using payment gateways. 12. Acceptance or rejection of any transaction will be explicitly communicated to the applicant (including facility to print a receipt for successful transactions). 13. MCA 21 will provide a unique transaction number, the Service Request Number (SRN) which can be used by the applicant for enquiring the status pertaining to that transaction. 14. 15. Filing will be complete only when the necessary payments are made. In case of a rejection, helpful remedial tips will be provided to the applicant.

16. The applicants will be provided an acknowledgement through e-mail or alternatively they can check the MCA portal. 2. 1. 2. 3. 4. What are the steps for online eFiling? When the business or the registered users access the MyMCA portal, they enter their username and authentication details – Password/ Digital Certificate. The user will be shown a list of eForms category-wise under eForms tab . At any time, the users can read the related instruction kit, available under Help menu, to uthorized themselves with the procedures. The users can then fill the appropriate eForm for the service required. There is an option of pre-fill facility in the eForms, where the static details such as name and address of the company will be pre-filled by the system automatically on entering the Corporate Identity Number (CIN). The users attach the necessary documents to the eForm. The users may avail the pre-scrutiny service of the eForm. The documents will be verified (pre-scrutinised) by the system. In case of any inadequacies, for example, if a mandatory column in the eForm is not filled in, the user will be asked to rectify before the document is ready for execution (signature). The applicant or a representative of the applicant will then submit the duly signed documents electronically. The system will calculate the fee, including late payment fees, if applicable. Payments will have to be made through appropriate mechanisms – electronic (credit card, Internet banking) or traditional means (at the bank counter).

5. 6.

7. 8. 9.

(a) Electronic payments can be made at the Virtual Front Office (VFO). (b) If the user selects the traditional payment option, the system will generate a pre-filled challan in the prescribed format. Traditional payments through cash, cheques can be

13.6

Corporate and Allied Laws done at the designated network of banks using the system generated challan. There will be five banks with estimated 200 branches uthorized for accepting challan payments.

10. The payment will be exclusively confirmed for all online (Internet) payment transactions using payment gateways. 11. Acceptance or rejection of any transaction will be explicitly communicated to the applicant (including facility to print a receipt for successful transactions). 12. MCA 21 will provide a unique transaction number, which can be used by the applicant for enquiring status pertaining to that transaction. 13. Filing will be complete only when the necessary payments are made. 14. In case of a rejection, helpful remedial tips will be provided to the applicant. 15. The applicants will be provided an acknowledgement through e-mail or alternatively they can check the MCA portal. 3. How can I apply for a Company Name? File eForm1 A by logging in the portal along with a payment of fees of Rs. 500/- and attaching the digital signature of the applicant proposing to incorporate the company. If proposed name is not available apply for a fresh name on the same application. 4. Can I apply for a Company Name Online? Yes, You can avail this service at MCA portal. 5. What is the validity period of the Name approved? The approved name is valid for a period of 6 months from the date of approval. The Applicant can renew the name within 6 months by submitting a fresh Name application (Form-1A) along with the fees of Rs. 500/-, by mentioning that the application is for renewal of the name already approved. Names inadvertently allowed or which are against the guidelines, which have subsequently come to the notice, may be withdrawn by the RoC before or after incorporation of the company. 6. What is the minimum number of directors required to form a company? Minimum no. of directors for Private Limited Company: Two. For Public Limited Company: Three. 7. What is the minimum number of subscribers required for registration of a company? Minimum no. of subscribers for Private Limited Company: Two. For Public Limited Company: Seven. 8. What is the minimum Paid-up Capital at the time of registration of a company? The minimum paid up capital for Private Limited Company: Rs. 1,00,000/- For Public Limited Company: Rs. 5,00,000/- This limit is not applicable to company having licence under section 25.

E-Governance 9. What are the documents to be filed with RoC every year?

13.7

Invariably, the Balance Sheet and Annual Return have to be filed every year. Other documents such as, Return of Allotment (Form-2), Change of Registered office (Form-18), Change among the Directors (Form-32), Charges (Form-8, 10, 17, 13)etc., have to be filed within the due date from the events taking place in the company as per the Companies Act, 1956. 10. How do I find SRN for form 1A filed before MCA 21 project? You may find SRN by entering NIC issued name approval reference number in the “Name Approval Reference Number” service available after logging into MyMCA portal. 13.8 DETAILS OF NEW FORMS AND FEES
S. No. Old Form No. Corresponding revised e-Form No. Subject Category Modalities for fee computation (incl. additional fees) Existing Practice of levying fee.

1

Form 1

Form 1

Application and declaration for incorporation of a company Application form for availability or change of name Particulars of person(s) or director(s) or charged or specified for the purpose of clause (f) or (g) of section 5 Application for confirmation by Regional Director for change of registered office of the company

Company Registration

2

Form 1A

Form 1A

Company Registration/ Change services Informational services

Rs. 500/-

3

Form 1AA, 1AC

Form 1AA

Existing Practice of levying fee.

4

Form 1AD

Form 1AD

Approval services Regional Director

Rs. 500/-

13.8

Corporate and Allied Laws
within the state from the jurisdiction of one Registrar to the jurisdiction of another Registrar

5

Form 1B (For Conversion of public company to private company)

Form 1B

Application for approval of the Central Government for change of name or conversion of a public company into a private company Return of allotment Particulars of contract relating to shares allotted as fully or partly paid-up otherwise than in cash Statement of amount or rate percent of the commission payable in respect of shares or debentures and the number of shares or debentures for which persons have agreed for a commission to subscribe for absolutely or

Approval services Registrar of companies/ Change services

As Per Companies (Fees On Application) Rules, 1968

6

Form 2

Form 2

Compliance related filing Compliance related filing

Existing Practice of levying fee. Existing Practice of levying fee.

7

Form 3

Form 3

8

Form 4

Form 4

Compliance related filing

Existing Practice of levying fee.

E-Governance
conditionally 9 Form 4C Form 4C Return in respect of buy back of securities Notice of consolidation, division, etc. or increase in share capital or increase in number of members Particulars for creation or modification of charges (other than those related to debentures) Particulars for registration of charges for debentures Appointment or cessation of receiver or manager Particulars for satisfaction of charges Compliance related filing Existing Practice of levying fee. Existing Practice of levying fee.

13.9

10

Form 5

Form 5

Change services

11

Form 8, 13, 55, 56, 59

Form 8

Charge management

Existing Practice of levying fee in respect of Form 8

12

Form 10, 13, 57, 59

Form 10

Charge management

Existing Practice of levying fee in respect of Form 10. Existing Practice of levying fee in respect of Form 15. Existing Practice of levying fee in respect of Form 7/60.. Existing Practice of levying fee.

13

Form 15, 16, 13

Form 15

Charge management

14

Form 17, 13, 60

Form 17

Charge management

15

Form 18

Form 18

Notice of situation or change of situation of registered office Declaration of compliance with the provisions of section 149(1)(a), (b)

Company Registration/ Change services

16

Form 19

Form 19

Company Registration

Existing Practice of levying fee.

13.10 Corporate and Allied Laws
and (c) of the Companies Act, 1956 17 Form 20 Form 20 Declaration of compliance with the provisions of section 149(2)(b) of the Companies Act,1956 Declaration of compliance with the provisions of section 149(2A) or of section 149(2B) Form for filing annual return of a company having a share capital Notice of the court or the company law board Particulars of annual return for the company not having share capital Statutory Report Form of return to be filed with the Registrar Registration of resolution(s) and agreement(s) Company Registration One Fee For Form 20 And another on SLPSchedule. IIIas per existing practice. Existing Practice of levying fee.

18

Form 20A

Form 20A

Company Registration

19

None

Form 20B [Refer Section 159 of the Companies Act, 1956]

Compliance related filing

As One Document Filing Fee

20

Form 21

Form 21

Informational services

Existing Practice of levying order fee. Existing Practice of levying fee.

21

Form 21A

Form 21A

Compliance related filing

22

Form 22

Form 22

Compliance related filing Informational services

Existing Practice of levying fee. Existing Practice of Form 3 for fee. Existing Practice of levying fee.

23

None

Form 22B

24

Form 23

Form 23

Informational services

E-Governance 13.11
25 Form 23AA Form 23AA Notice of address at which books of account are maintained Application to Central Government for modification in the matters to be stated in the company’s balance sheet or profit and loss account Application for exemption from attaching the annual accounts of the subsidiary companies Application to Central Government for not providing depreciation Form for filing balance sheet, profit and loss account and other documents with the Registrar Information by auditor to Registrar Form of application to the Central Government for appointment of cost auditor Informational services Existing Practice of levying fee.

26

None

Form 23AAA

Approval servicesHead Quarters

As per Companies ( Fees on Application Rules 1999)

27

None

Form 23AAB

Approval services Head Quarters

- DO-

28

None

Form 23AAC

Approval servicesHead Quarters

-DO-

29

None

Form 23AC

Compliance related filing

As One Document Filing Fee

30

Form 23B

Form 23B

Compliance related filing Approval services Head Quarters

Existing Practice- No Fee Existing Practice of levying fee.

31

Form 23C

Form 23C

13.12 Corporate and Allied Laws
32 Form 24 Form 24 Form of application to the Central Government for increase in the number of directors of the company Form for filing application to Central Government (Regional Director) Form for filing application for giving loan, providing security or guarantee in connection with a loan Form of application to the Central Government for obtaining prior consent for holding of any office or place of profit in the company by certain persons Form of application to the Central Government for approval of appointment and remuneration or increase in remuneration or waive for excess or over payment to Provisions relating to managerial personnel Existing Practice of levying fee.

33

Form 24A

Form 24A

Approval services Regional Director

Existing Practice of levying fee.

34

None

Form 24AB

Approval services Head Quarters

As per Companies ( Fees on Application Rules 1999)

35

Form 24B

Form 24B

Approval services Head Quarters

As per Existing practice

36

Form 25A, 26

Form 25A

Provisions relating to managerial personnel

As per Existing practice of levying fee on F-25 A

E-Governance 13.13
managing or whole - time director(s) or manager 37 Form 25B Form 25B Form of application to the Central Government for approval to amendment of provisions relating to managing, whole - time or non rotational directors Return of appointment of managing director or whole - time director or manager Particulars of appointment of managing director, directors, manager and secretary and the changes among them or consent of candidate to act as a managing director or director or manager r secretary of a company and/ or undertaking to take and pay for qualification shares Particulars of Provisions relating to managerial personnel As per Existing practice

38

Form 25C

Form 25C

Compliance related filing

Existing Practice of levying fee.

39

Form 32, 29

Form 32

Company Registration/ Change services

Existing Practice of levying fee.

40

None

Form 32 Addendum

Company

No fee

13.14 Corporate and Allied Laws
appointment of managing director, directors, manager and secretary and the changes among them or consent of candidate to act as a managing director or director or manager o secretary of a company and/ or undertaking to take and pay for qualification shares addendum to Form 32. 41 Form 35A Form 35A Information to be furnished in relation to any offer of a scheme or contract involving the transfer of shares or any class of sares in the transferor company to the transferee Receiver_s or manager_s abstract of receipt and payments Application by an existing joint stock company or by an existing Registration/ Change services applicable

Informational services

Existing Practice of levying fee.

42

Form 36

Form 36

Charge Management

Existing Practice of levying fee.

43

Form 37, 38

Form 37

Company Registration

Existing Practice of levying fee.

E-Governance 13.15
company (not being a joint stock company) for registration as a public limited or private limited or an unlimited company 44 Form 39, 40, 41, 42 Form 39 Registration of an existing company as a limited company Documents delivered for registration by a foreign company Return of alteration in the charter, statute or memorandum and articles of association, address of the registered or principal office and directors and secretary of a foreign company Notice of (A) alteration in names and addresses of persons resident in India authorized to accept service on behalf of a foreign company (B) alteration in the address of Company Registration Existing Practice of levying fee.

45

Form 44

Form 44

Company Registration

Existing Practice of levying fee

46

Form 49

Form 49

Change services

Existing Practice of levying fee

47

Form 52

Form 52

Change services

Existing Practice of levying fee

13.16 Corporate and Allied Laws
principal place of business in India of a foreign company (C) list of places of business established by a foreign company (D) cessation to have a place of business in India 48 None Form 61 Form for filing an application with Registrar of Companies Approval services Registrar of companies Application Fee As per Companies ( Fees On Application) Rules 1968. Each event as separate document & separate Filing Fee as Existing Practice As per Central Government Rules As per Central Government Rules As per the present practice of levying fee in regard to the form attached.

49

Form 4A, Return of Deposits, Liquidation forms (Voluntary), Compliance Certificate form None

Form 62

Form for submission of documents with the Registrar

Compliance related filing

50

Form 63

Form for filing application for declaration as Nidhi company Form for filing application for opening branch(s) by a nidhi company Form for filing application or documents with Central Government

Approval services Head Quarters Approval services Regional Director Approval services Head Quarters

51

None

Form 64

52

Application as prescribed under Companies

Form 65

(Application for Extension of Time or Exemption under Sub - section (8) of Section 58A) Rules, 1979. For other application None 53 Form II [Pursuant to Rule 2 of the Form II [Pursuant to Rule 2 of the Form of application for Approval services Existing Practice of

E-Governance 13.17
Companies (Appointment of Sole Agents) Rules Companies (Appointment of Sole Agents) Rules, 1975] approval of the Central Government for the appointment of sole buying agent by a company Return by a public company Head Quarters levying fee

54

Form DD - B [Pursuant to section 274(1)(g) read with rule 5 of Companies (Disqualification of Directors under section 274(1)(g) of the Companies Act, 1956) Rules, 2001] Form I [Pursuant to Rule 2 of the Companies (Appointment of Sole Agents) Rules

Form DD - B [Pursuant to section 274(1)(g) read with rule 5 of Companies (Disqualification of Directors under section 274(1)(g) of the Companies Act, 1956) Rules, 2001] Form I [Pursuant to Rule 2 of the Companies (Appointment of Sole Agents) Rules, 1975]

Compliance related filing

Existing Practice of levying fee

55

Form of application for approval of the Central Government for the appointment of sole selling agents by the company Form of application for removal of disqualification of directors

Approval services Head Quarters

Existing Practice of levying fee

56

None

Form DD - C [Pursuant to section 274 read with Companies (Disqualification of Directors under section 274(1)(g) of the Companies Act, 1956) Rules, 2001] Form [Pursuant to the Companies (Declaration of Dividend out of Reserve) Rule 1975 for approval for Declaration of Dividend of Reserve Rules, 1975 Form [Pursuant to section 159 of the

Provisions relating to managerial personnel

As per fee on application Rules

57

None

Form of application for approval for declaration of dividend out of reserves Reserves) Rules, 1975] Form of annual return

Approval services Head Quarters

As per fees on application Rules.

58

Part II - Form [Pursuant to

Compliance related filing

Existing Practice of

13.18 Corporate and Allied Laws
section 159 of the Companies Act, 1956 and rule 3 of Application of section 159 to Foreign Companies Rules, 1975] 59 Form 1 [Pursuant to Companies Act, 1956 and rule 3 of Application of section 159 to Foreign Companies Rules, 1975] Form 1 [Pursuant to Rule of a foreign company having a share capital levying fee

Statement of amounts credited to investor education and protection fund

Compliance related filing

Existing Practice of levying fee

Rule 3 of Investor Education and Protection Fund (Awareness and Protection of Investors) Rules 60 Cost Audit Report Form [Pursuant to section 233B(4), 600(3)(b) of the Companies Act, 1956 and rule 2(c) and rule 4 of the Cost Audit (Report) Rules, 2001] Investor Complaint Form

3 of Investor Education and Protection Fund (Awareness and Protection of Investors) Rules, 2001] Form for filing cost audit report and other documents with the Central Government Investor Complaint Form Compliance related filing Existing Practice of levying fee

61

None

Investor services

No fee

14
(N) OTHER RELEVANT MISCELLANEOUS PROVISIONS OF THE COMPANIES ACT, 1956

14.0

APPLICATION OF THE COMPANIES ACT, 1956 TO COMPANIES FORMED OR REGISTERED UNDER PREVIOUS COMPANIES ACT

(1) The provisions of the Act of 1956 shall apply to all companies whether limited by shares or by guarantee or unlimited which were formed and Registered under any of the previous Indian Companies Acts and were in existence on 1st April, 1956. But Table A of Schedule I shall not apply to a company registered of under the Acts of 1857, 1860, 1868 and 1882. The date of registration of such companies will be the actual date on which they were incorporated (Section 561). (2) The Act of 1956 shall apply to every company registered but not formed under any previous companies law, e.g. formed under a Deed of settlement but registered under any of the Companies Acts. This application shall be in the same manner as the provisions of Part IX i.e. Sections 565 to 581 to be discussed later on, of the 1956 Act have been made applicable to companies registered but not formed under this Act (Section 562). Date of registration of companies will be the actual date on which they were incorporated. (3) The Act of 1956 shall apply to every unlimited company registered as a limited company in pursuance, of any previous Company Law, in the same manner as it applies to an unlimited company. However, the date of registration of such companies will be the actual date on which they were incorporated (Section 563). (4) Transfer of shares of the companies registered under the Act of 1857 and/or the Act of 1860 will be in accordance with the practice existing in these companies or in the manner as the general meeting may direct [Section 564]. 14.1 COMPANIES AUTHORISED TO REGISTER UNDER THE ACT ♦ Companies capable of being registered (Section 565): Barring certain exceptions,

14.2

Corporate and Allied Laws any company consisting of 7 or more members, formed by an Act of the U.K. Parliament or Letters Patent in force in India or according to any law in India for other than the Companies Act, 1956, may be registered under the Companies Act, 1956 as a company limited by shares, limited by guarantees or as an unlimited company. Such registration shall not be invalid by reason only that it has taken place with a view to the company’s being wound up.

The exceptions referred above are: (i) a company registered under Indian Companies Act 1882 or 1913; (ii) a limited liability company formed by any Act of India or Act of the UK not being a joint stock company; (iii) a limited liability company formed under any of the previous Act as an unlimited company or as a company limited by guarantee; (iv) a company that is not registered as a joint stock company as defined in Section 566 under any of the previous Acts. That is to say, these companies are not registered under this Act. As regards the procedure for registration in pursuance of this Section, a resolution passed by a majority in person, or where proxy allows proxies, at a general meeting summoned for the purpose is a condition precedent to registration. It is not the majority of those voting but the majority of those present. Where an unlimited company is about to register as a limited company, a resolution has to be passed by 75% of the members present (not 75% of the voting) before the company can be registered. Where a company is about to register itself as a company limited by guarantee, the assent to its being so registered shall be accompanied by a resolution declaring that each member undertakes to contribute a specified amount, in case the company goes into liquidation. In computing the said majority at the meeting, when a poll is demanded, regard must be had to the number of votes to which each member is entitled according to the regulations of the company. ♦ Definition of “joint stock company” (Section 566): For the purposes of Part IX of the Act, a joint stock company means a company having: (a) a permanent paid-up or nominal share capital of a fixed amount, (b) divided into shares also of fixed amount or held and transferable as stock, or (c) divided and held partly in shares and partly in stocks and (d) the members are the holders of these shares or stocks. When such a company is registered under the Companies Act, 1956, then it shall be deemed to be a company limited by shares. ♦ Requirements for registration of joint-stock companies (Section 567): Prior to the registration of a joint-stock company (under Part IX), the following documents have to

Some Relevant Miscellaneous Provisions of the Companies Act, 1956 be delivered to the Registrar:

14.3

(a) a list of names, addresses and occupations of all persons who on a day named in the list (not being more than 6 clear days before the day of registration) were members of the company. The list also embodies the shares or stock held by them respectively, distinguishing, in cases where the shares are numbered, each share by its member. (b) a copy of any Act of Parliament or other Indian Law, Act of Parliament of the U.K., Royal Charter, Letters Patent, Deed of Settlement, Deed of Partnership or other instrument constituting or regulating the company; and (c) if the company is intended to be registered as limited company, a statement specifying such particulars as: (i) (ii) (iii) (iv) the nominal share capital of the company and the number of shares into which it is divided or the amount of stock of which it consists, the number of shares taken and the amount paid on each share, the name of the company with the addition of the word “Limited” or “Private Limited” as the last word or words; and in the case of a company intended to be registered as a company limited by guarantee, a copy of the resolution declaring the amount of the guarantee.

