INDIAN COMPANIES ACT, 1956

CHAPTER 1 – NATURE, FEATURES, INCORPORATION AND TYPES OF COMPANIES Q. 1 Ans. Define a Company. Explain various advantages and disadvantages of a Company. DEFINITION In common usage, the term ‘company’ means a group of persons, who have associated themselves together, with a view of achieving some common objective. S. 3 (1) of the Companies Act defines a company as – “An association of individuals formed for some purpose and registered under the present Companies Act or an earlier Indian Companies Act.” This definition seemed inadequate, as it was difficult to comprehend the real nature of the company. In order to know the nature of a company, one needs to refer to the definition of L. H. Haney, who defined company as; “An incorporated association, which is an artificial person created by law, having a separate entity, with a perpetual succession and a common seal.”
CHARACTERISTICS OF A COMPANY OR ADVANTAGES OF INCORPORATION

As the characteristics are unique to the company and also formed to overcome the drawbacks of partnership, they are also called as advantages of incorporation. Following are the characteristics: (1) Incorporated association: A company must be incorporated (registered) under the Companies Act. In other words, it is the registration of the association that creates a company. The minimum number required is two in case of private company and seven in case of public company. The maximum being fifty in case of private company and unlimited in case of public company. (2) Artificial legal person: Company on registration is given more or less the same status of an individual. But as the company is an entity created by law, it is called an artificial legal person. (3) Independent corporate personality: A company on registration has a separate identity of its own, which is different and distinct from the members who constitute it. This principle of independent corporate personality was laid down in the famous case of Salomon v. Salomon and Co. Ltd. (1897) A.C. 22. Mr. Salomon was carrying on shoe manufacturing business on proprietorship basis. He sold his business to a company Salomon & Co. Ltd. for £ 30,000. Salomon received consideration in the form of shares for £ 20,000 of £ 1 each and for £ 10,000, he got debentures. The company had seven members, consisting of Mr. Salomon, Mrs. Salomon, four sons and a daughter. All the other members of the company had only 1 share each. After some time the company had to be wound up on account of financial difficulties. The assets realised were £ 6,000, while the liabilities were £ 10,000 to Salomon as a secured creditor and £ 7,000 to outsiders who were unsecured creditors. The creditors claimed priority over Salomon (secured creditor) on the ground; Salomon and Salomon & Co. were one and the same. It was however, observed that “The company on incorporation, has a different personality different from the subscribers.”

Therefore the identity of the subscribers is immaterial. Hence Mr. Salomon was paid first as he was a secured creditor. (4) Limited liability: The liability of the shareholders is limited to the face value of the shares held by them. In other words, once the full amount of the shares is paid, they cannot be called upon to bear the loss from their personal property. (5) Perpetual succession: A company enjoys perpetual existence. It would not cease to exist even if all its members die. It is created by law and can be put to an end only by the process of law. Prof. Grover in his book ‘Modern Company Law’ stated ‘even a hydrogen bomb cannot destroy a company.’ (6) Hold and dispose of property: A company can hold and dispose of property in its own name. Property of the company cannot be treated as members' property and vice versa. (7) Transferability of shares: The shares are easily transferable, when compared to that of partnership. Though in between a public and private company, its easier in the former when compared to the latter. (8) Common seal: A company is an artificial person, with no physical existence. It acts through the directors. The directors act on behalf of the company and enter into contracts by affixing company’s common seal. The common seal of a company is its official signature. (9) May sue and be sued: A company having its own independent existence, can sue in its name, to enforce any of its statutory or contractual rights and be sued in its name by others, if it commits a breach of contract or fails to discharge its duties. Example: An employee not getting salary, may sue the company itself and not the directors. Similarly, if an employee has to be sued, the company and not the director who shall sue. DISADVANTAGES OF INCORPORATION (1) Excessive formalities and expenses: Incorporating a company is both cumbersome and expensive. The formalities to be complied with for registration are many. Running the ‘company also requires a lot of formalities to be followed, as well as funds. (2) Corporate veil: The Company by its separate corporate personality is accountable for its action. In fact, there is an invisible veil between the company and the members. The Company acts through human agency, yet it alone is accountable. In other words, holding a company for something which it is incapable of doing. This is a major drawback of incorporation. (3) Company is not a citizen: Although a company is called an artificial legal person, enjoying many rights and being subject to many duties, yet it is not treated as a citizen. (State Trading Corporation v. CTO AIR 1963 S.C. 1811).

Characteristics of a Company

Incorporated Association

Legal Person

Corporate Personality

Limited Liability

Perpetual Succession

Hold and dispose Property

Transferability of Shares

Seal

Sue and be sued

v. in real control of the corporate affairs is called the ‘principle of lifting the Corporate veil’ or ‘exceptions to the principle of independent Corporate personality of the company. The House of Lords held.A.’ (2) Where the company has been formed for some fraudulent Purpose or is a sham: If the company is formed to defeat the provisions of any law. This principle of ignoring the company’s corporate Personality and examining the character of persons. Home (1933) All E. in defacto control of its affairs are residents in an enemy country or. Held. He attempted to evade this obligation by forming a company. Example: Where the membership of a private company exceeds fifty members or a public company falls below the minimum of seven members. a former employee of the plaintiff had agreed not to solicit the plaintiffs customers. Ltd. Example: The defendant.R. the company was a sham used by the employee to defend himself from breach of a contract. LIFTING THE CORPORATE VEIL Although as explained earlier. 109 (C.Q.)). defraud creditors and avoid legal obligations. (4) To investigate the relationship between Holding Company and Subsidiary Company. a need was felt that the veils in rare cases need to be lifted. (5) Under statutory provisions: The Act also imposes personal liability on the directors or members of a company in certain cases. Under what circumstances can the veil be lifted? Ans. (1) When the company formed is against public interest company: In Daimler & Co. to meet the ends of Justice. ‘A company would assume an enemy character when persons. (3) Where the company is formed for evasion of taxes: If the company is formed for evasion of taxes or to avoid some welfare measures. (1916) ZA (302). Continental Tyre & Rubber Co. the veil shall be pierced. . company is having a separate entity of its own and is only responsible for its actions. the veil would be lifted. (Eilford Motor Company v. 2 Explain the doctrine of ‘Corporate veil’.’ The following are the circumstances when the veil may be lifted. wherever resident are acting under the control of enemies.

S. (1) Promoters and Pre-incorporation Contracts: Promoters are the persons. if the company has adopted the contract after incorporation and it is within the terms of the incorporation. has to a very large extent been overcome by S. S. Because of these hurdles. Effects of pre-incorporation contracts: (1) Pre-incorporation contracts are not binding on the company. The words ‘warranted by the terms of incorporation’ means within the scope of the company’s objects as stated in the memorandum of association. Certificate of Incorporation is the birth certificate of the company. who is engaged in the formation of the company or by a person named in the articles as director. (2) Registration: The following is the procedure to be followed for registration of the association. As they take responsibility in forming the company. attorney or pleader entitled to appear before the High Court or a Chartered Accountant.. (3) The promoters become personally liable. and floating of company was not possible. 1963. (2) Registration. before its incorporation for the purpose of the company.Q. . if satisfied will register the association and grant it a Certificate of Incorporation. The contracts which these promoters enter for floating the are called pre-incorporation contracts. who undertake to a form a y and takes steps to accomplish that purpose. It must be signed by an advocate of the Supreme Court. The difficulties posed by the company’s inability to ratify a Linary contract. (1) An application along with the requisite fee is made to the Registrar of Companies. (5) The Registrar. 19 (e) of the Specific Relief Act. 15(h): Sometimes. a company can sue and be sued. Write a note on formation of a company. 3 Ans. 19(e): The other party may also enforce the contract against the company. (3) Written consent of each person named in the articles. (4) A statutory declaration stating that all the requirements of t1 Act for registration are complied with. FORMATION OF A COMPANY Formation of a company involves two stages namely — (1) Promoters and pre-incorporation contracts. In such cases. as director and the undertaking to buy the qualification shares. Under these sections. they stand in a fiduciary ion to the company they float. (2) Pre-incorporation contracts are not binding on the third party as well. provided the contract specifically falls within the object clause. (2) The application must be accompanied by Memorandum of Association and Articles of Association. the company may enforce the contract f it is ‘warranted by the terms of incorporation’. as a company. 15 (h) and S. after incorporation because the company was not in existence at the time the contract was entered. promoters were reluctant to enter Contracts. the promoters of a public company have made a contract.

Example: Solomon & Co. issued by the Head of the State In India. 4 Ans. (III) (i) . On the basis of Number: (a) One-man Company: Where majority share is held by one individual or an entity. These are genera1ly. CLASSIFICATION OF COMPANIES The conventional classification of companies. public undertaking and formed with the main object of public utilities and not for profits Example: RBI. one director. CONSEQUENCES OF NON-REGISTRATION The following are the consequences of non-registration (i) (ii) (iii) (iv) (v) (vi) Q. The association shall be an illegal association Every member of the association becomes personally liable The association cannot contract debts The association cannot be ranked as a creditor The association cannot be wound up Finally. This sort of company had become defunct for some period of time. and (iv) Others.(6) A private company can start its business immediately. while a public company requires another certificate called the ‘Certificate of Commencement of business’ before it can start its business. the classification cannot be exhaustive. (I) (II) Chartered Companies: These companies come into existence by the by-the Royal Charter. (ii) On the basis of Liability. no suit can be filed for the partition of the assets or dissolution Briefly explain the classification of companies under the Act. But now. (iii) On the basis of Control. The reason being the corporate form can take many forms in order to efficiently meet the needs of time. (ii) Prohibits an invitation to the public to subscribe to the shares or debentures. (b) Private Company: Where the minimum number is two and maximum fifty. mainly into chartered Companies. In addition the following are the characteristics of a private company: (i) Minimum paid up capital is one lakh rupees or such higher paid up capital as may be prescribed in the articles. they are treated as foreign companies Example East India Company. Here there is one member. SBI. it is time that the entrepreneurial capabilities of the people are given an outlet for participation in economic activity. Companies can be further divided on the basis of: (i) On the basis of Number. with the increased use of information technology and computers. Such economic activity may take place through the creation of an economic person in the form of a company. Bank of Australia Statutory Companies: These are formed under the special Statute of the Parliament or the State Legislature. emergence of service sector. Registered Companies: Here the companies are registered under this act or previous acts. LIC etc. But one must remember. Thus company law recognizes a multiple classification of companies. Statutory Companies and Registered companies may no longer hold very true.

specified in the Memorandum in the event of liquidation of the company for payment of debts and liabilities of the company. (ii) Holds more than half in nominal value of shares of another company. Whose minimum number are seven and maximum unlimited. The liability of the members is limited to the face value of G shares. Each member. It can also be a subsidiary of a Government Company. in the event of its being wound up. (b) Subsidiary Company: Is a company under the control of another company. as may be prescribed. The amount promised is called guarantee. each of them being a producer. directors or their relatives. which t shareholder is bound to pay either at a time or by installment. On the basis of Control: (a) Holding Company: Where a company has control over another company. promises to pay a fixed sum of money. It can also include be interstate co-operative societies. On the basis of Liability: (a) Limited liability companies: In these companies. Has minimum paid-up capital of five lakhs rupees c such higher paid up capital. which is a subsidiary of a public company. is held by another company. (iii) Is a subsidiary of a third company which itself is a subsidiary of the controlling company. there is share capital and each share has a fixed value. (d) (i) (ii) Foreign Company: Is a company incorporated outside India and. A private company. A company is deemed to be a holding company of another if: (i) Controls in the composition of the Directors of another company. (b) Company limited by Guarantee: These types of companies may or may not have a share capital. The members of such company are liable. to the ‘“‘ extent of their fortunes to meet the obligations of the company Such company may or may not have a share capital. or any two or more producer institutions or a combination of ten or more individuals and producer institution. (c) Unlimited liability Company: Is a company. registering as a company for the purpose of primarily dealing with the produce of its active members. another company. Is not a private company. Others: (a) Producer Company: Any ten or more individuals. (Inserted by companies amendment in 2002) (iii) (iv) . (ii) More than half in nominal value of shares.(iii) (c) (i) (ii) (iii) (iv) (ii) Prohibits any invitation or acceptance of deposits from persons other than its members. not having any limit on the liability of the members. it is known as a holding company. It is deemed to be under control if: (i) Composition of the Directors is controlled by. be it the Central Governfleflt or the State Government or both. Public Company: Is a company which. (c) Government Company: Wherein minimum 51% of the paidup capital is held by the Government. Having its place of business in India or Not less than 51% of the paid-up capital is held by one or more Indian citizens or one or more body corporate incorporated in India and having its business in India.

charity or other useful object. science. arts.(b) Non-Trading Company: This is also called ‘association not for profit’. It enjoys the same privileges and obligations of a limited company. Classificatio n of Companies I Chartered Companies II Statutory Companies III Registered Number Liability Control Others One Man Company Limited Holding Producer Private Guarantee Subsidiary Non-trading Public Unlimited Government Foreign . No dividends are paid to its members. these associations are formed with the object of promoting commerce. religion. Under a license granted by the Central Government.

In a public company.. 1 2 Distinguish between a Private company and a Public company. A private company must add the words. unless the members in a general meeting decide otherwise.e. If a private company has a share capital. 1956. 6 7 Privileges 8 9 10 11 Number of directors Legal controls Remuneration of directors Borrowing of loans It enjoys a number of privileges. Following are the main points of distinction between a private company and a public company. exemptions from certain provisions of the Companies Act. A private company cannot invite the public to buy its shares or debentures. or a statement in lieu of prospectus. with the Registrar (Sec. There are less legal controls. Criteria Number of members Restriction on transfer of shares Private Company A private company cannot have less than two and more than fifty members.Q. with the Registrar. 70 (3)). There is no such restriction. must file a prospectus. A private company has not to file a prospectus or a statement in lieu of prospectus. Remuneration of a director is restricted to not more than rupees six lakhs per annum. Restrictions are far less. . 13). Directors cannot borrow from public companies. It must have a minimum of two directors. it imposes some restrictions on the right of its members to transfer their shares in the company. A public company. there need not be any such restriction. It must have a minimum of three directors. 5 Ans. A private company can issue new shares to outsiders. 3 4 5 Restriction on invitation to public Restriction on name Prospectus or a statement Issue of new shares A public company may do so. Directors can borrow from private companies. ‘Private Limited” at the end of its name (Sec. i. A public company must offer new shares first to existing equity shareholders pro rata. Public Company A public company cannot have less than seven members. It does not enjoy privileges. There are too many legal controls. no maximum has been fixed for it.

including a private company. there is restriction on transferability of shares. Thus a person if requires money immediately. the shares must be offered to the existing equity shareholders. Thus. the company has not issued any invitation to the public to subscribe for shares or debentures. (8) Minimum Number of Directors: A private company requires only a minimum of 2 directors. (4) Exempted from the Requirement of Minimum Subscription: A private company can proceed to allot shares without waiting for the minimum subscription. while sending its annual list of members and summary to the registrar. There is no need to wait for certificate of commencement of business. there is no question of having an index of members. it cannot enjoy more financial facilities as can be enjoyed by having more members. (d) A private company. (iii) its average annual turnover in the preceding three years was not 25 crores or more. thus it cannot enjoy the benefit of public money. (ii) it did not hold twenty-five per cent or more of its paid up share capital. (7) Exempted from Keeping an Index of Members: Index of members is required to be maintained where there are more than 50 members. Liquidity is difficult. (2) Restrictions on Transferability of Shares: In case of private company. it is not required to issue a prospectus. of one or more public companies. Hence. as it requires only two members. to attend and vote at a meeting. saves both time and money. (2) Starting of Business: It can start its business immediately on incorporation.Q. (3) Exempted from Issue of Prospectus: A private company is restricted from making invitation to the public. Following are the privileges or advantages. (3) Restrictions on Issue of Prospectus: As a private company cannot issue prospectus. even without making an offer to existing shareholders. which are available to all private companies. (4) Other Disadvantages: (a) A private company cannot issue share warrants. What are the advantages and disadvantages of incorporating a private company? Advantages of a Private Company: This may also be called as ‘special privileges of a private company’. (c) A private company is required to send a certificate to the Registrar stating that: (i) since the last annual general meeting. may face problems. (6) Exempted from Holding Statutory Meeting: A private company need not hold a statutory meeting. no body corporate has held twentyfive percent or more of its paid up share capital. (b) A member cannot appoint more than one person as proxy. 6 Ans. and (iv) it did not accept or renew deposits from the public. . Disadvantages of a Private Company: (1) Restrictions on Members: A private company can have a maximum of only 50 members. Thus. there is no question of minimum subscription. As a private company can have a maximum of only 50 members. which is the subsidiary of a public company: (1) Formation is Easy: A private company can be easily formed. there is no requirement of filing a statutory report. Thus. But a private company can issue shares directly to outsiders. must also send with this return a certificate stating that since the date of last return. (5) Further Issue of shares: In certain cases of new allotment. As no shares are issued to the public.

