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Handout on
Company Law
Unit 2
Suchitta Koley FCS, FICA Handout on Company Law – Unit 2
Company Secretary
National Institute of Financial Management, Faridabad
IA&AS Probationers
Capital
Share Capital
Definition
A share is a share in the share capital of a company, and includes stock except
where a distinction between stock and share is expressed or implied [S 2(46)]
• An exhaustive definition of share has been given by Farwell J. in Barland's
Trustees vs. Steel Brothers in the following words
♦ “A share is the interest of a shareholder in the company, measured by a
sum of money, for the purpose, of liability in the first place, and of interest
in the second, but also consisting of a series of mutual covenants entered
into by all the shareholders inter se”.
• The Supreme Court of India has approved the above definition of share in the
Commissioner of Income Tax vs. Standard Vacuum Oil Company, wherein it
has observed,
♦ “By a share in a company is meant not any sum of money but an interest
measured by a sum of money and made up of diverse rights conferred on
its holder by the articles of the company which constitute a contract
between him and the company.” Thus, a share (i) measures the right of a
shareholder to receive a certain proportion of the profits of the company
when it is a going concern and to contribute to the assets of the company
when it is being wound up; and (ii) forms the basis of the mutual
covenants contained in the articles binding the shareholders inter se.
• In another case Supreme Court defined a share as
♦ "a right to participate in the profits made by a company, while it is a going
concern and declares a dividend, and in the assets of the company when
it is wound-up [Bucha F. Guzdar v. Commissioner of Income-tax,
Bombay LR 617 (SC)].
Nature of a share
A 'share' is not a sum of money but is the interest of a shareholder in the company
measured by a sum of money for the purpose of liability in the first place, and of
interest in the second, but also consisting of a series of mutual 'covenants' entered by
all the shareholders inter-se [Borland's Trustees v. Steel Bros. & Co. Ltd. [1901] 1 Ch,
279 (Ch.D.)]
A share is a chose-in-action. A chose-in-action implies the existence of some person
entitled to the rights, which are rights in action as distinct from rights in possession,
and until the share is issued no such person exists. [Sri Gopal Jalan & Co. v. Calcutta
Stock Exchange Association Ltd. [1963] 33 Compo Cas. 862 (SC).]
In India, a share is regarded as 'goods'. Section 2(7) of the Sale of Goods Act, 1930
defines 'goods' to mean any kind of movable property other than actionable claims
and money and includes stock and shares. However, section 82 of the Companies
Act, while recognising shares as movable property, suggests that they shall be
transferable only in the manner provided by the articles of the company.
Section 82, in this regard reads:
The shares or other interest of any member in a company shall be movable
property transferable in the manner provided by the articles of the company. In
Vishwanathan v.East India Distilleries [1957] 27 Compo Cas. 175, it was
observed:
A share is undoubtedly movable property but it is not movable property in the same way
in which a bale of cloth or a bag of wheat is movable property. Such commodities are not
brought into existence by legislation, but a share in a company belongs to a totally
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© S Koley
Suchitta Koley FCS, FICA Handout on Company Law – Unit 2
Company Secretary
National Institute of Financial Management, Faridabad
IA&AS Probationers
Page 3 of 39
© S Koley
Suchitta Koley FCS, FICA Handout on Company Law – Unit 2
Company Secretary
National Institute of Financial Management, Faridabad
IA&AS Probationers
Subscribed Capital: It is that portion of the issued capital at face value which has
been subscribed for or taken up by the subscribers of shares in the company. It is
clear that the entire issued capital mayor may not be subscribed.
Called up Capital: It Is that portion of the subscribed capital which has been called up
or demanded on the shares by the company e.g., where Rs. 5.00 has been called up
on each of 40,000 shares of a nominal value of Rs. 10.00, the called up capital is Rs.
2,00,000.00.
Uncalled Capital: It is the total amount not yet called up or demanded by the company
on the shares subscribed, which the shareholders are liable to pay as 'and when
called, e.g., in the above case, uncalled capital is Rs. 2,00,000.00.
Paid-up-Capital: It Is the part of the total called up amount which is actually paid by
the shareholder e.g., as above, if only Rs. 1,90,000.00 is actually paid by the
shareholders the paid-up capital is taken as Rs. 1,90,000.00 only.
Unpaid Capital: It is the total of the called-up capital remaining unpaid i.e., Rs.
10,000.00 from above or the difference between called up and paid-up capital.
Reserve Capital: It is that part of the uncalled capital of a company which the limited
company has decided by special resolution in terms of Section 99 of the Companies
Act, 1956, not to call except in the event and for the purpose of the company being
wound up and thereafter that portion of the share capital shall not be capable of being
called up except in that event and for those purposes, e.g.. of the Rs. 5.00 per share
uncalled capital Rs. 2.00 per share may be resolved to be kept as reserve capital.
(Reserve capital should not be confused with capital reserve, which is created out of
profits).
Capital Reserve: Capital Reserve is created out of profits or earnings which are not
ordinarily distributable among shareholders of the company as opposed to revenue
reserve which is free for distribution to members. Statutory Capital Reserves are the
"securities premium account" and "the capital redemption reserve account". Non-
Statutory Capital Reserve may arise in many ways, e.g., where a fund Is set aside out
of the profits to replace assets which are wearing out, such as heavy machinery, or
where reserve is created out of profits made on sale or revaluation of assets. Reserve
created out of revaluation of assets Is also known as capital reserve.
Capital Assets: These assets constitute fixed capital and circulating or working
capital. Fixed capital assets comprises of assets acquired for retention and use, e.g.,
building and machinery. Circulating or working capital assets consists of assets
manufactured or acquired for sale at a profit.
Fixed and Circulating Capital: Fixed capital comprises of that part of capital which is
invested in fixed assets acquired for retention and use, e.g., land, buildings, plant and
machinery, whereas circulating or floating capital is that part of capital which is
invested in acquiring current assets like stock of goods, bills of exchange, cash, etc. It
is required for use in the day-to-day business operations and keeps on circulating.
Working Capital: Working Capital is represented by the excess of current assets over
current liabilities.
Loan or Debenture Capital: It is the money raised by a company by the issue of
debentures and is not capital in the true sense of the term, but a borrowing. It is the
money borrowed and so is a debt due by the company. The debenture holders are,
therefore, the creditors of the company and not shareholders.
Preference and Equity Share Capital: The share capital of a public company may
consist of only two kinds of shares – Preference Shares and Equity Shares.
A preference share has a preference in regard to payment of fixed amount of
dividend or fixed rate of dividend and preferential right of the repayment of capital
in the event of winding up of company. With regard to payment of dividend,
preference shares may be cumulative or non-cumulative. Equity shareholders are
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© S Koley
Suchitta Koley FCS, FICA Handout on Company Law – Unit 2
Company Secretary
National Institute of Financial Management, Faridabad
IA&AS Probationers
entitled to the residue of the divisible profits. if any, after the preference
shareholders have received their fixed rate of dividend (Section 85)
Two Types of Share Capital [S 86]
Preference Share Capital
Equity Share Capital
With Voting Rights
With differential rights as to voting, dividend or otherwise, as may be notified
• equity share capital may be with similar rights or with different rights as to
dividend, voting or otherwise In accordance with the Companies (Issue of
Share Capital with Differential Voting Rights) Rules; 2001 which have come
into force on 9th March, 2001
Kinds of Preference Shares
Cumulative preference shares. The divided payable on these shares goes on
accumulating till it is fully paid off. All preference shares are assumed to be
cumulative, unless the contrary is stated in the Articles of the company. A cumulative
preference share has a right to claim the fixed dividend to pay dividend only if it has
sufficient profits available for distribution.
Non-cumulative preference shares. In the case of non-cumulative preference shares,
the dividend shall be payable only out of the profits of the current year. If it is not paid
in a particular year, it is lost and the arrears of dividend cannot be carried forward. In
other words, the unpaid dividends cannot be accumulative.
Participating preference shares. Participating preference shares are not only entitled
to a fixed rate of dividend, but also to a share in the surplus profits which remain after
the claims of the equity shareholders have been met. If the articles are silent, all
preference shares are deemed to be non-participating.
Non-participating preference shares. Non-participating preference shares are entitled
to only a fixed rate of dividend and do not share in the surplus which belongs to the
equity shareholders.
Convertible preference shares. The holders of these shares have a right to convert
them into equity shares within certain, usually pre-defined period.
Non-convertible preference shares. The preference shares without a right of
conversion into equity shares are known as non-convertible preference shares.
