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Unit - 1

Introduction

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Unit – II
Documents

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LESSON : 1
MEANING, CHARACTERISTICS AND TYPES OF A COMPANY
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1. STRUCTURE
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1.0 Objective
1.1 Introduction
1.2 Meaning of Company
1.3 Characteristics of a Company
1.4 Distinction between Company and Partnership
1.5 Types of Company
1.6 Summary
1.7 Self Assessment Questions
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1.0 OBJECTIVE
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After reading this lesson, you should be able to:
(a)Define a company and explain its features.
(b)Make a distribution between company and partnership firm.
(c)Explain the various types of companies.
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1.1 INTRODUCTION
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Industrial has revolution led to the emergence of large scale business organizations.
These organizations require big investments and the risk involved is very high. Limited
resources and unlimited liability of partners are two important limitations of partnerships of
partnerships in undertaking big business. Joint Stock Company form of business organization
has become extremely popular as it provides a solution to overcome the limitations of
partnership business. The Multinational companies like Coca-Cola and, General Motors have
their investors and customers spread throughout the world. The giant Indian Companies may
include the names like Reliance, Talco Bajaj Auto, Infosys Technologies, Hindustan Lever
Ltd., Ranbaxy Laboratories Ltd., and Larsen and Tubro etc.

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1.2 MEANING OF A COMPANY
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Section 3 (1) (i) of the Companies Act, 1956 defines a company as “a company
formed and registered under this Act or an existing company”. Section 3(1) (ii) of the act
states that “an existing company means a company formed and registered under any of the
previous companies laws”. This definition does not reveal the distinctive characteristics of a
company. According to Chief Justice Marshall of USA, “A company is a person, artificial,
invisible, intangible, and existing only in the contemplation of the law. Being a mere creature

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of law, it possesses only those properties which the character of its creation confers upon it
either expressly or as incidental to its very existence”.
Another comprehensive and clear definition of a company is given by Lord Justice
Lindley, “A company is meant an association of many persons who contribute money or
money’s worth to a common stock and employ it in some trade or business, and who share
the profit and loss (as the case may be) arising there from. The common stock contributed is
denoted in money and is the capital of the company. The persons who contribute it, or to
whom it belongs, are members. The proportion of capital to which each member is entitled is
his share. Shares are always transferable although the right to transfer them is often more or
less restricted”.
According to Haney, “Joint Stock Company is a voluntary association of individuals
for profit, having a capital divided into transferable shares. The ownership of which is the
condition of membership”.
From the above definitions, it can be concluded that a company is registered
association which is an artificial legal person, having an independent legal, entity with a
perpetual succession, a common seal for its signatures, a common capital comprised of
transferable shares and carrying limited liability.
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1.3 CHARACTERSTICS OF A COMPANY
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The main characteristics of a company are-
1. Incorporated association. A company is created when it is registered under the
Companies Act. It comes into being from the date mentioned in the certificate of
incorporation. It may be noted in this connection that Section 11 provides that an association
of more than ten persons carrying on business in banking or an association or more than
twenty persons carrying on any other type of business must be registered under the
Companies Act and is deemed to be an illegal association, if it is not so registered.
For forming a public company at least seven persons and for a private company at
least two persons are persons are required. These persons will subscribe their names to the
Memorandum of association and also comply with other legal requirements of the Act in
respect of registration to form and incorporate a company, with or without limited liability
[Sec 12 (1)]

2. Artificial legal person. A company is an artificial person. Negatively speaking, it is not a


natural person. It exists in the eyes of the law and cannot act on its own. It has to act through
a board of directors elected by shareholders. It was rightly pointed out in Bates V Standard
Land Co. that : “The board of directors are the brains and the only brains of the company,
which is the body and the company can and does act only through them”.
But for many purposes, a company is a legal person like a natural person. It has the
right to acquire and dispose of the property, to enter into contract with third parties in its own
name, and can sue and be sued in its own name.
However, it is not a citizen as it cannot enjoy the rights under the Constitution of
India or Citizenship Act. In State Trading Corporation of India v C.T.O (1963 SCJ 705), it
was held that neither the provisions of the Constitution nor the Citizenship Act apply to it. It

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should be noted that though a company does not possess fundamental rights, yet it is person
in the eyes of law. It can enter into contracts with its Directors, its members, and outsiders.
Justice Hidayatullah once remarked that if all the members are citizens of India, the
company does not become a citizen of India.