The application to the Registrar of Companies should be in Form 37. The list of numbers should be in Form No. 39. Particulars of capital should be in Form No. 40. ♦ Requirements for registration of companies not being joint-stock companies (Section 568): This section lays down the procedure for registration of companies other than joint-stock companies. Prior to registration, the following documents have to be delivered to the Registrar, namely (i) a list showing the names, addresses and occupation of the directors, and the manager, if any; (ii) a copy of any Act of Parliament or other Indian Laws, Acts of the U.K. Parliament, Letters Patent, Deed of Settlement, Deed of Partnership or other instrument constituting or regulating the company; and (iii) in the case of a company intended to be registered as a company limited by guarantee, a copy of the resolution declaring the amount of the guarantee. The application for the registration of companies should be in Form No. 38 and the particulars of directors or managers or secretaries etc. in Form No. 42. ♦ Authentication of statements of existing companies (Section 569): The documents to be filed with the Registrar of Companies (mentioned above) have got to verify by the declaration of at least 2 directors or other principal officers of the company.

14.4

Corporate and Allied Laws

♦ Power of the Registrar to require evidence as to nature of the company (Section 570): The Registrar has the discretion to call for such evidence as he thinks necessary for the purpose of satisfying himself, whether any company proposing to be registered is or is not a joint-stock company within the meaning of Section 566. The Registrar has the discretion to refuse registration of a company, but he must not exercise this discretion arbitrarily. Against refusal by the Registrar, an application under Article 226 of the Constitution would lie in the High Court. ♦ Change of name for purposes of registration (Section 572): It is open to the Registrar of Companies to refuse registration of a company if its name is undesirable. In such a situation, the company may, with the approval of the Central Government signified in writing, change its name with effect from the date of its registration (under Part IX). However, for changing the name as aforesaid, a resolution has to be passed at a meeting of the members comprising the same. The passage of such resolution must be by a majority as specified in Section 5614. ♦ Addition of “Limited” or “Private Limited” to name: Under Section 573, on registration (under Part IX), every company must have the word “Limited” or “Private Limited”, in its name. However, such a company may obtain a license under Section 25 for the omission of the word “Limited” or “Private Limited”. ♦ Certificate of Registration of existing companies (Section 574): On compliance with the requirements as to registration and on payment of such fees (if any) as are payable under Schedule X, the Registrar shall issue a certificate of incorporation. According to Section 35, the issue of the said certificate is conclusive evidence that all the requirements of the Act have been complied with and the company is duly registered. ♦ Vesting of property on registration: In terms of Section 575, on registration of a company under this Act, all movable and immovable properties (including actionable claims) of the old company automatically vest in the new company. It has been held that no separate conveyance or deed is necessary in this regard. Section 576, which is supplementary to Section 575, provides that rights and liabilities in respect of any debt or obligation incurred or contracts entered into by the old company shall automatically stand transferred to and vested in or against the new company without being affected in any way. ♦ Continuation of pending legal proceedings: By virtue of Section 577, any suits or legal proceedings pending on the date of registration against the company or any public officer or member of the company any continue as before even after registration, without amending the pleadings. But in practice, the pleadings are amended to bring the altered situation on record.

Some Relevant Miscellaneous Provisions of the Companies Act, 1956

14.5

A decree obtained in any such proceeding shall not be executed against any individual member; it may be realised from the company and in default the company may be wound up. ♦ Effect of registration under Part IX (Section 578): When a company is registered under this Part, some of the provisions of its constitution shall be treated as contained in a registered memorandum: the rest of the provisions would be deemed to be contained in the registered articles. These provisions may be contained in any Act of Parliament: in any Indian law or any instrument constituting or regulating this company or in any resolution of such a company. On registration, those conditions, which are, in all propriety, to be deemed to be in the memorandum can be altered in the same manner as a condition in the memorandum can be altered in the case of company incorporated under this Act. As regards the residue provisions, they will be treated, as having been incorporated in the articles and alteration of any such provision shall be governed by the provisions for alteration of articles of a company incorporated under this Act. All the provisions of this Act shall apply to the company, its member’s contributories and creditors thereof, in the same manner in all respects as if it has been formed under this Act. But there are certain exceptions to the rule, which are as follows: (i) Table A in Schedule I shall not apply unless and except in so for as it is adopted by special resolution. (ii) The provisions of the Act relating to numbering of shares shall not apply to any jointstock company whose shares are not numbered. (iii) The company shall not have power to alter any provisions contained in any Act of Parliament or other Indian Law relating to the company except to the extent permitted by Section 578. (iv) Except permitted by this Section, the company shall not have power, without the sanction of the Central Government, to alter any provision contained in U.K., Royal Charter or Letters Patent, relating to the company. (v) The company cannot alter its objects if contained in any Act of Parliament or other Indian Law or in any Act of the U.K., Parliament, Royal Charter or Letters Patent. (vi) Every person who would have been liable to pay the company’s debt and liabilities and to contribute for adjustment of rights among the members before registration under the Companies Act, 1956, shall also be liable to the same extent in the event of the company being wound up. The legal representative of a deceased contributory will also be liable in respect of the liability of the contributory. The provisions of this Act with respect to (i) registration of an unlimited company as limited company and on such registration (ii) the power to increase the nominal amount of share capital (iii) the power of a limited company to determine that a portion of its share

14.6

Corporate and Allied Laws

capital shall not be capable of being called up except in the event of winding-up, will have the effect even though there are restrictions in any other Act or instrument constituting or regulating the company. Any provision contained in any Act or instrument constituting or regulating the company which would have been required to be contained in the memorandum and could not have been altered by the company, if the company had originally been formed under this Act, then, on registration, such provisions cannot also be altered. It may be noted that the expression “instrument” includes Deed of Settlement, Deed of Partnership, Act of U.K., Parliament, Royal Charter and Letters Patent. ♦ Power to substitute Memorandum and Articles for Deed of Settlement (Section 579): A company registered in pursuance of Part IX may by a special resolution, alter the form of its constitution, memorandum or articles for a deed of settlement (i.e., any Deed of Partnership, Act of U.K., Parliament, Royal Charter and Letters Patent or other instrument constituting or regulating the company. But the term does not include any Indian Act). The provisions of Sections 17, 18 and 19 regarding alteration of the objects, shall so far as applicable apply to any alteration under this Section with the following modifications: (a) There shall be substituted for the printed copy of the altered memorandum required to be filed with the Registrar a printed copy of the substituted memorandum and articles; and (b) on the registration of the alteration being certified by the Registrar, the substituted memorandum and articles shall apply to the company in the same manner, as if it were a company registered under this Act with that memorandum and those articles, and company’s deed of settlement shall cease to apply to the company. ♦ Power of Court to stay or restrain proceedings (Section 580): After the presentation of a petition for winding-up but before the order of winding-up is made, the Court may, on an application made under Section 442, stay any suit or legal proceedings already pending and may restrain any person from filing a suit or taking legal proceedings against the company. Under Section 580, the same jurisdiction of the Court may be exercised. The company, a contributory and a creditor may apply for stay of any suit or legal proceedings against the company. A suit or legal proceedings pending against a contributory, who might have been previously personally liable for company’s debts, can be stayed only on the application of the creditor Section 586 [discussion in Chapter 9] makes a similar provision in respect of unregistered companies.

Some Relevant Miscellaneous Provisions of the Companies Act, 1956

14.7

N.B: (i) Section 422 applies to companies within the meaning of the Companies Act, 1956. (ii) Section 580 applies to companies not incorporated under this Act but are allowed to be registered under the Act. (iii) Section 586 can be invoked when an Indian Court is winding-up an “unregistered company” including a foreign company. ♦ Suits stayed on winding-up order (Section 581): The provisions of this Section are similar to those of Section 446. No person can file or proceed with any suit or legal proceeding against the company or any contributory of the company except by leave of the court. This provision applies when a winding up order has been made or a provisional liquidator has been appointed and the company is registered under Part IX of the Act. 14.2 GUARANTEE COMPANY It is a company, which has two features in common with other companies. These are: (i) The company has a legal personality; (ii) The liability of the members is limited. In the case of a company having share capital, it is limited by the nominal amount of shares held by each member and in case of a company not having share capital, by amounts of guarantees undertaken by the members, i.e., the amounts they shall contribute in the event of the company being wound up, for repayment of its debts. It is a convenient form of organisation for associations such as clubs, chambers of commerce, trade associations, societies set-up for carrying on charitable work, made under Section 25 may be permitted by the Government not to have the word or words “Private Limited” or “Limited” as a part of its name. The advantage of guarantee company is as follows: (i) It becomes a separate entity and can own property, enter into contracts, sue or be sued in regard to its contracts and transactions, etc. (ii) In respect of the transactions of the company, no personal liability is incurred by the members of the company or its Board of directors or Committee of the management. If at all, their liability arises only on winding up. The form of memorandum and articles of association of a guarantee company not having a share capital as well as of a guarantee company having a share capital are contained-in Tables C & D of Schedule I respectively. They may adopt these forms either in toto or as near thereto as the circumstances warrant (Section 29). According to the proviso to

14.8

Corporate and Allied Laws

Section29 nothing shall be deemed to prevent a company from including any additional matters in its articles in so for as they are not inconsistent with the provisions contained in the Form in any of the Tables C & D adopted by the company. Whereas a company having a share capital can, according to Section 125, create a charge on its uncalled capital, a guarantee company cannot create a charge on the amount, which can be called up from its members only in the event of winding up [Re Irish Club Co. (1953) W.N. 127]. A guarantee company having a share capital may issue redeemable preference shares if authorised by its articles (Section 80); also share warrants to bearer if authorised by the articles but with the previous approval of the Central Government (Section 114). As in the case of any other limited company, the memorandum of a guarantee company, if it has a share capital, must also contain the amount of the share capital with which the company proposes to be registered and division thereof into shares of a fixed amount [Section 13(4)]. It is incumbent upon a guarantee company to register its articles along with the memorandum (Section 26). If it has share capital it may adopt Table D. Its articles must state the number of member with which it is proposed to be registered [Section 27(2)]. It is an index to the creditors of the company as regards the amount of guarantee on which they can rely as a security. If the number of members is increased, a notice of the increase is given to the Registrar within 30 days after the passing of resolution authorising the increase (Section 97). By construction of Section 165(1), a guarantee company, not having a share capital need not hold statutory meeting or forward the statutory report to the members. It is obligatory on the part of a guarantee company to keep a register of members and a register and index of debenture holders (Sections 150 & 151), a register of directors etc. (Section 303) as well as a register of charges (Section 125). It must give notice to the Registrar of special resolution passed by the company (Section 192). The forms of an annual return to be filed by a company not having a share capital and that to be filed by a company having a share capital differ in certain respects; the particulars thereof are contained in Sections 159 and 160. In the case of a company not having a share capital, an extraordinary general meeting can be convened on the requisition of members not having less than one-tenth of the total voting power of all the members, who have the right to vote at a general meeting. If on the other hand, the guarantee company has been formed with a share capital, the requisition must be made by such of the requisitionists as represent either a majority in value of the paid-up share capital held by all of them or not less than 1/10 of the paid-up capital carrying the right to vote at the general meeting [Section 169(4)].

Some Relevant Miscellaneous Provisions of the Companies Act, 1956

14.9

Section 37 prohibits a guarantee company not having a share capital and registered on or after 1.4.1914 from giving any person a right to participate in the divisible profits of the company otherwise than as a member. For the purpose any provision in the articles or memorandum or in any resolution of a company purporting to divide the undertaking into shares or interest will be treated as a provision for a share capital notwithstanding that the nominal amount or the number of shares or interests is not specified thereby. For investigation of the affairs of the guarantee company not having a share capital, the application must be made to the Central Government by not less than 1/5th of the persons on the Company’s register of members [Section 235(2)(b)]. In the case of guarantee company having a share capital for the same purpose, the application must be made by not less than 200 members or by members holding not less than 1/10th of the total voting power [Section 235(2)(a)]. The restrictions on the appointment or advertisement of directors do not apply to a guarantee company not having a share capital (Section 266). The provisions of Sections 171, 176 and 188 also are related to such companies. 14.3 GOVERNMENT COMPANIES Section 617 of the Act defines a Government company as any company in which, not less than fifty-one percent of the paid-up capital is held by the Central Government and partly by any State Government or Government or partly by the Central Government and partly by one or more State Governments. It also includes a company, which is a subsidiary of a Government company as thus defined. ♦ Audit of Government Companies: Under Section 619(2), the auditor of a Government company shall be appointed or re-appointed by the Central Government on the advice of the Comptroller and Auditor General of India. Even when the Government holding is only State Government or Governments, the Central Government will appoint the auditor. You have read in connection with Sections 224(1B) & (1C) in one of your Study papers in Auditing: (i) that on or from the financial year next to following the commencement of Companies (Amendment) Act, 1974, the appointment or reappointment of any person or firm as auditor of a company is legally banned, if he or it is already holding the audit of either 20 companies, each of which has a paid-up share capital of less than 25 lakhs or maximum 10 companies each of which has a paid-up share capital of Rs. 25 lakhs or more or plus 10 other companies, each of which having a paid-up share capital of not less than Rs. 25 lakhs (in all the numbers being 20 in this case as well); and (ii) that is the number of such holding of company audit exceeds the aforesaid limit of 20 companies immediately before the commencement of the Amendment Act of 1974, the person or the firm concerned must

14.10 Corporate and Allied Laws intimate to the concerned company or companies his or its unwillingness to be reappointed as auditor from the financial year next following the commencement of the Amendment Act, within 60 days from the commencement; also he or it must simultaneously intimate the Registrar the names of the companies of which he or it willing to be re-appointed as the auditor and forward a copy of the intimation of such companies. According to the proviso newly added to Section 619(2) of the Act by the Companies Amendment Act of 1974 the aforesaid limits also apply in relation to the appointment or reappointment of an auditor of a Government Company by the Central Government on the advice of the Comptroller and Auditor-General of India. The Comptroller and Auditor-General of India has power to direct the manner in which the accounts of Government companies are to be audited and to issue instructions to the auditor in regard to any matter relating to the performance of his duties and functions (Guru Gobinda Basu vs. Sankari Parasad Ghosal I.S.C.J.). The Comptroller and Auditor General is empowered to conduct a supplementary or test audit of the company’s accounts through any person or persons whom he may authorise for the purpose of such audit the C. & A.G., may require information or additional information to be furnished to any person or persons so authorised on any matter generally or specially directed for. The auditor of Government company must submit a copy of his report to the Comptroller and Auditor General who has the right to either comment on or supplement the audit report in a manner he thinks fit. Thereafter, the audit report shall be placed before the annual general meeting of the company at the same time and in the same manner as the audit report. The aforementioned provisions relating to audit also are applicable if the Government subsequently acquires 51% or more of the share capital in a company which previously was formed by private enterprise and the shares of which had been subscribed for by the public and the promoters in the first instance. ♦ Annual Report on Government Companies (Section 619A): The Central Government, where it is a member of a Government company, shall cause an annual report on the working and affairs of that company to be prepared within 3 months of its annual general meeting whereas, the audit report is placed under Section 619(5). As soon as this annual report is prepared the Central Government shall also cause to be laid before both Houses of Parliament together with the copy of the audit report and comments on, or supplement to the audit report made by the Comptroller and Auditor General. Where, in addition to the Central Government, any State Government is also member of the Government company, that State Government shall cause a copy of the annual

Some Relevant Miscellaneous Provisions of the Companies Act, 1956 14.11 report (prepared as aforementioned) to be placed before the House or both Houses of the State Legislature, together with a copy of the audit report and the comments thereon or supplement thereto. Where the Central Government is not a member of a Government company, every State Government which is a member of that company, or where only one State Government is a member of the company that State Government shall cause an annual report on the working and affairs of the company to be prepared within the time mentioned above. As soon as the annual report is prepared, the State Government concerned must cause it to be laid before the House or both Houses of the State Legislature with a copy of the audit report and comments or supplement referred to above. The provisions of this section shall so far as may be apply to a Government company in liquidation as they apply to any other Government [Section 619A(4) as added by the Companies (Amendment) Act, 1988]. ♦ Provisions of Section 619 of apply to certain companies: These provisions shall apply to a company in which not less than 51% (impliedly, may be more) of the paid up share capital is held by one or more of the following or any combination thereof, as if it were a Government company: (a) the Central Government and one or more Government companies (b) and State Government(s) and one or more Government companies; (c) the Central Government, one or more State Governments and one or more Government companies; (d)the Central Government and one or more corporations owned or controlled by the Central Government; (e) the Central Government, one or more State Governments and one or more corporations owned and controlled by the Central Government; (f) one or more corporations owned or controlled by the Central Government or the State Government; (g) more that one Government company [Section 619B inserted by the 1974 Amendment Act]. ♦ Application of the Act to Insurance, Banking, Electricity Supply and other companies governed by the Special Acts: The provisions of the Companies Act shall apply (a) to insurance companies, except in so far as the said provisions are inconsistent with the provisions of the Insurance Act, 1938; (b) to banking companies, except in so far as the said provisions are inconsistent with the provisions of the Banking Regulation Act, 1949; (c) to companies engaged in the generation or supply of electricity except in so far as the said provisions are inconsistent with the provisions of the Electricity (Supply) Act,; (d) to any other company governed by any special Acts, for the time being in force except in so far as the said provisions are inconsistent with the provisions of such special Acts; and (e) to such body corporate incorporated by any Act for the time being in force as the Central Government may, by notification in the Official Gazette specify in this behalf, subject to such exceptions modifications or adaptations as may be specified in the notification [Section 616(a) to

14.12 Corporate and Allied Laws (e) – the last clause viz., (e) being added to the Section by the 1974 Amendment Act]. ♦ Power of the Central Government to modify the Act relating to Government Companies (Section 620): The Central Government may, by notification in the Official Gazette, direct that any of the provisions of the Act, (with the exceptions of Sections 618, 619 and 619A) either shall not at all, or shall, subject to such exceptions, modifications and adaptations as maybe specified, apply to a Government company. But the power of the Central Government aforementioned is not an unfettered one; it is subject to the control of Parliament. A copy of every notification proposed to be issued under sub-section (1), shall be laid in draft before each House of Parliament, while it is in session, for a total period of thirty days which may be comprised in one session, or two or more successive sessions, and if, before the expiry of the session immediately following the session or the successive sessions aforesaid, both Houses agree in disapproving the issue of the notification or both Houses agree in making any modifications in the notification, the notification shall not be issued or, as the case may be, shall be issued only in such modified form as may be agreed upon by both the Houses. (As amended from 24.12.77). ♦ Government Company not a Public Body or Public Authority: The mere fact that company is wholly Government owned does not clothe it with the character of a “Public body’ or ‘Public authority’. Therefore, it cannot exercise any authority as a public body; it does not become, and cannot be regarded as a public body (Lakshmi vs. Neyveli Lignite Corporation Ltd. 1966, 6 Comp. Cas. 197). It was held in that case that where an employee was placed under a suspension on the basis of a departmental enquiry conducted by the employee of a defendant Corporation, it was not feasible for such an employee to apply for a writ of certiorari against the Corporation, in as much as such a Corporation is not a public authority and proceedings, thus, were only a domestic tribunal of a private body. As such, this could not be challenged under Article 226 of the Constitution of India. 14.4 PROVISIONS FOR REMOVAL OF ADMINISTRATIVE DIFFICULTIES 1. Protection of acts done in good faith: No suit, prosecution or other legal proceedings shall lie against the Government or any officer thereof or any other person in respect of anything which is done in good faith or is intended to be done in pursuance of the Act or any rules or orders made thereunder, or in respect of the publication by or under the authority of the Government or such officer of any report, paper or proceedings. The objective of such a protection is to indemnify persons acting in good faith, pursuant to the Act, who may not be Government officers and in respect of publication made by or under the authority of Government or such officers of such report, paper or proceeding (Section 635A).