(iv) By provisions of law. By special resolution: When the private company by a special resolution may become a public company. the default must be intentional.Q. However. . Under what circumstances can a private company be treated to have become a public company? Conversion of a private company into a public company and conversion of a public company into private company (1) Conversion of a private company into a public company: There are two modes namely: (i) By default. (iii) Becoming a subsidiary of a public company. (ii) By special resolution. 7 Ans. (i) (ii) By default: When a private company fails to comply with the essential requirements of a private company.

know about the company namely. MEANING AND DEFINITION OF MEMORANDUM OF ASSOCIATION Just like a country is known by its constitution. a company is known by its Memorandum of Association. The department of Company Affairs. (2) Registered Office Clause. what it can do. Ans. it must be printed or affixed on the outside of every office or. 1 What is the need for memorandum of association? Explain the clauses. These two documents are the guiding force for a company. it must have minimum authorized capital as stated below: Key Words Required authorized capital . are required to take care that the name is not an undesirable one. S. the official Seal and Emblem of Central and State Government.CHAPTER 2 – MEMORANDUM OF ASSOCIATION AND ARTICLES OF ASSOCIATION As one is already aware of the nature of the company. without which no company can proceed. activities or objects of the company. The promoters who select the name of the company. in a conspicuous position in letters easily legible. In other words the memorandum of association is the document which contains the rules regarding the constitution. (3) Objects Clause. “Memorandum means memorandum of association of a company originally formed or as altered from time to time in pursuance of any previous companies law or of this Act. (1) Name Clause: Every company must have a name of its own. The name gives the company a personal existence. (4) Liability Clause. (6) Association Clause or Subscription Clause. It is the frame work within which a company performs. To find answers to these questions. (5) Capital Clause. Once the name is registered. every company has two very important documents. 2(28) of the Act defines Memorandum as. They are the ‘Memorandum of Association’ and the ‘Articles of Associations’. Further. in case of public company with limited liability must add the word ‘Limited’ at the end of its name. the name and pictorial representation of political leaders have been prohibited. Q.” CONTENTS OF MEMORANDUM OF ASSOCIATION Every company shall state the following in its Memorandum of Association: (1) Name Clause. it becomes necessary to know how the members who come and go. arid the private company the word ‘Private Limited’ must be added at the end. Indian National Flag. has held that if the company uses any of the following key words in the name. The name and emblems of UNO and WHO. place of business. in the language in general use in the locality. what it cannot do and how to do.

that the liability of its members is unlimited. A company cannot go beyond the object clause without the approval of the shareholders and/or approval of the Central Government. If such a direction is issued then the company must change its name within three months. Manufacturing (Rs. the company shall. Where the company on its own wants to change its name. In case of a company with limited liability.) 5 Crores 1 Crores 50 Lakhs 50 Lakhs 5 Lakhs 1 Crore 10 Lakhs Registered Office Clause: Every company must have a registered office. The Registrar shall be intimated within 30 days of incorporation. Liability Clause: This clause states. If any of the words mentioned in (iv) is used within the name (with or without brackets) Industries / udyog Enterprises. In the absence of this clause in the memorandum means. Asia. Capital Clause: This clause states. from the date on which it commences its business or within thirty days of incorporation. from the date of direction. the nature of liability of the members. and (3) Other objects f the company not included in (1) and (2). immoral. it must state that the liability of the members is limited whether it is by shares or by guarantee. The procedure being by passing an ordinary resolution.1 2 3 4 5 6 7 (2) Corporation International. Products. C. D and E requires the objects clause to be divided into (1) Main objects of the company to be pursued by the company on its incorporation (2) Objects incidental or ancillary to the attainment of the main objects. continental. the memorandum must contain the name of the state. the same can be done by passing a special resolution at the shareholders meeting and with the approval of the (ii) . S. whichever is earlier. in which the registered office of the company shall be situated. InterContinental. have a registered office. At the time of registration. It must however be noted objects cannot be illegal. However. Asiatic (being the first name) If any of the words mentioned in (ii) is used within the name (with or without brackets) Hindustan. The central government can also direct the company to change its name within twelve months of registration. 13(1)(d) along with Table B. unless the time is extended. Universal. opposed to public policy or the Act. the name could be changed by passing an ordinary resolution at the shareholders meeting and with the approval of central government. Business. the share capital with which a company is registered and the number and value of the shares into which it is divided. globe. India. Bharat being the first word of the name. (3) (4) (5) (6) ALTERATIONS OF MEMORANDUM ASSOCIATION (1) Alteration of Name Clause: (i) Where the name is an undesirable one in the opinion of the Central Government. Objects Clause: This clause defines the objects of the company and indicates what a company can do. It is a declaration made by the subscribers who have signed the memorandum of their intention to form a company. Association Clause: This clause is also known as ‘subscription clause’.

The company shall make an application to the Regional Director for confirmation. town or village. and the entire proceedings of alteration will lapse and become void. in which case the change shall not be effective. must be passed.g. specified in the memorandum. The company shall file with the Registrar of companies. may conveniently or advantageously be combined with the objects. (2) Procedural Limits: The following procedure is to be followed: (i) A Special Resolution of shareholders. (2) Alteration of Registered Office: Provisions in respect of change in registered office are as follows: (i) Change within same city: Where the change is from one place to another within the same city. or any part of the undertaking. must be filed with the Registrar within three months of the date of the order. The change of name must be communicated to the Registrar within 30 days. (iii) If the alteration is confirmed by the central government. and creditors. may fall within the jurisdiction of another Registrar of Companies. The Registrar shall. (iii) . of the company. even though within the state. it can be made by passing a resolution by Board of Directors. As the change is going to affect the interest of the shareholders. a certified copy of the confirmation by the Regional Director within 2 months from the date of confirmation together with a printed copy of the memorandum as altered.central government. (vi) to sell or dispose of the whole. The Regional Director shall confirm the alteration within 4 weeks of receipt of the application. a petition must be made to the central government for confirmation of the alteration. (ii) Thereafter. (ii) to attain its main purpose by new or improved means (e. But no approval is needed if the change only relates to the dropping of word ‘private’. (ii) Change within same state: Where the change in the red office is from one place to another. by new scientific discoveries). unless approved by Regional Director. (iii) to enlarge or change the local area of the company’s operation. who shall then enter the new name and issue certificate with the changes incorporated. register the same within 1 month from the date of filing. debenture holders. (iv) to carry on some business. a certified copy of the order. Change from one state to another: This requires change in the Memorandum of Association. (v) to restrict or abandon any of the objects. it could be done by passing a special resolution at the share holders meeting. and (vii) to amalgamate with any other company or body of persons. together with a printed copy of the Memorandum as altered. the Act has imposed substantive and procedural limits upon the power of alteration. followed by filing a copy of the same with the Registrar of Companies within 30 days. otherwise the alteration. within the same state and is within the same office of Registrar of Companies. as discussed below: (1) Substantive Limits: If the alteration is essential for the company — (i) to carry on its business more economically or more efficiently. authorizing the alteration of the objects clause. Sometimes the change. specified in the Memorandum. which under existing circumstances.

Alteration of the Object Clause: The procedure for alteration of the object clause is the same as e alteration of registered office from one state to another. (Refer the same). Alteration of Capital Clause: The capital can be increased by passing a ordinary resolution the general body meeting . 18). Alteration of Liability Clause: No alteration can increase the liability unless voluntarily by the members.(3) (4) (5) The certificate of the Registrar of Companies is the conclusive evidence of the alteration and its validity (S.

But the money lent by a company not authorized to lend. contracted with Riche to finance the construction of railway line at Belgium. provided the same is traceable. and (b) to act as mechanical engineers and general contractors.” (ii) “such a statement of objects has two-fold operation. hire railway carriages and wagons. Injunction: Any member may obtain an order of injunction from the Court to restrain the company from persisting in ultra vires act. Property acquired under ultra vires transaction: If a company acquires property under an ultra vires transaction.. This doctrine was laid down in Ashbury Railway Carriages and Wagons Company v. (2) In the negative. which is so specified. Subsequently. giving no legal rights to the company or the outsiders.” (iv) “Hence. If the company could not make it. it was thereby placed beyond the powers of the company to make the contract.. which. it could authorize the making of contracts of any and every description. Anything that a company does which is beyond the scope of the object clause is called ultra vires the object clause and is null and void.” (iii) “The term ‘general contractors’ must be taken to indicate the making generally of such contracts. The objects of a company serve two fold functions. the directors repudiated the contract. If so. as are connected with the business of mechanical engineers. Ultra vires borrowing: In case of an ultra vires borrowing.” Effects of Ultra Vires Transactions: (1) (2) (3) (4) Contract void: Ultra vires transactions render the contract void. will be personally liable to restore to the company the funds used for such purpose. Lord Cairns. L. it tell us what a company cannot do. Two important objects being the company shall (a) make. Riche (1875) LR & HL 653.. observed thus: (i) “The subscribers are to state the objects for which the proposed company is to be established and then the company comes into existence for those objects and those only. null and void. The House of Lords held that the contract was ultra vires and therefore. The directors of the company. It states affirmatively the ambit and extent of powers of the company and it states negatively that nothing shall be done beyond that ambit and that no attempt shall be made to use the corporate life for any other purpose than that. the contract was entirely beyond the objects in the memorandum of association. The company was incorporated with a number of objects. can be recovered by it because the debtor will be stopped from pleading that the company had no power to lead. much less could it be rat fled. would be altogether unmeaning. the lender has no right of action in respect of the loan to the company. the company’s right over the property shall be protected because assets so acquired represents corporate capital.OBJECT CLAUSE AND THE DOCTRINE OF ULTRA VIRES We have already stated that a company must function within the frame work of its objects. If the term “general contractors” is not so interpreted. Directors personally liable: Directors who part with the company’s money or property for ultra vires objects. Riche brought an action for damages for breach of contract. on the ground that it was ultra vires the company. Such contracts can never be ratified. sell. They are: (1) It tells what the company can do. But he has certain rights in respect of money received by the company.C. (5) .

ALTERATIONS OF ARTICLES OF ASSOCIATION A company can. (14) regulation as to seal. (12) accounts and audit. (10) number. (6) transfer and transmission of shares. in the course of which the tort has been committed. poll. company limited by guarantee and private company limited by shares. resolution. (4) the execution or adoption of a preliminary agreement. But in other cases namely unlimited company. quorum. (8) exercise of borrowing powers including issue of debentures. falls within the scope of the Memorandum of Association. articles’ of association may be submitted along with the Memorandum of Association. the activity. 2 What do you mean by Articles of Association? Ans. voting. if any. (2) the amount of capital issued and the classes of shares into which the capital is divided. the increase and reduction of share capital. ARTICLES OF ASSOCIATION Q. Second. (9) general meetings. appointment and powers of directors. contains. calls and forfeiture of shares for nonpayment of calls. Form and Signature of Articles: Table A in Schedule I of the Companies Act. alter its Articles of Association .: First. In case of public company limited by shares. proxy. at any time. A company may either accept Table A or make changes in the content of Table A for its articles. minutes. if the following two conditions are satisfied. be divided into paragraphs and must be signed by all the subscribers.’ Contents of Table A: The articles of a company usually deal with the following matters: (1) the business of the company. (11) dividends — interim and final — and general reserves. the servant of the company must have committed the tort within the course of his employment. (15) regulation as to winding up. (5) the allotment of shares. viz.(6) Liability for torts: A company can be made liable for any tort. (7) company’s lien on shares. Articles of Association is a document containing rules and regulations for the administration of the company. the ‘Regulation for management of a company’. (3) the rights of each class of shareholders and the procedure for variation of their rights. The articles shall be printed. notices. (13) keeping of books — both statutory and others. articles of association must be submitted along with the memorandum of association. subject to the provisions of the Companies Act and also subject to the following conditions or restrictions: .

it is only an irregularity and can always be confirmed by the shareholders. it is absolutely null and void and Articles The Articles of Association are the internal regulations of the company. on the other hand. the shareholders and the outside public. Articles of Associations may be altered with retrospective effect. They provide the manner. Section 13 provides that some of the conditions of incorporation. . contained in the memorandum. An alteration of Articles which has the effect of converting a public company into a private company. Lastly. shall have effect only if the alteration is approved by the Central Government. cannot be altered except by the special resolution of the company and with the sanction of the central government. which will violate the conditions.(1) (2) (3) (4) (5) (6) (7) (8) Alteration of Articles can be made only by a Special Resolution of the shareholders of the company to that effect. even though the private interests of some members may be affected. Alterations must not contain anything illegal. Section 31. such as the objects clause. In other words. 4 Effect of acts done in contravention of MOA and AOA If the company does something in contravention of the provisions of its Articles. or any other provisions of general law which may be applicable. as it states the purposes for which the company has come into existence. 2 Dominant or subordinate Methods of alteration 3 The Articles are always held to be subordinate to Memorandum because they are mere internal regulations of the company. The memorandum is a dominant instrument. No alteration of Articles will be allowed. which will violate the provisions of the Companies Act. Alteration must be made bona fide in the interest of the company as a whole. provides that the Articles of Association can be altered simply by a special resolution. The conditions are introduced for the benefit of the creditors. If a company does something outside the scope of the objects stated in the memorandum. the company is allowed to be incorporated. DISTINCTION BETWEEN MEMORANDUM OF ASSOCIATION AND ARTICLES OF ASSOCIATION The following are the fundamental points of distinction between Memorandum of Association and Articles of Association: 1 Criteria Fundamental condition or internal regulations Memorandum The Memorandum contains the fundamental conditions upon which. An alteration must not constitute a fraud on the minority. No alteration of Articles will be allowed. It does not require the sanction of the central government or of any other authority. an alteration must not affect the interests of the minority shareholders. contained in the Memorandum of Association of the company. in which the company is to be carried and its proceedings disposed of. and the registered office clause.

Thus. The Courts have held ‘if a person deals with the company in good faith and the person with whom he is dealing has ‘ostensible authority’ to deal on behalf of the company. (3) Company and outsiders: All outsiders. that he was ignorant of what have been stated in the memorandum and articles of association. . (Dehdradun Mussoorie Electric Tramway Co. However. to inform the directors of his intention. (2) Members inter se bound: Each member is bound to the other members. dealing with the company are assumed to have read the articles of the company and are bound by the same. required a member who wanted to transfer his shares. no party can take the plea. 36 contains provision regarding the binding force of the Memorandum and the Articles. Any person who is dealing with a company.incapable of ratification. S. Outsiders shall be deemed to have constructive notice of the contents of Memorandum and Articles of the Company. by the terms contained in the Articles. the rule has in reality been diluted. DOCTRINE OF CONSTRUCTIVE NOTICE The memorandum and articles of association of a company are public documents. if the Articles provide about certain rights of members interse. EFFECT OF MEMORANDUM AND ARTICLES and thus rectified. Example: Although the articles had clearly stated that the directors could delegate all powers. the doctrine of indoor management comes to the aid of the outsiders. and then the directors will take the said shares equally between them at a fair value. Jagmandârdas. DOCTRINE OF INDOOR MANAGEMENT OR TURQUAND RULE As one is aware that the doctrine of constructive notice protects the company in its dealings with outsiders. but the power to borrow an overdraft taken by the managing agent without the sanction of the board was held to be binding on the company. Hence. Hands and others (1960) Ch. 1). it was held that the directors as members were obliged to take shares. while dealing with the company. They are: (1) Members and the company bound towards each other: The Memorandum and the Articles bind the company and its members. is presumed to have read and understood the proper meaning of the documents. Example: The plaintiff was the shareholder of a private company. was not governed by the rule incorporated in the articles. (Rayfield v. AIR (1932) All. The Articles of Association. On their refusal to take shares. as it fails to take note of business realities. to the same extent as if they had been respectively signed by the company and by each member. Such a temporary loan. the company will be held liable. 141). The doctrine of constructive notice comes to the aid of a company vis-à-vis the outsiders. v. a member can enforce such rights against the other members. the doctrine has been described as an unreal doctrine. In other words. on the company and its members.