3. Separate Legal Entity : A company has a legal distinct entity and is independent of its
members. The creditors of the company can recover their money only from the company and
the property of the company. They cannot sue individual members. Similarly, the company is
not in any way liable for the individual debts of its members. The property of the company is
to be used for the benefit of the company and nor for the personal benefit of the shareholders.
On the same grounds, a member cannot claim any ownership rights in the assets of the
company either individually or jointly during the existence of the company or in its winding
up. At the same time the members of the company can enter into contracts with the company
in the same manner as any other individual can. Separate legal entity of the company is also
recognized by the Income Tax Act. Where a company is required to pay Income-taxon its
profits and when these profits are distributed to shareholders in the form of dividend, the
shareholders have to pay income-tax on their dividend of income. This proves that a company
that a company and its shareholders are two separate entities.
The principal of separate of legal entity was explained and emphasized in the famous
case of Salomon v Salomon & Co. Ltd.
The facts of the case are as follows :
Mr. Saloman, the owner of a very prosperous shoe business, sold his business for the
sum of $ 39,000 to Saloman and Co. Ltd. which consisted of Saloman himself, his wife, his
daughter and his four sons. The purchase consideration was paid by the company by
allotment of & 20,000 shares and $ 10,000 debentures and the balance in cash to Mr.
Saloman. The debentures carried a floating charge on the assets of the company. One share of
$ 1 each was subscribed by the remaining six members of his family. Saloman and his two
sons became the directors of this company. Saloman was the managing Director.
After a short duration, the company went into liquidation. At that time the statement
of affairs’ was like this: Assets :$ 6000, liabilities; Saloman as debenture holder $ 10,000 and
unsecured creditors $ 7,000. Thus its assets were running short of its liabilities b $11,000
The unsecured creditors claimed a priority over the debenture holder on the ground
that company and Saloman were one and the same person. But the House of Lords held that
the existence of a company is quite independent and distinct from its members and that the
assets of the company must be utilized in payment of the debentures first in priority to
unsecured creditors.
Saloman’s case established beyond doubt that in law a registered company is an entity
distinct from its members, even if the person hold all the shares in the company. There is no
difference in principle between a company consisting of only two shareholders and a
company consisting of two hundred members. In each case the company is a separate legal
entity.
The principle established in Saloman’s case also been applied in the following: Lee V.
Lee’s Airforming Ltd. (1961) A.C. 12 Of the 3000 shares in Lee’s Air Forming Ltd., Lee
held 2999 shares. He voted himself the managing Director and also became Chief Pilot of the

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company on a salary. He died in an air crash while working for the company. His wife was
granted compensation for the husband in the course of employment. Court held that Lee was
a separate person from the company he formed, and compensation was due to the widow.
Thus, the rule of corporate personality enabled Lee to be the master and servant at the same
time.
The principle of separate legal entity of a company has been, in fact recognized much
earlier than in Saloman’s case. In Re Kondoi Tea Co Ltd. (1886 ILR 13 Cal 43), it was held
by Calcutta High Court that a company was a separate person, a separate body altogether
from its Shareholders. In Re. Sheffield etc. Society - 22 OBD 470), it has been held that a
corporation is a legal person, just as much in individual but with no physical existence.
The characteristic of separate corporate personality of a company was also
emphasized by Chief Justice Marshall of USA when he defined a company “as a person,
artificial, invisible, intangible and existing only in the eyes of the law. Being a mere creation
of law, it possesses only those properties which the charter of its creation confers upon it
either expressly or as accident to its very existence”. [Trustees of Darmouth College v
woodward (1819) 17 US 518).

4. Perpetual Existence. A company is a stable form of business organization. Its life does
not depend upon the death, insolvency or retirement of any or all shareholder(s) or director
(s). Law creates it and law alone can dissolve it. Members may come and go but the company
can go on for ever. “During the war all the member of one private company, while in general
meeting, were killed by a bomb. But the company survived; not even a hydrogen bomb could
have destroyed i”. The company may be compared with a flowing river where the water
keeps on changing continuously; still the identity of the river remains the same. Thus, a
company has a perpetual existence, irrespective of changes in its membership.

5. Common Seal. As was pointed out earlier, a company being an artificial person has no
body similar to natural person and as such it cannot sign documents for itself. It acts through
natural person who are called its directors. But having a legal personality, it can be bound by
only those documents which bear its signature. Therefore, the law has provided for the use of
common seal, with the name of the company engraved on it, as a substitute for its signature.
Any document bearing the common seal of the company will be legally binding on the
company A company may have its own regulations in its Articles of Association for the
manner of affixing the common seal to a document. If the Articles are silent, the provisions
of Table-A (the model set of articles appended to the Companies Act) will apply. As per
regulation 84 of Table-A the seal of the company shall not be affixed to any instrument
except by the authority of a resolution of the Board or a Committee of the Board authorized
by it in that behalf, and except in the presence of at least two directors and of the secretary or
such other person as the Board may appoint for the purpose, and those two directors and the
secretary or other person aforesaid shall sign every instrument to which the seal of the
company is so affixed in their presence.

6. Limited Liability: A company may be company limited by shares or a company limited


by guarantee. In company limited by shares, the liability of members is limited to the unpaid

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value of the shares. For example, if the face value of a share in a company is Rs. 10 and a
member has already paid Rs. 7 per share, he can be called upon to pay not more than Rs. 3
per share during the lifetime of the company. In a company limited by guarantee the liability
of members is limited to such amount as the member may undertake to contribute to the
assets of the company in the event of its being wound up.