Some Relevant Miscellaneous Provisions of the Companies Act, 1956 14.13 2. Exemption from disclosure of information in certain cases (Section 635AA): The Registrar, any officer of the Government or any other person cannot be forced under any circumstances to disclose to any Court or other authority when he got any information which has led the Central Government to direct a special audit under Section 233A or to order an investigation under Sections 235, 237, 247, 248 or 249 or which is or has been material or relevant in connection with such special audit or investigation. It is a provision intended to ensure that the flow of information is not obstructed by the identify of the sources being revealed. 3. Power of the Central Government or Company Law Board to accord approval on application, etc. subject to conditions and payment of prescribed fees (Section 637A): When the Central Government or Company Law Board is required or authorised by any provision of the Act (i) to accord approval, sanction, confirmation or recognition to any matter, or (ii) to give any direction in relation to any matter, or (iii) to grant exemption in relation to any matter, then the Government or Company Law Board may in the absence of anything to the contrary contained in such or any other Provisions of the Act, do so, subject to such conditions and limitations as it may think fit to impose. If however, such conditions and limitations are contravened, the Central Government or the Company Law Board may rescind or withdraw them. Every application made for any of the aforesaid purposes must be accompanied by such fee not exceeding Rs. 500 as may be prescribed. The Government and the Company Law Board are authorised to prescribe fees for application in respect of different matters or in the case of applications made by companies for applications by different classes of companies. All the aforementioned powers are contingent in the sense that the Central Government can exercise them only if these are required under any Provisions of the Act for according approval, etc., to or in relation to the matter at hand. Unless such an authority exists, these powers cannot be exercised. For instance, information as regards income received by director from other companies and the earning of the members of his family are not matters considered relevant for the purpose of inquiry against a company. The Government thus cannot authorise their collection. [Canara Workshops Ltd. vs. The Union of India (1966) 36 Comp. Cas. 63]. Unconditional orders cannot be rescinded, since those do not fall within the purview of Section 637A. [Nava Samaj Ltd. vs. Registrar of Companies (1965) 1 Comp. L.J 339]. 4. Power of Central Government to fix a limit with regard to remuneration: According to Section 637AA the Central Government may while according its approval

14.14 Corporate and Allied Laws to any appointment or re-appointment of managing or whole-time director under Section 269 or to any appointment or to any remuneration under Section 309 or Section 310 or Section 387 fix the remuneration of the person so appointed or the remuneration, as the case may be, within the limits specified in this Act at such amount or percentage of profits of the company, as it may deem fit. But while fixing this remuneration, the Central Government shall have to take into account the following factors, (a) the financial position of the company, (b) the remuneration or commission drawn by the individual concerned in any other capacity, including his capacity as a sole selling agent, (c) the remuneration or commission drawn by him from any other company, (d) professional qualifications and experience of the individual concerned, (e) public policy relating to the removal of disparities in income. 14. Power to condone delays: The Central Government may condone the delay in filing a document for reasons to be recorded in writing. For example, delay in the case of failure to make application or file document required to be made to or filed with the Government or with the Registrar (Section 637B). 6. Composition of certain offences: Section 621A inserted by the Companies (Amendment) Act, 1988 provides that notwithstanding anything contained in the Code of Criminal Procedure, 1973 any offence punishable under this act, not being an offence punishable with imprisonment only, or with imprisonment and also with fine may, either before or after the institution of any prosecution be compounded by (i) the Company Law Board (ii) the Regional Director, where the fine imposed for such offence does not exceed Rs. 5,000 on payment or credit of such sum, as may be specified. 7. Jurisdiction to try offences: An offence against the Act shall be tried at least by the Court of Presidency Magistrate or a magistrate of the First Class (Section 622). In as much as a company is judicial person, it can be prosecuted like any other individual also it can be convicted and fined, if it is found guilty. Suppose an offence is punishable under the Act only by fine and nothing else. In such a situation, if the offence were committed within Presidency town, it would be punishable upon summary conviction by any Presidency Magistrate of that town (Section 623). 8. Compensation in the case of frivolous and vexations prosecution: For the institution of frivolous and vexatious prosecution against a company or an officer thereof by a share holder, he may be ordered by the trying Magistrate to pay to the aggrieved party by way of compensation an amount not exceeding Rs. 1,000. In case of default in payment of the said amount the shareholder may be ordered to undergo a simple imprisonment for a maximum period of two months. The shareholder,

Some Relevant Miscellaneous Provisions of the Companies Act, 1956 14.15 however, shall have the right to appeal against such order (Section 625). 9. Power of the Central Government to alter Table and Forms in the Schedules except Schedules XI & XII and to alter or amend the forms: The power of the Central Government in this regard is limited only by the provision that the alterations made must be first published in the official Gazette. Only after notification, the alterations become effective. Moreover, every such alteration must be laid before each House of Parliament (Section 641). 10. Companies not entitled to fundamental rights under the Constitution: A company not being a citizen, no petition under Article 32 or 226 of Constitution can be entertained for any infraction of any fundamental right of citizen of India, which the company claims. The doctrine of piercing the veil of the Corporation does not apply to such a case. As a result, it cannot be argued that it is in fact the shareholders, but not the company, who have moved the Court under Article 32. A company cannot be indirectly allowed by relying on the doctrine of lifting the veil to achieve a thing, which it cannot directly do. [Tata Engineering and Locomotive Co. Ltd. vs. The State of Bihar (1964) I.S.C.J. 666; State Trading Corporation of India Ltd. vs. Commercial Tax Officer, 1963, 2 S.C.J. 605]. 11. Power of the Central Government to appoint Company Prosecutors and to appeal against orders of acquittal: For the conduct of prosecution arising in the administration of the Act, the Central Government may appoint generally or in any case or for any specified class of cases in any local area, one or more persons as company prosecutors. Such prosecutors will have the same powers and privileges as those enjoyed by public prosecutors under the *Code of Criminal Procedure, 1898 (Section 624A). The Central Government also may direct any company prosecutor appointed in the circumstances aforementioned or authorise any other person either by name or by virtue of his office, to present an appeal from an order of acquittal passed by any Court other than a High Court. Such an appeal will be deemed to have been validly presented to the Appellate Court (Section 624B). 14.5 POWERS OF THE CENTRAL GOVERNMENT Under the Act, extensive and wide powers have been vested in the Central Government in regard to several matters. As such, the success of the joint stock enterprise largely depends upon how the Central Government performs its administrative functions. These powers may be considered under the following heads:

14.16 Corporate and Allied Laws 1. Power to alter Schedules: By notification in the Official Gazette, the Central Government may alter any regulation, rules, tables, forms and other provisions contained and any of the Schedules to the Act except Schedules XI and XII. Any such alterations will come into force from the date of notification and will have the same effect as the Act itself. Any alteration in Table A of Schedule I will not however apply to any company registered before the date of such alteration [Section 641(1) and (2)]. Furthermore, every alteration aforesaid must be laid before each House of Parliament (while it is in session) for a total period of 30 days which may be comprised in one session or in two or more successive sessions if, before the expiry of the session in which it is so laid or the session immediately following, both Houses either agree to any modification made in the alteration aforesaid or agree that the alteration should not be made, the alteration shall thereafter have effect only in such modified form or be of no effect, as the case may be. But such modification or annulment shall be without prejudice to the validity of anything previously done in pursuance of that alteration [Section 641(3) as amended by the Companies (Amendment) Act, 1974]. 2. Power to make Rules: In addition to the powers conferred by Section 641 discussed above the Central Government is empowered to make rules, by notification in the Official Gazette. These are the rules for all or any of the matters which, under this Act, are to be, or may be, prescribed by the Central Government, and generally for carrying out the purpose of the Act [Section 642(1)]. Any such rule may provide that a contravention thereof, shall be liable to be punished with a fine extending up to Rs. 500 and if the contravention continues, a further penalty up to Rs. 50 per day shall be imposed. As regards the submission of every such rule to Parliament, the same requirements will have to be complied with, as those discussed above under Section 641(3) [Sections 642(2) and (3)]. 3. Power to delegate functions (Section 637): By notification in the Official Gazette and subject to such conditions and restrictions and limitations as may be specified in the notifications the Central Government may delegate: (a) any of its powers or functions under Act (other than the power to make rules and the power to appoint a person as public trustee under Section 153A, to such authority or officer as may be specified in the notification save and except those mentioned below. The Central Government is debarred from delegating the same under the following provisions, viz., Sections 10, 81, 89(4), 211(3) and (4), 212, 213, 235, 237, 239, 241, 242, 243, 245, 247, 248, 249, 259, 260, 268, 269, 274(2), 295, 300, 310, 311 349, 372, 396, 399(4) and (5), 208, 410, 411(b), 448, 609, 613, 620, 638, 641 and 642. A copy of the notification shall, as soon as possible after it has been issued, be placed before both Houses of Parliament.

Some Relevant Miscellaneous Provisions of the Companies Act, 1956 14.17 4. Power to accord approval, etc. (Section 637A): Read the earlier discussion. 5. Fixation of remuneration: Read the earlier discussion. 6. Power to call for statistics (Section 615): The Central Government is empowered to require companies generally, or any class of companies, or any company, to furnish such information or statistics, with regard to their or its constitution or working. An order addressed to companies generally, or to any class of companies, shall be published in the Official Gazette or in such other manner as the Government may think fit. But on the other hand, such an order addressed to a particular company must be served on it as any document is served on a company under Section 51. In order to be satisfied that the information or statistics furnished by a company is correct and complete the Central Government may require the company to produce records or documents in its possession of control for inspection before an officer, specified by the Government. For these purposes and in the case of company’s failure to comply with these requirements, the Government may direct an enquiry to be made by any person or persons who shall have such powers as may be prescribed. In the case of a body corporate incorporated outside India but having a place of business in India, the powers conferred by Section 615 may be enforced with reference to the business carried on in India. 7. Other powers: Certain other powers are granted to the Central Government vide different Sections of the Act like power to condone delays, power to allow for composition of certain offences etc. 14.6 GENERAL PROVISIONS ♦ Contracts by agents where a company is an undisclosed principal: Section 416 prescribes a special rule with regard to contracts entered into on behalf of a public company (or a private company which is a subsidiary of a public company) by the manager or other agent, in which the company is an undisclosed principal. It provides that any such person, when entering into such a contract, must draw up a memorandum of the terms of the contract, at the time of contract is entered into, specifying the names of the persons with whom it has been done. The memorandum must be placed in the record of the company and the copies thereof must be sent to all the directors. Subsequently, the memorandum should be placed before the Board at its next following meeting. In case of default, the contract, at the option of the company, shall be voidable as against the company, and the person who had entered into the contract or every officer of the company in default, as the case may be, would

14.18 Corporate and Allied Laws be liable to penalty, which may extend to Rs. 200/-. However, the Central Government may grant relief under Section 633 to an officer in default, if it appears to it that the person has acted honestly and reasonably and that having regard to all the circumstances of the case, he ought fairly to be excused. The relief may be granted either wholly or partially. ♦ Employees’ Security and Provident Funds: Sections 417-420 of the Companies Act, 1956 deal with the Employees’ Securities and Provident Funds. They provide as follows: (a) Any money or security deposit made by an employee of a company under the terms of his contract of services, must be kept or deposited by the company within 15 days from the date of deposit in a Post Office Savings Bank Account or in a special account to be opened with the State Bank of India or a Scheduled Bank or, where the company itself is a Scheduled Bank, in a special account to or be opened by it at or with the State Bank of India or any other Scheduled Bank. The Company must not utilise any portion of such moneys or securities except for the purposes agreed to, in the contracts of service (Section 417). (b) Where a provident fund has been constituted by a company for its employees or nay class of its employees, all money contributed to such fund (whether by the company or by the employees) or received or accruing by way of interest or otherwise to such fund, within 15 days from the date of contribution, receipt or accrual should be deposited in a Post Office Savings bank Account or in a special account in a Scheduled Bank or in the State Bank of India, or where the company itself is a Scheduled Bank in, a special account to be opened either in itself or in the State Bank of India, or in any other Scheduled Bank or suitably invested in securities mentioned or referred to in Sections 20(a) to (e) to the Indian Trusts Act, 1882 [Section 418(1)]. (c) In no case will an employee be entitled to receive an interest in respect of the amount standing to his credit at a rate in excess of that yielded by the investment made in accordance with the requirements aforementioned [Section 418(2)]. (d) An employee may obtain advances from the fund or with draw money standing to his credit in the fund, if the fund is a recognised provident fund within the meaning of Section 58A(a) of the Income Tax Act, 1922 or if the rules of the fund contain provisions corresponding to the rules 4 to 9 of the Income-tax (Provident Funds Relief) Rules [Section 418(3)]. Tutorial Note: Section 2(38) of the Income Tax Act, 1961 defines a recognised provident fund and the relevant rules thereto are provided in Part XII (Rules 67 to 81)

Some Relevant Miscellaneous Provisions of the Companies Act, 1956 14.19 of the Income-tax Rules, 1962. (e) If a trust has been created by the company with regard to any provident fund, the company must collect and pay the employee’s contributions together with its own contributions to the trustees within 16 days from the date of their collection. Thereafter the trustees will be obliged to comply with the aforesaid requirements as regards their investment [Section 418(4)]. An employee, on making request to the company or to the trustees, as the case may be, may look into the receipts issued by banks for provident fund money and securities deposited with them as well as the bonds or securities in respect of investments in trust securities (Section 419). But such a right can be exercised only by an existing employee and not by an ex-employee or past employee or a person whose service has been terminated. [The State vs. Girdhari Bajaj, 63 Bom. L.R. 743]. Any contravention of the provisions of Sections 417, 418 & 419 by an officer of the company or by a trustee of the provident fund will render him punishable with imprisonment for a period extending up to six months or with fine extending to Rs. 1,000 (Section 410). The status of Trust continues even though the balance in the Fund has been misapplied. Even if the balance standing to the credit of the provident fund, or the amounts deposited by the employees, is wrongfully invested and profits accrue to the company out of these wrongful investments the character of trust attaching to the fund is not altered. Neither would such a use have the effect of converting it into a loan. It will continue to remain a fund irrespective of the fact that the employees knew that the company had wrongfully employed the fund in its own business. It would not preclude the employees from claiming the funds from the company when it is in liquidation, as preferential creditors. This is because the company shall continue to be the trustee in respect of these funds and will not become mere debtor. [Alliance Bank of Simla Ltd. (1924) 21 C.W.N. 721, Re. Bengal Zamindari and Banking Co. (1937) 2 Cal. 305]. ♦ Receivers and Managers: A receiver of the property of a company should furnish the Registrar of Companies once in every half year while he remains in possession and also on his ceasing to act as receiver an abstract of receipts and payments during the period to which the abstract relates in Form No. 36 of the Companies (Central Government’s) Rules and Forms, 1956. Moreover, on the appointment of the Receiver, an entry to this effect should appear in every invoice, order for goods or business letter issued by or on behalf of the company or the receiver. In the event of these provisions being contravened, the company and every officer thereof, who is in default, shall be liable to pay a fine of Rs. 200 (Sections 421-423).

14.20 Corporate and Allied Laws ♦ Security for costs by Limited Company: When a limited company is the plaintiff of petitioner in a suit or in any other legal proceedings, if the Court having the jurisdiction in the matter has reason to believe that the company will not be able to pay the cost of the defendant, if he is successful in his defence, it may require the company to furnish sufficient security for costs, and may stay all proceedings until the security is provided (Section 632). It has however been held that it is open to a company to sue in forma pauperise. In such a case, the question of payment of security into Court will not arise. ♦ Modification of the Act in its application to Nidhis and Mutual Benefit Societies: Nidhi or Mutual Benefit Society means a company which the Central Government may by notification in the Official Gazette, declare to be a Nidhi or Mutual Benefit Society, as the case may be, and direct that any of the provisions of the Act specified in the notification: (1) shall not apply to any Nidhi or Society; or (2) shall apply to any Nidhi or Society with such exceptions, modifications and adaptations as are specified in the notifications. A copy of such a notification must be placed before each House of Parliament at the earliest, subsequent to its issue (Section 620A). Tutorial Note: Nidhis or Mutual Benefit Societies are companies registered with objects to enable the members to save money, to invest their savings and to secure loans at favourable rates. ♦ Penalty where no specific provision has been made elsewhere in the Act: When a company or any other person transgresses any provision of the Act, and for such transgression no punishment has been provided elsewhere in the Act the company and every officer thereof who is in default, shall be punishable with fine extending up to Rs. 500 and where the contravention is a continuing one, with a further fine extending up to Rs. 50 for every day during which the contravention continues. A similar punishment will also ensue for contravention of any condition, limitation or restriction subject to which any approval, sanction comment, confirmation, recognition, direction or exemption in relation to any matter has been accorded, given or granted (Section 629A). ♦ Enforcement of duty of a company to make returns etc. to Registrar: Where a company is required under the Act to file or register any return, account or other document or notice, and the company defaults in doing so for a period of 14 days, then any member or creditor of the company or the Registrar may make an application to the Company Law Board for such compliance. On such an application, the Company Law Board may direct the company and any officer thereof to make good the default within such time as may be specified in the order. But this provision does

Some Relevant Miscellaneous Provisions of the Companies Act, 1956 14.21 not affect the levying of any penalty on the company or its officers in respect of any such default (Section 614). ♦ Power of the Court trying offences under the Act to direct the filing of documents with Registrar: Any Court trying an offence for a default in compliance with any provisions of the Act, which requires a company or its officers to file or register with or deliver or send to the Registrar any return, account or other document, may, at the time of sentencing, acquitting or discharging the accused, as the case may be, compel such compliances by order on payment of the fee including the additional fee required to be paid under Section 611 within the time specified in the order. If such an order is not complied with, the defaulting officer or employee of the company shall be liable to be punished with imprisonment for a maximum period of 6 months or with fine, or with both (Section 614A). Further, if a director fails to comply with the order of the Court under the Companies Act to submit a return to the Registrar within the stipulated time, he shall be guilty of contempt of Court and the High Court has power to punish the direct or for contempt of the Court [State of U.P. vs. Tikka Ram Uniyal (1964) 34 Comp. Cas. 5]. ♦ Enforcement of orders: Any order made by a Court under the Companies Act is enforceable in the same manner as a decree made by the Court in a suit pending with it (Section 634). ♦ Enforcement of orders of Company Law Board: Section 634A which has been added by the Companies (Amendment) Act, 1977 and as amended by the Companies (Amendment) Act, 1988 provides that any order made by the Company Law Board may be enforced by the Board in the same manner as if it were a decree by a Court in a suit pending therein and it shall be lawful for that Board to send in the case of its inability to execute such order, to the Court within the local limits of whose jurisdiction: (a) in the case of an order against a company the registered office of the company is situated; or (b) in the case of an order against any other person, the person concerned voluntarily resides or carries on business or personally works for gain. ♦ Enforcement of orders of one Court by other Court: Where the order of the Company Court, which is deemed to be decree, is to be executed outside its jurisdiction, a certified copy of the order has to be produced before the other Court [Section 635(1)]. The production of such certified copy shall be sufficient evidence of the order. Upon the production of such certified copy of the Court shall take the requisite steps for enforcing the order, in the same manner as if it had been made by itself [Sections 635(2) & (3)]. Where, any order made by the Company Law Board

14.22 Corporate and Allied Laws required to be enforced by a Court a certified copy of the order shall be produced to the proper officer of the Court required to enforce the order and the provisions of subsections (2) & (3) shall, as far as may be, apply to every such order in the same manner and to the same extent as they apply to an order made by a Court [Section 635(4) added by the Amendment Act, 1977 as amended by the Companies (Amendment) Act, 1988].