Redeemable preference shares. A company limited by shares, if authorised by its
articles, may issue preference shares which are to be redeemed or repaid after a
certain fixed period.
Irredeemable preference shares. Irredeemable preference shares constitute
permanent capital of the company. These shares cannot be refunded before the
winding up of the company.
Reduction of Capital
A company limited by shares or a guarantee company with a share capital is permitted to
reduce its share capital by Section 100 in any of the following ways :
Extinguish or reduce. By extinguishing or reducing the liability on any of its shares in
respect of share capital not paid up.
Cancel. By canceling any paid-up capital which is lost or unrepresented by available
assets.
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© S Koley
Suchitta Koley FCS, FICA Handout on Company Law – Unit 2
Company Secretary
National Institute of Financial Management, Faridabad
IA&AS Probationers
Pay off. By paying off any paid-up capital which is in excess of the needs of the
company.
By court. By any other method approved by the court.
Procedure. The following procedure is to be followed for effecting a reduction in share
capital :
Company limited by shares. A company limited by shares or a guarantee company
with a share capital is permitted to reduce its share capital. [Sec. 100(1)].
Authorised by articles. Reduction in share capital can be effected when it is
authorised by articles of association of the company. If the articles do not give this
power to the company, they may be altered by special resolution to enable the
company to reduce its share capital. It is of no avail, where this authority is contained
in the memorandum only.
To pass a special resolution. The company must pass a special resolution effecting
the reduction in share capital. [Sec. 100(1)].
An application to the court. After having passed the special resolution for reducing the
share capital, the company must apply to the court for an order confirming the
reduction in share capital. The court must look after the interest of shareholders and
creditors. [Sec. 101(1)].
Interest of creditors. The special resolution of the company reducing the share
capital must in all cases be confirmed by the court and the court is empowered to
enquire into the objection that may be raised by the creditors in that behalf,
unless the court directs not to make such an enquiry. If the reduction of share
capital involves : (i) diminution of liability in respect of unpaid share capital; or (ii)
payment to the shareholder of any paid-up share capital; and (iii) in any other
case if the court so directs, every creditor of the company is entitled to object to
the reduction. Only such creditors are entitled to object the reduction to whom the
company owes a debt which would have been provable in the winding up of the
company.
• The court should settle the list of creditors entitled to object and issue public
notice fixing a day or days within which creditors who are entered on such list
are to claim to be so entered or to be excluded from the right of objecting to
the reduction.
Interest of shareholders. Before sanctioning the scheme of reduction of share
capital, the court must also look after the interest of shareholders. Court should
see that the scheme for reduction of capital is fair and equitable to all kinds of
shareholders.
Order confirming the reduction. The court may make an order confirming the
reduction of share capital on such terms and conditions as it thinks fit, if it is satisfied
that every creditor entitled to object has consented to the reduction or that his debt
has been discharged or secured by the company.
To add “and reduced” word to the name of company. The court may also order the
company to add the words and reduced to the name of the company for such period
as may be specified in the order, and these words will be deemed to be part of the
Company's name for such specified time [Sec. 102].
Production of Court order before the registrar. The order of the court confirming the
reduction must be produced before the Registrar and a certified copy thereof, along
with minutes should be filed with him for registration. On such registration by the
Registration, the resolution for reduction of share capital as confirmed by the court
takes place. Notice of the registration shall be published in such a manner as the
court may direct.
The Registrar shall certify registration of the order and the minutes in hand. The
Certificate of Registrar to this effect is a conclusive evidence that all the
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© S Koley
Suchitta Koley FCS, FICA Handout on Company Law – Unit 2
Company Secretary
National Institute of Financial Management, Faridabad
IA&AS Probationers
requirements of the Act regarding the reduction of share capital have been
complied with and that the share capital is such as is stated in the minutes. (Sec.
103).
Once the certificate has been issued by the Registrar, the reduction in share
capital cannot be upset towards on the ground that the company had not by its
articles of association the power to reduce its share capital or the special
resolution for reduction was invalid.
Liability of members on reduction. Section 104 of the Act provides for liability of members
regarding the reduced shares. A member of the company shall be liable to make the
payment of the amount deemed to have been unpaid on his shares, which would be
equal to the amount deemed to have been paid up on his shares, and reduced value of
shares as fixed by minutes of reduction. But in one case the members may be made
liable to pay the original nominal value of shares. This will happen when a creditor entitled
to object to the reduction has been left out of the list of such creditors by reason of his
ignorance of the proceedings and the company is unable to pay the amount of his debt. In
these circumstances the court may order the members to pay upto the original nominal
value of the shares held by them.
Reason for reduction in share capital.
The share capital of the company may be more than enough for its present and future
needs, and so, it may return the surplus capital to the shareholders.
The paid-up capital of the company is sufficient and it may refrain from calling up the
unpaid portion of share money.
Some of the capital may in fact have been lost or diminished e.g., share of Rs. 100
may represent assets worth Rs. 50. The company may wish to write off the lost
capital.
Reduction under the first two above will reduce the funds available to the
creditors.
Reduction under the third above affects the rights of different classes of
shareholders as well as the interest of the members of the public who may be
induced to take shares in the company.
Company not to buy its own shares directly or indirectly [S 77]
Buy – back of shares under S 77A is an exception
Board may buy back 10% of the Equity Capital in a year
Upto 25% of the Equity Capital can be bought back [in a year] with the authority
of “Special” Resolution of the Members
• Shares so bought back shall be extinguished
Application for transfer. An application for the registration of transfer of shares may be
presented either by the transferor or the transferee [Sec. 110(1)].
Transfer of partly-paid up shares. If the application for the registration of a transfer of
shares is made by the transferor in respect of partly paid-up shares, the company
must give the notice of it to the transferee. If the transferee does not make any
objection within two weeks from the date of the receipt of the notice, the company
may enter the name of transferee in the Register of Members [Sec. 110(2)].
To file a stamped instrument of transfer with company. Instrument of transfer shall be
duly stamped and signed by both the transferor and the transferee. Otherwise
transfer of shares will not be registered. It must contain particular regarding the name,
address and occupation of the transferee. [Sec. 108(1)].
Transfer should be in the prescribed form. Every instrument of transfer must be in the
prescribed form and presented before being signed by the transferor, to the
prescribed authority who shall stamp thereon the date of presentation. It should be
delivered to the company. (i) In case of listed shares before the closing of the register
of members according to the law for the first time after the date of the presentation of
the prescribed form to the prescribed authority or within two months from the date of
such presentation, whichever is later. (ii) In any other case within two months from
the date of presentation of the prescribed authority. [Sec. 108(A)].
Procedure where instrument of transfer is lost. Where it is proved to the satisfaction
of the Directors that the instrument of transfer has been lost, the company may, on an
application in writing made to it by the transferee and bearing the stamp required for
instrument of transfer, register, transfer on such terms as to indemnity as the Board of
Directors may think fit. [Sec. 108(1)].
Proposed transfer to be placed before the meeting of Board. The request for the
transfer of shares has to be placed in the meeting of the Board of Directors. The
directors of the company exercise their powers subject to the provisions of the
Articles of Association of the Company. Following are the two situations in this
connection.
The Articles of Association may not contain any clause empowering the directors
to refuse the transfer of share. In this situation, the shares will be assumed to be
freely transferable and the directors of the company will be presumed to have no
power to refuse the registration of transfer.
The Articles of Association of the Company may contain clause empowering
directors to refuse the transfer of shares.
Notice in case of refusal to register transfer. If the company refuses to register the
transfer of shares, its notice must be given to transferor and transferee within two
months from the date on which the instrument of transfer was delivered to its. If the
notice is not given within this period the company and every officer of the company
who is in default shall be punishable with a fine upto Rs. fifty per day till the default
continues [Sec. 111(1 and 2)].
Remedies in case of refusal. When the company refuses to register the transfer, the
aggrieved person has got the following remedies:
He can appeal to the Company Law Board [Sec. 111(2)].
He can also bring a suit to get his name registered by virtue of transfer under the
General Law.
Appeal to the Company Law Board
According to Sec. 111, in case of a public company or its subsidiary private company,
a special right of appeal to the Company Law Board is available, to the transferor or
the transferee, against the arbitrary action of the directors in refusing to register a
proposed transfer of shares. The appeal must be lodged within two months of either
the notice of refusal or of the failure to register the transfer within the specified period
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© S Koley
Suchitta Koley FCS, FICA Handout on Company Law – Unit 2
Company Secretary
National Institute of Financial Management, Faridabad
IA&AS Probationers
of 2 months, as the case may be, together with a fee as prescribed by the Company
Law Board not exceeding Rs. 500.00
The Company Law Board, after receiving the petition, shall issue notice to the
company, the transferor and the transferee in order to provide them an opportunity to
make their representation. If the refusal dues not seem to be justified, the Company
Law Board will issue an order to the company to register the transfer, which must be
given effect to, within 10 days of the receipt of the order. If default is made, fines and
penalties are to be imposed on the company and on every defaulting officer upto
Rupees one thousand with a further fine exceeding to Rupees one hundred from
every day during which the default continues.