7. Transferable Shares. In a public company, the shares are freely transferable. The right to
transfer shares is a statutory right and it cannot be taken away by a provision in the articles.
However, the articles shall prescribe the manner in which such transfer of shares will be
made and it may also contain bona fide and reasonable restrictions on the right of members to
transfer their shares. But absolute restrictions on the rights of members to transfer their shares
shall be ultra vires. However, in the case of a private company, the articles shall restrict the
right of member to transfer their shares in companies with its statutory definition.
In order to make the right to transfer shares more effective, the shareholder can apply
to the Central Government in case of refusal by the company to register a transfer of shares.

8. Separate Property: As a company is a legal person distinct from its members, it is


capable of owning, enjoying and disposing of property in its own name. Although its capital
and assets are contributed by its shareholders, they are not the private and joint owners of its
property. The company is the real person in which all its property is vested and by which it is
controlled, managed and disposed of.

9. Delegated Management: A joint stock company is an autonomous, self- governing


and self-controlling organization. Since it has a large number of members, all of them cannot
take part in the management of the affairs of the company. Actual control and management
is, therefore, delegated by the shareholders to their elected representatives, know as directors.
They look after the day-to-day working of the company. Moreover, since shareholders, by
majority of votes, decide the general policy of the company, the management of the company
is carried on democratic lines. Majority decision and centralized management compulsorily
bring about unity of action.

Corporate Veil A legal concept that separates the personality of a corporation from
the personalities of its shareholders, and protects them from being personally liable for
the company's debts and other obligations. This protection is not ironclad or impenetrable.
Where a court determines that a company's business was not conducted in accordance with
the provisions of corporate legislation (or that it was just a façade for illegal activities) it may
hold the shareholders personally liable for the company's obligations under the legal concept
of lifting the corporate veil.

Lifting the Corporate Veil Incorporation by registration was introduced in 1844 and the
doctrine of limited liability followed in 1855.Subsequently in 1897 in Solomon v. Solomon &
Company the House of Lords effected these enactments and cemented into English law the
twin concepts of corporate entity and limited liability. In that case the apex court simply laid
down that a company is a distinct legal person entirely different from the members of that

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company.
What this means is that the company has life of it's own, can own property, can sue and be
sued in it's own name, has perpetual life and existence to name a few of the benefits of
incorporation. It is a trite law that a rather hefty veil is drawn between these two that can be
lifted only in a limited number of circumstances that seem to be fluctuating according to
Current Judicial custody.

However the courts have not always applied the principal lay down in Solomon v. Solomon
& Co. In a number of circumstances, the court will pierce the corporate veil or will ignore the
corporate veil to reach the person behind the veil or reveal the true form and character of the
concerned company. The rationale behind this is probably that the law will not allow the
corporate form to be misused or for the purposes which is set out in the statute. In those
circumstances in which the court feels that the corporate forms are being misused it will rip
through the corporate veil and expose its true character and nature disregarding the Solomon
principal as laid down by the House of Lords. When the veil is lifted:

1.Fraud : The courts have been more that prepared to pierce the corporate veil when it fells
that fraud is or could be perpetrated behind the veil. The courts will not allow the Solomon
principal to be used as an engine of fraud. The two classic cases of the fraud exception are
Gilford motor company ltd v. Horne and Jones v. Lipman.
In the first case, Mr. Horne was an ex-employee of The Gilford motor company and his
employment contract provided that he could not solicit the customers of the company. In
order to defeat this he incorporated a limited company in his wife's name and solicited the
customers of the company. The company brought an action against him. The Court of appeal
was of the view that "the company was formed as a device, a stratagem, in order to mask the
effective carrying on of business of Mr. Horne" in this case it was clear that the main purpose
of incorporating the new company was to perpetrate fraud. Thus the court of appeal regarded
it as a mere sham to cloak his wrong doings.

In the second case of Jones v. Lipman a man contracted to sell his land and thereafter
changed his mind in order to avoid an order of specific performance he transferred his
property to a company. russel judge specifically referred to the judgments in Gilford v. Horne
and held that the company here was " a mask which (Mr. Lipman) holds before his face in an
attempt to avoid recognition by the eye of equity" he awarded specific performance both
against Mr.Lipman and the company. Under no circumstances will the court allow the ant
form of abuse of the corporate form and when such abuse occurs the courts will step in and
Jennifer Payne in her article lists three aspects of fraud, which needs to be looked at before
the corporate veil can be lifted which are:

A) What are the motives of the fraudulent person relevant?


Whether some level of deception is necessary needs to be determined. In the case of Hilton
v.plustile ltd the plaintiff and the defendant agreed to use a medium of a company in a
tenancy arrangement in order to evade the application of the rent act 1977.The court of
Appeal held that the plaintiff was not entitled to lift the veil since he had full knowledge of

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the matter at all times. However another interesting question that arises is what the effect of
deception on the other party is. The issue came up for discussion in the case of Adams
V.Cape industries plc.In considering whether the corporate form has been used in such a way
as to justify the lifting of the corporate veil, the court stated that the correct test in relation to
groups of companies was whether the company had been used as a "mere façade concealing
the true facts" applying this test Slade J. said that the "motives of the perpetrator may be
highly material" in both the classic cases intention to deceive the plaintiff was very much
present however it was not so in Adams V.Cape industries. So the point that needs to be
determined is whether motive is necessary for the fraud exemption to exist. However to get
any answer it is also important to find out the nature of legal right that is being denied to the
plaintiff.