Acts void ab-initio: This doctrine does not apply to acts that are void ab-initio. anyone dealing with the company who has no means of knowing about the internal functioning of the company has every right to presume that. Held. has no knowledge of the company’s articles of association. he is not protected by the doctrine. This came to be known as ‘Turquand Rule’. And any irregularity will not affect the rights of the outsiders. by a resolution passed at the general meeting of the company. No knowledge of articles: A person who at the time of entering into a contract with a company. Turquand (1856) 6E and B 327. cannot be saved or protected by the doctrine. Example: Where the document is a forged one: Acts. The company will not be allowed toescape liability. Suspicion of the internal irregularity: Where a person dealing with the company is placed in such circumstances. In Royal British Bank v. which are suspicious in nature and which invite inquiry. the company was liable on the bond as the borrower could presume that the resolution had been passed before making the borrowing through •the issue of bond. Exceptions to the Rule of Indoor Management: The doctrine of indoor management is subject to five exceptions: (1) (2) (3) (4) (5) Knowledge of internal irregularities of the company: A person already aware of the irregularity. outside the apparent authority of the company: Where the acts of an officer. cannot claim protection under this rule.The doctrine of indoor management implies. things are happening the way it ought to happen. protection under the doctrine cannot be claimed. . do not fall within the apparent authority of such an officer. A bond was issued against the borrowings made by the company without passing the required resolution. the articles authorized the directors to borrow on bonds. In other words the doctrine of indoor management is an exception to the doctrine of constructive notice.

law imposes duty on the promoters to state true statements in the prospectus. It is issued atleast three days prior to the opening of the offer. What may be treated as. Shelf Prospectus and Information Memorandum: It is a prospectus issued by any financial institution or bank (whose main object is financing) for one or more issues of securities or class of securities specified in that prospectus. DEFINITION AND MEANING S. circular. who receives the circular but who can accept the offer made. the test is not L. Deemed prospectus or prospectus by implication: Nowadays.L. Ltd. Prospectus is used to approach the public. the funds required are more. In Government Stock and Other Securities Investment Co. though in an abridged form. an issuer can state the size and number if shares are determined later. Christopher and Others (1956) I. advertisement or other document inviting deposits from the public or inviting offers from the public for the subscription or purchase of shares in or debentures of a body corporate. Note: Financing means making loan to or subscribing in the capital of a private company or industrial enterprise. soliciting applications from interested investors. As the public subscribe to the capital by what has been stated in the prospectus. the number of shares and the upper and lower price bonds are disclosed. 2 (36) defines a prospectus as — “any document described or issued as prospectus and includes any notice. It is the Issue House. a prospectus aims at. as may be prescribed. 237) it was held “for determining whether a circular or invitation has been issued to the public or not. Red Herring Prospectus: It is a prospectus which does not contain all particulars on the price and quantum of securities offered. This means that in case the price is not disclosed. financial position. v. As it is not advertised by the company. all documents containing offer of shares or debentures for sale shall be included within the definition of prospectus and shall be deemed as prospectus by implication.R.” What does not constitute a prospectus: No offer or invitation said to be made to the public if: (1) it is directed to a specified person. (2) it is not calculated to result in the shares or debentures becoming available to other persons. .CHAPTER 3 – PROSPECTUS In case of public company. On the other hand. these were not deemed to be prospectus. It contains only those details as are included in the prospectus. an issue to the public depends upon the facts and circumstances of each case. Therefore. offer of sale of shares or debentures are made through Issue Houses. (3) it is directed to a few persons. must have been issued to the public.” Abridged prospectus: It means a memorandum containing salient features of a prospectus. One way of getting it is by approaching the public. directors etc. engaged in infrastructural financing or such other companies as the central government may notify. by informing them about company’s business. A document to be prospectus. who advertises. To check the by-passing of the provision of law. When prospectus is not required to be issued: A company I not issue a prospectus jn the following cases: (1) In case of a private company. capital structure. W.

(ii) Name/(s) of stock exchange/(s) where application for listing is made. as may be prescribed. may be included in the prospectus. When the company intends raising funds only from existing shareholders! debenture holders. Section 60(5) lays down that any company and any person. who violate the above rules. (6) A statement. (10) Prospectus shall be issued within ninety days of its registration. relating to the affairs of the company by an expert. (5) Every application form for shares. shall be punishable. which may extend to rupees five thousand. (9) Before a prospectus is issued. is punishable with fine.(2) (3) (4) (5) When promoters or directors. (4) A prospectus must be signed by every person. (vi) Date of closing of the issue. (7) Consent of the expert must be obtained in. (8) No deposit can be invited without issuing an advertisement in a daily newspaper. These rules are not applicable to banking companies and such other companies as the Central Government may. issued to existing members and debenture holders. reflecting the company’s financial position issued by the Company and in such a form or in such a manner. intend raising fund from personal contacts and acquaintances without offering the shares and debentures to the public. The term “expert” includes an engineer. CONTENTS OF A PROSPECTUS Section 56 lays down that the matters and reports stated in Schedule II to the Act must be included in a prospectus. or his agent. (iii) Declaration about refund of the issue if minimum subscription of 90 per cent is not received within 90 days from closure of the issue. mentioned therein as a director or a proposed director. provides that the company and the officer. whose profession gives authority to a statement. (ix) Name and address of the underwriters and the amount underwritten by them. (v) Date of opening of the issue. issued for bona fide invitation to a person to enter into an underwriting agreements and (b) application forms. The said advertisement must contain a statement. specify on this behalf. chartered accountant. . When the shares or debenture issued are uniform in all respects with shares or debentures previously issued and dealt in or quoted in a recognized stock exchange. When shares are offered to underwriters under an underwriting arrangement. Section 58 A of Companies (Amendment) Act. made by him. who knowingly issues a prospectus without registration. this should be answered as ‘No’. must be accompanied by a copy of the prospectus except (a) application forms. under s. 73. a copy of it must be registered with the Registrar of Companies. valuer. (2) The prospectus must contain all the particulars1 listed in Schedule II to the Companies’ Act. issued by the company. at the prescribed rate. and other person. (viii) Whether rating from CRISIL or any rating agency has been obtained for the proposed debentures/ preference shares issue. in consultation with the Reserve Bank of India. (3) The prospectus must be dated. The format of a prospectus is divided into three parts. LEGAL REQUIREMENTS OF PROSPECTUS The following are the legal requirements of prospectus: (1) A prospectus is required to be issued only after the incorporation of the company. (iv) Declaration about the issue of allotment letters/refunds within a period of 10 weeks and interest in case of any delay in refund. If no rating has been obtained.writing and this fact must be stated in the prospectus. 1974. Part I: (1) General information: Under this head information is given about (i) Name and address of registered office of the company. (vii) Name and address of auditors and lead managers.

if any. Financial Information and Statutory and Other Information. and the dividends paid during the five financial years immediately preceding the issue of prospectus. Registrars to the issue. (vii) Stock market data for share/debentures of the company including high and low price in each of the last three years and monthly high and low during the last six months. subscribed and paid-up capital. (ii) Promoters and their background. if any. difficulty in availability of raw materials or in marketing of products. Bankers of the Company. solicitors. (ii) Expenses of the issue (iii) Underwriting commission and brokerage.(2) (3) (4) (5) (6) (7) (8) Capital structure of the company: (i) Authorized. in directors and auditors during the last 3 years and reasons thereof. (iii) Location of the project (iv) Collaborations. Bankers to the issue and experts. (v) Authority for the issue and details of resolution passed thereof. Lead Managers. Export possibilities. etc. (v) Nature of the product(s). Auditors. Particulars of the issue: (i) Objects. (ii) Changes. legal advisor. (iii) Procedure and time schedule for allotment and issue of certificates. (v) Issue of shares otherwise than for cash. (vi) Commission or brokerage on previous issue.. refunds. (2) Financial information includes: (i) reports of the auditors of the company with respect to its profits and losses and assets and liabilities. managers to the issue. (ii) How to apply. if any. etc. Co-managers. (viii) Revaluation of assets. Certain prescribed particulars: in regard to the company and other listed companies under the same management.. giving particulars about date of allotment. General Information. if any. Bankers to the issue. which made any capital issue during the last 3 years. (ii) Project cost. Terms of the present issue: (i) Terms of payment. (1) General Information shall include information on matters like: (i) Consent of directors. cost/time overrun.) Part II: Requires the company to give detailed information. if applicable. (iii) Any special tax benefits. sensitivity to foreign exchange rate fluctuations. giving separately reservation for preferential allotment to promoters and others. (iv) Names and address of Company Secretary. (vi) Future prospects. (ii) report by the accountants (who should be named) on the profits or losses for the preceding 5 financial years and on the assets and liabilities on a date which must not be more than 120 days before the date of the issue of the prospectus. auditors. (iv) Previous public or rights issue. Management perception of risk factors: (e. premium/discount. Outstanding litigations: relating to financial matters or criminal proceedings against the company or directors under Schedule XIII. (vii) Particulars about purchase of property. (iii) Means of Financing (including contribution of promoters). issued. (ii) Size of the present issue.g. Company management and project: (i) History and main objects and present business of the company. if any. . This part is further sub-divided into three parts viz. (3) Statutory and Other information includes information about: (i) Minimum subscription.

v/s Muggeridge (1860)3 Lt. which is not so. available to avoid civil liability: . Debentures and redeemable preference shares or others instruments issued but remaining outstanding on the date of the prospectus and terms of their issue. Defenses. Hence. for the loss he may suffer on account of the misstatement. (c) Every promoter of the company. or as one having agreed to become a director.(ix) (x) Material contracts and time and place where such documents may be inspected. the following persons shall be liable to pay compensation to every subscriber. comes to know of the company only by the prospectus. there is an inherent duty that the prospectus must state the true picture of the company i. The golden rule as regards. Facts to be proved by the allottee: (a) Mis-statements must be of facts and not of law or an opinion. either immediately or after an interval of time. the prospectus was laid down in New Brunswick & Canada Rly. or debentures of a company. (c) And the allottee must have acted upon it. prospectus is issued inviting persons to subscribe for shares in. who are investing their money in the public company. 651. (b) Every person who has authorized himself to be named and is named in the prospectus -as a director. (b) The mis-statement must be of material fact. prospectus must state things accurately and not omit material facts.e. (b) Compensation (c) Damages for non-compliance with the requirements regarding contents of the prospectus. But an expert is liable only in respect of his own un-true statement. Persons (I) Civil Liability: Liabilities for misstatement Whenever a person subscribes to the shares or debentures of a company on the basis of untrue statements in the prospectus. & Land Co. has the right of action both against persons responsible for the issue of such mis-statements as well as against the company. (a) Every person who is the director of the company at the time of issue of the prospectus. Part III: Gives explanations of certain terms and expressions used under Part I and Part II of the Schedule. (1) Against Persons: Whereas. Remedies available: (a) Damages for fraudulent misrepresentation. and no fact should be omitted the existence of which might in any degree affect the nature or quality of the principles and advantages which the prospectus holds out as an inducement to take shares” Hence any omission of a material fact or addition of untrue statement in the prospectus amounts to mis-statement and both civil and criminal action follows.“Nothing should be stated as a fact. and (d) Every person (including as expert) who has authorized the issue of the prospectus. LIABILITY FOR MIS-STATEMENTS IN THE PROSPECTUS The public.

offered to the public for subscription. or (f) The statement was made by an official or in an official document. or (2) which has issued a prospectus. that (a) The statement was immaterial. STATEMENT IN LIEU OF A PROSPECTUS A public limited company. or (b) It was issued without his knowledge or consent. as their application satisfying the conditions required was pending before the Board of Trade. and on becoming aware of the issue he gave reasonable public notice to that effect. (1) which has not issued a prospectus. or (b) He had reasonable grounds to believe and did up to the time of the issue of the allotment believe the statement to be true. or (d) He had reasonable grounds to believe that the statements were true and believed them to be true. Example: The directors of a Tramway company issued a prospectus stating that they had the right to run tram-cars with team power instead of the horse drawn carriages. (b) Fine up to rupees 50. and it was fair summary or copy of an expert’s report. C. They are: (a) He withdrew the consent to act as a director.000.The persons who could be held liable have certain defenses available to absolve their liability. as they honestly believed what they said in the prospectus to be true. is required to deliver to the Registrar a “Statement in lieu of Prospectus” for registration. or (c) Both He will not be liable is he proves either. (Derry v/s Peak 11889 A. the directors were not liable for fraud. every person who authorizes the issue of the prospectus is punishable with (a) Imprisonment up to 2 years. but has not proceeded to allot any of the shares. Held. before the issue of the prospectus and it was issued without his consent or authority. (e) The statement was correct. . at least three days before the allotment of shares or debentures. Peek. 337) (2) Against the Company: (a) Rescind the contract (b) Claim damages from the company Criminal Liability: (II) Where the prospectus contains any untrue statement. But the Board of Trade rejected their application. This statement was issued. a shareholder sued the directors for damages for fraud. or (c) He withdrew his consent after the issue of the prospectus but before allotment and public notice was given.

in accordance with the terms and conditions. repayable after three years. If allotment of shares or debenture is made without filing the statements in lieu of prospectus. the allottee may avoid it within two months after the statutory meeting. PUBLIC DEPOSITS Deposit means any deposit of money with the company and includes any amount borrowed by a company. (8) A company cannot accept deposits beyond 10% of the paidup capital. Rules for inviting or accepting deposits by the company: (1) No deposit can be invited. (4) Provision for nomination to be available. (7) A company cannot accept deposits. In the event of the company defaulting in repayment to such depositor. of the company. or where no such meeting to be held. or by his agent authorized in writing. Failure to comply with the provisions of law is fine of rupees five hundred per day and imprisonment up to three years. (10) In case of non-repayment within the above stipulated time. intimation will have to be given to the Company Law Board within sixty days of the default giving details. without an advertisement specifying the financial conditions. This period may be extended by another thirty days by the Central Government. Such a statement is required to be signed by every person.000. (6) Any deposit repayable before six months. .Schedule III contains the details of the particulars to be furnished. Company Law Board shall pass appropriate orders within thirty days. a sum not exceeding twenty thousand rupees in a company. In case of private company becoming a public company. management structure and other required particulars of the company. (2) Declaration as to repayment of the deposit. (5) No deposit payable on demand or repayable before three months can be accepted. the company shall be subjected to fine which shall not be less than twice the amount not repaid and every officer of the company. statement in lieu of the prospectus can be filed. within two months of the allotment. [refer Rule 2(b) of Companies acceptance of Deposits) Rules 1975 for categories excluded. (3) Declaration by the depositor that the money is not being deposited out of the funds acquired by him by borrowing or accepting deposits from any other person. Contravention also renders the company and every director liable to a fine upto rupees 10. Schedule IV contains the details of the particulars to be furnished for the same. but shall not include such categories or amount as may be prescribed in consultation with the RBI. Small depositor: Means a depositor who has deposited in a financial year. have to be refunded within thirty days of acceptance of the deposit. who is in default shall be punishable with imprisonment for a term which may extend up to five years. may be accepted provided such deposits do not exceed 10% of the paid-up capital and free reserves. (9) Any deposit received in contravention of the above rules. who is named therein as a director or a proposed director.