By virtue of this special right of appeal, free transferability of shares of public
companies is almost secured by the Companies Act. It is not, however, incumbent
upon the aggrieved party to prefer the appeal to the Company Law Board and it may
very well choose to come directly to the court (Nazamunnessa Begum vs. Vidya
Sagar Cotton Mills Ltd.)
Position of tranferee, if the appeal fails. The ordinary result of a refusal to register a
transfer of shares is that the transferor will be the trustee for the transferee, in respect of
the rights relating to the shares or if the transferee so chooses he may sue the transferor
for return of the consideration for the transfer under Sec. 65 of the Indian Contract Act,
1872.
Where a transfer of shares is refused the transferor continues to be the legal owner
thereof so far as the company is concerned.
Free Transferability and Registration of Transfers of Listed Securities of Companies
Borrowing Powers
A private company can exercise its borrowing powers immediately after its incorporation.
But a public company can exercise its borrowing powers only after the receipt of
‘certificate of commencement of business’. [Sec. 149(1)].
In the case of public companies, simultaneous issue of shares and debentures just after
the incorporation is allowed. [Sec. 149(5)].
The power to borrow money is generally exercised by the directors of the company but
the memorandum or articles of association or the statute provide for certain restrictions
on their powers to borrow
Section 293 of the Act also limits the directors powers to borrow to the aggregate of ‘the
paid-up capital of the company and its free reserves.’ It reads : “The Board of Directors of
a public company or of a private company which is a subsidiary of a public company shall
not, except with the consent of such public company or subsidiary in general meeting
borrow the moneys where the moneys to be borrowed, together with the moneys already
borrowed by the company (apart from temporary loans obtained from the company’s
bankers in the ordinary course of business) will exceed the aggregate of paid up capital of
the company and its free reserves, i.e., to say reserves not set apart for any specific
purpose.”
If a company borrows money beyond the powers given to it in this respect by the
Companies Act, the Memorandum of Association and the Articles of Association, is said
to resort to ultra vires borrowing. In the eyes of law, the borrowing by the company or the
directors in excess of the powers given are void ab initio.
Ultra vires borrowings are not recognised as a debt against the company and the
lender of money can neither sue the company for the recovery of the debt, nor can he
enforce any security given for such loan.
Ultra-vires Borrowings by a company by—
borrowing which is ultra vires the company, or
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© S Koley
Suchitta Koley FCS, FICA Handout on Company Law – Unit 2
Company Secretary
National Institute of Financial Management, Faridabad
IA&AS Probationers
borrowing which is ultra vires the directors i.e., beyond the authority of directors.
Ultra Vires Borrowings
Where a company borrows without or in excess of power conferred on it by the
memorandum of association, the borrowings is ultra vires the company.
In the case of Introduction Ltd. vs. National Provincial Bank Ltd., Ch. 199, a
company was formed with the main object of providing information and facilities
to overseas visitors to the Festival of Britain in 1951. The Company later engaged
in pig-breeding as its sole activity. For this purpose it borrowed money from a
bank which took debentures as security. The bank was given a copy of the
Memorandum of Association and it knew that the only business being carried on
by the company was pig-breeding. It was held that the loan was for a purpose
known to be ultra vires and, therefore the debentures were void.
Lender’s rights when borrowing is ultra vires. Where a borrowing is ultra vires a
company, the lender has no legal or equitable debt against the company. As such he
can have no rights against the company. As such he can have no rights against the
company for the recovery of loan. (Re. National Permanent Building Society (1869),
Ch. 809). An ultra vires borrowing creates no debts, either legal or equitable, on the
part of the company (Re. Madras Native Permanent Fund Ltd. (1931). 1 Comp. Cas.
256) the lender has, however, in equity the following rights or remedies :
Identification and tracing [Restitution]. If the money lent to the company can be traced
in the hands of the company in original form or even if it has been employed for the
purchase of property which is still capable of identification, the ultra vires lender can
obtain a tracing order and may claim that asset or money.
In the case of Sinclair vs. Bhougham, (1914) A.C. 389 Lord Parkar made the
following observation in this regard :
• “An ultra vires borrowing by persons affecting to act on behalf of a company
or other statutory association does not give rise to any indebtness either at
law or in equity on the part of such company or association. It appears to be
also well settled that the lender in an ultra vires loan transaction has a right to
what is known as a tracing order. A company or other statutory association
cannot be itself or through an agent be a party to an ultra vires act. If its
directors or agents affecting to act on its behalf borrow money which it has no
power to borrow, the money borrowed in their hands is the property of the
lender. At law, therefore, the lender can recover the money, so long as he
can identify it, and even if it has been employed in purchasing property, there
may be cases in which by ratifying the action of those who have so employed
it, he may recover the property purchased.”
Injunction. The lender can restrain the company from spending the money by an
injunction. But the lender must obtain the injunction against the company before it
spends that money.
Subrogation. If the money borrowed ultra vires is used to pay off the debts of the
company, the lender can subrogate to the rights of those creditors, i.e., he will step
into the shoes of old creditors for the purpose of recovering his money.
In the case of Neath Building Society vs. Luce, (1889) 43 Ch. D. 158, a building
society borrowed money to pay off principal and interest due on a mortgage. The
borrowing was ultra vires. It was held that the lenders were subrogated to the
rights of the creditors who were paid off.
• However, if the original creditors had any priority, will not be able to claim any
priority.
In the case of Re Wrexham, Mold & Connah’s Quay Rly. Co. Ltd., (1889) 1 Ch.
440, a company had exhausted its borrowing powers by issuing there different
series of debentures, i.e., debentures A, debentures B, and debentures C, the
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© S Koley
Suchitta Koley FCS, FICA Handout on Company Law – Unit 2
Company Secretary
National Institute of Financial Management, Faridabad
IA&AS Probationers
first having priority over the second and the second over the third. A bank
advanced money to the company to pay off the interest on the A debentures. The
borrowing by the company was ultra vires. A receiver was appointed who had
funds in hand sufficient to pay interest to the A debenture-holders but not enough
to pay the B and C debenture-holders in full.
• The bank claimed that—
♦ before any interest was paid to the debenture-holders it was entitled to be
repaid its advance, and
♦ alternatively it was entitled to be repaid the sum lent by it to pay interest
to the A debenture-holders before any payment was made to the B and C
debenture-holders.
• It was held that as the advance was not a void one, the bank became a legal
creditor of the company to the extent to which the bank’s money was used to
pay off the legal debt (i.e. the interest on the A debentures), but it was not
entitled to any priority.
Suit against the directors. If the directors have exceeded their powers of borrowing
the lender may sue them personally for breach of warranty of authority. (Weeks vs.
Propert)
Borrowing Intra Vires the Company but Ultra Vires the Directors
Any borrowing which is intra vires the company but beyond the authority of the directors,
is ultra vires the directors. If such borrowing is ratified, the company becomes liable to
repay the money. Where such borrowing is not ratified by the company, the ‘doctrine of
indoor managements’1 shall protect a lender provided he can establish that he advanced
the money in good faith. The company may in turn proceed against the directors and
claim indemnity.
Registration of Charges
Where in a transaction of value both parties evidence (show clearly) an intention that
some property of the debtor, existing or future, shall be made available as a security for
the payment of a debt, and the creditor shall have right to have it made available, there is
a charge, though the security can be made available only through the court.
Charge may be of two types
Fixed charge;
Floating charge.
Fixed charge. A charge is said to be fixed charge when it covers ascertained and specific
property such as land, buildings or heavy machinery. Where any particular property of the
company is specifically charged in favour of debenture-holders, the company cannot
dispose of the property, free of charge, without the consent of holders of the charge.
Even if it is disposed of the holders of the charge will have the first claim as against the
buyer of the property.
The essence of fixed charge is that though the possession of the specified asset is with
the company but the legal title belongs to the holders of the charge.
Floating charge. The floating charge is not attached to definite/specific property but
covers property of a fluctuating type, i.e., stock-in-trade.
The characteristics of a floating charge are
It is a charge on a class of assets, present and future.