B) Is the character of the legal obligation being evaded relevant?


What the court wants is to prevent limited companies from using the corporate form to evade
a contractual or legal obligation. However one needs to question whether the nature of this
obligation will affect the ability of the court to lift the corporate veil. In the classic cases the
defendants sought to avoid the legal obligations that existed prior to their incorporation, the
main motive of incorporation was to avoid the performance of the legal obligation in Adams
v. Cape there was some discussion about the need to allow the veil to be lifted in order to
prevent Cape avoiding publicity as to its involvement in the sale of asbestos to America and
to prevent cape from having any practical benefit of the group's asbestos trade in the states
without the attendant risks of tortuous liability. However the tortuous liability was purely
speculative. For the fraud exception to exist the defendant must deny the plaintiff some
preexisting legal right. In case no legal right is existent the intention on part of the defendant
to deceive the plaintiff must be speculative and hence less substantial in nature. if the legal
right crystallizes before the incorporation of the company then the mental element is satisfied
if however the reverse then question arises if whether in such circumstances the mental
element can be satisfied. A suitable answer to this is if the legal right crystallizes after the
incorporation but before the use of the corporate form to evade the legal right, the fraud
exception should be satisfied

C) Is the timing of the incorporation of the device company relevant?


In Creasey v. Breachwood Motors Limited, the reason for the failure of the fraud exception
was the timing of incorporation of the sham company. Here Mr. Creasey brought an action
against wrongful dismissal against his employers BW. BW served a defense but four months
later he was served a notice saying that the company was insolvent .BM took over all the
business except the plaintiff's claim. The plaintiff obtained an order for damages and interest
however before he received anything BW went was dissolved without going into liquidation.
The plaintiff sought an order substituting BM for BW on the grounds of justice. In this case
the facts may look similar to Adams v. Cape Industries however Richard Southwell sitting as
distinguished Gilford and Horne and Jones v. Lipman on the basis that in those cases the
sham companies are had been formed with the view to carry out the fraud .in the present case
the device company BM was already in business and caring on its own business. This a very
controversial case and should have been decided on the basis of the classic cases as it should

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not matter whether device companies were created to avoid the legal obligation or whether
they were in existence. Creasey should have been otherwise decided maybe on the grounds of
justice.

2. Group Enterprises: Sometimes in the case of group of enterprises the Solomon principal
may not be adhered to and the court may lift the veil in order to look at the economic realities
of the group itself. In the case of D.H.N.food products Ltd. V. Tower Hamlets it has been
said that the courts may disregard Solomon's case whenever it is just and equitable to do so.
In the above-mentioned case the court of appeal thought that the present case where it was
one suitable for lifting the corporate veil. Here the three subsidiary companies were treated as
a part of the same economic entity or group and were entitled to compensation.
Lord Denning has remarked that 'we know that in many respects a group of companies are
treated together for the purpose of accounts, balance sheet, and profit and loss accounts.
Gower too in his book says, "There is evidence of a general tendency to ignore the separate
legal group" however whether the court will pierce the corporate veil depends on the facts of
the case. The nature of shareholding and control would be indicators whether the court would
pierce the corporate veil. In the case of Woolfson the house of lords held that there was "no
basis consonant with the principle upon which on the facts of this case the corporate veil can
be pierced to the effect of holding Woolfson to be the true owner of Campbell's business or
the assets of solfred "the two subsidiary companies that were jointly claiming compensation
for the value of the land and disturbance of business. The House of Lords in the above
mentioned case had remarked "properly applied the principle that it is appropriate to pierce
the corporate veil only where special circumstances exist indicating that it is a mere façade
concealing the true facts" In the figurative sense façade denotes outward appearance
especially one that is false or deceptive and imports pretence and concealment. That the
corporator has complete control of the company is not enough to constitute the company as a
mere façade rather that term suggests in the context the deliberate concealment of the identity
and activities of the corporator.
The separate legal personality of the company, although a "technical point" is no matter of
form it is a matter of substance and reality and the corporator ought not, on every occasion, to
be relieved of the disadvantageous consequences of an arrangement voluntarily entered into
by the corporator for reasons considered by the corporator to be of advantage to him. In
particular "the group enterprise" concept must obviously be carefully limited so that
companies who seek the advantages of separate corporate personality must generally accept
the corresponding burdens and limitations.
In some cases the corporate veil has not been lifted prime examples of that are Adams V.
Cape Industries. This was a case involving a foreign judgment against a company. the court
in this case held that each company in the group is a separate entity. However one area where
the courts have been particularly reluctant to recognize the concept of group entity is with
relation with corporate debts. Though it is not possible to in absence of agency or trust to
hold one group liable for the debts of another in America equitable doctrines are applied and
in New Zealand as well as Ireland there are statutory provisions for pooling of assets.