These two expressions are being used interchangeably. a shareholder is one who holds shares in a company. be in the same position as if he had signed the memorandum for shares of that number or value. a shareholder is also a member of the company. etc. shares are transmitted to his legal representatives. an undertaking on the part of the director to buy qualification shares. it is called a joint membership. gift or some other transaction. (3) By allotment: A person may acquire membership of a company. puts him in the position of a subscriber to the memorandum. On the other hand. Hence neither application nor allotment of shares is necessary. He is deemed to be a member of the company and must be entered in the register of members.MEMBERSHIP OF A COMPANY AND REGISTER OF MEMBER MEANING OF MEMBER According to S. WHO CAN BECOME A MEMBER Following are the categories of persons or entities. However where a company has a share capital. the name of the member appearing first is considered to be the main member for the purpose of sending notices. if he allows his name to be put on the register of members or otherwise holds himself out as a member. (6) Membership by acquiescence and estoppel: A person is deemed to be a member of a company. (ii) A company can become a member of another company. dividends. Thus. However. Hence a shareholder is also a member but a member may not necessarily be a shareholder of a company. to take and pay for his qualification shares. . who become members of the company on their being entered in the register of members.CHAPTER 4 . even if there is no agreement to become a member. who can a member of a company: (i) Any person competent to contract. (iii) every person. acquires membership. While in cases. 41 of the Companies Act. ACQUISITION OF MEMBERSHIP A person may become a member of a company in the following ways: (1) By subscribing to the memorandum: Signatories to the memorandum ipsofacto become members of the company on its incorporation. a member of a company means a person — (i) who has subscribed his name to the memorandum. (ii) any other person. (5) By transfer: A person who take shares from an existing member by sale. who has agreed in writing to become a member and whose name is entered in the register of members. (4) By transmission: On the death of a shareholder. they all shall be treated as a single member. By virtue of being subscribers. by application and allotment of shares. where the company has no share capital they are members. In such a case. on his name appearing in the register of members. holding equity share capital of a company and whose name is entered as beneficial owner in the records of the depository (inserted by the Depositories Act. they are deemed to have become members and must be entered in the register of members. (2) By undertaking to buy qualification shares: Where a person has signed an undertaking. this liability springs into existence as a result of acquiescence and estoppel. 1976). (7) Joint members: When two or more persons hold share in a company in their joint names. Thus. he shall as regards those shares.

where such surrender is permitted. one lath or if it exceeds that amount. (5) If his shares are sold in execution of a decree of the Court. A trustee. (4) If he validly surrenders shares to the company. However. by means of transfer of shares provided the shares are full paid up. (10) If the company is being wound up.. does not exceed Rs. as for example. These rights cannot be withheld. A non-resident cannot become a member of a company without the permission of the Reserve Bank of India under the Foreign Exchange Regulation Act.(iii) (iv) (v) (vi) (vii) (viii) A firm is not a legal person. 1973. taken away. Hence. any person holding shares in a company as a trustee. 1963 has provided for appointment of public trustee by the Union Government. An insolvent. A copy of such declaration is required to be sent by the trustee to the company concerned within 21 days after the declaration to the public trust. and therefore cannot buy shares in its own name. TERMINATION OF MEMBERSHIP Termination of membership happens under the following circumstances: (1) Transfer of shares: The transferor ceases to be a member when the transferee is placed on the register of members. (2) If his shares are forfeited by the company. However. it does not exceed Rs. whichever is less. (9) If redeemable preference shares are redeemed. these provisions are not applicable to the following two cases: (a) where a trust is not created by an instrument in writing. is required to make a declaration to the public trust within the prescribed time. The shares of an insolvent. A registered society can acquire shares in a company. held in trust. if the company goes into liquidation. A minor can be admitted to the membership of a company limited by shares. (6) If he rescinds the contract to take shares. if any. However. who buys shares. by Companies Amendment Act. However. vest in the Official Receiver or Assignee. . or modified by the Memorandum or Articles of Association. the estate of the deceased member remains liable until the shares are registered in the name of his legal representative. a firm may hold shares in the names of individual partners who may be entered as joint holders. may be taken as a member so long as his name appears in the register of members. in the exercise of its rights to enforce a lien. notwithstanding the right of official assignee or receiver to be registered as a member. (7) If he is adjudicated insolvent. he remains liable to be placed in the ‘B’ list for one year. However. if the value of the shares. Some of the Statutory rights of a members are as under: (a) A member has a right of priority to have shares offered in case of increase of capital. (8) If he dies. a member remains liable as a contributor and is also entitled to share in the surplus assets. RIGHTS AND LIABiLITIES OF MEMBERS Rights of Members: The following are the rights of the members of a company: (1) Statutory Rights: The statutory rights are conferred upon members of a company by the Companies Act. on the ground of misrepresentation in the prospectus or of irregular allotment. 5 lakhs or 25% of the paid up share capital of the company. will be treated as a member in his individual capacity. (3) If the company sells his shares under some provision in its Articles. and (b) even if the trust is created by an instrument in writing. Failure to do so will invite a penalty of fine.

shall keep an index of the names of the members of the company. one being a member of a company. (b) the date on which each person was entered in the register as a member. subject only to valid and authorized transfer of shares. Right to participate in appointments of directors and auditors in the annual general meetings. Therefore every company must keep a register of members with the following details: (a) the name. ie liability of each member is to the extent of guarantee agreed upon.e. Right to petition to the High Court for winding up of the company. (2) Index of Members: Every company. Right to receive a share certificate. having more than fifty members. Liabilities of Members: Liabilities of the members depends upon the kind of company i.(b) (c) (d) (e) (f) (g) (h) (i) (j) (k) (l) (2) (3) Right to receive notices of meetings. The purpose of this is to enable entries relating to a particular member to be readily found. register of debentureholders and copies of annual returns. where the company is a limited company. (c) the date on which any person ceased to be a member. Right to receive copies of annual accounts of the company. Right to petition to the Central Government for ordering an investigation into the affairs of the company. (4) Documentary Rights: These rights are conferred upon the members by the Memorandum and Articles of Association. (b) Privilege of immunity from personal liability of company’s debts. . Right to petition to the High Court for relief in cases of oppression and mismanagement. Right to transfer shares. attend and vote at meetings. unless the Register of Members itself is kept in the form of an index. right to participate in the distribution of assets in case of liquidation of the company. REGISTER OF MEMBERS Register of Members: Register of members is prima facie evidence of. if ordered in the discretion of the directors. the iability of each member is unlimited. Any default in complying with the above shall render the company and every officer in default liable to a fine which may extend to rupees 500 for every day during which the default continues. the liability of each is limited to the face value of the share he has agreed upon. Right to apply to the Court for calling an extraordinary meeting of the company. While if the company is a company limited by guarantee. (c) Right to participate in dividend distribution. (b) Right to bring representative suits on company’s cause of action. address of members and shares held by each and the amount paid. Right to apply to the Central Government for calling an annual general meeting if the board of directors fails to call such a meeting. Proprietary Rights: Proprietary rights include the following rights: (a) Right to be registered as a member in the company’s register of members. Remedial Rights: Remedial rights include the following rights: (a) Right to information and inspection of company’s records. Right to inspect the register of members. to remedy mismanagement or unauthorized acts and thereby to compel the company to enforce its rights. Finally in case of company with unlimited liability. (d) Finally.

it is important that the register maintains. or any member of the company. keep in any state or country outside India a branch register of members or debenture holders residing in that state or country. or investor. the provisions for private company is dealt with under subsection 14 of section 111. publish in some newspapers circulated in the district. The petition is to be made in writing along h the prescribed fee of rupees five hundred. if so authorized by its articles. every officer of the company who is in default. 1996. The person aggrieved. Act 1992 or any regulation made there under. the company. If the register of members is closed without giving the required notice or after giving a shorter notice or where the register is closed for an aggregate period in excess of the limit specified. the same shall be notified to the Registrar.(3) (4) If there are any changes in the Register of Members. the provisions. In default of complying with the orders of the Tribunal. Non-compliance of any rule shall entail fine for the company and every officer upto rupees five hundred for every day of default. The grounds on which rectification may be sought are: (a) Where the transfer of shares is in contravention of any provision of the SEBI. whenever there is a change in the place of keGping the register or discontinuance. whereas for public companies. a depository or the Securities and Exchange Board of India can make a petition. for rectification of register of members for both private companies as well as public companies were the same. as to the place of keeping the register. whether a person is a member or not. shall be punishable with fine which may extend to rupees ten thousand and with a further fine which may extend up to rupees one thousand for every day after the first day after which the default continues. and every officer of the company in default shall be punishable with fine which may exceed to rupees five thousand for everyday during which the register is so closed. Any non-compliance shall attract a fine upto rupees five hundred for every defaulting member and the company. Foreign Register of Members: A company with ‘share capital’ or which has issued debentures may. The Tribunal after hearing the parties ‘pass relevant orders including interim orders and/or costs. Closure of Register of Members: A company may after giving not less than seven day’s notice. in which the registered office of the company is situated. or the company may apply to the Tribunal for rectification of register. it was with the Company Law Board. changing without sufficient cause. A participant. close the register of members for a period not exceeding 45 days in each year. within two months of the intimation of the refusal for rectification along with the requisite fee. This application has to be filed within two months of the refusal or within four onths of cause of action. Similarly. The power to order rectification now vests with the Tribunal. RECTIFICATION OF REGISTER OF MEMBERS: As the register of members is the prima facie evidence of. the power to order for rectification of register of member vests with the Tribunal since 2002. Rectification of register of members of private companies and I public companies: Rectification could be on account of refusing to make changes. Prior to year 2002. true and correct information. a new section 111A has been inserted. Rectification of register of members of public companies: Even in case of public companies. The Registrar shall be notified within 30 days of the opening of the register. but not exceeding 30 days at any one time. such changes must be indicated on the Index of Members within fourteen days of the alteration. or omitting without sufficient cause. It is important to note that prior to the amendment of section 111 by the Depositories Act. . Now.

Where the transfer of shares is in contravention of any provision of any other law for the time being in force. (f) Particulars of the directors. and the dates on which they ceased to be members. 4 must be filed within 60 days of the holding of the AGM or from the last day on which the meeting should have been held in accordance with the provisions of the Companies Act. (d) The shares and debentures of the company. 1985. the whole time secretary is also required to sign. the remedy would be to file a civil suit. its manager and its secretary. (c) The register of debenture holders. If the company fails to comply with any of the provisions contained in the Act. Further it enables him to record the changes. which may extend to rupees five hundred for every day during which the default continues. managers and secretaries. (e) Total indebtedness of the company. Filing of the annual returns enables the Registrar to know of the changes that have occurred during the year. every officer of the company who is in default.. past and present. (c) The names of persons who ceased to be members. Note: Section 111A deals only with regard to transfer of shares and debentures. For other matters. The Tribunal after hearing the parties. The return must contain the following particulars: (a) The registered office.(b) (c) Where the transfer of shares is in contravention of any provision of the Sick Industrial Companies (Special Provision) Act. (d) All particulars with respect to persons who at the date of the return were the directors of the company. the company and every officer of the company who is in default shall be punishable with fine. (b) The names of members and respective dates on which they became members. (e) The particulars of the total indebtedness of the company. (b) The register of members or debenture holders both present and past. shall be punishable with fine which may extend to rupees ten thousand and with a further fine which may extend up to rupees one thousand for every day after the first day after which the default continues. Annual return of the company not having a share capital must furnish the following particulars: (a) The address of the registered office of the company. and for the companies having no share capital. The director and the manager or secretary of the company must sign the annual returns. Every company having a share capital must file the annual return with the Registrar at least once in a calendar year. If the company has no manager or secretary then it must be signed by at least two directors. The particulars to be stated in the annual return are different for the companies having a share capital. managing directors. may pass the relevant orders including interim orders and/or costs. In default of complying with the orders of the Tribunal. Annual return of a company having a share capital: The annual return must contain the particulars specified in Part 1 of Schedule V. . In case the company shares are listed on a recognized stock exchange.

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which has been demanded from the subscribers for payment.SHARE CAPITAL AND SHARES SHARE CAPITAL The capital raised by a limited company is called the share capital. Note: A public company cannot start. if so authorized by the articles. if the minimum subscription has not been received. that has been subscribed by the public. that has been issued by the company for subscription. has been received by the company in cash. alter its share capital. a prospectus or a statement in lieu of the prospectus at least three day prior to the allotment. (d) Called-up capital: It is that part of the nominal capital amount of the subscribed capital. A company to start may issue a part of the capital called the issued capital to the public for subscription. after taking into account the matters specified in clause 5 of part Ito Schedule II of the Act. . (b) Any preliminary expenses payable. This is the amount specified in the memorandum of association. (c) Subscribed Capital: It is the amount of shares. is not paid by the subscribers or where the application money is not kept in a scheduled bank. the amount stated in the prospectus as minimum subscription. then within two months of the allotment. (c) Any commission payable towards subscription of any shares. (b) Issued Capital: It is that part of the capital. (e) Reserve capital: It is that part of the company’s uncalled capital. avoid the allotment within two months after the statutory meeting and if not statutory meeting is held or allotted after the meeting. (2) Consolidate arid divide all or any of its share capital into shares of larger amount than its existing shares. This capital is used in the following senses: (a) Authorized Capital: Also called as nominal or registered capital. But no company can allot shares unless. (e) Working capital. Minimum subscription: The minimum subscription is the amount fixed by the Board of Directors. which shall be called except on winding up. (c) Where the shares have not been listed on the stock exchange. the applicant may if he so desires. If a company makes an irregular allotment. (d) The repayment of any money borrowed by the company for the above matters.CHAPTER 5 . This is the maximum amount the company is authorized to raise by issue of shares. (f) Any other expenditure. ALTERATION F SHARE CAPITAL A company having share capital may. The matters to be taken into account are: (a) The purchase price of any property purchased or to be purchased. (b) Five percent amount of the nominal value of the shares payable on application. Irregular allotment: An allotment is irregular if: (a) The company does not file with the Registrar. Thus the capital may be altered by: (1) Issue of new share. within 10 weeks or the application for listing has been rejected by the stock exchange.

It must be accepted within fifteen days. in the form of composite application form specifying the number of shares offered. Alteration of the share capital must be done in the bona fide interest of the company. (II) Reduction in the share capital. Where. the directors may dispose them in a maimer most beneficial to the company. increase its capital by issue of new shares also called rights issue or by allotment of unallotted shares. Offering of shares to the existing shareholders is called the rights issue and the shareholder’s right to receive these shares is called the ‘pre-emptive rights’. . in favour of their nominees who may or may not be members of the company. (c) The offer of shares must be made by a notice.(3) (4) (5) Convert all or any of its fully paid shares into stock and reconvert that stock into fully paid shares of any denomination Sub-divide its shares into shares of smaller amount. Cancel shares not subscribed. Increase In Increase in the Share Capital Further Issue of Shares Conversion of Debentures or Loans into Shares (1) Further Issue of Shares: A company by passing an ordinary resolution in its general meeting may. offered to them. (I) INCREASE IN THE SHARE CAPITAL: The company can increase its share capital by: (1) By further issue of shares. that they have the right to renounce all or any of the shares. The conditions for making a rights issue: (a) Rights issue can be offered only after the expiry of two years from the formation of the company or after the expiry of one year. the existing shareholders have renounced shares. whichever is earlier. (b) The new shares must be offered to the existing shareholders. This alteration could be in the form of: (I) Increase in the share capital. (d) The notice must inform the shareholders. failing which the offer lapses. in proportion to the paid up capital on the shares held by them on that date. from the first allotment of shares. (2) By conversion of debentures or loans into shares. or where shares have been left after proportionate allotment to the existing shareholders.

which are to be converted into shares by the order of the central government. Where the company is not in favour of the order of conversion. (2) Conversion of debentures or loans into shares: The debentures or loans may be converted into shares. the terms of issue of the debentures or the loan. (e) Where the company is a private company. (3) Minimum subscription clause applies to rights issue as well. (4) Rights issue should be kept open for at least 30 days and not exceeding 60 days. Debentures issued to or loan obtained from the government or any institution specified by it. . the capital of the company. deciding to offer new shares directly to outsiders. made by the central government in this behalf. exceed rupees fifty lakhs. there are certain circumstances under which the company can directly issue the shares to the outsiders in total exclusion of the existing shareholders. the rate of interest payable. However. the company may within thirty days from the date of communication of the order or within such further time as may be granted by the Court prefer an appeal to the Court. its loan liabilities. (2) In case the right issue of a listed company. This is done under the following circumstances: (a) Where the shares are issued against conversion of debentures or loans provided the following two conditions are satisfied: (i) That the company by passing a special resolution has accorded approval to the terms of issue of such loans or debentures. and (ii) That the terms of issue of such loans or debentures. if any. (c) Where the existing shareholders decline to accept the shares. or (b) Where the company passes an ordinary resolution and obtains the approval of the central government. the profits of the company in the last five years and the current market price of the shares of the company. for the first time after its formation. (b) The central government while approving must keep in mind the financial position of the company. which intend to raise funds in excess of 50 lakhs. in case of conversion of debentures or loan obtained from the govermnent. SEBI GUIDELINES ON RIGHTS ISSUE: (1) The guidelines apply only to existing listed companies. (5) Underwriting of rights issue is not mandatory. have either been approved by the central government before the issue of the debentures or the V raising of the loans.Although further issue has got to be firstly offered to the existing shareholders. the company must appoint a merchant banker. its reserves. or are in conformity with the rules. (d) Where the new shares are issued within two years of the formation of the company or within one year of the allotment made. Those circumstances are: (a) Where the company passes a special resolution in the general meeting. the proposed order needs to be placed before each House of the Parliament while in session for a period of thirty days which may be comprised in one session or in two or more successive sessions. thus having the effect of increasing the authorized capital of the company.