The class of assets charged must be one which in the ordinary course of
business of the company would be changing from time to time.
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© S Koley
Suchitta Koley FCS, FICA Handout on Company Law – Unit 2
Company Secretary
National Institute of Financial Management, Faridabad
IA&AS Probationers
Until some steps are taken to enforce the charge, the company may continue to
deal with assets charged in the ordinary course of business.
To create a floating charge, no particular form of words is necessary. Any words
which show an intention to allow the company to continue to deal with the assets by
sale, lease, mortgage etc. in the course of its business will create a floating charge.
The advantage of such charge is that the company may continue to deal with the
property charged.
A floating charge is an equitable charge on the assets for the time being of a going
concern.
The nature of the floating charge has been ably summed up by Bukley L.J. in these
words, “A floating security is not a future security. It is a present security, which
presently affects all the assets which are included in it. But it is not a specific security.
The holder of a floating security cannot affirm that any particular asset is specifically
mortgaged to him.”
A floating charge does not necessarily cover the whole of the property of the
company but may be confined to a specific portion of the assets. It is in the nature of
such a charge that the company shall continue as a going concern and the
debenture-holder has no power to interfere till his charge has become crystallised.
Neither the ownership nor the possession is passed to the lender under this type of
charge.
Crystallisation of a Floating Charge or When Does a Floating Charge – Becomes a Fixed
Charge
When the company goes into liquidation; or
When the company ceases to carry on business; or
When a receiver is appointed; or
When default is made in the payment of principal money or interest and the
debenture-holder brings an action to enforce his security.
A floating charge may also crystallise on the happening of an event specified in the
charging deed.
Lord Macnaughten in Government Stock Co. vs. Manila Railway observed : “A
floating security is an equitable charge on the assets for the time being of a going
concern. It attached to the subject charged in the varying conditions in which it
happens to be from time to time. It is the essence of such a charge that it remains
dormant until the undertaking charged ceases to be a going concern or until the
person in whose favour the charge is created intervenes. This right to intervene may,
of course, be suspended by agreements. But if there is no agreement of suspension,
he may exercise his right whenever he pleases after default.”
Registration of Charges
As per Sec. 124 of the Act the expression “charge” also includes a “mortgage.”
As per Sec. 125, following charges (including mortgages) are required to be
registered with the Registrar of Companies within thirty days of their creation in order
to be valid against the creditor and the liquidator. Seven days more may be allowed
by the Registrar if there is sufficient cause for delay.
a charge for the purpose of securing any issue of debentures;
a charge on the uncalled share capital of the company;
a charge on any immovable property, or any interest therein;
a charge on any book debts of the company;
a charge, not being a pledge, on any movable property of the company;
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Suchitta Koley FCS, FICA Handout on Company Law – Unit 2
Company Secretary
National Institute of Financial Management, Faridabad
IA&AS Probationers
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Suchitta Koley FCS, FICA Handout on Company Law – Unit 2
Company Secretary
National Institute of Financial Management, Faridabad
IA&AS Probationers
It may be noted that where the Company Law Board extends the time for the
registration of a charge, the order shall not prejudice any rights acquired in respect of
the property concerned before the charge is actually registered.
Company’s Register of Charges [Sec. 143]
Every company shall keep at its registered office a register of charges and enter
therein all charges specifically affecting property of the company and floating charges
on the undertaking or any other property of the company, giving in each case :
short description of the property charged :
the amount of the charge; and
except in the case of securities payable to the bearer, the names of the persons
entitled to the charge.
Right to inspect copies of instrument creating charges and company’s register of charges
The copies of instruments creating charges and register of charges shall remain open
during business hours (subject to reasonable restriction as the company in general
meeting may impose, so that not less than 2 hours in each day are allowed for
inspection) to the inspection of any creditor or member of the company without fee at
the registered office of the company. [Sec. 144(1)].
The register of charges shall also be open, during business hours but subject to
reasonable restrictions, to the inspection of any other person on payment of
prescribed fee for each inspection at the registered office of the company. [Sec.
144(2)].
If the inspection of the said copies or register is refused, the company and every
defaulting officer, shall be punishable with fine upto fifty rupees and with a further fine
upto twenty rupees for every day during which the refusal continues. [Sec. 144(3)].
The Company Law Board may also by order compel immediate inspection of the said
copies of register. [Sec. 144(4)].
Board of Directors
“Director includes any person occupying the position of directors by whatever name
called.” [Sec. 2(13)]
This definition given by the Companies Act does not give the clear meaning of the
word director, but it means that a person who performs the duties of a director will be
deemed to be a direct or irrespective of the name by which he is called. Similar view
was expressed in Re, Forest Dean Coal Mining Co. ‘It does not matter what you call
them, as long as you understand what their true position is, what is that they are
commercial men, managing a trading concern for the benefit of themselves and all
other shareholders in it.”
“A director is the officer of the company.” [Sec. 2(30)]
Any person, in accordance with whose directions or instructions, the Board of Director of
the company is accustomed to act, shall be deemed to be director of the company. [Sec.
303, Explanation (1)]
Only Individuals can be appointed [S 253]
Not less than 3 directors [Private Company 2] [S 252]
Not more than 12 Directors [S 258]
Any increase in AoA beyond 12 shall be with CG permission [S 259]
Private Company / Government Company not subject to this restriction
Legal Position/Status of Directors
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Company Secretary
National Institute of Financial Management, Faridabad
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The Act does not define the position/status of directors, and it is difficult to define the
exact legal position of the directors of a company.
Although, the directors have been referred as the trustees, or the managing partner of
the company, but in real sense they are none of them. Directors may be considered
as the agent, trustees or managing partner for a particular moment and for the
particular purpose.
In Imperial Hydropathic Co. vs. Hampson case Bowen, L.J. observed, “Directors
are described sometimes as agents, sometimes as trustees and sometimes as
managing partner. But each of these expressions is used not as exhaustive of
their powers and responsibilities, but as indicating useful points of view from
which they may for the moment and for the particular purpose be considered.”
Position of Directors as Trustees
Legally a director is not the trustee. Legally speaking a director is not the trustee of
the company. In the case Smith vs. Anderson, James L.J. observed, “A trustee is a
man who is the owner of property and deals with it as principal, as owner and as
master, subject only to an equitable obligation to account to some persons to whom
he stands in relation of a trustee. The office of director is that on a paid servant of the
company. A director never enters into a contract for himself, but he entres into a
contract for his principal i.e., for the company of which he is a director or for whom he
is acting.”
From this point of view, directors are not the trustees of the company, because
they are not the legal owners of the properties of the company.
Directors as trustees of the Company’s property and money. Although the directors
are not, properly speaking, the trustees, yet they are trustees of the company’s
money and property and they are bound to deal with capital under their control as a
trust. They must act in good faith and exercise their powers in the interest and benefit
of the company.
In Re : Lands Allotment Co., Lindley L.J. observed, “Although directors are not,
properly speaking, trustees, yet they have always been considered and treated
as trustees of money which comes to their hands or which is actually under their
control, and ever since joint stock companies were invented, directors have been
held liable to make good moneys which they have misapplied upon the same
footing as if they were trustees.”
Thus when directors pay dividend out of capital even though the company has
not earned any profits, they are liable for breach of trust. [Re: Sharpe’s Case
(1892) 1, Ch. 154]
Directors as trustees to the powers entrusted to them. The directors are the trustees
in respect of powers entrusted to them. They must exercise these powers bonafide
and for the benefit of the company as a whole. Examples of such powers are as
follows :
the power of employing the funds of the company;
the power to declare dividend in the general meeting;
the power to make call;
the power of forfeiting shares;
the power of receiving payment of call in advance;
the power of approving the transfer of shares;
the power of accepting the surrender of shares;
the power of issuing the unissued shares of the company and making allotments
thereof.
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Company Secretary
National Institute of Financial Management, Faridabad
IA&AS Probationers
Directors not as trustees to the shareholders. It should be noted that directors occupy
a fiduciary relationship only in relation to the company and not in relation to an
individual shareholder. They are not trustees for any particular shareholder.
In case of Percival vs. Wright. “The Directors purchased shares from a
shareholder when negotiations were being held by them for sale of the company
at a very high price. They did not disclose this fact to the shareholder. It was held
that the shareholder could not repudiate the contract on that ground.”
Directors not as trustees to the outsiders. The directors are not as trustees to other
persons entering into any contract with the company. [Re. City Equitable Fire
Insurance C., (1925) Co. 407]
The position of directors as trustee can be briefly stated as under :
They are not trustees in the legal sense of the term.