3. Agency: In the case of Bodrip v. Solomon Justice Vaughan Williams expressed that the

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company was nothing but an agent of Solomon " That this business was Mr. Solomon's
business and no one else's; that he chose to employ as agent a limited company; that he is
bound to indemnify that agent the company and that this agent, the company has lien on the
assets………" however on appeal to the house of lords it was held that a company did not
automatically become an agent of the shareholder even if it was a one man company and the
other shareholders were dummies.
A company having power to act as an agent may do so as an agent for its parent company or
indeed for all or any of the individual members if it or they authorize it to do so. If so the
parent company or the members will be bound by the acts of its agent so long as those acts
are within actual or apparent scope of the authority. But there is no presumption of any such
relationship in the absence of an express agreement between the parties it will be difficult to
establish one. In cape attempt to do so failed. In cases where the agency agreement holds
good and the parties concerned have expressly agreed to such a agreement them the corporate
veil shall be lifted and the principal shall be liable for the a acts of the agent.

4. Trust: The courts may pierce the corporate veil to look at the characteristics of the
shareholders. In the case of Abbey and Planning the court lifted the corporate veil. In this
case a school was run life a company but the shares were held by trustees on educational
charitable trusts. They pierced the veil in order to look into the terms on which the trustee
held the shares.

5. Tort: Usually the English courts have not lifted the veil on the ground of tort it is a
phenomenon not witnessed in most common law jurisdictions apart from Canada

6. Enemy character: In times of war the court is prepared to lift the corporate veil and
determine the nature of shareholding as it did in the Daimler case where germen shareholders
held the shares of an English company during the time of world war 1.

7. Tax :At times tax legislations warrant the lifting of the corporate veil. The courts are
prepared to disregard the separate legal personality of companies in case of tax evasions or
liberal schemes of tax avoidance without any necessary legislative authority. Statutory
support of lifting the veil ( English law).

(i) Reduction of number of members under section 24 of the companies act if a public
company carries on business for more than six months may become liable jointly and
severally with the company for the payment of debts the right that this section confers on
creditors is limited. it is only that member who remains after 6 months that can be sued. The
anomaly of this section is that the liability attaches to a member and not a director unless the
director also happens to be a director as well. This section has very little practical utility
because of the limitation.

(ii) Fraudulent or wrongful trading

a) Criminal liability: -If any business of a company is carried on with the intend to defraud

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creditors of the company or creditors of any other person or for any fraudulent purpose who
was knowingly a party to the carrying on of the business in that manner is liable to
imprisonment or fine or both This applies whether or not the company has been or is in the
course of being wound up.

The civil liability for the same offence in now a part of the Insolvency Act

b) Sections 213-

(1) If in the course of winding up of a company it appears that any business of the company
has been carried on with the intend to defraud creditors of the company or creditors of any
other person or for any fraudulent purpose...then

(2) The court on application of the liquidator may declare that person in who were knowingly
parties to the carrying on of business in that manner are liable to make such contributions (if
any) as the court thinks proper.
Wrongful trading is dealt with in section 214 of the insolvency act and has similar provisions
to section 213.however this section operates only in cases of insolvent liquidation and the
declaration can be made only against a person who at some time before the commencement
of winding up, was a director of the company and knew or ought to have concluded at that
time that there was no reasonable prospect that the company would avoid going into
liquidation.
No such declaration will take place is the court is satisfied that the person took all the
possible steps to minimize the losses. These sections have been considered to be opposed to
the Solomon principle.
(3) Abuse of company names or employment of disqualified directors

Section 216 of the Insolvency Act now makes it an offence for anyone who was a director or
a shadow director of the original company at any time during the 12 months preceding its
going into insolvent liquidation to be in any way concerned (except with leave of court)
during the next five years in the formation, management, of a company or business with a
name by which the original company was known or one so similar as to suggest an
association with that company.

A person acting in violation of 216 is under 217 personally liable, jointly and severally with
that company and any other person so liable, for the debts and other liabilities of that
company and any other person so liable, for the debts and liabilities of that company incurred
while he was concerned in its management n breach of section 216.

(4) Mis-description of the company Section 349(4) of the companies act provides that if any
officer of the company or other person acting on its behalf Signs or authorizes to be signed on
behalf of the company any bill of exchange, promissory note, endorsement, cheque or order
for money or goods in which the companies name is not mentioned in legible letters..He is
liable to a fine and he is personally liable to the holder of such as mentioned above.

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(5)Premature trading. Another example of personal liability is section 117 (8). Under this
section a public limited company newly incorporated as such must not "do business or
exercise any borrowing power" until it has obtained from the registrar of companies a
certificate that has complied with the provisions of the act relating to the raising of the
prescribed share capital or until it has re-registered as a private company. if it enters into any
transaction contrary to this provision not only are the company and it's officers in default,
liable to pay fines but it the company fails to comply with its obligations in that connection
within 21 days of being called upon to do so, the directors of the company are jointly and
severally liable to indemnify the other party in respect of any loss or damage suffered by
reason of the company's failure.