Example: Where the share value is Rs. the liability on each share shall be only R. on account of non listing or under subscription etc. who shall register the same. this not mean. An issuer company shall not withdraw the rights issue after announcement of the record date. It could be done only with the sanction of the Tribunal. the goodwill. The order becomes operative from the date of registration. which is in excess of the requirements of the company. the day to day functioning. The company may cancel any paid up share capital. make any rights issue. No company shall pending conversion of fully convertible debentures or partly convertible debentures. But. it cannot make another application for listing of any of its securities for a minimum period of twelve months from the record date. If the articles do not contain any provision for reduction. confirming the reduction in the share capital. the borrowing capacity of the company and the creditors rely on the security of the share capital. which is lost or is un-represented by any available assets. If it does so. Moreover.(6) (7) (8) (9) (10) The company must enter into an agreement with a Depository for dematerialization of securities.10 . Option to the subscribers to hold securities in dematerialized form or in the form of share certificates. However.. 70 has already been paid. or forfeited. firstly the articles must be altered to provided for the same. The reason being. The certified copy of the Tribunal confirming the reduction of the capital must be ified with the Registrar of Companies. that the share capital cannot be reduced. the power was vested with the Court). 100 and is reduced to Rs. one must not forget that the liability of both present and past members shall change in accordance with the reduction in the capital. Partly paid up shares if any. The company must pass a special resolution followed by the approval of the Tribunal. The Tribunal before confirming must look into the interest of the creditors as well as the interest of the shareholders. unless similar benefit is extended to the holders of such fully convertible debentures or partly convertible debentures. The capital of a company may be reduced in any of the following ways: (1) (2) (3) Reduction in the liability on its unpaid shares. the shares so reserved may be issued at the time of conversion/s of such debentures on the same terms on which the rights issue was made. (Prior to the Second Anendment in 2002. If Rs. till the securities referred to in the offer document have been listed or application money refunded. No company shall make a rights issue during the period commencing from the submission of offer document to the SEBI.s. The company may pay off any paid-up share capital.80 per share. REDUCTION OF THE SHARE CAPITAL: (II) Reduction of Share Capital Reduction of Liability Cancle of shares Pay off A company must as far as possible must not reduce its share capital. must be fully paid up. The company can reduce its share capital only if authorized by the articles of association.

However. V By buying back of shares by the company. Any contravention of this will make the company and every . Purchase of shares by the company under the orders of the Tribunal under sec. and of interest in the second. the nominal amount]. for the purpose of liability in the first place. 1872.” Farwell J. has defined share as “the interest of a shareholder in the company measured by a sum of money. and includes stock except where there is a distinction between stock and shares is expressed or implied. when subscription is invited.” Shares represent equal portion into which the capital is divided. A person acquires shares in a companyV by making application to the company. [i. By surrender of shares. Allotment is governed by the rules of the Indian Contract Act.icer of the company who is in default punishable with fine up rupees fifty thousand. Those circumstances are: (1) (2) (3) (4) (5) (6) In case of forfeiture of shares.402(b) V By redemption of redeemable preference shares by the company.e. without the sanction of the Tribunal. there are certain circumstances wherein reduction in the share capital occurs. SHARES Share has been defined as “a share in the share capital of company. but also consisting of a series of mutual covenants entered into by all the shareholders inter se. By cancellation of shares which have not been taken or agreed to be taken.. It must be noted no shares or debentures shall be made. Allotment of the shares can be made only after the Board of Directors have passed a resolution to that effect. . until the beginning of the fifth day after the day on which the prospectus is first issued or luch later time as may be prescribed in the prospectus.

Participating. (b) (c) . out of the profits of the company or out of the proceeds of a fresh issue. the rights attached to different classes of shares are called class rights. 10. Further equity shares have been on the basis of voting rights are further sub-divided into two kinds.) Preference shares are further classified as follow: (a) Cumulative and Non-cumulative: When a company fails to declare the dividend in a particular year. after repayment of the claims of the creditors and preference shareholders.KINDS OF SHARES A share carries both rights and obligations. or may issue shares with different rights and obligations. after paying off the preference shareholder and equity shareholder. Non-compliance shall render the company and every officer in default. they are called non-participating preference shareholder.’ On the other hand if the shares are redeemed out of the proceeds of a fresh issue of shares. namely: (a) With voting rights or (b) With differential voting rights. The most common types of classes of shares are: (1) Equity or ordinary shares (2) Preferential shares (1) Equity Shares: Means shares.000. The rate of dividend is not fixed. such shares may then be cancelled according to the procedure laid down. which are not preference share. Where the shares are redeemed out of the profits. when the dividend of a previous year if unpaid. but carrys forward the arrears of dividend. Where there is variation. and A preferential right in regard to repayment of capital on winding up. Non-cumulative preference shares are. Preference shares: A preference share is one. before paying the equity shareholders. are called participating preference shareholder On the other hand. which carries the following two rights over holders of equity share: (a) (b) A preferential right in respect of dividends. may issue preference shares which provide. punishable with fine up to Rs. A company may issue all shares with same rights and obligations. equity share capital is repayable only. and pays out of the profits of the subsequent year is called as cumulative preference shares. The arrears shall be paid. Redeemable and Irredeemable Preference shares: Are when shares become payable during the lifetime of a company after the expiry of a fixed period or after giving a certain notice at any time at the will of the Company are called redeemable preference shares. shall be transferred to an account called the ‘capital redemption reserve account. camot be carried forward. a sum equal to the amount paid on redemption from profit. (2) (Note: A private company which is not a subsidiary of a public company. Generally preference shares are cumulative in nature. and non-participating: Preference shareholders who participate in the surplus profit. made for the purpose of redemption. if the preference shareholders do not participate in the distribution of the surplus profit. at a fixed amount or rate. The shares may be redeemed. In the event of winding up of the company. no preferential right in return of capital in the case of winding up.

In case of debentures. if the shares become payable only at the time of liquidation of the company. The amount received. (c) The rate of commission must he disc1od in the prospectus or in the statement in lieu of the prospec as the case may be. The payment of commission is subject to the following conditions: (a) Must be authorized by the Articles. must not exceed five percent of the price at which the shares are being issued or any other price whichever is less. they are non-convertible preference shares. Issue of shares at a discount: Means. are called irredeemable preference shares. Note: Debentures cannot be issued at a discount. Discount can be allowed only after one year of commencement of the business of the company. Ordinary resolution has been passed together with the approval of the Central Government. as soon as the pricing process is complete. On the other hand if they do not carry any option of conversion. Soft underwriting: Is where an underwriter agrees to buy the shares at a later stage. Underwriting agreements may be hard underwriting or soft underwriting: Hard underwriting: Where. The amount from this account can be utilized only for specffic purposes listed by the act. subjects the company and every officer of the company who is in default. OTHER MATTERS RELATING TO SHARES (1) Underwriting agreements: A company may pay commission. (d) The prospectus must state the number of shares or debentures agreed to be underwritten. which are not offered to the public. (2) Issue of shares at a premium: A company enjoys the power to issue shares at a premium. as premium shall be transferred to an account called the ‘Securities Premium Account’. Generally a company cannot issue irredeemable preferential shares. Any default in complying with the rules. as it would affect the interest of the creditors. within a certain period of time are termed convertible preference shares. the commission must not exceed two and a half percent of the price of the debentures are issued or anyrother price whichever is less. discount not exceeding ten percent shall be permitted. (f) No commission shall be paid to any person on shares or debentures. However. (b) The commission paid or agreed to be paid. punishable with a fine extending up to rupees fifty. (d) Convertible and Non-convertible preference shares: Preference shares carrying the option of being converted into equity shares. the same shall be allowed provided it is specified in the Articles. (e) A copy of the underwriting agreement must be submitted to the Registrar. Such agreements are called underwriting agreements. the underwriter agrees to buy his commitment at the earliest stage. issued at a premium. But under certain circumstances. (3) . When the securities are issued at a price above the par or nominal value they are said to be. Generally this is not allowed. issue of shares below ‘par or face value.On the other hand. to any person who agrees to subscribe or procure subscription for shares or debentures of a company.

Book Building: Is a process undertaken by which a demand for the securities proposed to be issued by a body corporate is elicited and built up and the price for the securities is assessed on the basis of the bids obtained for the quantum of securities offered for subscription by issuer. included in the public issue and operating a post-listing price stabilizing mechanism for a period not exceeding thirty days in accordance with the provisions of Chapter VIII A of the DIP guidelines. from specified reserves. Shares can be transferred in accordance with the Articles of Association . 1996 (1) Transfer of shares under the Companies Act: Transferring of shares is one of the important features of a company. The following rules needs to be followed: (a) Call must be made in accordance with the Articles. This gives an opportunity to the market to discover the price for securities. In other words. the Board of Directors. the Board of Directors by passing a resolution authorize for buy back of shares and securities not exceeding ten percent of the total capital and reserves. This is an arrangement wherein the Issue would be over allotted to the extent of maximum of 15% of the issue size. The spread between the floor and the cap of the price band shall not be more than 20%. within which the payment is to be made. for providing know how or making available rights in the nature of intellectual property or value additions be whatever named called. by passing a special resolution and in accordance with the SEBI regulations. (f) Call to be made only in the bona fide interest of the company. This can be issued. However the buy back cannot exceed twenty-five percent of the total paid up capital and free reserves of the company in that financial year. exercises this option. Green Shoe Option: Is an option of allocating shares in excess of the shares. (b) A resolution must be passed by. (5) (6) Price Band: Price band is the price for securities within which the investors can bid. 1999 Act a company can buy back its own shares and other specified securities. Call on shares: Is the demand by the company on its shareholders to pay up the whole or part of the unpaid amount on shares. (7) (8) (9) TRANSFER OF SHARES Transfer of shares can take place under: (1) The Companies Act. by passing a special resolution. However by an amendment in 2001. (c) The resolution must state the amount and the time. Buy Back of shares or Safety Net: By Companies (Amendment).five percent of the nominal value of the share. The company. 1956 (2) The Depositories Act. (e) The maximum amount per call cannot exceed twenty. in any period of 365 days. only after one year of commencement of business. it means the cap should not be more than 120% of the floor price. Call on shares can be made at any time during the lifetime of the company or during the winding up. through a stabilizing agent.(4) Sweat Equity Shares: Are issued to a class of employees at discount or for consideration other than cash. Minimum fourteen days notice to be given (d) It must be made on uniform basis.

it shall within two months from the date on which the instrument of transfer was delivered to the company. However in case of a private company. (2) Transfer of shares under the Depositories Act: In this the shares are held in an electronic form. TRANSMISSION OF SHARES Here transfer of shares takes place by operation of law. who is an agent of the depository.000 and with a further fine of Rs. Transfer of shares takes place by means of a ‘Share Transfer form’. The depository shall arrange to complete the transaction by updating one’s account. 1. (1) On the death of a shareholder. This process is called dematerialisation. (3) Where a company is a shareholder and it goes into liquidation. Transmission of shares is the transmitting of shares under the following three circumstances namely: (1) On the death of a shareholder. appeal can be filed before the National Company Law Tribunal within two months. send notice of refusal to the transferor and transferee. Here transfer takes place in a paper format. Failure to comply with the orders of the Tribunal. No transfer is valid. In case the company does not send notice. (2) In case of insolvency of the shareholder. shall make the company and every officer in default punishable with fine up to Rs. Then the form is sent to the company for effecting the transfer. Transfer of shares become complete only when the name of the transferee is registered in the register of members. Against the order of refusal. giving reasons for such refusal. in which case an appeal can be filed within four months from the date on which the instrument of transfer was delivered to the company. . Where a company refuses to register a transfer. This is done with the help of a Depository Participant. Here no further communication to is necessary. subject to the production of Probate or Letter of administration or Succession Certificate as evidence of title. The National Company Law Tribunal may dismiss or direct the company to register the transfer within ten days of the receipt of the order. his shares shall vest in the Official Assignee or Official Receiver. which shall be presented for being stamped by the Registrar. the shares shall vest in legal representatives. 10. (2) Insolvency of the shareholder. unless the requisite stamp is affixed. there are restrictions on its members with regard to the transfer of shares. Here transfer takes place with a request of debit through the depository participant.000 for every day. Share certificates shall be surrendered and credit shall be given to one’s account with the number of shares. (3) If the company which is a shareholder.of a company together with the provisions of the Companies Act. goes into liquidation. the shares shall vest with the liquidator for necessary action. who can sell and transfer the shares. after the first day after which the default continues.

the principal is liable. company can also ratify acts of a director provided it is not ultravires. Generally. Dissimilarities: (1) A trustee can acquire property in his own name on behalf of the trust whereas a director cannot do so. Hence. This is because the director’s position and functions are having similarities with the expression used but are also dissimilar from them. while the company is the principal. Director as trustee: Though a director is not trustee in the strict sense of the term yet he has been held to be so since he stands in a fiduciary relation towards the shareholder. but not implied director.e. Director’s role is akin to the agent in the following aspects: (i) Acts of the director are acts of the company: The director is the agent. (2) The directors are agents of the company not shareholders. App 771. (3) The directors enjoy much more powers than that of an ordinary agent. The minimum number of directors required is two in case of private company and three in case of public company. 2 (13) defines – “Director includes any person occupying the position of director. Similarities: (1) Director is the trustee of company’s property and money like a trustee. Wilsàn (1866)2 Cli. (2) Director is a commercial man. the company is liable for the director’s act. (2) . Legal position of a director: As a director performs multi functions. sometimes as trustee. lacking both physical existence of its own as well as a mind of its own. function and duties that he discharges are important and not the name by which he is called. (Case — Fergusan v. However. (3) Like a trustee. (ii) Notice to a director is.CHAPTER 6 . The judiciary has given number of opinions as to the position of the directors. by whatever name it called. managing for the benefit of shareholders and self.” Thus his position. DEFINITION AND LEGAL POSITION OF A DIRECTOR Definition: S. But none of these expressions are exhaustive of their powers and responsibilities. He has sometimes been described as agent. it requires some human agency. who are responsible for the functioning of the company. notice to the company: Just as notice given to the agent is notice to the principal. The Act provides that human agency in the form of directors. So is it in case of company i. it is important to note that only individuals can be directors. any notice given to the director will be taken to be given to the company. sometimes as an employee and sometimes as an organ of the human body. while trustee manage only for the benefit of the beneficiary.DIRECTORS A company is an artificial legal person. (1) Director as agent: Director is primarily recognised as an agent of the company. (iii) Ratification: Like a principal who may ratify the act of an agent. Dissimilarities with agent: (1) There can be an implied agency. he cannot retain secret profits. (2) Director is the trustee of the powers delegated to him by the shareholders. for the acts of the agent falling within the scope of authority. it is very difficult to describe his position. sometimes as managing partner. through which it can function.

it was held ‘directors role is akin to that of a managing partner’. A person cannot be a director of more than 15 companies simultaneously Modes of appointment of directors: There are five modes of appointments. This is because directors while holding the interest of the company. However. rather he is appointed by the members in the AGM. because the company operates through the director. Every public company shall have a minimum of 3 directors and private company shall have a minimum of 2 directors. ha1l have a director elected by the small shareholders. (2) Appointment of directors in the Annual General Meeting. Cunningham (1926) 2 CH. (4) Appointment of directors by the Central Government. By amendment in 2000. Directors . 34. Dissimilarities: (1) He is not employed by the company. (1) First Directors: They are usually named in the articles of association. . Director as managing parther: In Automatic Self Cleansing Filter Syndicate Co. these directors hold office only till the first annual general meeting. Dissimilarity: Generally an organ does not suffer from any illness without its immediate effect on the whole body. but not any one role exclusively. Whereas director is liable independently for breach of duty. In conclusion one may say. MODES OF APPOINTMENT OF DIRECTORS Constitution of Board of Directors: The directors of a company are collectively called ‘Board of Directors’. (2) Liabffity of directors are limited. v. the subscribers may appoint or they themselves shall be deemed to be the directors. (5) Director as an organ of the body: A director is many a time compared to the brain.000 or more small shareholders. while the liability of partners are unlimited. Ltd. Dissimilarities: (1) An individual director cannot bind the other directors unlike partners. but may be increased with the permission of the Central government.(3) (3) Role of a director is more varied when compared to that of a trustee. They are: (1) First Directors. are authorized by the shareholders to manage and control the affairs of the company in which shareholders are considered as inactive partners. The maximum number is twelve. where act of one partner binds all other partners. a public company having paid up capital of 5 crores or more or having 1. it may not be correct to call him so. (2) A director can hold directorship of as many as 15 companies. (3) Appointment of directors by the Board of Directors. (4) Director as an employee: Although a director may be compared to an employee as he gets paid for the work done. director performs all the roles. If not named. (5) Appointment of directors by the third parties.