15
CORPORATE SECRETARIAL PRACTICE – DRAFTING OF RESOLUTION, MINUTES, NOTICES AND REPORTS
A company secretary is one of the principal officers responsible for the secretarial work and management of the business of a company as per the policy and instructions laid down by the Board of Directors. 15.0 DEFINITION Section 2(45) of the Companies Act, 1956 provides that, “secretary means company secretary within the meaning of Section 2(1)(c) of the Companies Secretaries Act, 1980 and includes any other individual possessing the prescribed qualifications and appointed to perform the duties which may be performed by a secretary under this Act and any other ministerial or administrative duties”. This definition reveals three important facts. Firstly, only an individual may be appointed as a company secretary and any firm or body corporate can not be so appointed. Secondly the company secretary should either be a person who is a member of the Institute of Company Secretaries of India or has requisite qualifications prescribed by the Central Government. Thirdly the duties of the secretary are ministerial or administrative, they are not managerial since he is not entrusted with the direction, control or management of the affairs of the company. The Companies Act, however, does not prevent a company from appointing a secretary enjoying – limited executive powers of management delegated by the Board of Directors in addition to his routine secretarial duties. 15. 1 CERTAIN COMPANIES TO HAVE SECRETARIES Section 383A, provides that every company having a paid up share capital not less than prescribed limit (presently the limit being Rs. 2 crores ∗) shall have a wholetime secretary

GSR 419(E) dated 11th June, 2002.

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and such secretary should possess the qualification that may be prescribed by the Central Government. Further, no individual can hold the office of secretary in more than one such company. The companies which have paid-up share capital of less than rupees two crores have no obligation to appoint any secretary at all or a qualified secretary or a whole-time secretary. However, they may voluntarily appoint a secretary. A director may be appointed as a Secretary in addition to his post as director but where the Board of Directors of a company has only two directors, neither of them can be appointed as secretary of the company. Obviously, this restriction is meaningful in case of private companies as the minimum number of directors prescribed for a public company is three. This means, in a company, which has three or more directors, a director can also act as secretary [Section 383A(1)]. It is further provided that if a company fails to comply with the above provisions, the company and every officer of the company who is in default, shall be punishable with fine which may extend to fifty rupees for every day during which the default continues. However, when any proceedings against a person in respect of the above offence are taken, he may defend himself by proving that all reasonable efforts were made to comply with the above provisions that the financial position of the company was such that it was beyond its capacity to engage a whole time secretary. [Section 383A(1A)] 15.2 QUALIFICATIONS OF SECRETARY For companies required to appoint a company secretary in accordance with the provisions of Section 383A, the person to be so appointed must be a member of the Institute of Company Secretaries of India constituted under the Companies Secretaries Act, 1980. However, the qualifications possessed by a person holding the office of whole time secretary of company immediately before 30th October, 1980, in terms of the second proviso to clause (a) of rule 2 of the Companies (Secretaries Qualifications) Rules, 1975, shall be deemed to be the qualifications which he is required to possess in order to be eligible to continue as whole time secretary in that company. If a company which is not required to appoint a company secretary as per the provisions of Section 383A of the Act (i.e. company having a paid up capital of less than Rs. 2 crores Notification No. GSR 419(E) dt. 11.6.2002 DCA) voluntarily appoints a person as its secretary, he must possess one or more of the following qualifications namely: (i) membership of the Institute of Company Secretaries of India constituted under the Company Secretaries Act, 1980 (56 of 1980); (ii) pass in the Intermediate examination conducted either by the Institute of Company Secretaries of India constituted under the Company Secretaries Act, 1980 (No. 56 of 1980), of by the earlier Institute of Company Secretaries of India incorporated on 4th October, 1968, under the Companies Act, 1956 (1 of 1956) and licensed under Section 25 of that Act;

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(iii) post graduate degree in commerce or corporate secretaryship granted by any university in India; (iv) degree in law granted by any university; (v) membership of the Institute of Chartered Accountants of India constituted under the Chartered Accountants Act, 1949 (38 of 1949); (vi) membership of the Institute of Cost and Works Accountants of India constituted under the Cost and Works Accountants Act, 1959 (23 of 1959); (vii) post graduate degree or diploma in management sciences, granted by any university or the Institute of Management, Ahmedabad, Kolkata, Bangalore or Lucknow; (viii)post graduate diploma in company secretaryship granted by the Institute of Commercial Practice under the Delhi Administration or Diploma in Corporate Laws and Management granted by the Indian Institute, New Delhi. (ix) postgraduate diploma in company law and secretarial practice granted by the University of Udaipur; or (x) membership of the Association of Secretaries and Managers, Calcutta, registered under the West Bengal Registration of Societies Act, 1961 (XXVI of 1961): Provided that where the paid up share capital of such company is increased to Rs. 50 lakhs or more, the company shall, within a period of one year from the date of such increase, appoint a company secretary as is required to be appointed as per Section 383A. 15.3 POSITION OF SECRETARY Though the Companies Act, 1956 does not define the legal position of a company secretary, yet his position may be assessed and described from the nature of the duties he is required to discharge pursuant to his agreement with the company and in conformity with the statute. You have already read the statutory definition of the Secretary in Section 2(45) of the Companies Act. You should also note that according to Section 2(30) of the Act, the Secretary is the officer of the company, and his legal position is determined accordingly. For instance, he may be held liable for default in holding the statutory meeting and filing the statutory report under Section 165, for default in registering certain resolutions and agreements as required under Section 192. The Secretary, like any other officer of a company will be punishable with imprisonment if he falsifies the books of the company or if he wilfully and knowingly makes a material false statement in the balance sheet or in certain returns, reports, certificates, or other documents of a company which is being would up (Sections 539 to 541). Misfeasance proceedings may also be taken against him in a winding up if he has misapplied any money or property of the company or has been guilty of breach of trust (Section 543).

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Corporate and Allied Laws

Being a mere servant, he has no authority to represent anything at all. An agreement between him and the company does not prevent the company from appointing a general manager (Krishna vs. Indo Union ASS Limited, 1944). The Secretary has no authority to summon a general meeting himself. He has also no authority to strike-out a name from the register or to register a transfer before it is passed by the Board. The secretary of a company has no general authority to make representations to induce persons to take share in the company so that a person who is induced to take shares in then company by a fraudulent misrepresentation secretary of the company (not authorised by the officers of the company entitled to make the representation), is not entitled to maintain an action against the company for the recession of the contract or for damages for such misrepresentation (Diwan Chand vs. Gurjanwalla Sugar Mills 1937). In no circumstances can a Secretary of a company discharge the functions of the Board or act, on behalf of the company in matters of policy or take substantial steps which are not of an administrative or ministerial nature. He can not give consent on behalf of the company under Section 399 to the filing of the petitions under Sections 397 and 398 (Mohan Lal Mittal vs. Universal Wires Limited 1983). He cannot also file a suit on behalf of the company, unless authorised to do so. So also the Secretary cannot issue notice without the Board’s authority or commence litigation in the company’s name without authority from the. However, the position of Company Secretary has undergone, a big change in modern times. He is now recognised as an important executive officer of a company with managerial duties and responsibilities. The Companies Act also permits the Board of Directors to delegate administration powers of management to the Company Secretary in addition to his routine managerial duties and responsibilities. He is no longer a mere clerk. He regularly makes representation on behalf of the company and enters into contracts on its behalf which come within the day to day running of the company’s secretariat. All such matters come within the ostensible authority of a Company Secretary. An accomplished Secretary acts as the brain of the company. His ability, his contacts with the commercial world and his administrative control over the whole office enable the Secretary to vitally influence the management. In all matters of policy and administration, the directors consult an experienced and well conversant Secretary. He is bestowed with ample discretionary powers which he can exercise without intervention of the Board of Directors. The Secretary, vis-à-vis the administrative set-up of a company, is in some cases next to the managing director. He, as an executive head, is empowered to supervise and control the secretarial and share department or other departments and may even have the powers to appoint and dismiss the staff working under him, depending upon the Board’s decisions in this respect. The Board, may, however delegate to him various other duties.

Corporate Secretarial Practice- Drafting of Resolution, Minutes, Notice and Report 15.4 APPOINTMENT OF SECRETARY

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The first Secretary of a company may be named in the Articles. He may be called upon to assist the promoters in all preliminary work before the incorporation such as holding the meetings, keeping the minutes the meetings, preparation of various documents and statements required for registration of the company. But a clause in the Articles naming the Secretary does not constitute a contract between the Secretary and the company. Articles constitute a contract between the members and the company. Outsides have nothing to do with the Articles. Even if the Articles say that Mr. A.B. shall be the first Secretary of the company for a fixed salary and a definite period, the secretary would not be able to sue the company if the directors appointed another Secretary after incorporation. Hence, the Secretary who has been acting-pro-tem in the preliminary stages of the company’s existence whether named in the Articles or nor, must immediately after incorporation, get his appointment confirmed by a Board resolution and should preferably enter into a separate service agreement with the promoters regarding his remuneration and guarantee of its payment; but all the work done by him in the pre-incorporation stage is in his unofficial status as the company itself is non existing and it cannot appoint any person as its secretary or solicitor. If he is associated with the promoters from the beginning he will get an opportunity to familiarise himself with the contents of the memorandum and the articles of association in view of his active participation in their drafting and preparation. He will also be familiar with the financial position of the company and its potentialities regarding future prospects and development. The resolution of appointment of secretary may be in the following form: RESOLVED that Mr. P.R. Anandgiri be, and is hereby, appointed the Secretary of the Nav Bharat Engineering Works Limited, the appointment to be subject to six months notice on either side and the terms of salary and allowances will be as follows: 1. Rs. 60,000 per month salary, 2. Rs. 6,000/- per month as dearness allowance, 3. Rs. 6,000/- per month as house rent allowance, 4. Rs. 8,000/- per month as car allowance, 5. Rs. 20,000 per year as leave travel allowance, 6. Free medical help upto Rs. 20,000 per year and 7. Rs. 10,000 per month on company’s expense account. In addition to this resolution, he should enter into a written service agreement which will deal great length with the terms and conditions of service, such as period of appointment and probation, if any period notice of termination of service, mode of remuneration, provident fund or pension benefits, etc., it may be noted that his remuneration is not taken into account for purposes of calculating over all managerial remuneration under Section 198. The Secretary’s appointment has to be entered in the Register of Directors, etc., and it is also necessary to send a notice of his appointment to the Registrar (Section 303).

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FORM NO. 1 Agreement for the Appointment of a Secretary An agreement made on the………. day of…… 20….. between…………. Ltd. (hereinafter called the Company) of the one part, and Mr………… of the other part whereby it is agreed as follows: (1) The said Mr…………. shall be the Secretary of the Company for a term of ten years from the date hereof. (2) There shall be paid by the Company to the said Mr…………. as such secretary as aforesaid a salary at the rate of Rs. ……….. per month beginning from 1st December, 1999. (3) Mr………….. shall, unless prevented by ill health, throughout the said term devote the whole of his time, attention and abilities to the business of the Company shall obey the orders from time to time of the Board of Directors of the Company and in all respects conform to and comply with the directions and regulations made by such Board and shall serve the Company well and faithfully use his utmost endeavours to promote the interests thereof. (4) The said Mr……………. shall, during the tenure of his office, be entitled to leave of absence for a period……………. in each year not exceeding one month and the said salary of Mr…………… shall continue not withstanding such leave of absence. (5) Either of the parties hereto may at any time after the………….. day of……….. 20….. determine their agreement by giving to the other not less than three calendar months notice in writing and upon expiration of the period specified in such notice the said Mr………… shall cease to be secretary to the Company. As Witness Etc. Director 1…………. Director 2…………. (appointee) Seal Day and Date Sd/1. 2. 3.

A director can also act as secretary. But we must have special resolution for such an appointment as it will be an office of profit. However, if a company has only two directors, none of them shall act as a Company Secretary. 15.5 DUTIES OF A COMPANY SECRETARY The duties of a Company Secretary are multifarious and these vary from company to

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company depending upon various factors, such as the size of the company, the nature of its business and the exact positions that he enjoys in the company. In a large concern, he is charged with the duty of ensuring that the affairs of the company are conducted in accordance with the provision of the Companies Act, the company’s articles and generally in accordance with the law. There the function as the head of the secretarial department. In small concerns the secretary may, in addition to his purely secretarial duties, be much more involved in the company’s administrative operations, organisation and control of the office and its staff. However, the duties of a Company Secretary can be broadly grouped under the following heads: 1. Statutory duties. 2. Duties towards directors. 3. Duties towards shareholders. 4. Duties towards public. 5. Duties towards the office and staff. 1. Statutory duties: The statutory duties of a Company Secretary are to ensure that the affairs of the company are conducted in accordance with the provisions of the Companies Act and other statutes pertaining to company management such as the Income tax Act, the Indian Stamp Act, the Monopolies and Restrictive Trade Practice Act, etc. The most important part of the statutory duties of a Company Secretary is concerned with the compliance of the provisions of the Companies Act, 1956 which are: (a) Maintenance of the statutory books and/or registers of the company. (b) Preparation, authentication and filing of resolutions, agreements, documents and return with the Registrar of Companies. (c) Attending the meetings and recording their proceedings. (d) Allowing the members of the company to inspect the statutory books and to take copy there of and to make all necessary communication to the members. (e) Assisting the directors in respect of the issue, allotment, transfer, transmission and forfeiture of shares and debentures. (f) Keeping the common seal of the company in safe custody and using it where so authorised by the articles or the Board of Directors. Filing with the Registrar a return in the prescribed form [Section 5(g)].

Some example of statutory duties are given as follows: (i) (ii) Statutory declaration as to compliance in respect of incorporation (Section 33). (iii) To file Return of Allotment with the Registrar of Companies (Section 75).

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(iv) Giving notice to the Registrar of an increase of share capital (Section 97). (v) Issuing Certificates of Shares, Debentures and Debenture Stock (Section 113). (vi) Allowing inspection of the Debenture Register (Section 118). (vii) Delivering particulars of mortgages and charges for registration (Sections 125 to 127). (viii) Making the statutory declaration for commencement of business (Section 149). (ix) To maintain the Register of Members with prescribed particulars (Section 150). (x) To maintain Register of Debenture holders (Section 152). (xi) To sign the Annual Return and certify the documents annexed thereto and file it with the Registrar (Sections 159 to 162). (xii) To Allow inspection of and furnish copies of Register of Members (Section 163). (xiii) To file copies of certain Resolutions and Agreements with the Registrar (Section 192). (xiv) To maintain minutes of general and board meetings (Section 193). (xv) To file three copies of the Balance Sheet and Profit & Loss Account with the Registrar (Section 220). (xvi) To file the certificate as to compliance of requirements of Schedule XIII (Section 269). (xvii) To maintain Register of Directors, etc., with prescribed particulars (Section 303). (xviii) To allow inspection of the Register of Directors (Section 304). (xix) To maintain a Register of Directors, etc., with prescribed particulars (Section 307). (xx) Where a director’s liability is made unlimited, to give the notice required to be given to him (Section 322). (xxi) To assist in the making of the Statement of Affairs of the company in a winding up (Section 454). Under the Income-tax Act, he is required to deduct income tax from the salaries of the employees and officers of the company and from dividends and interest and deposit the same with the Government within the prescribed time. He must also furnish a certificate of income tax deducted at source to every shareholder receiving the dividend and to every debenture holder receiving interest. He is also required to submit a return of the income of the company to the income tax authorities in time. Under the Indian Stamp Act, it is the duty of the company secretary to see that documents such as letters of allotment, share certificates, share warrants, debentures, transfer forms mortgages and charges, etc., which are issued from his office, are affixed with stamps of requisite amount as required under the Act.

Corporate Secretarial Practice- Drafting of Resolution, Minutes, Notice and Report

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Under the other allied laws, the Company Secretary is principal officer and is responsible to give notice and verify statements relating to various forms of expansion, establishment of new undertaking, merger and amalgamation and registration of an undertaking. Under the Sales Tax Act, he must endure timely submission of returns and payment of tax. In addition, the Secretary must see that the provisions of the Foreign Exchange Regulation Act, Industries (Development and Regulation) Act, Securities and Exchange Board of India Act are duly complied with by the company. In the case of a manufacturing company, he must see that the provisions of the Factors Act, Payment of Wages Act, Minimum Wages Act, Industrial Disputes Act, and other industrial laws, are duly complied with. 2. Duties towards directors: In the eyes of law, the Company Secretary is no more than a mere servant of the Board. He should, therefore, carry out the instructions of the Board. He acts under authority of the Board which may be either express or implied. He is also responsible for providing necessary information to the Board for the formation of its policies. He should also advise the directors in respect of legal matters pertinent to company’s affairs. As the directors cannot act without a meeting, the Secretary has to arrange Board meeting, issue notices and prepare agenda of such meeting in consultation with the directors. He has also to record the minutes of the proceedings in consultation with the directors. He has also to record the minutes of the proceedings of their meetings. He acts as the mouthpiece of the Board and communicates its decisions to staff, shareholders and outsiders dealing with the company. He also deals with all correspondence in which the directors are interested and maintains all important files and records for them. He generally prepares the draft of the directors’ report at their instance to be presented before the annual general meeting. In addition, he keeps the common seal of the company and uses it as directed by the Board. It has been rightly said that “while the directors are the brains of the company the Secretary is its eyes, ears and hands.” 3. Duties towards shareholders: A Company Secretary serves as a link between the company and the shareholders. As the shareholders are the owners of the company, he owes to them the highest courtesy and consideration. It is the duty of the Company Secretary to safeguard the interests of shareholders as between themselves, as also vis-àvis the company. He communicates the decisions of the Board to the shareholders. He also deals with all correspondence between the company and the shareholders and looks into their grievances and complaints. The shareholders will frequently seek from his information as to the company’s affairs and the Secretary should satisfy them with reasonable replies. His other duties towards shareholders are with regard to the following: (i) Issuing a prospectus. (ii) Receiving applications and allotment of shares.