Conclusion:
The Judgment of the Court of Appeal in the Adams case is the current law, which is nothing
more than a reiteration of the law laid down by the House of Lords in Solomon's case. The
bottom line being only the court will lift the veil in the face of grave abuse of the corporate
form not otherwise.
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1.4 DISTINCTION BETWEEN COMPANY AND PARTNERSHIP
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The difference between a company and partnership is as follows:
Company Partnership

1. Mode of creation By Registration by By Agreement

Statute.

2. Legal Statute Legal entity distinct Firm and partners

from members, are not separate; no

perpetual succession. separate entity;

uncertain life

3. Liability Limited liability of Unlimited joint and

Members several liability of

partners

4. Authority Divorce between Right to share mana-

ownership and gement, common and

Management ownership and

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Representative Management.

Management Mutual agency -

Implied authority.

5. Transfer Public Co.-freely Ordinarily no right of

of shares transferable; transferee transfer of share by a

gets all the rights of partner-limited rights

the transferor of transferee


6. Number of Private Co-Minimum 2 Minimum 2

Members and Maximum 50 Maximum 20.

public Co. Minimum7

and Maximum unlimited.

7. Resources Large and unlimited Personal resources of

Resources partners are limited.

8. General Memorandum defines Easy to change the

Powers and confines the scope agreement and so also

of the company. the powers of the

alteration difficult. partners.

9. Legal Statutory books, No legal formalities

Formalities Audit, Publication Registration not

Registration, compulsory. No audit,

filing, etc. lots of legal no publication of

Formalities accounts etc.

10. Dissolution Only according to the Dissolution by

provisions of law- agreement by

usually by an order of notice, by court.

the court. Death of a partner

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Death of a share- may mean dissolution

holder does not of partnership

affect the existence

of a company.
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1.5 TYPES OF COMPANY
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Joint stock companies can be of various types. The following are the important types of
company:
1. Classification of Companies by Mode of Incorporation
Depending on the mode of incorporation, there are three classes of joint stock companies.

A. Chartered companies. These are incorporated under a special charter by a monarch. The
East India Company and The Bank of England are examples of chartered incorporated in
England. The powers and nature of business of a chartered company are defined by the
charter which incorporates it. A chartered company has wide powers. It can deal with its
property and bind itself to any contracts that any ordinary person can. In case the company
deviates from its business as prescribed by the charted, the Sovereign can annul the latter and
close the company. Such companies do not exist in India.

B. Statutory Companies. These companies are incorporated by a Special Act passed by the
Central or State legislature. Reserve Bank of India, State Bank of India, Industrial Finance
Corporation, Unit Trust of India, State Trading corporation and Life Insurance Corporation
are some of the examples of statutory companies. Such companies do not have any
memorandum or articles of association. They derive their powers from the Acts constituting
them and enjoy certain powers that companies incorporated under the Companies Act have.
Alternations in the powers of such companies can be brought about by legislative
amendments.

The provisions of the Companies Act shall apply to these companies also except in so far
as provisions of the Act are inconsistent with those of such Special Acts [Sec 616 (d)]
These companies are generally formed to meet social needs and not for the purpose of
earning profits.
C. Registered or incorporated companies. These are formed under the Companies Act,
1956 or under the Companies Act passed earlier to this. Such companies come into existence
only when they are registered under the Act and a certificate of incorporation has been issued
by the Registrar of Companies. This is
the most popular mode of incorporating a company. Registered companies may further be
divided into three categories of the following.
i) Companies limited by Shares : These types of companies have a share capital and the
liability of each member or the company is limited by the Memorandum to the extent of face

14
value of share subscribed by him. In other words, during the existence of the company or in
the event of winding up, a member can be called upon to pay the amount remaining unpaid
on the shares subscribed by him. Such a company is called company limited by shares. A
company limited by shares may be a public company or a private company. These are the
most popular types of companies.

ii) Companies Limited by Guarantee : These types of companies may or may not have a
share capital. Each member promises to pay a fixed sum of money specified in the
Memorandum in the event of liquidation of the company for payment of the debts and
liabilities of the company [Sec 13(3)] This amount promised by him is called ‘Guarantee’.
The Articles of Association of the company state the number of member with which the
company is to be registered [Sec 27 (2)]. Such a company is called a company limited by
guarantee. Such companies depend for their existence on entrance and subscription fees.
They may or may not have a share capital. The liability of the member is limited to the extent
of the guarantee and the face value of the shares subscribed by them, if the company has a
share capital. If it has a share capital, it may be a public company or a private company.
The amount of guarantee of each member is in the nature of reserve capital. This amount
cannot be called upon except in the event of winding up of a company. Non-
trading or non-profit companies formed to promote culture, art, science, religion, commerce,
charity, sports etc. are generally formed as companies limited by guarantee.

iii) Unlimited Companies : Section 12 gives choice to the promoters to form a company
with or without limited liability. A company not having any limit on the liability of its
members is called an ‘unlimited company’ [Sec 12(c)]. An unlimited company may or may
not have a share capital. If it has a share capital it may be a public company or a private
company. If the company has a share capital, the article shall state the amount of share capital
with which the company is to be registered [Sec 27 (1)]
The articles of an unlimited company shall state the number of member with which the
company is to be registered.