They occupy a fiduciary position in relation to the company and they are
considered trustees with respect to the company’s property and money.
They are also trustees as regards powers entrusted to them. They must exercise
these powers bonafide in the interest of the company and they are accountable
for secret profits made by them, if any.
They are not trustees of individual shareholders.
Position of Directors as Agents
The company being an artificial person cannot manage its affairs itself but the
management of the company is entrusted to some human agency known as
directors. They are the elected representatives of the shareholders. They run the
business on behalf of the shareholders and may be termed as the agent of the
company.
In the case Ferguson vs. Wilson, Cairns L.J. stated the position of the directors
as, “They are merely agents of the company. The company itself cannot act in its
own persons for it has no person, it can act ‘only through directors’ and the case
is, as regards those directors, merely the ordinary case of principal and agent, for
whenever an agent is liable, those directors would be liable. Where the liability
would attach to the principal and the principle only, the liability is the liability of the
company.”
In Great Eastern Railway vs. Turner, it was held that the directors are agents in
the transaction which they enter into on behalf of the company.
To bind the company, the directors must act in the name of the company and within
the scope of their authority. If the directors enter into a contract which is beyond their
powers but within the powers of the company, the company, like any other principal,
may ratify it (Grant vs. United Kingdom Switchback Rail Co.)
Where the directors enter into a contract which is ultra vires the company, the
company cannot ratify it and neither the company nor the directors are liable on it.
However the directors may be held liable for breach of implied warranty of authority.
(Weeks vs. Property).
It is however not correct to say that directors are the agents of the company because
agents are not elected but appointed and second thing that agents have no
independent power while the directors have independent powers on certain matters.
Position of Directors as Officers
Under Sec. 2(30) of the Companies Act, the directors are the officers of the company.
As officers, they may be held liable if the provisions of the Companies Act have not
been fully complied with by them.
Position of Directors as Employees
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Company Secretary
National Institute of Financial Management, Faridabad
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The directors may be considered as the employees of the company also, because
they work under a special contract of service with the company and are paid
remuneration accordingly.
APPOINTMENT OF DIRECTORS
Appointment of Directors by Signatures to the Memorandum (Sec. 254 and Clause 64
of Table A)
The Articles of a company usually name the first directors by their respective names
or prescribe the method of appointing them.
If the directors are not named in the Articles of the Company, the number of directors
and the name of the directors shall be determined in writing by the subscribers of the
Memorandum or a majority of them. (Clause 64 of Table A)
If the first directors are not appointed in the above manner, the subscribers of the
Memorandum who are individuals shall be deemed to be the directors of the
company. They shall hold office until directors are duly appointed in the first annual
general meeting. [Sec. 254]
Subsequent directors shall be appointed according to the provisions of Sec. 255 of
the Act.
Appointment of Directors by Company in the General Meeting (Secs. 255 to 257, 263
and 264)
Section 255 provides that subsequent directors shall be appointed by the company in
general meeting. In the case of a public company or a private company which is a
subsidiary of a public company, unless the Articles provide for the retirement of all
directors at an annual general meeting, at last two-thirds of the total number of
directors shall be liable to retire by rotation and shall be appointed by the company in
general meeting. This means one-third of the total number of directors can be
permanent directors. The remaining directors in the case of any such company and
all the directors in the case of private company not being a subsidiary of the public
company may be appointed as provided in the Articles. In the absence of any
regulation in the Articles of the company, these directors shall be appointed by the
company in general meeting.
The appointment or re-appointment of directors by a company in the general meeting
is governed by the following provisions:
First appointment.
At the first annual general meeting of a public company or a private company which is
subsidiary of a public company, held after the general meeting at which the first
directors are appointed and at every subsequent annual general meeting, one-third
(or the number nearest to one-third) of such of the directors for the time being as are
liable to retire by rotation shall retire from office. [Sec. 256(1)].
The provisions are aimed at eradicating the mischief caused by self-perpetuating
management. [Oriental Metal Pressing Works (Pvt) Ltd., vs B.K. Thakoor (1961)
31 Comp. 143 (S.C)].
The directors to retire by rotation at every annual general meeting of the company
shall be those who have been longest in the office since their last appointment. But
as between persons who became directors on the same day, those who are to retire
shall be determined by mutual agreement or, in default, by lot. [Sec. 256(2)].
In B.R. Kundra vs. Motion Pictures Assn. (1976) 46 Comp. Cas, 339 (Det.), it was
held that the directors cannot prolong their tenure by not holding the annual
general meeting in time. They would automatically retire on the expiry of the
maximum permissible period within which a meeting ought to have been held.
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Company Secretary
National Institute of Financial Management, Faridabad
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Reappointment.
At the annual general meeting at which a director retires by rotation the company may
fill up the vacancy by appointing the retiring director or some other person there to.
[Sec. 256(3)].
If the place of the retiring director is not filled up, and the meeting has not expressly
resolved not to fill the vacancy, the meeting shall stand adjourned till the same day in
the next week at the same time and place. If at the adjourned meeting also, the place
of retiring director is not filled up, nor expressly resolved not to fill the vacancy, the
retiring director shall be deemed to have been reappointed at the adjourned meeting
except in the following cases :
When at any previous meeting, a resolution for his reappointment was put before
the meeting, but was lost; or
When the retiring director has declined reappointment in writing;
When he has been disqualified; or
When the reappointment will not be valid unless it is made by passing a
resolution, whether special or ordinary; or
When the meeting has expressly resolved not to fill up the vacancy. [Sec. 256(4)]
Appointment of a new director.
If a new director is to be appointed, a notice in writing shall be given to the company
at least 14 days before the meeting. The notice shall be given by the person seeking
appointment as director or by some member intending to propose him as director
along with a deposit of Rs. 5,000. The deposit shall be refunded to the depositor if
such person succeeds in getting elected as a director. [Sec. 257(1)]
The company shall inform the members at least seven days before the meeting about
the candidature. It is no necessary for the company to serve individual notices upon
the members if the company advertises such candidature not less than seven days
before the meeting, in at least two newspapers. One of the newspapers must be in
English language and the other in the regional language of the place where the
registered office of the company is located.
This provision shall not apply to a private company unless it is a subsidiary of a public
company. [Sec. 257(2)]
As per Sec. 264 of the Act, person who is being proposed as a candidate for the
office of a director must sign and file with the company his consent in writing to
act as a director, if appointed. This requirement does not apply to a director
retiring by rotation.
Notice to the Registrar. The director must file his written consent to act as a director with
the Registrar within 30 days of his appointment.
One resolution for two or more directors.
Appointment of directors of a public company must be voted individually by separate
ordinary resolution, unless the company has in general meeting unanimously so
resolved. In other words, each director shall be appointed by a separate resolution
unless it is unanimously decided at the general meeting that more than one director
may be appointed by a single resolution. Any resolution moved in contravention of
this provision shall be void even if no objection was raised at the time of its being so
moved. [Sec. 263].
Appointment of Directors by Board of Directors (Secs. 260, 262, and 313)
Additional Directors. Section 260 of the Companies Act empowers the Board to
appoint additional directors and Articles of every company also confer his power to
the Board. But the additional director shall hold his office upto the next annual general
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Suchitta Koley FCS, FICA Handout on Company Law – Unit 2
Company Secretary
National Institute of Financial Management, Faridabad
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meeting. The number of directors including the additional director should in no case
exceed the maximum number of directors as determined by the articles of the
company.
Casual Director. The Companies Act empowers the Board to appoint the casual
director subject to any regulation in the Articles. The casual vacancy in the office of
the director may exist due to retirement, resignation, insolvency or any other reason.
The casual director may hold his office only upto the period to which the original
director would have his office if he had not vacated. [Sec. 262]
Alternate Director. This Board may appoint the alternate director if the article
authorises. The Board is empowered to appoint the alternate director if the original
director remains absent for more than three months from the state in which the
meetings is ordinarily held. Such alternate director shall hold office only for the period
till the original director returns [Sec. 313]
Appointment of Directors by Third Parties (Sec. 255)
The articles may permit the third parties for the appointment of director as their
nominee, but the number of directors so appointed should not exceed one-third of the
total number of directors and they are not liable to retire by rotation. The third party
means the Vendor, Banking Company, Finance Corporation and Debenture-holders.
The idea behind the appointment is that they may have the watch that money
advanced to the company has been utilised for same purpose for which it was lent.