The share must be acquired latest by 2 months of appointment. The person shall hold office only upto the date. resignation. The alternate director holds office. disqualification of a director appointed in the general meeting. The nominal value of qualification share shall not exceed rupees five thousand unless the nominal value of one share is more than five thousand rupees. these directors hold office only till the next annual general meeting. whichever is earlier. for a period of not less than three months from the State where the meetings are ordinarily held. Appointment by the Board of Directors: There are three kinds of directors appointed by the Board of Directors. (5) he has not paid calls for six months. Of the two thirds. if he had not vacated or the next AGM whichever is earlier. articles may specify the minimum shares a director must hold in order to be eligible to be a director. Directors are eligible for reappointment. directors may be appointed. under Sick Industrial Companies Act. These directors can hold office for a period of not more than three years on one occasion. can appoint additional directors. arising by reasons of death. (3) he has applied to be adjudicated as insolvent. The director longest in office is first to retire.(2) (3) (4) (5) Appointment in the Annual General Meeting: In case of public company or a private company which is a subsidiary of a public company. the director in whose places he is appointed would have held the office. one-third shall retire in every annual general meeting. appoint alternate director to act for a director during his absence. While two-thirds of them retire by rotation. (iii) Alternate Director: The Board if authorized by the articles of association or by the company in the general meeting. (2) Share qualifications: Although the Companies Act does not specify share qualification. Appointment by Central Government: The Central Government is empowered to appoint directors to prevent oppression and mismanagement on orders passed by the Company Law Board. QUALIFICATIONS AND DISQUALIFICATIONS Qualifications: (1) He must be competent to contract. (2) he is an undischarged insolvent. (ii) Filling up Casual Vacancies: The board is empowered to fill up a casual vacancy. Appointment by third parties: At times third parties like financial institutions. The directors are elected by ordinary or by proportional representation. till the return of the director in whose place he was appointed or till the period the original director was entitled to hold office. only one-third of the directors are permanent directors. Disqualification: A person shall not be capable of being appointed as a director of a company if — (1) he is found to be of unsound mind. . However. (i) Additional Directors: Subject to the provision of the articles of association the Board. (4) he has been convicted of any offence involving moral turpitude and sentenced to imprisonment for not less than six months and a period of five years has not lapsed from the date of expiry of the sentence.

whichever is longer. (3) By Central Government. The rules of vacation shall apply to both public and private companies. by the director may be circulated amongst members. Grounds may be stated. However. (v) Removal is effected by passing ordinary resolution. (1) By Shareholders: Shareholders can remove a director by following the below mentioned procedure: (i) The company must be. VACATION OF THE OFFICE OF DIRECTORS The office of a director shall become vacant if the director incurs the below mentioned disqualifications or on any of the following additional grounds: (1) (2) (3) (4) (5) (6) Where he absents himself from three consecutive meetings of the Board or from all meetings of the Board for a continuous period of three months. 2002]: In case of oppression and mismanagement. 1. (iii) Where the company appoints two-thirds of its directors by proportional representations By Tribunal [Substituted for Company Law Board. (iii) Reply if any. breach of trust or persistent default in discharging his duties. If he fails to obtain the qualification shares within two months of his appointment or at any time he ceases to hold them. By Central Government: The Central Government on the recommendation of the Tribunal may remove a director. the Tribunal may appoint a special officer or an advisory board for the proper working of the company. (iv) All members are informed. (2) By Tribunal. the Tribunal may order removal of director/s In such cases. MODES OF REMOVAL OF DIRECTORS There are three modes of removal of directors. served with special notice atleast fourteen days prior to the passing of the resolution for removal of the director. in the following cases. (ii) Where the director is holding office for life on April. 1956 of a private company. a director cannot be removed by the shareholders: (i) Where appointment is by the Central Government. If he is disqualified by an order of the Court. if time permits or else may be read out before passing of resolution. (ii) A copy of the same is sent to the director concerned. . without leave of absence. They are — (1) By Shareholders. If he is removed before the expiry of period of his office. (2) (3) Grounds for reference to Tribunal: (a) The director is guilty of fraud. If he has taken a loan from the company in contravention of Companies Act. (b) Business is not being carried on. in accordance with sound business principles. misfeasance. If he enters into a contract with the company without disclosing his personal interest. by Companies (Second Amendment) Act.(6) he has been disqualified by the Court on the ground of fraud or misfeasance in relation to the company.

(1) General powers: The powers of the Board of Directors are coextensive with that of the company. Procedure: (1) The Central Government may refer a case against the director to be removed on any of the above grounds to the Tribunal. (2) Powers exercisable with the approval of the Board. or for unlawfu’ purpose or in a manner prejudicial to the public interest. (3) Powers exercisable with the approval of shareholders. is affecting the interest of trade. Powers exercisable only with the consent of shareholders (by approval at the AGM): This powers may also be referred as ‘restrictions on the powers of the board of directors’. POWERS AND RIGHTS OF DIRECTORS Powers of Directors: Powers of directors can be studied under the following headings: (1) General powers. (ii) Board becoming incompetent. shall send its recommendations to the Central Government. (iv) Under residuary powers. (i) Sale. direct the director against whom enquiry is pending. (2) (3) . That the business of a company is. If a director is removed by the Tribunal. the following cases: (i) Directors acting malafide. may if it thinks fit. casual and alternative directors. Powers exercisable with the approval of the Board of Directors: The board of directors shall exercise the followings powers only by passing a resolutions at the board meeting: (a) call on shares (b) issue debentures (c) buy back shares (d) borrow money (e) power to make loans (f) invest money (g) appoint additional. (5) The Central Government shall suitably pass orders. received by the company on compulsory acquisition in securities other than trust securities. not to discharge his duties during the inquiry. shall conduct an enquiry. However.(c) (d) That the conduct of business by such director. (2) The Tribunal. industry or business to which such company pertains. (4) Powers exercisable with the consent of Central Government. (4) The Tribunal. (3) The Tribunal. have an overriding power over the decisions of the Board in. lease or disposal of the company’s undertaking. (iii) Investment of amount of compensation. or has been conducted by such a person with a intent to defraud creditors. he shall be disqualified from holding any such post for a period of five years. the shareholders. (iii) Deadlock in the management. (iv) Borrowings beyond paid-up capital of the company. (ii) Extension of time for repayment of debt due by a director.

(v) Contributions to any charitable or other funds beyond Rupees 50. quarterly or yearly. whichever is greater. they must discharge their duties with greatest good faith. (i) Liability of directors as shareholders: Directors are also shareholders of the company. For other directors it should not exceed 1% of net profits where the company also has managing or whole time directors and not more than 3% of net profits in other cases. (iv) Duty not to delegate functions. (ix) Duty to make good the losses in capital before declaration of dividend. (v) Duty to invest company’s money in a proper state of investments. (ii) Right to remuneration: For whole-time director or managing director of a public company or a private company. (xi) Duty to refrain from acting on behalf of the company. (iii) Right to compensation: A director is entitled to compensation on pre-mature termination. Therefore. which is a subsidiary of a public company remuneration may be upto 5% of net profits. (iii) To sanction loan to directors of a public company. (iv) To increase the remuneration of a director. unlimited or limited by guarantee based on the nature of the company. (vi) Duty to deposit money of the company in a scheduled bank. when validly demanded. The remuneration in all cases may be paid monthly. Hence like the shareholder their liabilities may be limited. (ii) Duty to act with reasonable care and diligence. Rights of Directors: The Act confers following rights on directors: (i) Right to attend and participate in the meetings. wholetime director or non-rotational director. breach of trust. if there is one such director and not more than 10% if there are two or more directors. (ii) To appoint a person for the first time as managing or whole-time director.000 in one financial year or 5% of its average net profits during the preceeding three financial years. (i) To amend provision relating to the appointment of a managing director. However no compensation shall be paid if the director is guilty of fraud. (4) Powers exercisable with the approval of the Central Govemment: The following powers may be exercised by the board of directors only with the prior approval of the Central Government. (vii) Duty to forward statutory report to every member. (v) To invest in shares of another company. (iii) Duty to attend board meetings and committee meetings. (x) Duty to prepare and place the balance sheet at the ACM. . (viii) Duty to call for extra-ordinary meeting. in the case of liquidation. DUTIES AND LIABILITIES OF DIRECTORS Duties of Directors: The duties of a director are — (i) Duty to act in good faith: Directors are in a fiduciary relation to the company. Liabilities: The liabilities of directors may be studied from three points.

” Thus a managing director is a person with vast substantial powers. and could be appointed by an agreement or by resolution passed in the general meeting or by resolution passed in the board of directors meeting or by virtue of Memorandum of Association or Articles of Association. or (2) Has at any time been adjudged an insolvent. These provisions do not apply to a private company. (b) For untrue statement in the prospectus. or has at any time suspended payment to his creditors or makes or has at any time made a composition with the. A managing director is disqualified if: (1) If he is an un discharged insolvent. which is a subsidiary of a public company. failure to allot shares within stipulated time. (e) For fraud and torts of the company directed by the directors. till he vacates the office. 1 Lakh. 5000 per day. by virtue of its memorandum or articles of association. The appointment however.(ii) (iii) Personal liabilities of directors: Personal liabilities of directors occurs in the following circumstances: (a) For breach of trust. has to have the approval of the Central Government. Note: The acts done up to the date of finding. falsification of accounts etc. Where the application is not approved by the Central Government and if the managing director so appointed fails to vacate the office. for certain breach of their duties like making untrue statement in the prospectus. in which case the Tribunal has the power to impose the following penalties: Company shall be liable to fine up to Rs. 50. is liable to be fined which may extend up to Rs. or (1) . Criminal liability: The Companies Act imposes criminal liability upon directors. (d) For misapplication of company’s money. MANAGING DIRECTOR Sec. shall be liable to a fine up to Rs. would be valid provided they were otherwise valid. 2(26) defines a managing director as: “A director wlo by virtue of an agreement with the company or of a resolution passed by the company in general meeting or by its Board of directors or. (f) For loss on account of failure to exercise skill and diligence. commission and perquisites received.1 lakh and also will have to refund the entire amount of salaries. if one of the two is a public company or a private company. (3) The person appointed as managing director shall be liable to fine up to Rs. Where the appointment is made in contravention of Schedule XIII. (2) Every officer of the company who is in default. 5 crores. shall have a managing director. is entrusted with substantial powers of management which would not otherivise be exercisable by him. (c) For ultravires acts of the company. the Central Government may refer the matter to the Tribunal. Every public company and every private company. or (3) If he suspends.000. Appointments cannot be made for more than five years at a time. which is a subsidiary of a public company and having a paid up capital of Rs. A person cannot be a managing director of more than two companies. The application for approval of the appointment has to be made within 90 days of appointment. and includes a director occupying the position of a managing director. by whatever name called.

(4)

If he is, or has at any time been convicted by a court of an offence involving moral turpitude.

A managing director may be paid remuneration either monthly or at specified percentage of the net profits of the company or partly by one way and partly by another. But such remuneration shall not exceed -five percent of the net profits for one such director and if there are more than one managing director not more than ten percent of the net profits for all of them put together. Any change in remuneration other than stated needs the prior approval of the central government. WHOLE TIME DIRECTOR The Companies Act has not specifically defined whole time director. The term managing director or whole time director has been generally used in the sections. However, in the explanation to sec. 269, it has been stated, “whole time director includes a director in the whole time employment of the company.” The provision regarding appointment, remuneration, disqualification, tenure etc. are the same as that of the managing director. The only points of difference between the whole time director and the managing director are, the former cannot be appointed in more than one company at the same time, whereas the managing director can be appointed in two or more companies depending on the nature of the company. Also a whole time director has no restriction on the term of appointment, whereas a managing director can be appointed for not more than five years at a time.

IMPORTANT QUESTION Chapter 1 Q. 1 Define a Company. Explain various advantges and disadvantages of a Company. Q. 2 Explain the doctrine of ‘Corporate veil’. Under what circumstances can the veil be lifted? Q. 3 Briefly explain the classification of companies under the Act. Q. 4 Distinguish between a Private company and a Public company. Chapter 2 Q. 1 What is the need for memorandum of association? Explain the clauses. Q. 2 What do you mean by Articles of Association? Chapter 3 Q. 1 What is a prospectus? What does not consitute a prospectus? Q. 2 What are the remedies available to a subscriber for mis-statements in the prospectus? Discuss. Chapter 4 Q. 1 Who is a member of a company? Explain the different modes of acquiring membership in a company. Q. 2 What are the rights and liabilities of a member of a company? Chapter 5 Q. 1 Briefly explain the various classification of preference shares. Q. 2 Write a note on transfer and transmission of shares. Q. 3 Write a note on underwriting agreement.

CHAPTER 7 - COMPANY MEETINGS INTRODUCTION A company is an artificial person, acting through the Board of Directors. In fact, the capital of the company comes from the shareholders and members. Hence, as they have invested money, they are also interested in the functioning of the company. But they are not in a position to monitor day to day activities. They express their opinion on important decisions of the company in the meetings. The following are the kinds of meetings where the shareholders participate. (1) Statutory Meeting (2) Annual General Meeting (3) Extra-ordinary General Meeting (4) Class Meeting KINDS OF MEETINGS (1) Statutory Meeting: This meeting is to be held by every public company limited by shares or limited by guarantee and having a share capital. The object of the meeting is to acquaint the members with matters arising out of the promotion and formation of the company. It is conveyed after one month and not later than six months of commencement of business. The Directors are required to give minimum twenty-one days notice to the members. Along with the notice, a statutory report must be sent to all the members. A copy of the report is required to be sent to the Registrar. The statutory report contains the following matters: (a) Total shares allotted. (b) Cash received. (c) Summary of receipts and payments made up to 7 days prior to the report. Company Meetings 139 (d) Names, addresses and occupations of the directors, manager and secretary of the company and of its auditors. (e) Particulars of contracts if any. (f) Extent of non-carrying of each underwriting contract, together with the reason. (g) Details of commission and brokerage paid or to be paid to the director or manager, in connection with the issue of sale of shares or debentures. (h) Details of arrears due from every director and manager. If any default is made in filing the statutory report or in holding the statutory meeting, those in default are liable to fine, which may extend to five thousand rupees. Another consequence being the Tribunal can order for compulsory winding up of the company. (2) Annual General Meeting (AGM): Every company is required to hold the annual general meeting, in addition to any other meeting held by the company. This meeting enables the shareholders with the opportunity to exercise their powers of control, to place their views, and seek clarifications on matters that may not have convinced them.

which is not a public holiday and during the business hours. Example: A company incorporated in January 1. at the requisition by such number of members who hold at least 1/10th of the paid up capital. which cannot be postponed till the next annual general meeting. (e) The business to be transacted at such a meeting may comprise of: (i) Consideration of accounts. The company need not hold any other meeting in 2003 and 2004. (3) Extraordinary or Special General meeting: Any meeting held between two annual general meeting is called extraordinary general meeting. the Registrar of Companies may extend the time for holding the ACM by not more than 3 months. (f) Where the meeting is not held in accordance with the law. it must be signed by such number of members who have at least 1 / 10th of the total voting power. If the company has no share capital. (d) The meeting must be held at the registered office or the company or at some place within the city. 2003. The provisions relating to this meeting may be summarized as follows: (a) AGM must be held once a year. Further the Central Government has the power to call for the ACM.000 and in case of continuing default with further fine which may extend to Rs. The first annual general meeting of the company was held in May 2004.500 per day during the continuance of default. place and time of the meeting. and if such a general meeting is held within that period. (v) Any other business. However. (iv) Appointment of auditors and fixation of their remuneration. (Note: The meeting must be called within 45 days from the date of deposit of the requisition. The gap between two consecutive AGMs cannot be more than 15 months. and have a right to vote. town or village in which the registered office is situated. The notice must specify the date. The provision relating to this meeting may be summarized as follows: This meeting may be called: (a) By the Directors (b) By the Directors. it shall not be necessary for the company to hold any annual general meeting in the year of its incorporation or in the following year. (b) At least 21 days notice of the meeting must be given to every member of the company. (c) Shorter days of notice may be given with the consent of all members entitled to vote at the meeting.) . 2.The first general meeting is required to be held within a period of not more than 18 months from the date of its incorporation. 50. It is called to transact some urgent or special business. (ii) Declaration of dividend (iii) Appointment of directors. the company and every officer of the company who is in default shall be punishable with fine which may extend to Rs. The meeting must be held on a day. balance sheet and the reports of the Board of directors and auditors.