II. On the Basis of Number of Members


On the basis of number of members, a company may be :
(1) Private Company, and (2) Public Company.

A. Private Company
According to Sec. 3(1) (iii) of the Indian Companies Act, 1956, a private company
is that company which by its articles of association :
i) limits the number of its members to fifty, excluding employees who are members
or ex-employees who were and continue to be members;
ii) restricts the right of transfer of shares, if any;
iii) prohibits any invitation to the public to subscribe for any shares or debentures of the
company. Where two or more persons hold share jointly, they are treated as a
single member. According to Sec 12 of the Companies Act, the minimum number

15
of members to form a private company is two. A private company must use the
word “Pvt” after its name.

Characteristics or Features of a Private Company. The main features of a private of a


private company are as follows :
i) A private company restricts the right of transfer of its shares. The shares of a private
company are not as freely transferable as those of public companies. The articles generally
state that whenever a shareholder of a Private Company wants to transfer his shares, he must
first offer them to the existing members of the existing members of the company. The price
of the shares is determined by the directors. It is done so as to preserve the family nature of
the company’s shareholders.
ii) It limits the number of its members to fifty excluding members who are employees or ex-
employees who were and continue to be the member. Where two or more persons hold share
jointly they are treated as a single member. The minimum number of members to form a
private company is two.
iii) A private company cannot invite the public to subscribe for its capital or shares of
debentures. It has to make its own private arrangement.

B. Public company
According to Section 3 (1) (iv) of Indian Companies Act. 1956 “A public company
which is not a Private Company”,
If we explain the definition of Indian Companies Act. 1956 in regard to the public
company, we note the following :
i) The articles do not restrict the transfer of shares of the company
ii) It imposes no restriction no restriction on the maximum number of the members on
the company.
iii) It invites the general public to purchase the shares and debentures of the companies

(Differences between a Public Company and a Private company)


1. Minimum number : The minimum number of persons required to form a public company
is 7. It is 2 in case of a private company.

2. Maximum number : There is no restriction on maximum number of members in a public


company, whereas the maximum number cannot exceed 50 in a private company.

3. Number of directors. A public company must have at least 3 directors whereas a private
company must have at least 2 directors (Sec. 252)

4. Restriction on appointment of directors. In the case of a public company, the directors


must file with the Register a consent to act as directors or sign an undertaking for their
qualification shares. The directors or a private company need not do so (Sec 266)

5. Restriction on invitation to subscribe for shares. A public company invites the general
public to subscribe for shares. A public company invites the general public to subscribe for

16
the shares or the debentures of the company. A private company by its Articles prohibits
invitation to public to subscribe for its shares.

6. Name of the Company : In a private company, the words “Private Limited” shall be
added at the end of its name.

7. Public subscription : A private company cannot invite the public to purchase its shares or
debentures. A public company may do so.

8. Issue of prospectus : Unlike a public company a private company is not expected to issue
a prospectus or file a statement in lieu of prospectus with the Registrar before allotting shares.

9. Transferability of Shares. In a public company, the shares are freely transferable (Sec.
82). In a private company the right to transfer shares is restricted by Articles.

10. Special Privileges. A private company enjoys some special privileges. A public company
enjoys no such privileges.

11. Quorum. If the Articles of a company do not provide for a larger quorum. 5 members
personally present in the case of a public company are quorum for a meeting of the company.
It is 2 in the case of a private company (Sec. 174) (17)

12. Managerial remuneration. Total managerial remuneration in a public company cannot


exceed 11 per cent of the net profits (Sec. 198). No such restriction applies to a private
company.

13. Commencement of business. A private company may commence its business


immediately after obtaining a certificate of incorporation. A public company cannot
commence its business until it is granted a “Certificate of Commencement of business”.
Special privileges of a Private Company
Unlike a private a public company is subject to a number of regulations and
restrictions as per the requirements of Companies Act, 1956. It is done to safeguard the
interests of investors/shareholders of the public company. These privileges can be studied as
follows :
a) Special privileges of all companies. The following privileges are available to every private
company, including a private company which is subsidiary of a public company or deemed to
be a public company:
1. A private company may be formed with only two persons as member. [Sec.12(1)]
2. It may commence allotment of shares even before the minimum subscription is subscribed
for or paid (Sec. 69).
3. It is not required to either issue a prospectus to the public of file statement in lieu of a
prospectus. (Sec 70 (3)]
4. Restrictions imposed on public companies regarding further issue of capital do not apply
on private companies. [Sec 81 (3)]