Appointment of Directors by Proportional Representation (Sec. 265)
Directors are appointed individually either by show of hands or by ballot unless the
Articles otherwise provide. If the Articles permit, a system of proportional
representation may be adopted for the appointment of directors. The appointment
may be made by the single transferable vote or by a system of cumulative voting. In
this system, the minority shareholders may become in a position to have their
representation in the Board of Directors. Such appointment is made once in three
years and the casual vacancies are filled up according to the provisions of Secs. 262
and 265.
Appointment of Directors by the Central Government (Sec. 408)
According to Sec. 408, the Central Government may appoint the directors but not
more than two in number and for the period not exceeding 3 years.
The appointment of directors is made to prevent the affairs of the company which are
oppressive to any member or which are prejudicial to the public or company’s
interest.
The Central Government may appoint the director on the application of not less than
100 members of the company or the members holding not less than 1/10th of the
total voting rights. Such directors need not to retire annually and are also not required
to have the qualification shares.
The Companies (Amendment) Act, 1974, empowers the Central Government to issue
necessary directions to companies where an appointment of directors is so made.
[Sec. 408(6)]
Further, the directors so appointed are required to keep the Central Government
informed of the affairs of the company to enable it to take such timely action as may
be required by exigencies of the circumstances. [Sec. 408(7)]
Qualifications of Directors
The Act does not lay down any academic or share-holding qualification for a director.
There is a widespread misconception that a director must necessarily be a
shareholder of the company. But if it is not so, unless the articles of the company
provide otherwise, a director need not be a shareholder of the company. But usually
the articles provide for certain qualification shares for the directors.
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Company Secretary
National Institute of Financial Management, Faridabad
IA&AS Probationers
Qualification shares. If the articles of the company so provide then as per Sec. 270,
the directors must obtain their qualification shares as follows :
The directors must obtain qualification shares within two months after their
appointment unless they already hold shares.
If any provision in the articles requiring a person to hold the qualification shares
before his appointment as a director or to obtain them within a period shorter than
two months shall be void.
The nominal value of one qualification share must not exceed Rs. 5,000.
Bearer share warrants will not be counted for the purposes of qualification
shares.
If a director does not obtain qualification shares within two months of his
appointment or thereafter does not possess such shares at any time, he ceases
to be a director automatically.
The director should not obtain shares by way of gift from a promoter. He should
make the payment for his qualification shares.
A director is required to hold qualification shares in his own right. It is also
sufficient if he holds them as a trustee provided it does not appear on the register
of members that he is a trustee.
Unless the articles provide otherwise, a joint holding will be sufficient for share
qualification.
A person who acts as a director of a company without holding qualification shares
even after the expiry of the period of two months from the date of his appointment
shall have to vacate his office as a director and be punishable with a fine
extending to Rs. 500.00 for every day from the date of expiry of the period of two
months till the date he continues to act as a director. [Sec. 272]
Written consent. Every person proposed as a candidate for the office of a director has to
sign and file with the company his consent to act as a director, if appointed (Sec. 264).
However, the following persons have not to file such consent;
A person who is retiring from directorship by rotation or otherwise;
A person who has given notice of his candidature for directorship at the registered
office of the company under Sec. 257.
However, a newly appointed director shall not act as a director unless he has also
within 30 days of his appointment signed and filed with the Registrar his consent
to act as such director. Filing of such a consent is not necessary in the case of
following persons :
• A director reappointed after retirement by rotation or immediately on the
expiry of his term of office.
• Additional or alternate director, or a person filling a casual vacancy in the
office of a director under section 262 or appointed as a director or
reappointed as an additional or alternate director immediately on the expiry of
his term of office.
• A person named as a director under its articles of association as first
registered.
It is to be noted that only persons newly seeking appointments as directors have to
file their consent to act as such. A person who is already a director and who is retiring
at the annual general meeting but immediately seeking reappointment is exempted
from filing the consent.
The provisions of this section are not applicable to an independent private company.
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Suchitta Koley FCS, FICA Handout on Company Law – Unit 2
Company Secretary
National Institute of Financial Management, Faridabad
IA&AS Probationers
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Suchitta Koley FCS, FICA Handout on Company Law – Unit 2
Company Secretary
National Institute of Financial Management, Faridabad
IA&AS Probationers
he is adjudged as insolvent;
he is convicted by a court of an offence involving moral turpitude and sentenced to
imprisonment for not less than six months;
he fails to pay any calls on the shares held by him within six months from the date
fixed for payment; unless the Central Government has by notification in the official
Gazette removed this disqualification;
he absents himself from three consecutive meetings of the Board of directors or from
all the meetings of Board for a continuous period of three months (whichever is
longer), without obtaining leave of absence from the Board;
he (whether by himself or by any person for his benefit or on his account) or any firm
in which he is a partner or any private company of which is a director; accepts a loan
or guarantee or security for a loan from the company in contravention of Sec. 295;
he does not disclose to the Board of directors of his interest in any contract or
proposed contract with the company;
he is restrained by court from being a director for committing fraud or misfeasance in
relation to the company under Sec. 203;
He is removed by the company in general meeting in pursuance of Sec. 284;
having been appointed a director by virtue of his holding any office or other
employment in the company, he ceases to hold such office or other employment in
the company.
The office of a director is also vacated if he or any of his relative hold any office or
place of profit in the company or its subsidiary in contravention of Sec. 314.
A private company which is not a subsidiary of a public company may by its Articles
provide for additional grounds for vacating the office of a director.
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When the person is so removed, he cannot claim compensation from the company.
Moreover, he cannot be appointed as a director of a company for the period of five
years after that. [Sec. 407]
Resignation by the Directors
There is no provision relating to the resignation by a director in the Companies Act. If
there is any provision in the articles of the company giving right to a director to resign
at any time, a director may resign in the manner provided in the articles of
association. If there is no provision in the Articles, then the director may submit the
resignation by sending a reasonable notice.
In the absence of any provision relating to resignation in the articles, it is well settled
that a resignation once made takes effect immediately when the intention to resign is
made clear. (T. Murari vs. State 1976)
The resignation may be oral. [Latchford Premier Cinema Ltd., vs. Ennion (1931) 2 Ch.
409]
Once a director has resigned, he is not entitled to withdraw except with the consent of
directors or the company [Glossop vs.Glossp (1907) 2 Ch. 370]
It may be noted that a resignation by director will not relieve him from any liabilities
and obligations which he may have incurred while in office.
REMUNERATION OF DIRECTORS
The Companies Act does not give any right to the directors for drawing remuneration from
the company but specifies the maximum and minimum limit of payment. It is the Articles
of Association of every company which empower the directors to draw remuneration from
the company. Before passing the Companies Act, 1956, it was deemed to be purely
internal affair but now the payment is made under the Companies Act. The provisions of
the Companies Act regarding remuneration are as follows :
Overall Limit to Managerial Remuneration
According to Sec. 198 of the Companies Act, the total managerial remuneration paid
by a public company or subsidiary private company to its directors and managers,
should not exceed 11 per cent of the net profits of the company. The net profit of the
company is computed in the manner as laid down in Secs. 349, 350 and 351.
While calculating 11 per cent the fee payable to the directors is excluded. [Sec.
198(2)]
Minimum Remuneration in Case of Inadequate Profits
Section 198(4) as amended by the Companies (Amendment) Act, 1988, prohibits the
payment of any sum by way of minimum remuneration where company has no profit
or its profits are inadequate, except with the previous approval of the Central
Government. However there is one exception to this rule. Where the appointment and
remuneration of the managerial personnel is subject to the provisions of section 269
read with Schedule XIII to the Act, the Company can pay minimum remuneration (in
spite of losses or inadequacy of profits) without the approval of the Central
Government.
Meaning of the Term ‘Remuneration’
any expenditure incurred by the company in providing any rent-free accommodation
or any other benefit or amenity in respect of accommodation free of charge;
any expenditure incurred by the company in providing any other benefit or amenity
free of charge at a concessional rate;
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Suchitta Koley FCS, FICA Handout on Company Law – Unit 2
Company Secretary
National Institute of Financial Management, Faridabad
IA&AS Probationers
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Suchitta Koley FCS, FICA Handout on Company Law – Unit 2
Company Secretary
National Institute of Financial Management, Faridabad
IA&AS Probationers
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Company Secretary
National Institute of Financial Management, Faridabad
IA&AS Probationers
it may direct that one member present in person or proxy shall be deemed to
constitute a valid meeting.
Class meetings of shareholders. Where one person held all the shares of a
particular class, that member alone was held to constitute a valid meeting of that
class of shareholders.
Meeting of one-man committee of board of directors. As per Rule 77 of ‘Table A’,
the board of directors may delegate their works to a Committee which may have
only one member. When the meeting of such Committee will be held, only one
member will present and he alone was held to constitute a valid meeting.