15.10 Corporate and Allied Laws (iii) Issuing letter of allotment, share certificates and shares warrants. (iv) Sending all notices. (v) Transfer and transmission of shares. (vi) Payment of dividends. (vii) Sending notices of meetings of shareholders. (viii)Making arrangements for such meetings. (ix) Recording proceedings of the meetings in minutes book. (x) Allowing shareholders to inspect various books and registers as permissible under the Act. (xi) Supplying information and copies of documents to shareholders on demand as permissible under the Act. The Secretary is in possession of certain confidential information and it is his duty to see that such information is not disclosed prematurely to a section of the shareholders thus prejudicing the rights of others. Such information should be released simultaneously to all the parties interested in the information. 4. Duties towards public: The Company Secretary acts as a liaison officer between the company and the general public consisting of debenture holders, bankers, creditors, customers, suppliers prospective investors and the public at large. He should be in constant touch with them, keep them informed of the company’s policies and programmes and supply necessary explanations and clarifications to the queries raised by them. His attitude towards them should be one of courtesy, tact and integrity. It is the Secretary who negotiates with third parties and the outside public in regard to settlement of contracts and bargains, etc. He is to look after the interests of creditors and debenture holders of the company. He has also to entertain the complaints of customers and suppliers and satisfy them. He should not divulge confidential information to the public prematurely, thus affecting the public opinion about the company. 5. Duties towards the office and the staff: The Company Secretary is the executive head at the registered office of the company and is solely responsible to the Managing Director or Manager and Directors for the smooth running of office work. In fact, the Company Secretary is the pivot around which the whole corporate machinery revolves. All the heads of various departments into which office is organised, viz., the share department, correspondence department, filing and records department, are directly responsible to the Secretary. It is the Secretary’s duty to see that these departments are properly organised, supervised, coordinated and adequately staged.

Corporate Secretarial Practice- Drafting of Resolution, Minutes, Notice and Report 15.11 15.6 COMPANY CORRESPONDENCE & REPORTS 1. Company Correspondence Correspondence in company matters is dealt with by or in the name of the Company Secretary these matters cover a wise range of subjects broadly, such correspondence may be classified as follows: ♦ Correspondence with members: The Secretary is the organ of the Board of Directors and a vital link between the company and its members or the public. Being authorised by the Board, he has to convene meetings, notify declaration of dividends, deal with the issue, transfer, transmission and allotment of shares or debentures, further issue of shares, bonus issue, etc., and disclose the position of the company as required by the Companies Act. The Secretary’s correspondence with members relates mostly to statutory and formal matters. But, in special circumstances he is also required to reply letters of inquiries relating to prospectus of the company, rate of dividend, any irregularity on proceedings of meetings, loans and investments, any question arising out of transmission of shares, loss of share certificates or dividend warrants, any court proceedings, etc. In all statutory or formal correspondence, the Secretary acts as the agent of the company or the Board as well as one subservient to the Act and the company’s articles. In other types of correspondence, he can, however, exercise some amount of discretion. But in view of his fiduciary relationship vis-à-vis the company and the general body of shareholders, he should exercise his discretion in the larger interest of the company. ♦ Correspondence with directors: The Secretary is the servant of the company under the control of the Board. He is required deal with all the correspondence in connection with the directors and record their deliberations and decisions. He must maintain written records of his dealings and communications with the directors. His dealing with them needs the utmost tact. His language should be polite and at the same time firm. He must observe decency and decorum in communicating with the directors to furnish or withhold any information or draw their attention to any matter in the interest of the company. ♦ Correspondence with the Public: In this connection, his dealings as mainly with customers, brokers, other companies or public bodies, creditors, etc. He must be courteous, tactful and must guard against disclosure of secrets or favouring anyone unduly, e.g. by disclosing some new development. His letters must be firm, dignified and convey a good impression, about the company. 2. Drafting and Preparation of Reports A report is a statement containing an assessment of a situations and/or facts and data relevant thereto. It is based on one’s knowledge and a systematic style of the situation. For example, the marketing manager may prepare a report to the decline of sales in a particular

15.12 Corporate and Allied Laws area. The report may or may not contain the comments or conclusions of the writer. It is intended to enable the interested persons to form their judgement to take suitable action thereon. The success of a reporter depends upon the extent of his knowledge of the matter reported and his capacity to pick out from the mixed facts and figures the important significant and relevant ones, the ability to marshall the facts with lucidity, his capacity to see the picture as a whole and above all, his ability think logically. Preparation of a variety of statutory and non-statutory reports falls within the domain of the company secretary. With reference to the Companies Act, the following are some of the important statutory reports: (a) Statutory report prepared under Section 165 and sent to the members along with the notice of statutory meeting as well as to the Registrar of Companies. (b) Auditors’ reports placed before the annual general meeting. (c) Director’s reports placed before the annual general meeting. (d) Annual returns submitted by the company to the Registrar. The returns as regards allotment, statement in lieu of prospectus too are in the nature of reports. (e) Inspector’s reports submitted after investigation into the affairs of the company concerned. (f) Registrar’s report relating to unsatisfactory affairs of the company. (g) Liquidator’s report in winding-up proceedings. Non-statutory report, through beyond legal requirements, are nonetheless compiled in special circumstances by a director, secretary or accountant, committee or sub-committee or a special body with a view to aiding authorities in taking decisions. The following are some of the non-statutory reports: (a) Report of a committee of directors to be submitted to the Board after enquiring into the exigencies of the business situation. (b) Report of the Board of Directors to shareholders, beyond the legal requirements. (c) Chairman’s speech at the annual general meeting. (d) Reports of special committees-standing or ad hoc-constituted by the Board, e.g. finance committee report, share allotment committee report, project committee reports, etc. The reports of the ad hoc committee may relate to a special problems such as opening or closing a branch office, raising of additional capital, introduction to certain office routine or method, etc.

Corporate Secretarial Practice- Drafting of Resolution, Minutes, Notice and Report 15.13 (e) Report to stock exchange. (f) Circular reports issued to customers, clients and general public. (g) Report of individual experts, or departmental managers or officers of the company such as secretary, accountant, commercial manager, sales manager, works manager, personnel manager and the like. ♦ GENERAL HINTS ON DRAFTING REPORTS: Reports are too numerous to be governed by precise rules. However, a few general hints for drafting them are given below: (a) Collection of material or data being the foundation on which the report stands; the writer must collect them by referring to office records, interviewing people, visiting different places, etc., as may be necessary. (b) The material collected as aforesaid has to be marshalled in a logical sequence so that the report, when made out, may read like a narrative. (c) The report should have a leading and a preface explaining its purpose and nature. (d) Its language has to be simple, clear and unequivocal short sentences are to be preferred to long ones. It should be drafted in an impersonal manner, making use of ‘third person’. (e) If the report is likely to be lengthy, it should be divided into parts and appropriate subheading should be used. The report must then contain a summary also. Many people adopt the practice of giving the gist in one page and the matter in detail later in the report. (f) Where the directors are not technical persons, technical phraseology should be eschewed, yielding place to plain and simple phraseology, the idea being to make the report, as far as practicable, easily understandable by those for whom it is meant. (g) The conclusions put forward should be founded on the material or data collected; also these should be unbiased in character. 3. Specimen Directors’ Report of ‘Maruti Ltd.’ is given hereunder The Directors have pleasure in presenting the 13 th Annual Report together with the audited accounts of Company for the year ended 31st March, 2006. ♦ Highlights of 2005-06: Your company concluded another year of growth in all areas of operation setting several new records. The millionth vehicle was produced on 25 th March, 2006. The profit for the year before tax increased to Rs. 1367 million (previous year Rs. 366 million) after providing depreciation of Rs. 730 million (previous year Rs. 364 million) and interest of Rs. 747 million (previous year Rs. 528 million).

15.14 Corporate and Allied Laws Production increased from 128138 vehicles in 1994-95 to record of 158109 vehicles representing an increase of 23%. Total income for the year was 29215 million as against Rs. 22195 million in the previous year. In continuation of our efforts to provide convenient and quality after sales service to our customers 5 dealer workshops and 55 Maruti Authorised Service Stations were added during the year. 100 Free Inspection Camps were organised for specialised check-up. As in the previous year All India Skill Competition was organised to motivate dealers’ mechanics in enriching their knowledge and diagnostic ability. During the year the company successfully cleared the COP audit as per EEC regulatory requirement. ♦ Outlook for 2005-06: The company expects to increase production to a 2,00,000 vehicles in the coming year. The new assembly shop and paint shop for the expansion of production would be operational during the year. ♦ Dividend: The directors recommend a dividend of 10% amounting to Rs. 132 million (previous year 6% amounting to Rs. 76 million) on equity shares, subject to deduction of tax. ♦ Exports: A total of 17187 vehicles (previous year 14566 vehicles) representing an increase of 18% over 2004-05 valued at Rs. 1982 million (previous year Rs. 1474 million) were exported during the year. In recognition of export performance in 1994-95 the company was awarded the status of Trading House by the Government of India. During the year 20 new markets for exports were developed. The sample units of new model ‘Alto’ were sent for obtaining homologation and national type approval in E.E.C. This model was also launched in the Geneva Motor Show. The company is actively pursuing further growth in exports. ♦ Conservation of Energy, Technology Absorption and Foreign Exchange Earnings and Outgo: A statement giving details of conservation of energy, technology absorption and foreign exchange earnings and outgo in accordance with the Companies (Disclosure of Particulars in the Report of the Board of Directors) Rules,1988, is annexed. ♦ Particulars of employees: The information required as per Section 127(2A) of the Companies Act, 1956 read with Companies (Particulars of Employees) Rules, 1975 forming part of this Report is enclosed. ♦ Environment: Modification of the existing effluent treatment plant was undertaken to take care of additional effluents generated due to capacity expansion. Data on nonmethane hydro-carbons in Paint Shop and Engine Testing Shop, ambient air quality, stack emissions and effluents are being regularly monitored and the parameters are maintained well within prescribed limits. Development of green belt around gasturbine

Corporate Secretarial Practice- Drafting of Resolution, Minutes, Notice and Report 15.15 and R&D areas was further augmented by plantation of 3000 additional saplings. ♦ Directors: Suzuki Motor Corporation nominated Mr. Y. Kakei as part-time director on the Board in place of Mr. S. Nakanishi w.e.f. 21.7.2006. The Board placed on record its deep appreciation of the valuable contribution and services rendered by Mr. S. Nakanishi as director of the company and otherwise to the company. ♦ Auditors: M/s Price Waterhouse, retire as auditors and being eligible, offer themselves for reappointment. ♦ Cost Auditors: The Central Government have issued a direction in regard to audit of cost accounts maintained by the Company pertaining to motor vehicles for the year ended 31.3.2006 and for every financial year thereafter. Accordingly, the company appointed M/s R.J. Goel & Co., as Cost Auditors for auditing cost accounts of the company for the year ended 31st March, 2006 with the approval of the Central Government. ♦ Acknowledgement: The Board of Directors would like to express its sincere thanks for the co-operation and advice rendered by various ministries of the Government of India, including the Department of Heavy Industry, and also the Haryana State Government and its concerned departments. The Board also expresses its gratitude to the statutory auditors, cost auditors and bankers for the co-operation and assistance rendered by them. Your directors also take this opportunity to place on record their appreciation for the valuable support and co-operation received from Suzuki Motor Corporation, Japan as well as from its employees including the Japanese staff, dealers, vendors and other suppliers, without which it would not have been possible for Maruti to achieve all-round progress. For and on behalf of Board of Directors

New Delhi 29th July, 2002

(A.R. Halasyam) Director-Finance

(R.C. Bhargava) Managing Director

15.7 RECORD MAINTENANCE AND FILING OF DOCUMENTS Maintenance of different kinds of registers: A company secretary being administrative incharge of the company is responsible for the maintenance of registers, books of accounts and other documents required to be kept by the company as per statutory norms. A list of such documents is as follows:

15.16 Corporate and Allied Laws Registers to be Maintained by the Company Section(s) 301(1) & (5) Registers Register of contracts (referred to in Sections 297 and 299), with companies and firms in which the directors are interested containing particulars mentioned in Section 301 to be kept at the registered office. Register of directors, managing director manager and secretary containing particulars mentioned in the section to be kept at the registered office. Registers of director’s shareholdings and debenture-holdings containing particulars mentioned in the section to be kept at the registered office. Register of investments made by the company in any shares or debentures of bodies corporate in the same group showing in respect of each investment, the particulars required by the section to be kept at the registered office. Books of accounts or other documents Books of accounts containing the particulars required under the section which must be kept at the registered office. All contracts entered into by a company appointment of a manager, managing director, managing agent or secretaries and treasurers, the which must be kept at the registered office.

303

307

372(5) & (8)

Section(s) 209 302(6)

The following documents must also be kept or maintained by a company (This follows from the provisions). 1. Copies of balance sheet and profit and loss account, and the documents to be annexed or attached thereto (Sections 210, 212, 216 & 217). 2. Statements to be published by limited banking companies, insurance companies and deposit provident or benefit societies (Section 223 & Form F in Schedule 1). Notice of Board meeting Notice of Board meeting is required pursuant to Section 286(1). The length and form of notice of the Board meeting which have not been prescribed under the Companies Act usually follow such directions as are prescribed in the articles of the company. Table ‘A’ of

Corporate Secretarial Practice- Drafting of Resolution, Minutes, Notice and Report 15.17 Schedule I to the Act in clause 73(2) provides the procedure and authority competent to issue notice. Under the said clause, a director may, and the manager or secretary, on the requisition of a director, shall, at any time summon a meeting of the Board. Specimen notice Board Meeting Section 286: ‘Notice’ convening a Board Meeting Akash & Company Limited Palkaji, Bombay-900 012. Dated the..…… 20…. To Shri ABC, Nagpur-440 012. Dear Sir, Notice is hereby given that a meeting of the Board of Director which will be held at the registered office of the company at Palkaji, Bombay- 400 012 on……………… the…………… 20……… at….….a.m./p.m. You are requested to make it convenient to attend the meeting. A copy of the agenda of the businesses which are likely to be transacted at the meeting is enclosed for your perusal. Yours faithfully For AKASH & COMPANY LIMITED Secretary (each director should be individually addressed with a copy of agenda of the meeting) Agenda The various items of business to be transacted constitute the agenda, literally “things to be done” for the meeting. Though it is common practice to send to directors or members an agenda or a list of items of business proposed to be transacted at the meeting, the Act does not lay down any such requirement. The current practice is, to lay down the agenda preferably in the form of proposed resolutions. It is usually prepared by the secretary but issued however, after it has been approved by the managing director or an executive of an

15.18 Corporate and Allied Laws equal rank. Preparation of agenda: The preparation of agenda requires considerable care. An ideal agenda is the one which is so worded that only by altering a few words of an item to convert it into past tense, it would form the minutes. It may be, and is often drawn up on loose sheets of foolscap Paper. However, it is also preferable to write in bond book specially kept for that purpose. The order in which various items appear in the agenda is generally the order in which the business is to be transacted at the meeting. As it is customary to discuss routine matters first such items as relate to it come first in the agenda. They are followed by important items which, it is expected would provoke discussion among members. At the end, the item which require only to be noted by the members listed. Such an order generally has the merit of dividing equitably the time of the meeting among various items according to their importance. It must be added, however, that the chairman has the discretion to take up item for consideration by the meeting in the order he considers convenient for the disposal of the business. The various items listed on he agenda are numbered serially for convenience of recording minute and for future reference. AGENDA for the Board Meeting Summary Form Agenda for Board Meeting to be held at………. one..…… day, the……. 20……. at………… [a.m.] ……………………………………….. Ltd. 1. The Chairman to announce that the quorum for the meeting is present. 2. The Chairman to address the meeting, and to move that, with the permission of the members present, the notice of the meeting and the Directors’ Report be taken as read, and to call on the Secretary to read the Auditors’ Report. 3. The Chairman to make a statement commenting upon the working of the company. 4. The Chairman to propose: “Resolved that the audited Balance Sheet as at…………….. 20…… at the Profit and Loss Account for the year ending…………….. 20……… together with the Directors’ Report and Auditors’ Report thereon, be and the same are hereby received and adopted”. Mr…………….. to second. The Chairman to invite members to put questions regarding working of the company under review. After the members have spoken and their queries answered, put motion to meeting and declare result.

Corporate Secretarial Practice- Drafting of Resolution, Minutes, Notice and Report 15.19 5. Mr…………… a Director to propose: “Resolved that pursuant to the recommendation of the directors, divided at the rate of Rupees……………… per share on the equity share capital of the company for the year ended……………… 20…… be and is hereby declare out of the current profits [or out of the accumulated profits] of the company and that the same be paid, after deduction of income-tax at source, to those shareholder whose names appear on the company’s register of members on……………… 20…… and that divided warrants be posted within 30 days hereof only to those shareholders who are entitled to receive payment”. Mr.…………… to second. Put motion to meeting and declare result. 6. Mr……………… a Director to propose: “Resolved that Mr……………… who retires by rotation and is eligible for re-appointment, be and is hereby re-appointment a Director of the Company”. Mr……………… to second. Put motion to meeting and declare result. 7. Mr……………… a member to propose: “Resolved that the retiring Auditors, Messrs……………… Chartered Accountants, be and they are hereby re-appointed Auditors of the company to hold office till the conclusion of the next Annual General Meeting at a remuneration of Rs………………”. Mr……………… another member to second. Put motion to meeting and declare result. 8. Mr………………, who has given notice proposing candidature of Mr……………… for the office of Director under Section 257 of the Companies Act, 1956, to propose: “Resolved that, due notice in writing signifying the intention of a member to propose: Mr……………… as a Director having been received pursuant to Section 257 of the Companies Act, 1956, Mr……………… be and is hereby appointed as a Director of the company liable to retire by rotation”. Mr……………… to second. Put motion to meeting and declare result. 9. The Chairman to propose as a special resolution: “Resolved that pursuant to the provisions of Sections 294 and 294AA and all other provisions, if any, of the Companies Act, 1956, and subject to the approval of the Central Government, the company hereby approves the appointments of the following

15.20 Corporate and Allied Laws as sole selling agents of the company for a period not exceeding five years commencing from the dates of appointment and for the products and the areas respectively set out against each in the table appended below on the terms and conditions recorded in the relative draft agreement submitted to this meeting and initialed by the Chairman hereof for purposes of identification, and that the Board of Directors be and is hereby authorised to effect such modifications in the terms and conditions of the said draft agreement as may be approved by the Central Government and agreed to by the Board the said sole selling agents.” Name of the Agent Areas Period Products Commission

Mr…………….. to second. Put motion to meeting and declare result. 10. The Chairman to declare the meeting closed. Resolutions A meeting is an important instrument in the corporate decision-making process. The business at a meeting is preceded by a notice containing the agenda. The resolution is the event that takes place in the meeting. Dictionary meaning of the word ‘resolution’, is ‘a formal proposal put before a public assembly or the formal determination of such proposal on any matter’. Derived from this meaning, a resolution is a formal agreement as to adoption of proposal put before an assembly of persons or meeting. In the context of company management, it is either a Board meeting or a General meeting of the members. The passing of a resolution should be construed as the manner in which a meeting formally acts expressing the intent and purpose of the meeting and if it is a meeting of members, it means the will of the company, and if it is a meeting of the Board of directors, it means the exposition of the intent of the executive action initiated or to be initiated subject to the limiting and regulatory force of the different statute. Hints on drafting of resolution While framing resolution, it is to be ensured that: (i) They should be express clearly and in precise terms, and not vaguely, whether they embody the decisions of the directors or are those passed at general meeting. (ii) All identification of instruments, persons, etc., referred to in the resolution are properly made.