A deliberate omission of notice. is stated in the Articles of Association. Here the Tribunal may give directions in respect of the place. the date of receipt of notice and the date of meeting shall be excluded. it is important that the meetings are held in accordance with the procedure laid down. day and hour of the meeting. But. (4) Class meeting: It is a meeting of a particular class of shareholders. However the minimum required is 2 members in case of a private company and 5 members in case of a public company. By the Tribunal. The following are the legal rules for a valid meeting: (1) (2) Proper Authority: The meeting must be called. when it is impracticable to call for an extraordinary meeting. Quorum: The quorum that is required to hold the meeting as valid. where the Directors fail to call the meeting under the previous subsection. to being present personally in order to constitute a valid meeting. He is the person to put resolution to the meeting. for by the proper authority. Also. count the votes. that will bind only the members of the class concerned. if the Articles are silent. LEGAL RULES FOR A VALID MEETING The company meetings are held wherein decisions on important and relevant matters are taken. The proper authority to call a general meeting is the Board of Directors. even to a single member shall invalidate the meeting. The notice should be given minimum 21 days prior to the date of the meeting. In computing the period. then the members shall elect a chairman for the meeting. date and the manner in which the meeting be held and conducted. The meeting must be held within 3 months from the date of deposit of the requisition. It is generally held to pass resolution. these decisions shall be binding on all persons in respect of whom the matters are decided. (3) (4) (5) QUORUM ‘Quorum’ means the minimum number of members required. Hence. (b) The nature of the business to be transacted at the meeting. whenever it is necessary to alter or change the rights or privileges of that class as provided by the articles. The Articles of Association provides for the quorum. Chairman of the Meeting: The Chairman is necessary for the conduct of the meeting. declare the result and authenticate the minutes by signing. Proper Notice: A proper notice should be given to every member of the company. Contents of Notice: The notice must specify the following: (a) The place.(c) (d) By the requisitionists themselves. The appointment of the chairman is regulated by the Articles of Association of the company. But if . These class meetings must be convened.

then the number of members present shall constitute the quorum and the meeting may proceed. it is one man. day and place but it should be within the town. on the application of any member of the company.the quorum has not been stated in the Articles. If within half an hour the quorum is not present. One must note that quorum is required at the time when the meeting proceeds to transact business. The chairman is bound to order for a poli when demanded by: (a) In case of a public company having a share capital. (4) When the Board of Directors is empowered by Articles of Association to delegate some of their powers to a committee consisting of one member. or (2) . (2) Where the Central Government/Tribunal calls or directs the calling of AGM of the company. However under the following circumstances the presence of one member may constitute a valid quorum: (1) In case of class meeting of shareholders where all the shares of that class are held by one person. In Sharp v/s Dawes (1876).D. city or village of the registered office. If in the adjourned meeting also. It shall be the duty of the chairman to count the hands raised and to declare the results accordingly. it may direct even one member of the company present in person or by proxy shall be deemed to constitute a valid meeting. matters may be put to vote by show of hands. held one person cannot constitute a meeting as prima-facie meeting means coming together of more than one person. A declaration by the chairman as to the results shall be conclusive. By poll: Poll may be demanded by the members if they are dissatisfied by the results of voting by show of hands. They are as follows: (1) By show of hands or (2) By taking a poli (1) By show of hands: At any general meeting. 2 Q. by member or members having: (i) At least 1 / 10th of the total voting power in respect of resolution. (3) The Central Government/Tribunal may call a meeting other than the AGM and may direct that even one member present in person or proxy shall be deemed to constitute a valid meeting. quorum is irrelevant. one vote irrespective of the number of shares held. which can be adopted by the chairman to put the matter to vote in order to ascertain the wishes of the members. VOTING There are various methods. Here. the meeting shall stand adjourned to the same day next week at the same time and place. the Board may fix some other time. However.26. constitutes the quorum. Even one member present personally.B. then minimum 5 members in case of a public company and 2 members in the case of any other company constitute the quorum (member refers to member present in person and not by proxy). It need not be present through out or at the time of passing resolutions or voting. (5) In case of adjourned meeting. quorum is not present within half an hour.

Matters requiring special resolution are: (a) Alteration of any provision contained in the Memorandum.50. In case of a private company having a share capital by: (i) One member present in person or by proxy if not more than seven such members are personally present. A poll demanded on a question of adjournment or the appointment of a chairman. Some of the matters requiring ordinary resolution are as follows: (a) Issue of shares at a discount. (3) Resolution requiring special notice. (b) Alteration of share capital. by members having at least 1/10th of the total voting power in respect of the resolution. (c) In case of any other company. (i) Voluntary winding up of a company. (2) Special Resolution. and (ii) Two such members present in person or by proxy if more than seven members are personally present. 1. Generally matters are so important and outside the ordinary course of the company’s business. Special Resolution: When the motion is passed by not less than three-fourth majority of the members at the meeting. (c) Adoption of statutory report. a poll shall be taken within 48 hours of the demand for poll. Approval of appointment of sole selling agent. (e) Appointment of auditors and fixation of their remuneration. balance sheet along with report of directors and auditors. They are: (1) Ordinary Resolution. account. (f) Appointment of first directors who are liable to retire by rotation.(ii) At least Rs. (2) . A poll is complete when the result is ascertained. shall be taken forthwith. the votes cast in favour of the resolution are more than the votes cast against the resolution. (b) RESOLUTIONS A formal proposal put to the members in a meeting of the ‘company is called resolution. (h) Removal of a director before the expiry of his term. (j) Register an unlimited company as a limited company. which could lawfully have been contained in the Articles instead of the Memorandum. In any other case. In other words.000 of paid-up capital. (c) Alteration of the object clause. that majority of the need to members approve of them. Ordinary Resolution: When a motion is passed by simple majority of the members voting at a general meeting it is said to have been passed by an ordinary resolution. (g) Appointment of managing director. There are three kinds of resolutions. (d) Adoption of profit and loss. may be passed by a company. (b) Alteration of the registered office clause from one city! town/village to another or from one state to another.

Winding up of the company voluntarily. (5) Change in place of registered office outside the local limits of any city. To appoint inspectors to investigate the affairs of the company.(d) (e) (f) (g) (h) (i) (j) (k) (1) (m) (n) (o) (3) Alteration of the Articles. and requesting them to send their assent or dissent in writing on a postal ballot within a period of thirty days from the date of posting of the letter.000 or more. To create reserve capital. To appoint auditors under certain circumstances. to move the resolution has to be given to the company by the shareholder. To permit directors etc. along with a draft resolution explaining the reasons thereof. Investment exceeding the prescribed limit. where the paid up capital of the company is Rs. To reduce the share capital. may give an advertisement in the newspaper or may adopt any other appropriate manner. PASSING OF RESOLUTION BY POSTAL BALLOT: This provision has been incorporated by Companies (Amendment) Act. 2000 with effect from June 2001. (2) Alteration of the articles of association in relation to the deletion or insertion of provisions defining private company. The following are the matters where resolutions may be passed through postal ballot: (1) Alteration of the object clause of Memorandum. (c) Appointment of certain person.00. Matters requiring resolution with special notice are: (a) Appointment of auditor other than the retiring one. To pay interest out of the capital. (b) Removal of director before the expiry of the term and appointment of another in the place of the removed director. To have the company wound up by the tribunal. To commence new business. The company on receipt of the notice shall issue a notice to its shareholders in this regard. The company shall send a notice to all the shareholders.the company. 50. The company is permitted to seek votes of its members through postal ballot. town or village. (4) Issue of shares with differential voting rights as to voting or dividend or otherwise. who cannot be appointed in the ordinary course as director. The company if so desires may instead of serving notice on the shareholders. may be a retired judge or any person of repute) to conduct the postal ballot voting process in a fair and transparent manner. to hold office of profit. The company shall appoint one scrutinizer (a person who is not in the employment of . (6) Sale of whole or substantially the whole of the undertaking of a company. To appoint sole selling agents. (3) Buy-back of own shares by the company. Resolution requiring special notice: A resolution requiring special notice means a notice of at least 14 days. not less than 7 days before the meeting. .

(7) (8) (9) (10) Giving loans or extending guarantee or providing security in excess of the prescribed limit. who is in default shall be punishable with fine. small shareholders’ director. CHAPTER 8 . Power to compromise or make arrangements with creditors and members. which may extend to fifty thousand rupees.e. Election of a director i. The minutes are maintained in the Minute Book. The copy shall be furnished within 7 days of requisition. The minutes must contain a fair and correct summary of the proceedings. Variation in the rights attached to a class of shares or debentures or other securities. Minutes must be entered within 30 days of the conclusion of the meeting concerned. MINUTES Minutes are a record of the business transacted at a meeting. the company and every officer of the company. which have the pages numbered. Any default made in complying with the rules.BORROWING POWERS OF THE COMPANY INTRODUCTION All companies be it a trading company or a non-trading company requires money to carry on its activities. The finance required by a company are met by two ways: (1) Issue of shares (2) By public borrowing .. Also copy can be obtained on payment of the prescribed fee. The minutes are the evidence of the proceedings. A member has the right to inspect free of cost the minutes of the general meeting of the company.

(4) Suit for damages against the directors: The lender may claim damages from the directors and sue them personally for a breach of warranty of authority. On the other hand if the company refuses to ratify the directors’ act. on the other hand. the following equitable remedies shall be available to the lender: (1) Injunction and recovery: Where the money lent to the company has not been spent. BORROWING POWERS Every company’s power to borrow money is subject to the Companies Act and/or the Memorandum or Articles. (2) Subrogation: If the company in paying off its lawful debts. the borrowing becomes ultra vires. in this topic we shall restrict ourselves to public borrowings. the lender may obtain an injunction. The power to borrow money can be exercised by a public company. Thus the effects can be accordingly dealt with. this right is not available. the power to borrow is implied and hence. However. While in the case of a private company. has used the money borrowed. However. Borrowing may be ultra vires the company or ultra vires the directors. only after obtaining the certificate of commencement of business. if it borrows beyond its express or implied powers. he shall not have any priority over the other creditors even if the debts paid off had priority. the lender can subrogate to the position of the creditor so paid. Borrowing which is intra vires the company but ultra vires the directors: Where the borrowing is merely in excess of the power of the directors but not of the company. does not create an actionable debt. In all kinds of companies. Hence. However. depending on whether the company is a trading company or a non-trading company. the . EFFECTS OF ULTRA VIRES BORROWING Although the company has the power to borrow. where the fact that the company has no power to borrow is apparent. the company may borrow even if the power has not been specifically provided in the Memorandum or Articles. to restrain the company from parting with the money and seek for the recovery. the lender may claim such money or property. in case of non-trading company. However. the borrowing is ultra vires the company and is void. Hence. Effect of borrowing which is ultra vires the company: Where the board of directors borrow money beyond its express or implied powers. unless it has been expressly or impliedly stated in the Memorandum or Articles.Finance secured from the issue of shares has already been covered. this power to borrow can be exercised by the board of directors. Where the company is a trading company. it can be ratified and rendered valid. (3) Identification and tracing: Where the money is traceable or where the company has purchased property. it would be binding both on the company and the lender. the board of directors can borrow money at any time. with the ultra vires borrowing. However this right varies. does not have the power to borrow. Then.

A debenture holder does not have any right to vote in the company meetings. Debentures under the companies reads as: Sec. However. Now-a-days companies generally do not issue this kind of a debenture. transferable in the maimer provided by the articles. Thus it is commonly understood to mean.principle of agency shall apply. DEBENTURES The most usual form of borrowing by a company is by the issue of debentures. (2) . It usually specifies the date of redemption. then the rule laid down in Royal British Bank V/S Turquand shall apply. They are regarded as negotiable instrument. KINDS OF DEBENTURES Kinds of Debentures Nonconvertible Bearer (1) Registered Redeemable Irredeemable Convertible Bearer debentures: Are also known as unregistered debentures. It may or may not be under seal and so does not necessarily imply that any charge is given on the company’s asset. and are payable to bearer. if the borrowing amounts to an internal irregularity over which the outsider has no means of knowing. Registered debentures: These are debentures which are payable to the registered holders. whose name appears in the register of debenture holders. “a document acknowledging a loan made to the company and providing for the payment of interest on the sum borrowed until the debenture is redeemed. though such a charge usually exists.2(12) “Debenture includes debenture stock.” CHARACTERISTICS OF DEBENTURES (1) (2) (3) (4) (5) It is issued by a company and is usually in the form of a certificate. which is an acknowledgement of indebtedness. The debentures of a company are movable property. It generally creates a charge on the undertaking/s of the company.” Thus the act does not define what a debenture is. Such debentures are transferable in the same way as share or in accordance with the conditions stipulated. bonds and any other securities of a company whether constituting a charge on the company’s assets or not. It also provides for the payment of principal and interest at specified date or dates.

Convertible debentures: These debentures carry an option to the holders to convert them into preference or equity shares. A floating charge may get converted into a fixed charge. Thus. A debenture will be treated as irredeemable. winding up of a company. If the holder. after a certain period. without any priority of one over the other. The company can deal with such property. e. charge on the land. MORTGAGES AND CHARGES When a company borrows money. The charge created on the assets of the company may be of two kinds. they cease to be lenders to the company and become members. Generally. This is known as ‘crystallisatiOn of a floating charge’. as and when they mature. Debenture holders are also like creditors. Hence in the event of the company having insufficient funds. in the event of insufficient funds. In other words they are discharged rateably. (1) Fixed Charge: Is also known as ‘Specific Charge. creditors of a certain kind are ranked in the order of time. All transactions are subject to the charge. debentures are redeemable. exercise the right of conversion. the company is restrained from dealing with the property with charge. They are to be duly paid. the debentures shall be payable according to the date of issue or in accordance with the numerical order. the company has the right to pay back the debenture. However. (4) (5) (6) DEBENTURES WITH PARI PASSU CLAUSE Generally. for repayment of the principal amount or repayment of it is made conditional on the happening of an event.’ It is an equitable charge. (2) Floating Charge: It is a charge that is created on property that is changing. under section 124 of the act.. On the expiry of that specified time. stockin. it also has the power to give security for the debt by creating a mortgage or charge upon its assets.g. as regards the charge created to secure them.. Non-convertible debentures: These debentures do not give any option to their holders to convert them into preference e equity shares. though issued at different and varying times. where either there is no period fixed.(3) Redeemable Debentures: Here the debentures are issued for a specified period of time. which is created on some specific and definite assets of the company eg. the expression charge includes mortgage. The convertible debentures may be ful1y convertible (FCD) or partly convertible (PCD). which may not happen for an indefinite period of time. without the consent of the holder of the charge. in the normal course of business. where the ‘pari-passu’ clause is used in the debenture.trade.holders and have its properties released from the mortgage or charge. eg. Irredeemable debentures: Are also known as perpetual debentures. Although strictly speaking there is a difference in mortgage and charge. They are: (1) Fixed Charge. building etc. (2) Floating Charge. then all the debenture of the same series are to be ranked together. This happens when: ..

or. (5) Failure to register the charge as required. (9) A charge on goodwill. (6) A floating charge on the undertaking or any property of the company including stock in trade. extend the period by another 30 days on payment of additional fee not exceeding ten times the amount of fee specified. or a copyright or a licence under a copyright. the charge-holder becomes an unsecured creditor and cannot claim benefit of the charge. or A receiver is appointed1 or A default is made in paying the principal and / or interest and the holder of the charge brings an action to enforce it.mentioned cases within 30 days of creation of the charge. The Act requires the following charges to be registered with the Registrar. CONSEQUENCES OF NON-REGISTRATION OF CHARGE (1) The money secured becomes immediately payable. REGISTRATION OF CHARGES Registration of charge helps the people dealing with the company. will hold the company and its officer punishable with fine up to Rs. (4) A charge on any book debts of the company. (3) The unregistered charge automatically becomes void against the liquidators when the winding up commences. (2) A charge on uncalled share capital of the company (3) A charge on any immovable property. (5) A charge not being a pledge on any movable property of the company. (8) A charge on a ship or any share in a ship. 5000 for every day the default continue. or a patent or a licence under a patent. to ascertain as to what extent the company has charge on its assets and it also facilitates inspection of documents and records. . (7) A charge on calls made but not paid. The company is required to register the charge in the above. The Registrar may if satisfied. (1) A charge for the purpose of securing any issue of debentures. (2) The charge-holder cannot claim right of lien on the documents of title.(a) (b) (c) (d) The company goes into liquidation1 or The company ceases to carry on business. (4) On the winding up of the company.a trademark or a licence under a trademark.