COMPANY MEETINGS
Kinds of Company Meetings
Meetings of shareholders:
Statutory meeting;
Annual general meeting (AGM);
Extra-ordinary general meeting;
Class meetings.
Meetings of directors;
Meetings of board of directors;
Meetings of committee of directors.
Meetings of creditors.
Meetings of debenture holders.
MEETINGS OF DIRECTORS
At least one meeting in every three months. The directors of a company exercise most of
their powers in a joint meeting called the meeting of the Board. In the case of every
company, a meeting of the Board of Directors must be held:
at least once in every three months, and
at least four such meetings shall be held in every year. [Sec. 285]
In other words, no three months should pass without directors’ meeting being
held, and no year should expire without at least four directors’ meetings having
been held in it.
The object of this section is to ensure that the Board meetings are held at reasonably
frequent intervals so that the directors may be in touch with the management of the
affairs of the company.
However, the Central Government is empowered to relax the rule with regard to any
class of companies (Section 285). The object of this provision is to save smaller
companies having insufficient business to be transacted at Board meetings from
unnecessary hardships and expenditure involved in holding them.
Notice of the meeting. Notice of every meeting of the Board of Directors must be given in
writing to every director in India and at his usual address in India to every other director
who is outside India for the time being (Sec. 286). A director has no power to waive his
right of notice. Notice must be given to a director, even if he has stated that he will be
unable to attend the meeting. (Young vs. Ladies Imperial Club)
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© S Koley
Suchitta Koley FCS, FICA Handout on Company Law – Unit 2
Company Secretary
National Institute of Financial Management, Faridabad
IA&AS Probationers
There is no need to send notice, if the articles provide for meetings to be held at
regular intervals e.g., monthly, the time and place being fixed. Also if all the directors
should meet casually, and are willing to hold a meeting, the meeting can be held
notwithstanding the absence of notice. (Smith vs. Paringa Mines Ltd.)
Unless the articles of the company provide a definite period of notice, a reasonable
notice must be given of the Board meeting. What is a reasonable notice will depend
on any particular case. If a proper notice is not given the proceedings are invalid
unless all the directors are present at the meeting. (Harban vs. Phillips)
The notice should mention the place, time and date of the meeting. The day must be
a working day and the time should be during business hours unless agreed otherwise
by all the directors. It is not necessary to state in the notice the business to be
transacted, unless the articles of the company or the Act so require.
Agenda. The term ‘agenda’ means things to be done. In the present context it is a
statement of the business to be transacted at a meeting. It also sets out the order in
which the business is to be dealt with. Though the Companies Act does not make it
obligatory on the secretary to send an agenda or to incorporate the same in the notice of
Board meeting, yet by convention it necessarily accompanies the notice calling the
meeting.
When the agenda is enclosed with the notice each director gives due consideration to
the proposed business and comes with necessary preparations for discussion in the
meeting.
Quorum. There must be a proper quorum for every meeting. The quorum for Board
Meeting should be at least two directors or one-third of total strength of the Board of
Directors, whichever is more subject to a minimum of two directors. While determining the
total strength, the vacancies are not counted. Again the directors who are interested in
any of the resolutions to be passed at the Board meeting shall not be counted for the
purpose of quorum of that resolution. If at any time the number of interested directors
exceeds or is equal to two-thirds of the total strength of directors, then the remaining
directors who are not interested will be the quorum for that item, provided their number is
not less than two [Sec. 283]. If the meeting of the Board could not be held for want of
quorum then unless the articles otherwise provide the meeting shall automatically stand
adjourned till the same day in the next week and at the same time and place. Where that
day happens to be a public holiday then the meeting stands adjourned to the next
succeeding day, at the same time and place. If a meeting could not be held for want of a
quorum, it shall allright be counted towards the minimum number of meetings which must
be held in every year under Sec. 285. [Sec. 288]
Meeting of the Committees of Directors
The Board of Directors may form certain committees and delegate some of its powers
to them. These committees should consist of only directors. The delegation of powers
to such committees is to be authorised by the Articles of Association and should be
subject to the provisions of the Companies Act.
In a large company routine matters like Allotment, Transfer, Finance are handled by
sub-committees of the Board of Directors. The meetings of such committees are held
in the same way as those of Board Meetings.
Resolution by circulation
Notice along with detail notes to all directors in India
Address in India in other cases
Consent of majority of directors entitled to vote on the matter
To be confirmed at the next meeting
MEETINGS OF SHAREHOLDERS
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© S Koley
Suchitta Koley FCS, FICA Handout on Company Law – Unit 2
Company Secretary
National Institute of Financial Management, Faridabad
IA&AS Probationers
The shareholders are the real owners of the company, but due to certain limitations they
can not take part in the management of the company. They leave this to their
representatives called the directors. For controlling the board of directors and their
activities shareholders’ meetings’ are held from time to time. Meeting of shareholders can
be classified as under.
Statutory Meeting
Every public company having share capital must convene a general meeting of
shareholders within a period of not less than one month and not more than six
months after the date on which it is authorised to commence its business. This is the
first meeting of the shareholders of the company and it is held once in the whole life
of the company.
The following companies need not to hold statutory meeting:
Private company.
Company limited by G—Uhtee having no share capital.
Unlimited liability company.
A public company which was registered as a private company earlier.
Notice of the meeting. The directors are required to send a notice of the meeting to all
the members of the company at least 21 days before the date of the meeting stating
that it is the ‘statutory meeting’ of the company. If the notice convening this meeting
does not name it as the “Statutory Meeting” it will not amount to compliance with the
provisions of this section. [Gardner vs. Iredale (1912) 1 Ch. 700].
Objects of statutory meeting. The statutory meeting is held to inform the shareholders
about matters relating to incorporation, allotment of shares, the details of the
contracts concluded by the company, etc. According to Stephenson, “Statutory
Meeting is convened in order to afford the shareholders an opportunity for seeing
what degree of success has attained the floatation of the company and in order that
any special matters requiring their approval may be laid before them.”
Statutory report. The directors are required to prepare and send a report called the
‘Statutory Report’ to every member of the company at least 21 days before the date
of the meeting. If the report is sent later it shall be deemed to have been duly
forwarded if it is so agreed to by a unanimous vote of the members entitled to attend
and vote at the meeting [Sec. 165 (2)]. A copy of this report should be sent to the
Registrar.
The Statutory report must set out the following information:
Shares allotted. The total number of shares allotted distinguishing those allotted
as fully or partly paid-up otherwise than in cash and stating in case of shares
partly paid-up the extent to which they are so paid-up and in either case the
consideration for which they have been allotted.
Cash received. The total amount of cash received by the company in respect of
all the shares allotted, distinguished as aforesaid.
Abstract. An abstract of the receipts of the company and of the payments made
thereout, upto a date within seven days of the date of the report, exhibiting under
distinctive headings the receipts of the company thereout from shares and
debentures and other sources the payments thereout and particulars concerning
the balance remaining in hand and an account or estimate of the preliminary
expenses of the company, showing separately any commission, or discount paid
or to be paid on the issue or sale of shares or debentures.
Directors, auditors and other managerial personnel. The names, addresses and
occupations of its directors and auditors and also of its manager and secretary, if
any, and the changes which have occurred since the date of the incorporation.
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© S Koley
Suchitta Koley FCS, FICA Handout on Company Law – Unit 2
Company Secretary
National Institute of Financial Management, Faridabad
IA&AS Probationers
Contracts. The particulars of any contract and the modification or the proposed
modification of any contract which is to be submitted for the approval of the
members at the meeting.
Underwriting contract. The extent to which the underwriting contract, if any, has
not been carried out and the reason therefor.
Arrears of calls. The arrears, if any, due on calls from any director and the
manager.
Commission and brokerage. The particulars of any commission or brokerage paid
or to be paid to any director or to the manager in connection with the issue or sale
of shares or debentures of the company.
Certification of Report. The statutory report must be certified as correct by not less
than two directors; one of whom shall be the managing director, if any. The auditors
of company then shall certify it as correct regarding the shares allotted, cash received
in respect of such shares and the receipts and payment of the company. [Sec. 165
(4)]
A certified copy of the statutory report shall be filled with the registrar for registration
immediately after the same has been sent to the members of the company. [Sec.
165(5)]
Annual General Meeting (AGM)
It is a meeting of shareholders which is held once in a year. The object of holding this
meeting is to review the progress and prospects of the company and elect its office
bearers for the coming year.
Holding the meeting. The first annual general meeting of the company is held within
18 months of its incorporation. After holding such meeting it is not necessary to hold
any other annual general meeting in the year of its incorporation and in the next year.