Corporate Secretarial Practice- Drafting of Resolution, Minutes, Notice and Report 15.21 (iii) If the resolution is being passed in pursuance to the provisions of the Act, it refers to relevant section or sections. (iv) If the resolution is such as requires the approval of the Central Government/Company Law Board or confirmation of the Court, it states that effect. (v) If the resolution is to be effective immediately, it is drawn to show that effect. (vi) The resolution is confined to one subject matter. Wherever possible, lengthy resolutions should be divided into paragraphs and arranged in their logical order having regard to the subject matter of the resolution. Members’ resolution Resolution that may be passed by a company are of two kinds: (i) Ordinary resolution and (ii) Special resolutions Specimen General Meeting Resolutions-Ordinary Section 269: Appointment/re-appointment of Managing/Whole-time Director-General Meeting-Ordinary Resolution I. “Resolved that Shri ABC who fulfills the conditions specified in Parts I and Part II of Schedule XII to the Companies Act, 1956 be and is hereby appointed as the Managing Director/Whole-time Director/ Manager of the company for a period of five years effective from……………….. and that he may be paid remuneration by way of salary, commission and perquisites in accordance with Part II of Schedule XIII of the Act. Resolved further that in the event of loss or inadequacy of profit the salary payable to him shall be subject to the limits specified in Schedule XIII”. II. Resolved that Shri ABC be and is hereby appointed as Managing Director/Whole-time Director/ Manager of the company subject to the approval of the Central Government for a period of five years effective from……………….. and that he may be paid remuneration as follows: (i) Salary (ii) Commission (iii) Perquisites: Housing, Medical reimbursement, Leave Travel Concession, Club fee Personal Accident Insurance, Gratuity, Provident Fund etc. Resolved further that the secretary of the company be and is hereby authorised to make an application to the Central Government seeking their approval to the above appointment. Section 433: Winding up by Court-Ordinary Resolution

15.22 Corporate and Allied Laws Whereas the company has been incurring continued losses for the past several years and WHEREAS the assets of the company are insufficient to meet the liabilities and WHEREAS it is no longer possible to run the company except at a loss. Now therefore it is Resolved that the company be wound up by the Tribunal at Bombay, which will become effective from the date the Court declares the company to be wound up by such Court and that the Board of Directors be and is hereby authorised to make necessary applications therefor and take action for the winding up of the company by the said Court”. Section 394: Approval of scheme of arrangement between company and class of shareholders – Special resolution Resolved that, subject to sanction by the Tribunal at……………….., a scheme of arrangement in terms of the draft laid before this meeting and for the purpose of identification signed by the Chairman thereof, or with such alteration or modification thereof as may be directed by the said Tribunal, between the company and the holders of the promoters shares and the holders of the equity shares for the purpose of eliminating existing……………….. promoters shares of Rs…………… each by converting them into……………….. equity shares of Rs……………… be and is hereby approved. Section 433(a): Winding up of the company by the Court – General Meeting – Special Resolution “Resolved that consent of the company be and is hereby accorded to the Board of Directors of the company to present a petition to the Tribunal of Delhi for winding up the company by the Court from such date as it may determine.” Directors’ Resolutions Resolutions passed in a Board meeting. As a general rule, the directors act exercise their powers by resolutions passed at Board meetings. These resolutions may be resolution requiring: Adoption by majority: The articles usually provides (Articles 74 of table A) for a simple majority of votes to secure adoption of directors’ resolution. Unanimous adoption: The resolution must be passed unanimously where the Act as requires for example, Section 316(2) proviso and Section 372(5). It is not essential to the validity of directors’ resolution that the determination should be embodied in a formal resolution. Further, decision of the directors need not in all cases be formally recorded in writing and their intention may be incurred from conduct [H.L. Belton & Co. vs. T.J. Graham & Sons (1956)].

Corporate Secretarial Practice- Drafting of Resolution, Minutes, Notice and Report 15.23 Resolution by circulation Sometimes it becomes impracticable to call a meeting of the board to discuss matters on which decisions are needed. To enable the directors to do so, the articles usually provide (Regulation 81 of Table A) that a resolution in writing, signed by all the members of the Board entitled to receive notice of a Board meeting, shall be valid and effective as if it were passed at a duly convened meeting. Such resolutions are called resolutions passed by circulation. When a resolution is passed by circulation, it should be recorded in the minutes of the next Board meeting to ensure its authenticity. Section 289 provides that no resolution shall be deemed to have been duly passed by circulation unless: (a) the resolution has been circulated in draft together with the necessary papers to all the directors in India at their usual address, and (b) it has been approved by all or majority of them as are entitled to vote on the resolution. Specimen Board Resolutions passed in the meeting Section 316: Appointment of Managing Director or a person who is already Managing Director of another company-Board Resolution “Resolved that subject to the approval of the Central Government to Sub-section (4) of Section 316, Mr. X.Y.Z. who is already the Managing Director of two companies, namely M/s ABC Limited and M/s BCD Limited, be and is hereby appointed as Managing Director of the company for a period of five years commencing from 1 st October, 2002, with the consent of all the Directors present at the meeting of which meeting and the resolution to be moved there at specific notice was given to all the directors then in India, on the terms and conditions in the draft agreement tabled before the meeting and initialled by the Chairman for purposes of identification and that Shri SPM, the Secretary of the company be and is hereby authorised to apply to the Central Government for seeking their approval. Resolved further that Shri LMD, Director and Shri SPM the Secretary of the company be and are hereby authorised to execute the said agreement subject to such modifications/alterations made by the Central Government while giving their approval and to affix the common seal of the company thereon.” Section 318: Compensation for loss of office – Board Resolution “WHEREAS Mr. NBS was employed for period of three years the Managing Director of the company from……………….. 20….. and Whereas the company wanted to dispense with the series of the said Managing Director, and WHEREAS the company has duly served notice to the said Managing Director in terms of clause……… of the agreement between the company and the said Mr. NBS governing his terms and condition as the Managing Director’ of the company, in term of clause……… of the agreement between the company and the said Mr. NBS, NOW THEREFORE IT IS HERE BY RESOLVED that an amount of Rs…………., be

15.24 Corporate and Allied Laws paid to Mr. NBS as compensation for the loss of his office the Managing Director of the company.” Section 372A: Purchase of shares etc., of other companies – Board Resolution “Resolved that pursuant to Section 372A of the Companies Act, 1956, the company do purchase 3,50,000 equity shares of Rs. 10 each to M/s MPC & Company Limited (not being under the same management as this company) and that the resolution be passed by all the directors present unanimously. Resolved further that Mr……………….., a Director of the company, be and is hereby authorised to sign/ execute the necessary documents in this connection.” Regulation 31 of Table A of Schedule I: Forfeiture of shares – Notice of default pursuant to articles – Board resolution Resolved that pursuant to article…….. of the Company’s articles the undermentioned shares in the capital of the Company be and are hereby, forfeited for non-payment of the final call of Rs………… per share payable on or before………… 19….. due notice of which had been served upon the defaulting shareholders on…………… 19….. Shares Nos. Registered holders

……………………………….... ……………….………………... ……………….………………... ……………………………….... ……………….………………... ……………….………………... ……………………………….... ……………….………………... ……………….………………... Specimen Board Resolution – Passed by Circulation ………………..Ltd. To Mr………………., Director ……………….…………… (Address in India only). Dear Sir, The following resolution, which is intended to be passed as a resolution by circulation as provided in Section 289 of the Companies Act, 1956, is circulated herewith as per the provisions of the said section.

Corporate Secretarial Practice- Drafting of Resolution, Minutes, Notice and Report 15.25 If only you are Not Interested in the resolution, you may please indicate by appending your signature in the space provided beneath the resolution appearing herein below as a separate perforated slip if you are in favour or against the said resolution. The perforated slip may please be returned if and when signed within……………….. days of this letter. However, it need not be returned if you are interested in the resolution. Yours faithfully, (Secretary) ………………..Ltd. Resolution by circulation passed by the directors as per circulation effected………… 19….. Resolved that………………..………………..………………..………………..………………..……………….. [Set out the resolution intended to passed] *For/Against Signature *Strike off whichever is inapplicable. Minutes The minute in a literal sense means a note to preserve the memory of anything. The minutes of a meeting are a written record of the business transacted, decisions and resolutions arrived at the meeting. Section 193 of the Act imposes a statutory obligation on every company to cause minutes of all proceedings of general meetings, board meetings and meetings of the committee of the board to be recorded. Section 194 of the Companies Act provides that minutes of meeting kept in accordance with the provisions of Section 193 shall be evidence of the proceedings recorded therein. This proceedings recorded therein. This provision dies not mean that minuted are conclusive evidence of proceeding and can not be questioned but it means that they will be accepted as evidence in any legal proceedings. The statutory requirements relating to keeping of the minutes of meeting are: (1) There shall be separate minute books for Board, Committee and General meetings. (2) The pages of the minute books must be consecutively numbered. (3) The entries in the minute book must be made within 30 days of every meeting. (4) Each page shall be initialled or signed and the last page of the record of each meeting shall be dated and signed. (5) For Board or committee meetings, the chairman of the same or the next succeeding meeting shall sign the minutes and for general meetings, the chairman of the same

15.26 Corporate and Allied Laws meeting must sign within 30 days of the meeting. (6) Minutes of a meeting in no case be attached to the book by pasting or otherwise. Minutes of Board meeting may be recorded in a loose-leaf binder or in a bound book. Pages of the loose-leaf minute book must be serially numbered and duly typed and the loose leaves should be bound at reasonable intervals not exceeding six months. If minutes are maintained on loose-leaf binders appropriate safeguards against interpolation of the leaves in the books should be taken. (7) In the case of minutes of Board meetings, besides the names of those present, the names of directors who refrained from voting on matters in which they were interested, should also be given. Apart from these general considerations, Section 193 provides that: (a) the minutes of each meeting must contain a fair and correct summary of the proceedings; (b) all appointments of officers made at the meeting must be included in the minutes; (c) in the case of a meeting of the board of directors or a committee thereof, the minutes must also state: (i) the names of the directors present at the meeting; and (ii) in the case of a resolution passed at the meeting, the names of those directors who did not concur in the resolution. It is also provided that certain details will not be included in the minutes if, in the opinion of the chairman of the meeting, any of them: (a) is, or could reasonably be regarded as, defamatory of any person; or (b) is irrelevant or immaterial to the proceedings; or (c) is detrimental to the interests of the company. Drafting of minutes: The minutes may be drafted in a tabular form or they may be drafted in the form of a series of paragraphs, numbered consecutively and with relevant headings. However, all minutes whether of general meetings, or board meetings, should contain the following particulars: Particulars of the Meeting (1) Name of the meeting. (2) Place, date and time of meeting. (3) How the meeting was constituted: Constitution of the Meeting - Present (a) name of person in the Chair.

Corporate Secretarial Practice- Drafting of Resolution, Minutes, Notice and Report 15.27 (b) names of directors and Secretary. (c) names of persons in attendance……. Solicitor,……….auditor (in a board meeting). (d) together with number of members (in general meeting). Contents of minutes (4) Serial number of the minute. (5) Brief subject heading or index of each minute. (6) Full terms of resolutions adopted. (7) All statistical figures, amounts, dates, rate of interest, disti. Nos. of Shares, etc. (8) Specific business upon which decisions were taken. (9) All appointments of officers, salaries, etc. (10) Financial and contractual transactions considered by the meeting. (11) In the case of special resolution number of votes for and against. (12) Objections and protests raised by members together with the Chairman’s rulings when members insist on their recording in the minutes, e.g., Mr. A objected to the proposed motion on the ground that it was ultra vires, the Chairman ruled that the motion was in order. (13) Names of directors dissenting or not concurring with any resolution passed at a Board Meeting. (14) Reference about interested directors abstaining from voting is necessary. (15) The Chairman’s signature and date of verification of minutes as correct. Specimen Minutes Minutes of……………….. meeting of the Board of Directors of ABC Limited, Kanpur held on……………….. the……………….. 2002, at New Delhi Present: 1. 2. 3. ……………….. Chairman ……………….. Director ……………….. Director

In attendance Secretary Item No. 1: Leave of absence: Leave of absence was granted to Saravashri……………….. directors.

15.28 Corporate and Allied Laws Item No. 2: Confirmation of minutes of the……………….. Board meeting: The minutes of the……………….. meeting of the Board of Directors held on……………….. were considered and confirmed. Item No. 3: Appointment of Managing Director: The Board noted the appointment of Shri……………….. director of the company as the Managing Director of the company. In this connection, the following resolutions were passed: “Resolved that Shri……………….. who fulfils the conditions specified in Parts I and II of Schedule XIII to the Companies Act, 1956, be and is here by appointed as the Managing Director of the company for a period of five years effective from……………….. and that he may be paid remuneration by way of salary, commission and perquisites in accordance with Part II of Schedule XIII of the Act. RESOLVED FURTHER that in the event of loss or inadequacy of profit the salary payable to him shall be subject to a cut of 10%. Resolved further that the Secretary of the company be and is hereby directed to file the necessary returns with the Registrar of Companies and to all acts and things as may be necessary in this connection.” Item No. 4: Statement of lieu of prospectus: Secretary informed the Board that pursuant to the provisions of Section 70 of the Companies Act, 1956, the company has to file a statement in lieu of prospectus with the Registrar of Companies so that the company may allot shares to the collaborators. The draft of statement in lieu of prospectus placed before the meeting was perused and approved by the Board. The following resolutions were passed: “Resolved that the draft of the statement in lieu of prospectus placed before the Board and duly initialled by the Chairman for purpose of identification be and is hereby approved. Resolved further that the Secretary of the company be and is hereby authorised to file the statement in lieu of prospectus duly signed by the Directors with the Registrar of companies.” Item No. 5: Approval of the Statutory Report: The Board was informed that the Statutory Meeting under Section 165 of the Companies Act, 1956, has to be held within six months from the date the company was entitled to commence business. The draft of the Statutory Report placed before the Board was approved. In this connection the following resolution were passed: Resolved that subject to the approval of the shareholders pursuant to the provisions of Section 165 of the Companies Act, 1956, the draft of the Statutory Report placed before the

Corporate Secretarial Practice- Drafting of Resolution, Minutes, Notice and Report 15.29 Board and duly initialled by the Chairman for the purposes of identification be and is hereby approved. Resolved further that the Statutory Report be certified as correct on behalf of the Board by Shri……………….. Managing Director and Shri……………….. Director of the company for submission to the company’s Auditors for their report thereon. “Resolved further that the Statutory Meeting of the share holders of the company be convened on……………….. at………………….. the registered office of the company on…………………………….. the……………….. at……… hours. Resolved further that the Secretary of the company be and is hereby authorised to issue notice calling the Statutory Meeting of the shareholders of the company and circulate the Statutory Report along with the notice of the meeting to all the shareholders of the company and deliver a certified copy of the Statutory Report to the Registrar of Companies forthwith after sending copies thereof to the shareholders of other company for registration.” Item No. 6: Opening of a Branch Office: The Board was informed that for sale of the company’s products, it was suitable site for setting up the company’s plant, measuring 5000 sq. mt. Near Gurgaon. The owner of the land is willing to sell the same to the company at a total price of Rs. 10 lakhs. The site plan of the said plot of land placed before the Board was perused by the Board. The matter was considered by the Board and the following resolution was passed in this connection: “Resolved that Shri SPM, Director of the company be and is hereby authorised to finalise the deal with the owner of the land a total value of Rs. 10 lakhs and arrange registration and mutation of the title to such land in favour of the company.” Item No. 7: Next Board Meeting: The next meeting of the Board will be held on……………….. the……………….. 19…… at the registered office of the company. The meeting ended with a vote of thanks to the chair. PROCEDURES Main task of a company secretary is to ensure that for doing any business company fulfils requirements of Companies Act and the rules thereunder and of any other relevant law in force so that the validity of the business transacted cannot be objected. On this line procedures for some important businesses to be untaken by a company are discussed hereunder: Extension of Financial Year This can be done by a company in order to make its financial year end with its holding or subsidiary company under Section 213(1) or by any other company (irrespective of whether the company is a holding company or subsidiary or not) under Section 210(4). The procedure to be followed by the company in this regard is as follows:

15.30 Corporate and Allied Laws (1) Call a Board meeting of the company and at the meeting adopt a new financial year and approve preparation of next accounts for the new period which may be more or less than a year. (2) Make an application to the concerned Registrar of companies on plain paper giving full details. (3) Attach an application to the concerned Registrar of companies on plain paper giving full details. (a) A certified true copy of the last balance sheet and profit and loss account of the company and its subsidiary or holding company. (b) A certified true copy of the Memorandum and Articles of Association of the company and its subsidiary or holding company. (c) A certified true copy of the resolution passed by the Board of Directors. (4) Obtain the permission of the concerned Registrar of Companies. (5) Obtain, if necessary, the approval of the concerned Registrar of companies to the extension of time for holding the Annual General Meeting beyond fifteen months. Step to be taken to make loans to other body corporates The Board’s power to make loans is governed by Section 292. 1. Verify that the Memorandum of Association contains the power to lend the funds to the Company. If not, then amend it accordingly. 2. If the loan is to be given to bodies corporate under the same management under Section 370, then get the approval of the General meeting by special resolution. 3. If the aggregate of loans given to all bodies corporate, whether under the same management or not, exceeds 30% of the aggregate of the subscribed capital of lending company and its free reserves, obtain prior approval of the Central Govt. 4. If a special resolution is passed for making the loan, then file it alongwith explanatory statement in Form No. 23 with the Registrar within 30 days of its passing alongwith prescribed fee. 5. If approval of the Central Govt. is required for loan, then: (a) make an application to the Central Govt. in Form No. 34AA. (b) Alongwith the application, the following documents should be furnished: (i) (ii) (iii) A certified true copy of the special resolution. A certified true copy of the Board’s resolution. A certified true copy of each of the Memorandum and Articles of Association

Corporate Secretarial Practice- Drafting of Resolution, Minutes, Notice and Report 15.31 of the lending company and the borrowing company. (iv) (v) Certified true copies of annual reports and annual accounts of both the lending and the borrowing company for the last three financial years. A receipt evidencing the payment of prescribed fee.

6. Forward three copies of the notice of General meeting in which said special resolution is passed and a copy of the proceedings of the same to the concerned stock exchange. 7. For giving loans in other cases, place the proposal in the Board meeting, get it approved by passing a resolution in the meeting. 8. Deliver simultaneously a copy of the application made to the Central Govt. alongwith copy of each of the documents annexed to it. 9. Maintain a register to record particulars of every loan, guarantee or security within 3 days of the making of such loan, giving of such guarantee or the provision of such security. Steps to be taken to borrow funds 1. Convene the Board meeting and place the proposal in it and get it approved by way of resolution passed in the meeting. 2. If such borrowing exceeds the paid-up share capital and free reserves of the borrowing company, then get it approved in the General meeting. [Section 293(1)(d)] 3. File the above resolution in Form No. 23 within 30 days of its passing with the Registrar alongwith the requisite fee. [Section 192(4)(ee)(i)] 4. Forward three copies of notice and a copy of the proceedings of the General meeting to the concerned stock exchange. 5. In case of a public company, check up whether the provisions of Sub-sections (4) to (7) of Section 81 are applicable. It so, comply with them. Procedure to make investments in shares of other companies 1. See whether the investments in shares are to be made by the following: (a) a private company, unless it is a subsidiary of a public company; (b) any banking or insurance company; (c) any company established with the object of financing whether by way of making loans or advances to, or subscribing to the capital or, private industrial enterprises in India in any case where the Central Government has made or agreed to make to the company a special advance for the purpose or has guaranteed or agreed to guarantee the payment of moneys borrowed by the company from any institution outside India. (d) by a holding company to its subsidiary other than a subsidiary within the meaning of clause (a) of Sub-section (1) of Section 4. [Section 372(14)(e)];

15.32 Corporate and Allied Laws (e) any company in rights shares offered under Section 81(1) [Proviso to Section 372(4)]. 2. Convene a Board meeting after giving notice to all the directors of the company as per Section 286 and place the proposal in a Board meeting and get it approved by passing a resolution. This power may also be delegated to others in accordance with Section 292. 3. In cases other than those mentioned in item 1 above, where the investment in shares is within (a) thirty per cent of the subscribed equity share capital of the company or (b) thirty percent of the aggregate of the paid-up equity and preference capital of the other company; (c) thirty percent of the aggregate of the subscribed capital and free reserves of your company together with all other investments already made; or (d) within thirty percent of the aggregate of the subscribed capital and free reserves of your company in respect of the investments both in shares and debentures in companies in the same group together with all such other investments already made (not applicable to an investment company)/then do the following: (i) Convene a Board meeting after giving notice to all the directors of the company as per Section 286 by giving specific notice of the meeting and the resolution to be proposed in this regard in writing to every director in India and at his usual address in India to every other director;

(ii) Pass the resolution with the consent of all the directors present at the meeting and entitled to vote [Sections 372(2) & (5)] after paying requisite filing fee as prescribed under Schedule X of the Companies Act, 1956. 4. Where investments are made by a company together with its one or more subsidiary companies, the percentage specified in (a) and (b) of item 3 should be computed with reference to the aggregate of the investments made by the company and its subsidiaries. 5. In case other than those mentioned in items 1 and 3 above, where the investments in shares exceed the limits specified in item 3 above: (i) Convene a Board meeting after giving notice to all the directors of the company as per Section 286 to approve the investment and to fix up date, place and agenda for a General meeting to pass an ordinary resolution there at in this regard, subject to approval of the Central Government [Section 372(4)].