The majority vote may either be a simple majority or a special majority. BASIS OF THE RULE OF SUPREMAC OF MAJORITY The basis of the rule of supremacy of majority may bestated as follows: (1) To honour the will of the shareholders: The will of the majority must prevail. The rule of majority. (2) To avoid multiplicity of suits: It is the fundamental principle of law. The court held. the COmpaty itself should bring an action and not individuals. The number involved in case of a company.’ MAJORITY RULE OR RULE IN FOSS V/S HARBOTTLE The supremacy of the majority rule was laid down in the year 1843 in the famous case of Foss v/s Harbottle. then there may arise a situation that for the same cause. If each and every shareholder were given the right to bring an action against the person who has caused loss to the company. and there should be an end to the litigation. are binding on the company and minority cannot bring an action. the majority votes of the shareholders. This rule is known as ‘Majority rule’ or the ‘rule of supremacy of the majority.important matters governing the company administration and management.and the proper plaintiff for wrongs done to the company. unnecessary litigation should be avoided. is the company itself and not the minority shareholders. two shareholders brought an action against the directors and promoters of the company alleging. (3) To recognize the separate legal entity of the Company: it is s believed that any wrong to the company. However. other than those delegated to the board of directors. (1843)2 Hare 461. may range from minimum two in case of a private company to a maximum of fifty. which are legally confirmed by the majority. For all. as maiiy actions as the number of shareholders may be brought. (4) To preserve the rigit of the majority to decide a democracy. the company in its general body meeting had already decided not to take action against the directors. seeks to ensure this principle. In this case. EXCEPTIONS TO THE RULE OF SUPRE1MCY OF MAJORITY . Thus the acts. decision is by. majorities’ will. whereby the property of the company was misapplied.CHAPTER 9 . It further held. the acts of the directors were capable of confirmation by the majority of members. that the company can act only through its majority shareholders. This is evident from the provisions of resolutions under the companies act. alienated and wasted” and prayed.THE MAJORITY RULE AND MINOROTY RIGHTS INTRODUCTION The company is an artificial legal person. while in case of public company the minimum number is seven whereas the maximum is unlimited. by the will of the majority shafeholders. Thus the company is governed and managed by the will of the majority and thus bind the minority. the directors be asked to make good the loss suffered by the company. It acts through the human agency. that shall prevail. It is also inferred that the sbreholder agrees to be guided. that they were responsible for “concerting and affecting various fraudulent and illegal transactions.

If done so. has the right to bring an action. Example: A company was formed. which is inconsistent with the articles. the company lent money without any security. A had started some legal action against B. Even a single shareholder. (Menier v/s Hoopers’ Telegraph Works. This is4 called as the ‘minority rights. the majority passed a resolution to compromise the action in a manner which was favourable to company B and unfavourable to company A. and one of the objects was to ‘advance money on security of land. (Brown v/s British Abrasive W1el Co. Held. Example: A large majority (98%) of the shareholders wished to buy up the minority (2%) with a view of extending the capital.Although law firmly believes in the majority rule. They can also bring an action to restrain the alteration of the articles. (3) (4) (5) . With ti’e it was realized the majority could approve. Any violation of them gives the individual a right of action. as the act is ultra vires the object clause. the minority cOuld bring an action. machinery’. the minority of company A can bring an action for setting aside the compromise. and the majority then passed a special resolution. which is not made bona fide for the benefit of the company.’ Under the following circumstances the minority can exercise their right: (1) Ultra vires acts: The acts that are ultra vires the company. the minority may challenge it. Acts inconsistent with the articles of association: The minority shareholders can restrain the company from doing an act. This resulted in the exceptions to the majoty rule wherein every shareholder may bring an action. the decision of the majority constitutes a fraud on the minority. any shareholder can bring an action restraining the majority from doing. In such case. These rights may be conferred by the Companies Act or by the Articles or by the General law. The minority refused to sell. any shareholder can bring an action. Every shareholder has the right to bring an action to restrain the company from doing such acts. altering the Articles so as to enable thee majority to purchase the minority shares compulsorily. Example: Changing the registered office from one place to another within the state requires special resolution. cannot be ratified even by the majority. 350). But at the meeting of the company A. houses. (2) Fraud on the minority: Sometimes.as a whole. App. but one cannot totally ignore the voice of the minority.. (1874) 9 Cli. (Bharat Insurance Company v/s Kanhaya La! AIR (1935) Lahore 792). only those acts which can be ratified. (1919) 1 Ch.290) Infringement of personal rights of individual members: Every shareholder has certain rights against the company. Held. However. If with ordinary resolution the registered office is being changed. The majority of the members of A were also the members of B. Example: A and B were two competing companies. a simple majority cannot approve it. Acts requiring special majority: When the act requires the approval of special majority.

for prevention of oppression and mismanagement. The shareholder can challenge it. The minority can bring an action under Ss. or the mismanagement of the company’s affairs. These have been discussed under the relevant heading. Under General Law: They are the exceptions to the majority rule. (4) Right to apply to the Tribunal. where there is a breach of duty by the directors and majority shareholders to the detriment of the company.ss rights.Example: A shareholder is denied the right to vote in the meeting without valid ground. These are: (1) Right to apply to the court. (6) Breach of duty: The minority shareholders may bring an action against the company. (5) Right to apply to the Court for winding up of the company. (3) Right to apply to the court with regard to reconstruction and amalgamation. for the cancellation of the variation of cla. (2) Right to apply to the Tribunal. The action will be allowed even if no fraud exists. there is oppression of minority. 397 and 398 of the companies act. Oppression and mismanagement: Sometimes. for the investigation of company’s affairs. (7) The companies Act as well as the General law provide certain specific provisions for protection of the minority shareholders and limits the majority rule. .

where the minority L. (3) The denial of right of inspection to the shareholder. However the courts have held the following acts do not amount to oppression: (1) Minor acts of mismanagement. we have already seen how the majority rule prevails in the case of company matters barring. thereby not permitting some shareholders to have voting rights in the company. . t exceptions provided. 743 (S. that the act of the company is harsh and unjust. to elect directors and to receive dividends. It has been taken to mean.CHAPTER 10 . and makes it impossible for the company to function. Forcing new and moite risky objects upon an unwilling minority. Omission to do something. Where the members of a company are deprived of their right to vote. which is otherwise just to do for protecting company’s interest. (1981) 51 Comp. Hence it is to be understood in the general and common way. One such exception. The minority shareholders have the following I powers for the protection of their own interest and also that of the public: (1) Application to the Tribunal for prevention of oppression and mismanagement.” Instances of Oppression: (1) (2) (3) (4) (5) (6) Where majority shareholders persistently flouts the decisions of the board of directors. Where there is an ui-treasonable and consistent refusal to accept a transfer or transmission of shares. in the context. Persistently disregarding the decisions of the board. harsh and wrongful But a series of illegal acts following upon one another can. (2) Failure to declare dividends and building up of reserves does not amount to oppression.). V/s Needle industries Newey (India) Holding Ltd. may not necessarily and by itself support the inference that the law was violated with a mala fide intention or that such violation are bur4ensome.C.. ‘not keeping to the accepted standards of honesty and fairness and a lack of regard of the other shareholders’ interest’. It refers to. in order to gain control over company’s affairs. of which the object is to cause or commit the oppression of persons against whom those acts are directed. is to prevent oppression and mismanagement. lead justifiably to the conclusion that they are a part of the same transaction. got the inherent right to interfere. the Supreme Court observed with regard to oppression: “The true position is that an isolated act. In Needle industries (India) Ltd. Cas.PREVENTION OF OPPRESSION AND MISMANAGEMENT INTRODUCTION In the earlier chapter. (2) Application to the Central Government seeking relief from the Tribunal (3) Application to the Central Government (4) Application to the Court for winding up MEANING OF OPPRESSION The term has not been defined in the act. which is contrary to law.

Business loss will not automatically show mismanagement. even if they turn out to be wrong or cause temporary losses Advances out of company’s funds by the controller to the sister concerns is not a mismanagement. Instances where courts have held there is no mismanagement (1) Bona fide decisions of the directors which are consistent with the company’s memorandum and articles of company itself association. Controlling group conspiring to defraud the members. not less than 100 membersor not less than 1/10th of the total numbner of its members which ever is less. The Central government of deems fit may authorise any member/s to apply. Where the company had not maintained proper records. In case of a company not having a share capital. Continuation in office by the managing directors after the expiry of their term. The central government may by itself apply. APPLICATION TO THE TRIBUNAL FOR RELIEF IN CASE OF OPPRESSION AND MISMANAGEMENT . where satisfactory explanation are given and also the advance is not against the interest of the lending company. Instances of Mismanagement (1) (2) (3) (4) Infighting among directors resulting in serious losses to the company. conducting the affairs of the company in a manner which is not in the interest of the company or the public. (2) (3) WHO CAN APPLY? (1) (2) (3) (4) Where the company has a share capital. by not less than 1/5th of the total number of its members. Failure to comply with formalities required in the matter of giving notice of a general meeting.e.(4) (5) Alteration of voting rights in the interest of the company. MEANING OF MISMANAGEMENT Means an improper management of the affairs of the company member/s to apply i.

in case of purchase of shares by the company itself. The1 Tribunal can pass such order as it deems fit. Purchase of the shares or interests of any members of the Reduction of the share capital. APPLICATION TO THE CENTRAL GOVERNMENT SEEKING RELIEF FROM THE TRIBUNAL The central government has also the right to directly apply to the Tribunal in cases of oppression and mismanagement.mentioned category. may apply to the Tribunal for prevention of oppression and mismanagement. it can also pass the following orders: (1) (2) (3) (4) (5) (6) The regulation of the conduct of the company’s affairs in future. the Tribunal. This directors hold office for a period not exceeding three years at a time. After hearing. Thus winding up may be voluntary or involuntary. The termination. by creditors/s (3) Any contributory/ies (4) By all the above categories. The termination. setting aside or modification of anyagreement made between the company on one hand and managing director / any other director / manager on the other. The setting aside of any fraudulent preference made within 3 months before the date of the application. APPLICATION TO THE COURT FOR WINDING UP It is a process by which the company is dissolved.Any of the above. APPLICATION TO THE CENTRAL GOVERNMENT TO PREVENT OPPRESSION AND MISMANAGEMENT On the recommendation of the Tribunal. This process can be initiated by: (1) The tribunal (2) On petition by the company. transfer of goods or other acts done with the intention of defrauding the creditors. the central government may appoint such number of directors. known as government directors to prevent oppression or mismanagement. CHAPTER 11 – COMPANY LAW ADMINISTRATION INTRODUCTION . The fraudulent preference means any payment. setting aside or modification of any agreement made between the company on one hand and managing director/ any other director/ manager on the other. notwithstanding the general powers to pass appropriate orders.

Qualification for the President: President shall be a person who has been the judge of the High Court or is eligible to be appomted as a judge of the High Court. many a time there were multiplicity of proceedings. acquisition and reconstruction. Qualification for the judicial members: A person shall not be appointed as a member of the tribunal unless he/she possess any of the following qualification: (1) Has held judicial office for at least 15 years. one non technical and one from other categories like persons mentioned in category 3 of qualification for technical member shall be set up. special benches comprising of three members of whom one shall be technical. or (3) Has held for at least 15 years a Group ‘A’ post or an equivalent post under the Central government (including at least 3 years of service as a member of the Indian Legal Service in grade I of that service). yet there was long delay in disposing off the matters. The Tribunal consists of the President and such number of judicial and technical members not exceeding sixty-two. a need was felt that there be one body which shall deal with all matters like merger. In order to avoid such difficulties. Company Law Board. revival and rehabilitation and winding up of companies. restructuring or winding up of the company. And the matters pending disposal before various authorities have been transferred to the National Company Law TribunaL NATIONAL COMPANY LAW TRIBUNAL (NCLT) The National Company Law Tribunal was set up by the Central Government. or (5) Has held the post of the Joint Secretary to the Government of India for not less than 5 years. on the recommendations of the Selection Committee. there were various bodies like the High Court.Before the Companies (Second Amendment) Act 2002. In case of matters relating to rehabilitation. for a total period of 15 years. In spite of there being a number of bodies. by the President. or (6) Is or has been a Chartered Accountant! Cost Accountant! Company Secretary for not less than 15 years. or (2) Has at least 10 years experience as an advocate of a High Court or has partly held judicial office and has been partly practiced as an advocate. or (4) Has held for at least fifteen years a Group ‘A’ post or an equivalent post under the Central government (including at least 3 years of service as a member of the Company Law Service (Accounts Branch) in a senior administrative grade. amalgamation. Industrial and Financial Reconstruction and Appellate Authority for Industrial and Financial Reconstruction for dealing with various matters related to companies. This resulted in the setting up of the National Company Law Tribunal and National Company Law Appellate Tribunal on the recommendations of Eradi committee. Qualification for the Technical Member No person shall be qualified to be a technical member unless: . NCLT also has the power to set up benches comprising of one or two members.

industrial finance. economics.(1) (2) (3) (4) (5) He has held for not less than 15 years Group ‘A’ post or an equivalent post under the Central !State Government (including 3 years service as a. or (3) Has become physically or mentally incapable for acting as such President or member of the Tribunal. or (5) Has abused his position.’ marketing or any other matter. or professional experience. Tribunal or National Tribunal constituted under the Industrial Disputes Act. (2) Power to rectify any mistake apparent from record. technology. or Is or has been Presiding Officer of a Labour Court. (2) Salary allowances etc shall be prescribed by the central government. member of the Company Law Service (Accounts Branch) in a senior administrative grade) or Is or has been a joint Secretary to the Government for not less than 5 years and has adequate knowledge and experience in dealing with the problems relating to the company law. No person shall hold the office of the president beyond 67 years and for that of the members it is 65 years. Selection Committee: The Selection committee shall comprise of the Chief Justice of• India or his nominee as Chairman of the committee and Secretaries of the Ministry of Finance and Company Affairs. . which would be in the opinion of the Central Government useful to the tribunal. industry. investment. Removal of the President or Member The Central Government in consultation with the Chief Justice of India. The Tribunal has the same powers as those exercised by the Civil Court. accountancy. administration. industrial management. law. or (4) Has acquired such financial or other interest as is likely to affect prejudicially his functions as such president or member of the tribunal. Terms and Conditions: (1) Tenure is 3 years but is eligible for reappointment. or Is a person having a special knowledge of and experience of not less than 15 yeas in the matters relating to labour. or The member shall be a person of ability. banking. or amend its order within a period of 2 years from the date of passing of the order. as to render his continuance in office. 1947. Powers and Procedure: (1) Power to pass orders. industrial reconstruction. (3) Power to review its order (4) Power to seek assistance from Chief metropolitan Magistrate and District Magistrate. may remove from office the President or any Member who: (1) Has been adjudged insolvent. or (2) Convicted for an offence involving moral turpitude. prejudicial to the public interest. with the special knowledge. matters relating to labour. integrity and standing having special experience of not less than 20 years in science. Labour Law & Justice as members of the Committee.

would be in the opinion of the Central Government usefu. accountancy. law. the special knowledge of. No person shall be appointed as a member unless. may remove from office the President or any Member who(1) Has been adjudged insolvent. The NCLAT shall consist of a Chairperson and two Members. No person shall hold the office of the President beyond 70 years and for that of the Members it is 67 years. marketing or any othe matter. administration. or (2) Convicted for an offence involving moral turpitude. investment. integrity and standing having special experience of not less than 25years in science. technology. matters relating to labour. or . he is a person of ability..NATIONAL COMPANY LAW APPELLATE TRIBUNAL (NCLAT) Constitution: Central Government shall constitute NCLAT on the recommendation of the Selection Committee. Selection Committee: The Selection Committee shall comprise of the following persons: • Chief Justice of India or his nominee Chairperson • Secretary in the Ministry of Finance and Company Affairs Member • Secretary in the Ministry of Labour Member • Secretary in Ministry of Law and Justice Department of legal Affairs and legislative department) Member • Secretary in the ministry of Finance and Company Affairs (Department of Company Affairs) Member The Joint Secretary in the Ministry or Department of the Central Government dealing with this Act shall be the Convener of the Selection Committee. Removal of the President or Member: The Central Government in consultation with the Chief Justice of India. banking. industrial finance. industry. shall be prescribed by the Central Government. or professional experiel which. economics. industrial reconstruction. industrial management. allowances etc. or (3) Has become physically or mentally incapable for acting as such President or member of the Tribunal. (2) Salary. to the Appellate tribunal. but is eligible for reappointment. Qualification for the Chairperson: The chairperson shall be a person who has been a judge of the Supreme Court or the High Court. Terms and Conditions: (1) Tenure is 3 years for both the President and Member. Qualification for the Member.

(4) (5) Has acquired such financial or other interest as is likely to affect. Appeals to be made within 60 days of the communication of the order. --ooOoo-- . (2) Power tO pass orders. The appeal has got to be ified within 45 days of the receipt of the order or decisions. if satisfied with the reasons for delay. From the orders of the Appellate Tribunal. or Has abused his position as to render his continuance in office. prejudicially his functions as such president or member of the tribunal. Note: The parties may represent in person. appeal shall lie to the Supreme Court. prejudicial to the public interest. or by a legal Practitioner or by a Chartered Accountant or by a Company Secretary or by a Cost Accountant. However the Appellate Tribunal may hear matters even on the expiry of the term. (3) Power to review its order The Appellate Tribunal has the same powers as those exercised by the Civil Court. Powers and Procedure: (1) Power to hear appeals from the Tribunal.

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