Subsequent annual general meeting must be held by the company each year within
six months of the closing of the financial year but the interval between any two annual
general meetings must not be more than fifteen months. The registrar is empowered
to extend the time upto a period of three months except in the case of first annual
general meeting.
Notice. The Board of Directors has to call Annual General meeting giving 21 days
notice to all the members entitled to attend the meeting. However, such a meeting
may be called with short notice, if it is agreed to by all the members to vote in the
meeting. certified copies of Profit and Loss Account and Balance Sheet, Directors’
Report and Auditor’s Report should also be forwarded to the members at least 21
days before the holding of the meeting of the company.
Considering the importance of annual general meeting to shareholders it has
been held that the directors must call the meeting even though the accounts are
not ready or the company is not functioning.
Effect of non-compliance.
If default is made in holding the annual general meeting in accordance with the
above provisions, the Central Government may on the application of any member
of the company, call or direct for the calling of the meeting and give such
directions for this purpose as it thinks proper. The directions may include that one
member of the company present in person or by proxy shall be deemed to
constitute the meeting. (Sec. 167)
If default is made in holding a meeting of the company in accordance with the
above provisions, the company and its every officer who is in default shall be
punishable with a fine which may extend to five hundred rupees and in case of
continuing defaults, with a further fine which may extend to Rs. 250 for every day
during which such default continues.
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© S Koley
Suchitta Koley FCS, FICA Handout on Company Law – Unit 2
Company Secretary
National Institute of Financial Management, Faridabad
IA&AS Probationers
Personal delivery
Advertisement in press
Explanatory Statement [S 173] – must give an explanatory statement disclosing all
material facts etc
Quorum [S 174] – 5 [2 in case of a private company] members present in person
Authorised representative of company members / government [where government is
member] to be treated as member in person and shall have right to appoint proxy
Chairman of meeting
Chairman of the Board to chair in normal course else
Any one of the directors present else
Members present shall elect one of themselves
Proxy
Every member has right to appoint a proxy who need not be a member
This must be stated in the notice prominently
Proxy can not speak unless AoA empowers them
Can be appointed by executing in any one of the two formats as per Sch IX
Must be deposited at the registered office at least 48 hours before the meeting
Any stipulation of more than 48 hours shall be invalid [can be reduced]
Company shall not suggest
However can make suggestion on request
Member can inspect by giving 3 days advance notice
Inspection can be made starting 24 hours befor the meeting and until conclusion
of meeting
Voting
By show of hands
Result declared by Chairman final
Poll
Can be demanded / declared by
• Chairman on his own
• Members having requisite eligibility
♦ Public Company –
Holding 10% voting power
Holding 10% of paid-up capital
Or Rs 50,000 paid-up value
♦ Private company – 1 if less than 7 present / 2 if 7 or more present
• Voting power can be restricted by AoA in the event of default of payment of
call
♦ No other restriction on voting power valid
• Should be taken
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© S Koley
Suchitta Koley FCS, FICA Handout on Company Law – Unit 2
Company Secretary
National Institute of Financial Management, Faridabad
IA&AS Probationers
♦ Immediately in case of
Appointment of chairman
Question of adjournment
♦ Within 48 hours in other cases
• Chairman to appoint 2 scrutinizers
♦ One shall be a member who is not an employee if one such member
available
Member’s Resolution
Members holding 5% voting power
100 number or aggregate of Rs 1000.00 thousand paidup value of shares
Requisition in writing 6 weeks in advance
Notice issued after requisition deemed to be 6 weeks in advance
Special Resolution
Stated in notice
Proposed as such
Votes in favour at least three times votes against ignoring votes not exercised
Minute book
Authentic record of proceedings
Bound book with pages pre-numbered
Entries to be made with 30 days
Signed by the chairman with 30 days
By chairman of next board meeting [alternative method only in case of board
meetings]
Conclusive evidence of proceedings
ACCOUNTS
The shareholders provide capital to the company for running the business. They are in a
way, the owners of the company. All of them cannot take part in managing the affairs of
the company as their number is usually much more than the number of directors who
manage the company. But they have every right to know as to how their money has been
dealt with by the directors in a particular period. This is with perhaps compulsory
disclosure through annual accounts has been provided under the Companies Act. as a
method of furnishing information to the shareholders by the directors about the working
and financial position of the company enabling them to exercise a more intelligent and
purposeful control over the affairs of the company. For preparation of annual accounts the
maintenance of proper books of account is a must.
Books of Account to be kept by a Company
Section 209 of the Companies Act requires every company to keep at its registered office
proper books account with respect to---
all sums of money received and expended by the company and the matters in respect
of which the receipt and expenditure take place;
all sales and purchases of goods company; and
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© S Koley
Suchitta Koley FCS, FICA Handout on Company Law – Unit 2
Company Secretary
National Institute of Financial Management, Faridabad
IA&AS Probationers
If no meeting is held, copies to be filed within 30 days of the last date by which
meeting should have been held
Signing of Balance Sheet etc
By the Manager or Secretary
Two Directors [including Managing Director, if there is one {in that case there will be
no Manager}]
Presented to the auditors after signing
AUDIT
Need of Audit
Divorce of management from ownership
Accounts of all Companies must be audited
Chartered Accountant or a firm of CAs can be appointed as Auditor
Disqualifications for appointment:
Body Corporate
Officer / employee of the Company or their employee
Person who is indebted to the Company for an amount more than 1,000.00
rupees
Internal Auditor
Cost Auditor
Person holding shares in the Company
Appointment
First Auditor
By the Board within 1 month of incorporation
• Failing which – by general meeting
♦ Failing which – by Central Government
Shall hold office till the conclusion of 1st AGM
• Members shall appoint the Auditor thereafter
After First Auditor
Shall be appointed at every Annual General Meeting
• Shall hold office from the conclusion of the AGM where appointed and until
the conclusion of the next following AGM
Shall have the right of reappointment
• If not reappointed, company will need to follow procedure for removal of
auditor
♦ Special notice
♦ Approval of Central Government
• Can however resign on their own at any time
• Can also optionally forego reappointment
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© S Koley
Suchitta Koley FCS, FICA Handout on Company Law – Unit 2
Company Secretary
National Institute of Financial Management, Faridabad
IA&AS Probationers
Verification of assets
Managerial remuneration
Depreciation
Government dues
Employee dues – ESI / PF / Superannuation contributions and payments
Various such other matter
Cost Audit
Applicable only to such companies as may be notified by the CG
To be appointed by the Board with the approval of CG
Report to be submitted within 120 days of end of F-Year
Government Company
Auditor to be appointed by the Comptroller and Auditor General of India
CAG shall direct the manner of conduct of audit
Shall annex their comment on the report before presentation to the Parliament
Audit Committee comprising of “Independent” Directors
Chairman must attend AGM
Review Balance Sheet etc before presentation to the auditors
Lay down accounting policies
Ensure consistency
Review draft report of auditor before finalisation
DIRECTOR’ REPORT
To be attached with Balance Sheet etc and shall deal with:
Financial status
Reserves
Achievements and future outlook
Research and development and absorption of technology
Conservation of:
Energy
Foreign exchange
Detail particulars of employees:
Remuneration in excess of Rs 24.00 lacs per annum
Remuneration in excess of Rs 2.00 lacs per month in case employed for less
than a year
Full and detailed explanation of adverse remarks / observations / qualification of the
auditors made in their report
Statement of due compliance
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© S Koley
Suchitta Koley FCS, FICA Handout on Company Law – Unit 2
Company Secretary
National Institute of Financial Management, Faridabad
IA&AS Probationers
DIVIDEND
Payable out of profits of the year only
In case of past losses, at least unabsorbed depreciation must be fully absorbed
Else permission of CG needed
Must be paid in cash only
Must be approved by a General Meeting
Board may declare Interim Dividend from time to time
Shall need final ratification of General Meeting
Amount of dividend must be:
Deposited in separate bank account for the purpose within 05 days of declaration
Paid out of that account within 30 days of declaration
Unclaimed / unpaid amount at the end of 30 days should be transferred to
“Unpaid/Unclaimed Account” with 7 days thereafter
Any claim after such transfer shall be paid out of this account
Payment shall be made for 7 years only
Within 7 days after 7 years, must be deposited into “Investor Education and
Protection Fund” created by CG
No claim can be made thereafter
Quantum of dividend if more than 10%, compulsory transfer of certain sum to General
Reserve
Payment of dividend out of reserves also possible in exceptional circumstances
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© S Koley