(ii) Issue notice at least twenty-one days before the date of the general meeting proposing the ordinary resolution with suitable explanatory statement [Section 17(1) read with Section 173(2)]; (iii) Hold the General meeting and pass the resolution; (iv) Apply to the Central Government in Form No. 34B and enclose thereto the following: (a) A copy of the resolution passed by the company in General meeting

Corporate Secretarial Practice- Drafting of Resolution, Minutes, Notice and Report 15.33 together with a copy of the resolution of the Board approving the investments; (b) A copy of the memorandum and articles of association of the company and of the other body corporate; (c) Copies of balance sheets of both of the company and the other body corporate for the last three financial years; (d) A copy of balance sheets of both of the company and the other body corporate for the last three financial years; (e) Receipt of treasury challan or demand draft evidencing payment of the requisite fees. 6. Deliver simultaneously a copy of application and other documents mentioned in item 5 (iv) to the concerned ROC. 7. Forward to the concerned Stock Exchange, 3 copies of the notice and a copy of the proceedings of the General meeting mentioned in item 5. 8. On receipt of the approval from the Central Government, make necessary investment. Procedure for entering into contract with interested parties As the paid-up share capital of the company is more than Rs. 1 crore, it is necessary to get prior approval of the Central Government under proviso to Section 297(1), besides complying with the other provisions of Sections 297, 299, 300 and 301 of the Companies Act, 1956. Further: 1. Hold a Board meeting and place the terms of the contract for consideration. The interested director(s) must disclose the nature of their interest as required under Section 299. 2. Make an application to the Central Government in Form No. 24A and attach the following documents with the application: (i) Certified copy of the Board resolution approving the contract. (ii) Certified copy of the agreement containing particulars of the contract. (iii) Challan for payment of prescribed fees. 3. If the contract entered into is for cash purchase on prevailing market price or the private company with whom the contract is entered into regularly deals with such raw materials, then no consent of the Board or the Central Government will be necessary provided that the value of such transaction does not exceed Rs. 5,000 in aggregate in any year comprising the period of contract or contracts [Section 297(2)]. 4. It may be noted that the consent of the Board under Section 297(1) must be accorded only by a resolution passed at the meeting of the Board and not otherwise [Section 297(4)].

15.34 Corporate and Allied Laws 5. It must also be ensured that the interested director do not take part in discussion and vote in respect of the contract in which he is interested (Section 300). Such an interested or concerned director will not also be counted in quorum (Section 303). 6. The particulars of the contract must be entered in the register maintained under Section 301 of the Companies Act, 1956. Procedure for amalgamation of companies – Refer to C & AL - Chapter 1(f) Procedure for voluntary winding up (Members’ as well as creditors’) – Refer to C & AL- Chapter 1 (i) Steps to be taken in case of compulsory winding up of the company: (1) A petition for winding up is to be made by any of the persons and in the manner as mentioned in Section 439. If the petition is presented by the company, see that every contributory or creditor of the company is furnished with a copy of the petition within 24 hours of his requiring the same on payment of the prescribed charges. (2) See that the petition is advertised in the prescribed form at least 14 days before the dated fixed for hearing in the Official Gazette and in a daily newspaper in English and in the regional language circulating in this State or Union Territory concerned. (3) Apply to the concerned Tribunal with a affidavit showing sufficient grounds for the appointment of a provisional Liquidator and obtain the order of the concerned Tribunal appointing Official Liquidator as the provisional Liquidator. (4) The Tribunal will issue winding up order and on receipt of such order it should be advertised within 14 days in a newspaper in the English language and in the regional language in circulating in the State or the Union Territory concerned. (5) File with the concerned ROC a certified copy of the winding up order within 30 days alongwith the prescribed fee. (6) Forward promptly to the concerned stock-exchange 3 copies of the petition advertised. (7) A statement of the affairs of the company must be submitted in duplicate to the Official Liquidator within 21 days from his appointment or from the date of winding up order. Such time can be extended up to the maximum of 3 months. (8) The winding proceedings will be carried out and the Official Liquidator will report the Tribunal regarding dissolution of the company. The company shall be deemed to be dissolved at the date on which the order dissolving the company has been reported by the Liquidator.

SECTION B

ALLIED LAWS

16
THE SECURITIES AND EXCHANGE BOARD OF INDIA (SEBI) ACT, 1992

UNIT I
16.0 INTRODUCTION The capital market has witnessed tremendous growth in recent times characterised particularly by the increasing participation of the public. Investors confidence in the capital market can be sustained largely by ensuring investors protection. With this end in view, the Government decided to vest SEBI immediately with statutory powers required to deal effectively with all matters relating to capital market. It was felt by the Government that by transferring the powers of the Controller of Capital Issues to an independent body it would enable it to effectively regulate, promote and monitor the working of Stock Exchanges in the country. Earlier, the regulation of the securities market was being done through the office of Controller of Capital Issues under the Capital Issues (Control) Act, 1947 which has been since repealed. Accordingly, SEBI has been set up under the SEBI Act, 1992. The CCI Act has now ceased to have any application and stands withdrawn from the law w.e.f. 216.5.1992. The Securities and Exchange Board of India Act was passed by the Parliament as Act No. 15 of 1992 and received the assent of the President on 4th April, 1992. 16.1 PURPOSE OF THE ACT The purpose of the SEBI Act is to provide for the establishment of a Board called Securities and Exchange Board of India (SEBI, for short). The Preamble to the Act provides for the establishment of a Board to: (i)

Protect the interests of investors in securities,

Updated as per SEBI (Amendment) Act,2002

16.2

Corporate and Allied Laws

(ii) Promote the development of the securities market, (iii) To regulate the securities market, and (iv) For matters connected therewith or incidental thereto. The statement, of objects and reasons appended to SEBI Bill, 1992 states that SEBI which was first established in 1988 through a Government resolution to promote orderly and healthy growth of the securities market and for investors' protection has been monitoring the activities of stock exchanges, mutual funds and merchant bankers etc., to achieve these goals. 16.2 HISTORY OF THE LEGISLATION The Securities and Exchange Board of India was set up to achieve the following objectives: (i) To promote fait dealings by the issuers of securities and ensure a market place where they can raise funds at a relatively low cost. (ii) To provide' a degree of protection to the investors and safeguard their rights and interests so that there is a steady flow of savings into the market. (iii) To regulate and develop a code of conduct and fair practices by intermediaries like brokers, merchant bankers, etc., with a view to making them competitive and professional. With the coming into force of the SEBI Act, 1992, the Securities and Exchange Board of India administratively set up by the Government in 1988 has been replaced by the statutory SEBI. All the assets and liabilities of the Securities and Exchange Board of India have been transferred to SEBI by virtue of Section 10 of the SEBI Act. Securities 'legislation in any country has two objectives, namely, regulation of stock exchanges (where securities are traded) and protection of the interests of the investors (those who subscribe to securities). Whenever share markets have crashed 'in any country, the Governments have enacted and enforced the Securities and Exchange Acts to tighten the controls, and ensure fair play in the securities business. This happened in the United States after the Black Thursday crash of October 29, 1929 and the Securities Exchange Act, 1934 was passed by the U.S. Congress. Similarly, in the United Kingdom the Financial Services Act, 1986 was passed after the severe crash of October 27, 1986. The law relating to securities in India is contained in different enactments like Companies Act, 1956, Securities Contracts (Regulation) Act, 1956 and the Capital Issues (Control) Act, 1947 (which has now been repealed). It was found that the legislation in this regard was scattered in different laws and the administrative agencies did not have proper manpower or expertise to ensure a fair deal to investors. There was no monitoring or prosecuting machinery to check malpractices,

The SEBI Act, 1992 insider trading, uncontrolled market pricing etc.

16.3

There was also a need to regulate mutual funds and venture capital. Realising the need to promote a healthy and growth - oriented securities market the Government of India in 1988 constituted an interim body, the Securities and Exchange Board of India by a resolution of the Department of Economic Affairs in the. Ministry of Finance. It was proposed that this administrative body would be a precursor to the statutory Board (SEBI) with which it would be ultimately merged. 16.3 SHORT TITLE, EXTENT AND COMMENCEMENT The Securities and Exchange Board of India Act, 1992 (hereinafter to be called SEBI Act) extends to the whole of India and shall be deemed to have come into force on the 30th of January, 1992. Even though the Act received, the assent of the President on 4th April, 1992, the Act was deemed to have come into force on the 30th of January, 1992 on which date SEBI Ordinance was promulgated by the President of India as Parliament was not in session. This Act has further been amended by the Securities Laws (Amendment) Act, 1995 which was enacted on 25th March, 1995 and further amended by SEBI (Amendment) Act, 2002 [59 of 2002] which came into force on 29th October, 2002. 16.4 DEFINITIONS The important words and expressions used in the Act are as follows: (a) "Board" means the Securities and Exchange Board of India established under Section 3; (b) "Chairman" means the Chairman of the Board; (c) "Existing Securities and Exchange Board" means the Securities and Exchange Board of India constituted under the Resolution of the Government of India in the Department of Economic Affairs No. 1 (44)/SE/86 dated on 12th day of April, 1988; (d) "Fund" means the Fund constituted under Section 14; (e) "Member" means a member of the Board and includes the Chairman; (f) "Notification" means a notification published in the Official Gazette; (g) "Prescribed" means prescribed by rules made under this Act; (h) "Regulations" means the regulations made by the Board under this Act; (i) "Securities" has the meaning assigned to it in Section 2 of the Securities Contracts (Regulation) Act, 1956. (j) “Reserve Bank” means the Reserve Bank of India constituted under section 3 of the

16.4

Corporate and Allied Laws

Reserve Bank of India Act, 1934 (2 of 1934). It has further been provided that the words and expressions used in the Act but not define there in but have been defined in the Securities Contracts (Regulation) Act, 1956 (42 of 1956) shall have the meanings respectively assigned to them in that Act. 16.5 ESTABLISHMENT OF SEBI (BOARD) SEBI (hereinafter called 'the Board') has been established as a body corporate by notification of the Central Government for the purpose of the Act in pursuance to Section 3 of the SEBI Act (hereinafter called as the Act). The Board is a body corporate and has perpetual succession and common seal, with powers to acquire, hold and dispose of property, both movable and immovable, and to contract as also to sue or be sued by the name of SEBI. The head office of the Board is at Bombay (Mittal Court, B- Wing, 224 Nariman Point, Bombay 400 021) with offices at other places in India. ♦ Management of the Board [Section 4] : The Board shall consist of the following members, Viz.: (a) a Chairman; (b) two members from amongst the officials of the Ministry of the Central Government dealing with Finance and administration of the Companies Act, 1956 (1 of 1956); (c) one member from amongst the officials of the Reserve Bank; (d) five other members of whom at least three shall be the whole-time members. The Chairman and members referred to in clauses (a) and (d) shall be appointed by the Central Government and the members referred to in clauses (b) and (c) shall be nominated by the Central Government and the Reserve Bank respectively [Section 4(4)]. The Chairman and the other members referred to in clauses (a) and (d) above shall be persons of ability, integrity and standing who have shown capacity in dealing with problems relating to securities market or have special knowledge or experience of law, finance; economics, accountancy, administration or in any other discipline which, in the opinion of the Central Government, shall be useful to the Board [Section 4(5)]. The general superintendence, direction and management of the affairs of the Board shall vest in a Board of Members, which may exercise all powers and do all acts and things, which may be exercised or done by the Board. These powers also vest in and can be exercised by the Chairman except as otherwise provided by regulations. ♦ Term of Office of Chairman and Members of the Board [Section 5]: The term of office and other conditions of service of Chairman and other Members of the Board as are

The SEBI Act, 1992

16.5

appointed by the Central Government shall be as may be prescribed by rules made under the Act. The Central Government will have the right to terminate the services of the Chairman or other members appointed to the Board (other than its own officials or of the Reserve Bank on the Board) at any time before the expiry of their tenure by giving three months notice in writing or salary and allowance in lieu thereof. The Chairman and other members shall equally have the right to relinquish office at any time before the expiry of their tenure by giving a notice of three months in writing to the Central Government. ♦ Removal of Members of the Board [Section 6]: The Central Government shall have the power to remove a member or the Chairman appointed to the Board, if he: (a) at any time has been adjudicated as insolvent (b) has been declared by a competent court to be of unsound (c) has been convicted of an offence involving moral turpitude in the opinion of the Central Government. (d) has so abused his position as to render his continuance in office detrimental to the public interest . Before removing a member or the Chairman, he will be given a reasonable opportunity of being heard in the matter. ♦ Meetings of the Board [Section 7]: The Board shall meet at such times and places and shall observe such rules of procedure in regard to the transaction of business at its meetings (including quorum at such meetings) as may be provided by regulations made under Section' 30 of the Act. In the absence of the Chairman, for any reason, any member chosen by the other members present from amongst themselves shall be decided by majority vote of the members present and the Chairman or the presiding member will have a second or casting vote. "7A Member not to participate in meetings in certain cases: Any member, who is a director of a company and who as such director has any director indirect pecuniary interest in any matter coming up for consideration at a meeting of the Board, shall, as soon as possible after relevant circumstances have come to his knowledge, disclose the nature of his interest at such meeting and such disclosure shall be recorded in the proceedings of the Board, and the member shall not take any part in any deliberation or decision of the Board with respect to that matter." Any vacancy (other than casual) in the Board (Section 8) shall not invalidate any of its acts or proceedings. Similarly, any defect in the constitution of the Board/or in the appointment of any person or member of the Board or any irregularity in the procedure of the Board shall not invalidate the merits of a case before the Board.

16.6

Corporate and Allied Laws

16.6 POWERS & FUNCTIONS OF SEBI [SECTION 11] ♦ Section 11: This section relates to the functions of the Board, which are as follows: (1) Subject to the provisions of this Act, it shall be the duty of the Board to protect the rule rest of investors in securities and to promote the development of, and to regulate the securities market, by such measures as it thinks fit. (2) (a) regulating the business in stock exchanges and any other securities markets; (b) registering and regulating the working of stock brokers, sub - brokers, share transfer agents, bankers to an issue, trustees of trust deeds, registrars to an issue, merchant bankers, underwriters, portfolio managers, investment advisers and such other intermediaries who may be; associated with securities markets in any manner; (ba) registering and regulating the working of the depositories, participants, custodians of securities, foreign institutional investors, credit rating agencies and such other intermediaries as the Board may, by notification, specify in this behalf. (c) registering and regulating the working of venture capital funds and collective investment schemes, including mutual funds; (d) promoting and regulating self-regulatory organisations; (e) prohibiting fraudulent and unfair trade practices relating to securities markets; (f) promoting investors' education and training of intermediaries' of securities markets; (g) prohibiting insider trading in securities; (h) regulating substantial acquisition of shares and take-over of companies; (i) calling for information from, undertaking inspection, conducting inquiries and audits of the stock exchanges, mutual funds, other persons associated with the self-regulatory organisation in the securities market; (ia) calling for information and record from any bank or any other authority or board or corporation established or constituted by or under any Central, State or Provincial Act in respect of any transaction in securities which is under investigation or inquiry by the Board;” (j) performing such functions and exercising such powers under the provisions of the Securities Contracts (Regulation) Act, 1956, as may be delegated to it by the Central Government. (k) levying fees or other charges for carrying out the purposes of this section. (l) conducting research for the above purposes; (Ia) calling from or furnishing to any such agencies, as may be specified by the Board, such information as may be considered necessary by it for the efficient discharge of its functions. (m) performing such other functions as may be prescribed.

The SEBI Act, 1992

16.7

(2A) Without prejudice to the provisions contained in sub-section (2), the Board may take measures to undertake inspection of any book, or register, or other document or record of any listed public company or a public company (not being intermediaries referred to in section 12) which intends to get its securities listed on any recognised stock exchange where the Board has reasonable grounds to believe that such company has been indulging in insider trading or fraudulent and unfair trade practices relating to securities market. (3) Notwithstanding anything contained in any other law for the time being in force while exercising the powers under clause (i) or clause (ia) of sub-section (2) or sub-section (2A), the Board shall have the same powers as are vested in a civil court under the Code of Civil Procedure, 1908 (5 of 1908) while trying a suit, in respect of the following matters, namely: (i) the discovery and production of books of account and other documents, at such place and such time as may be specified by the Board; (ii) summoning and enforcing the attendance of persons and examining them on oath; (iii) inspection of any books, registers and other documents of any person referred to in Section 12, at any place. (iv) inspection of any book, or register, or other document or record of the company referred to in sub-section (2A); (v) issuing commissions for the examination of witnesses or documents. (4) Without prejudice to the provisions contained in sub-sections (1), (2), (2A) and (3) and section 11B, the Board may, by an order, for reasons to be recorded in writing, in the interests of investors or securities market, take any of the following measures, either pending investigation or inquiry or on completion of such investigation or inquiry, namely:— (a) suspend the trading of any security in a recognised stock exchange; (b) restrain persons from accessing the securities market and prohibit any person associated with securities market to buy, sell or deal in securities; (c) suspend any office-bearer of any stock exchange or self-regulatory organisation from holding such position; (d) impound and retain the proceeds or securities in respect of any transaction which is under investigation; (e) attach, after passing of an order on an application made for approval by the Judicial Magistrate of the first class having jurisdiction, for a period not exceeding one month, one or more bank account or accounts of any intermediary or any person associated with the securities market in any manner involved in violation of any of the provisions of this Act, or the rules or the regulations made thereunder : Provided that only the bank account or accounts or any transaction entered therein, so far as it relates to the proceeds actually involved in violation of any of the provisions of

16.8

Corporate and Allied Laws

this Act, or the rules or the regulations made thereunder shall be allowed to be attached; (f) direct any intermediary or any person associated with the securities market in any manner not to dispose of or alienate an asset forming part of any transaction which is under investigation: Provided that the Board may, without prejudice to the provisions contained in sub-section (2) or sub-section (2A), take any of the measures specified in clause (d) or clause (e) or clause (f), in respect of any listed public company or a public company (not being intermediaries referred to in section 12) which intends to get its securities listed on any recognised stock exchange where the Board has reasonable grounds to believe that such company has been indulging in insider trading or fraudulent and unfair trade practices relating to securities market : Provided further that the Board shall, either before or after passing such orders, give an opportunity of hearing to such intermediaries or persons concerned. ♦ Additional functions of SEBI under the Securities Contracts (Regulation) Act, 1956: By virtue of the SEBI Act, 1992, certain provisions contained in the Securities Contracts (Regulation) Act, 1956 have been amended with a view to giving power to SEBI to regulate and prevent undesirable transactions in securities by regulating the business of dealing therein, by prohibiting options and by providing for certain other matters connected therewith. The Securities Contracts (Regulation) Act, 1956 (SCRA) which was enacted to prevent undesirable transactions in securities and to regulate the business of securities had given certain powers to the Central Government, under the provisions of that Act. The functions of the Central Government under that Act have been granted to SEBI. These functions are: (a) Power to call for periodical returns or direct enquiries to be made (Section 16): SEBI will receive from every recognised Stock Exchange such periodical returns relating to its affairs as may be prescribed by SCRA rules. It shall be open to SEBI to inspect at all reasonable times books of accounts and other documents to be maintained by the Stock Exchanges for periods not exceeding five years as may be prescribed in the public interest and in the interest of trade by the Central Government. It shall also be open to SEBI to call upon recognised stock exchanges or any member thereof to furnish in writing such information or explanation relating to the affairs of the Stock Exchange or of the member in relation to the stock exchange as may be required by SEBI in the interest of trade or in the public interest. It shall also be open to SEBI to appoint, by order in writing, one or more persons to make an inquiry in the prescribe manner in relation to the affairs of the governing body of stock exchange or the affairs of any of the members of the stock exchange in relation to the stock exchange and submit a report of the result of such enquiry to SEBI within the time as, specified in the order. In the case of affairs of any of the members/ of a stock exchange, SEBI can direct the governing body of such stock exchange to make an inquiry and submit its report. Every director, manager, secretary or other officer of such stock exchange, every member of such stock exchange and every

The SEBI Act, 1992

16.9

constituent or agent of such member if it is a firm and every other person or body of persons having dealings with any of these persons whether directly or indirectly shall be bound to produce before SEBI or other enquiry officer, all books of accounts and other documents in his custody or power relating to the subject matter of the enquiry. This has to be done within the time specified and as may be required by the enquiry authority. (b) Power to approve the bye-laws of stock exchanges: Section 9 of SCRA provides that any recognised stock exchange may make bye-laws for the regulation and control of contracts with the previous approval of SEBI. Such bye- laws may provide for submission of periodical settlements carried out by clearing houses to SEBI or publication of such particulars by clearing houses subject to SEBI's directions. Such bye-laws have to be published for public comments and after approval by SEBI shall have to be published in the Gazette of India and also in the Official Gazette of the State unless SEBI, by written order with reasons dispense with the condition of previous publication. (c) Power of SEBI to make or amend bye-laws of recognised stock exchanges (Section 10, SCRA): SEBI may either on a request in writing received by it in this behalf from the governing body of a recognised stock exchange or on its own motion make byelaws on matters specified in Section 9 of SCRA or amend any bye-laws made by such stock exchange. SEBI will have to be satisfied, after consultation with the governing body of the stock exchange, that it is necessary or expedient to make or amend the bye-laws and record its reasons also. The bye-laws so made or amended will have to be published in the Gazette of India and also in the Official Gazette of the State in which the principal office of the recognised stock exchange is situated and upon such publication, the byelaws so made or amended shall hive effect. It has also been provided that where the governing body of a recognised stock exchange objects to any bye-laws made or amended by SEBI on its own motion, it may within months of the publication in the Gazette, apply to SEBI for revision thereof and SEBI may, after giving an opportunity to the governing body to be heard in the matter, revise- the bye-laws so made and amended. After such revision, the same shall have to be published in the Gazette. The obligation to publish the amendments or revisions of the bye-laws in the Gazette is mandatory unless SEBI is satisfied in any case that in the interest of trade or public interest, the condition of previous publication may be dispensed with which may be ordered in writing specifying the reasons therefor. (d) Licensing of dealers in securities in certain areas (Section 17 SCRA): SEBI has been empowered to grant a Iicence to any person for the business of dealing in securities in any State or area to which Section 13 of SCRA has not been declared to apply. Section 13 of SCRA deals with contracts in notified areas to be illegal in certain circumstances. Under Section 13, the Central Government having regard to the nature or volume of transactions in securities in any State or area may by notification in the Official Gazette, declare Section 13 to apply to such State or area and thereupon every contract in such

16.10 Corporate and Allied Laws State or area which is entered into after the date of the notification otherwise than between members and recognised stock exchanges in the said State or area or through or with such member shall be illegal. It has also been provided that licensing would not be necessary if the Central Government is satisfied that the manner in which securities are being dealt with in a State or area is neither undesirable nor inexpedient. It has also been provided that the restrictions as to licensing shall not apply to the doing of any thing by or on behalf of a member of any recognised stock exchange in relation to dealings in securities. (e) Power to compel listing of securities by public companies: By Section 21 of SCRA, SEBI has been empowered to require any company, after giving it an opportunity of being heard, to comply with such requirements as may be prescribed with respect to the listing of its securities on any recognised stock exchange. This power can be exercised by SEBI after it is satisfied, having regard to the nature of securities issued by the public company or to the dealings in them, that it is necessary or expedient in the interest of trade or in the public interest to require it to have the listing of securities done on any recognised stock exchange. (f) Power to punish: Section 23(2) of SCRA lays down that any person who enters into any contract in contravention of the provisions contained in Section 15 (members not to act as principals in certain circumstances) of SCRA or who fails to comply with the orders of SEBI under Section 21 (power to compel listing of securities by public companies) of SCRA shall, on conviction be punishable with fine which may extend to one thousand rupees. (g) Power to delegate: Section 29A has been introduced in SCRA, 1956 to provide that the Central Government shall have power, by order published in the Official Gazette, to direct that the powers exercisable by it under any provision of the SCRA shall, in relation to such matters and subject to such regulations as may be specified in the order, be exercisable also by SEBI. Accordingly, vide Notification S.O. 573 of Ministry of Finance, Department of Economic Affairs F.No. 1(27) 8E/92 dated 30.7.1992 and a further notification dated 13.16.94 published in the Gazette of India Extraordinary it has been notified by the Central Government that the powers exercisable by it under Sections 4(5), 7, 8, 11, 12, 16 and 3, 4 (1) to (4), 5, 7 A(2), 13, 18(2), 22 and 28(2) of the said Act shall also be exercisable by SEBI. These are: Sec.3 Sec.4(1) to (4) Sec.4(5) relating to submission of applications for the recognition of stock exchanges. relating to grant of recognition to stock exchanges. relating to amendment of the rules of recognised stock exchange.

The SEBI Act, 1992 Sec.5 Sec.7 Sec.7A (2) relating to the withdrawal of recognition of a stock exchange. relating to the annual reports to be furnished by a stock exchange. relating to making or amending rules or articles of association of a stock exchange regarding voting rights of members of a stock exchange at any meeting. relating to direction to stock exchanges for making rules. relating to the exercise of power to supersede governing bodies of recognised stock exchanges.

16.11

Sec.8 Sec.11 Sec.12 Sec.13

-

relating to the exercise of power to suspend business of recognised stock exchanges. relating to the issue of notification declaring this section to apply to an area, consequent upon which contracts issued in that area otherwise than between members of a recognised stock exchange or through or with such member shall be illegal. relating to the exercise of power to prohibit contract in certain cases. relating to regulation and control of the business of dealing in spot delivery contracts. relating to hearing appeals submitted by companies against refusal of a stock exchange to test their securities. relating to issue of a notification specifying any class of contracts as contracts to which the Act or any provision contained therein shall not apply.

Sec.16 Sec.18(2) Sec.2 Sec.28(2)

-

♦ More Powers for SEBI: Certain additional powers have been conferred on SEBI with regard to certain provisions under the Companies Act. The sections of the Companies Act the violation of which can be tried by SEBI include: Section 56(3) : Which entails that every application form must be accompanied by a memorandum containing salient features of a prospectus. Sections 57 and 58 : According to which the expert mentioned in the prospectus should be unconnected with the formation or the management of company. Also, the consent of the expert to the issue of the prospectus containing statement by him is necessary. Section 516. : It contains penal provisions in respect of violations under Sections 57 and 58.

16.12 Corporate and Allied Laws Section 63. : It deals with criminal liability for mis-statement in prospectus. Section 68. : It contains penal provisions for fraudulently inducing persons to invest money. Section 73(2) : Which deals with the provision that over subscription money be returned within a specified time can also be tried directly by SEBI. Section 113(1) : Which entails that the shares be 'issued within 3 months of their allotment and the shares be transferred within two months of their lodgement. SEBI can 'low prosecute the companies for these violation. Section 207: It deals with the remittance of dividends within 42 days of the declaration thereof to the shareholders. ♦ Insertion of new Sections 11A and 11B : ♦ Board to regulate or prohibit issue of prospectus, offer document or advertisement soliciting money for issue of securities [Section 11A]: (1) Without prejudice to the provisions of the Companies Act, 1956 (1 of 1956), the Board may, for the protection of investors,— (a) specify, by regulations— (i) the matters relating to issue of capital, transfer of securities and other matters incidental thereto; and (ii) the manner in which such matters shall be disclosed by the companies; (b) by general or special orders— (i) prohibit any company from issuing prospectus, any offer document, or advertisement soliciting money from the public for the issue of securities; (ii) specify the conditions subject to which the prospectus, such offer document or advertisement, if not prohibited, may be issued. (2) Without prejudice to the provisions of section 21 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956), the Board may specify the requirements for listing and transfer of securities and other matters incidental thereto.”. ♦ Power to issue directions[Section 11B]: Save as otherwise provided in Section 11, if after making or causing to be made an enquiry, the Board is satisfied that it is necessary: (i) in the interest of investors, or orderly development of securities market; or (ii) to prevent the affairs of any intermediary or other persons referred to in Section 12 being conducted in a manner detrimental to interest of investors or securities market; or

The SEBI Act, 1992

16.13

(iii) to secure the Proper management of any such intermediary or persons, it may issue such directions (a) to any person or class of persons referred to I in Section 12, or associated with the securities market; or (b) to any company in respect of matters specified in Section II-A, as may be appropriate in the interests of investors in securities and the securities market". ♦ Investigation [Section 11C]: (1) Where the Board has reasonable ground to believe that— (a) the transactions in securities are being dealt with in a manner detrimental to the investors or the securities market; or (b) any intermediary or any person associated with the securities market has violated any of the provisions of this Act or the rules or the regulations made or directions issued by the Board there under, it may, at any time by order in writing, direct any person (hereafter in this section referred to as the Investigating Authority) specified in the order to investigate the affairs of such intermediary or persons associated with the securities market and to report thereon to the Board. (2) Without prejudice to the provisions of sections 235 to 241 of the Companies Act, 1956 (1 of 1956), it shall be the duty of every manager, managing director, officer and other employee of the company and every intermediary referred to in section 12 or every person associated with the securities market to preserve and to produce to the Investigating Authority or any person authorised by it in this behalf, all the books, registers, other documents and record of, or relating to, the company or, as the case may be, of or relating to, the intermediary or such person, which are in their custody or power. (3) The Investigating Authority may require any intermediary or any person associated with securities market in any manner to furnish such information to, or produce such books, or registers, or other documents, or record before him or any person authorised by it in this behalf as it may consider necessary if the furnishing of such information or the production of such books, or registers, or other documents, or record is relevant or necessary for the purposes of its investigation. (4) The Investigating Authority may keep in its custody any books, registers, other documents and record produced under sub-section (2) or sub-section (3) for six months and thereafter shall return the same to any intermediary or any person associated with securities market by whom or on whose behalf the books, registers, other documents and record are produced: Provided that the Investigating Authority may call for any book, register, other document and record if they are needed again: Provided further that if the person on whose behalf the books, registers, other

16.14 Corporate and Allied Laws documents and record are produced requires certified copies of the books, registers, other documents and record produced before the Investigating Authority, it shall give certified copies of such books, registers, other documents and record to such person or on whose behalf the books, registers, other documents and record were produced. (5) Any person, directed to make an investigation under sub-section (1), may examine on oath, any manager, managing director, officer and other employee of any intermediary or any person associated with securities market in any manner, in relation to the affairs of his business and may administer an oath accordingly and for that purpose may require any of those persons to appear before it personally. (6) If any person fails without reasonable cause or refuses— (a) to produce to the Investigating Authority or any person authorised by it in this behalf any book, register, other document and record which is his duty under sub-section (2) or sub-section (3) to produce; or (b) to furnish any information which is his duty under sub-section (3) to furnish; or (c) to appear before the Investigating Authority personally when required to do so under sub-section (5) or to answer any question which is put to him by the Investigating Authority in pursuance of that sub-section; or (d) to sign the notes of any examination referred to in sub-section (7), he shall be punishable with imprisonment for a term which may extend to one year, or with fine, which may extend to one crore rupees, or with both, and also with a further fine which may extend to five lakh rupees for every day after the first during which the failure or refusal continues. (7) Notes of any examination under sub-section (5) shall be taken down in writing and shall be read over to, or by, and signed by, the person examined, and may thereafter be used in evidence against him. (8) Where in the course of investigation, the Investigating Authority has reasonable ground to believe that the books, registers, other documents and record of, or relating to, any intermediary or any person associated with securities market in any manner, may be destroyed, mutilated, altered, falsified or secreted, the Investigating Authority may make an application to the Judicial Magistrate of the first class having jurisdiction for an order for the seizure of such books, registers, other documents and record. (9) After considering the application and hearing the Investigating Authority, if necessary, the Magistrate may, by order, authorise the Investigating Authority— (a) to enter, with such assistance, as may be required, the place or places where such books, registers, other documents and record are kept; (b) to search that place or those places in the manner specified in the order; and

The SEBI Act, 1992

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(c) to seize books, registers, other documents and record, it considers necessary for the purposes of the investigation: Provided that the Magistrate shall not authorise seizure of books, registers, other documents and record, of any listed public company or a public company (not being the intermediaries specified under section 12) which intends to get its securities listed on any recognised stock exchange unless such company indulges in insider trading or market manipulation. (10) The Investigating Authority shall keep in its custody the books, registers, other documents and record seized under this section for such period not later than the conclusion of the investigation as it considers necessary and thereafter shall return the same to the company or the other body corporate, or, as the case may be, to the managing director or the manager or any other person, from whose custody or power they were seized and inform the Magistrate of such return: Provided that the Investigating Authority may, before returning such books, registers, other documents and record as aforesaid, place identification marks on them or any part thereof. (11) Save as otherwise provided in this section, every search or seizure made under this section shall be carried out in accordance with the provisions of the Code Criminal Procedure, 1973 (2 of 1974) relating to searches or seizures made under that Code. ♦ Cease and desist proceedings [Section 11D]: If the Board finds, after causing an inquiry to be made, that any person has violated, or is likely to violate, any provisions of this Act, or any rules or regulations made thereunder, it may pass an order requiring such person to cease and desist from committing or causing such violation : Provided that the Board shall not pass such order in respect of any listed public company or a public company (other than the intermediaries specified under section 12) which intends to get its securities listed on any recognised stock exchange unless the Board has reasonable grounds to believe that such company has indulged in insider trading or market manipulation.” ♦ Section 12: This Section relates to the registration of stock-brokers, subbrokers, share transfer agents etc. which are as follows: (1) No stock broker, sub-broker, share transfer agent, banker to an issue, trustee of trust deed, registrar to an issue, merchant banker, underwriter, portfolio manager, investment adviser and such other intermediary who may be associated with securities market shall buy, sell or deal in securities except under, and in accordance with, the conditions of a certificate of registration obtained from the Board in accordance with the regulations made under this Act. Provided that a person buying or selling securities or otherwise dealing with the securities

16.16 Corporate and Allied Laws market as a stock-broker, sub-broker, share transfer agent, banker to an issue, trustee of trust deed, registrar to an issue, merchant banker, underwriter, portfolio manager, investment adviser and such other intermediary who may be associated with securities market immediately before the establishment of the Board for which no registration certificate was necessary prior to such establishment, may continue to do so for a period of three months from such establishment or, if he has made an application for such registration within the said period of three months, till the disposal of such application. "Provided further that any certificate of registration, obtained immediately before the colJ1mencement of the Securities Laws (Amendment) Act, 1995, shall be deemed to have been obtained from the Board in accordance with the regulations providing for such registration". (IA) No depository, participant, custodian of securities, foreign institutional investor, credit rating agency, or any other intermediary associated with the securities market as the Board may by notification in this behalf specify, shall buy or sell or deal in securities except under and in accordance with the conditions of a certificate of registration obtained from the Board in accordance with the regulations made under this Act; Provided that a person buying or selling securities or otherwise dealing with the securities market as a depository, participant, custodian of securities, foreign institutional investor 'or credit rating agency immediately before the commencement of the Securities Laws (Amendment) Act, 1995, for which no registration certificate was required prior to such commencement, may continue to buy or sell securities or otherwise deal with the securities market until such time regulations are made under clause (d) of sub-section (2) of Section 30; (IB) No person shall sponsor or cause to be sponsored or carry on or caused to be carried on any venture capital funds and collective investment scheme including mutual funds, unless he obtains certificate of registration from the Board in accordance with the regulations. . Provided that any person sponsoring or causing to be sponsored, carrying or causing to be carried on any venture capital funds or collective investment scheme operating in the securities market immediately before the commencement of the Securities Laws (Amendment) Act, 1995, for which no registration certificate was required prior to such commencement, may continue to operate till such time regulations are made under clause (d) of sub-section (2) of Section 30. (2) Every application for registration shall be in such manner and on payment of such fees as may be determined by regulations. (3) The Board may, by order, suspend or cancel a certificate of registration in such manner as may be determined by regulations; Provided that no order under this subsection shall be made unless the person concerned has been -given II reasonable opportunity of being heard.

The SEBI Act, 1992

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♦ Prohibition of manipulative and deceptive devices, insider trading and substantial acquisition of securities or control [Section 12A]: No person shall directly or indirectly— (a) use or employ, in connection with the issue, purchase or sale of any securities listed or proposed to be listed on a recognised stock exchange, any manipulative or deceptive device or contrivance in contravention of the provisions of this Act or the rules or the regulations made thereunder; (b) employ any device, scheme or artifice to defraud in connection with issue or dealing in securities which are listed or proposed to be listed on a recognized stock exchange; (c) engage in any act, practice, course of business which operates or would operate as fraud or deceit upon any person, in connection with the issue, dealing in securities which are listed or proposed to be listed on a recognized stock exchange, in contravention of the provisions of this Act or the rules or the regulations made thereunder; (d) engage in insider trading; (e) deal in securities while in possession of material or non-public information or communicate such material or non-public information to any other person, in a manner which is in contravention of the provisions of this Act or the rules or the regulations made thereunder; (f) acquire control of any company or securities more than the percentage of equity share capital of a company whose securities are listed or proposed to be listed on a recognized stock exchange in contravention of the regulations made under this Act. 16.7 PENALTIES ♦ Penalty for failure to furnish information, return, etc. (Section 15A) : If any person who, is required under this Act or any rules or regulations made thereunder. (a) to furnish any document, return or report to the Board, fails to furnish the same, he shall be liable to a penalty of one lakh rupees for each day during which such failure continues or one crore rupees, whichever is less. (b) to file any return or furnish any information, books or other documents within the time specified therefor in the regulations, fails to file return or furnish the same, he shall be liable to a penalty of one lakh rupees for each day during which such failure continues or one crore rupees, whichever is less. (c) to maintain books of accounts or records, fails to maintain the same, he shall be liable to a penalty of one lakh rup