17
5. Provisions of Sections 114 and 115 relating to share warrants shall not apply to it. (Sec. 14)
6. It need not keep an index of members. (Sec. 115)
7. It can commence its business after obtaining a certificate of incorporation. A certificate of
commencement of business is not required. [Sec. 149 (7)]
8. It need not hold statutory meeting or file a statutory report [Sec. 165 (10)]
9.Unless the articles provide for a larger number, only two persons personally present shall
form the quorum in case of a private company, while at least five member personally present
form the quorum in case of a public company (Sec. 174).
10. A director is not required to file consent to act as such with the Registrar. Similarly, the
provisions of the Act regarding undertaking to take up qualification shares and pay for them
are not applicable to directors of a private companies [Sec. 266 (5) (b)]
11. Provisions in Section 284 regarding removal of directors by the company in general
meeting shall not apply to a life director appointed by a private company on or before 1st
April 1952 [Sec. 284 (1)]
12. In case of a private company, poll can be demanded by one member if not more than
seven members are present, and by two member if not more than seven member are present.
In case of a public company, poll can be demanded by persons having not less than one-
tenth of the total voting power in respect of the resolution or holding shares on which an
aggregate sum of not less than fifty thousand rupees has been paid-up (Sec. 179).
13. It need not have more than two directors, while a public company must have at least three
directors (Sec. 252)
b) Privileges available to an independent private company (i.e. one which is not a subsidiary
of a public company)
An independent private company is one which is not a subsidiary of a public
company. The following special privileges and exemptions are available to an independent
private company.
1. It may give financial assistance for purchase of or subscription for shares in the company
itself.
2. It need not, like a public company, offer rights shares to the equity shareholders of the
company.
3. The provisions of Sec. 85 to 90 as to kinds of share capital, new issues of share capital,
voting, issue of shares with disproportionate rights, and termination of disproportionately
excessive rights, do not apply to an independent private company.
4. A transfer or transferee of shares in an independent private company has no right of appeal
to the Central Government against refusal by the company to register a transfer of its shares.
5. Sections 171 to 186 relating to general meeting are not applicable to an independent
private company if it makes its own provisions by the Articles. Some provisions of these
Sections are, however made expressly applicable.
6. Many provisions relating to directors of a public company are not applicable to an
independent private company, e.g.
a) It need not have more than 2 directors.
b) The provisions relating to the appointment, retirement, reappointment, etc. of directors
who are to retire by rotation and the procedure relating, there to are not applicable to it.

18
c) The provisions requiring the giving of 14 days’ notice by new candidates seeking election
as directors, as also provisions requiring the Central Government’s sanction for increasing the
number of directors by amending the Articles or otherwise beyond the maximum fixed in the
Articles, are not applicable to it.
d) The provisions relating to the manner of filing up casual vacancies among directors and
the duration of the period of office of directors and the requirements that the appointment of
directors should be voted on individually and that the consent of each candidate for
directorship should be filed with the Registrar, do not apply to it.
e) The provisions requiring the holding of a share qualification by directors and fixing the
time within which such qualification is to be acquired and filing with the Registrar of a
declaration of share qualification by each director are also not applicable to it.
f) It may, by its Articles, Provide special disqualifications for appointment of directors.
g) It may provide special grounds for vacation of office of a director.
h) Sec. 295 prohibiting loans to directors does not apply to it.
i) An interested director may participate or vote in Board’s proceedings relating to his
concern of interest in any contract of arrangement.
7. The restrictions as to the number of companies of which a person may be appointed
managing director and the prohibition of such appointment for more than 5 years at a time, do
not apply to it.
8. The provisions prohibiting the subscribing for, or purchasing of, shares or debentures of
other companies in the same group do not apply to it.
9. The provisions of Section 409 conferring power on the Central Government to present
change in the Board of directors of a company where in the opinion of the Central
Government such change will be prejudicial to the interest of the company, do not apply to it.
When a Private company becomes a Public company
A private company shall become a public company in following cases :
i) By default : When it fails to comply with the essential requirements of a private
company provided under Section 3 (1) (iii) Default in complying with the said
three provisions shall disentitle a private company to enjoy certain privileges (Sec.
43).
ii) A private company which is a subsidiary of another public company shall be deemed
to be a public company.
iii) By provisions of law - Section 43-A.
Section 43-A
a) Where not less than 25% of the paid-up share capital of a private company is held by one
or more bodies” corporate such a private company shall become a public company from the
data in which such 25% is held by body corporate [Sec. 43-A (1)]
b) Where the average annual turnover of a private company is not less than Rs. 10 crores
during the relevant period, such a private company shall become a public company after the
expiry of the period of three months from the last day of the relevant period when the
accounts show the said average annual turnover [Sec. 43 A (1 A)].
c) When a private company holds not less than 25% of the paid up share capital of a public
company the private company shall become a public company from the date on which the
private company holds such 25% [Sec. 43A (IB)].

19
d) Where a private company accepts, after an invitation is made by an advertisement of
receiving deposits from the public other than its members, directors or their relatives, such
private company shall become a public company [Sec. 43A (IC)].
iv) By Conversion : When the private company converts itself into a public company by
altering its Articles in such a manner that they no longer include essential requirements of a
private company under Section 3 (1) (iii). On the data of such alternations, it shall cease to be
private company. It shall comply with the procedure of converting itself into a public
company [Sec. 44].
The Articles of Association of such a public company may continue to have the three
restrictions and may continue to have two directors and less than seven members. Within 3
months of such a conversion. Registrar of Companies shall be intimated. The Registrar shall
delete the word ‘Private’ before the words ‘Limited’ in the name of the company and shall
also make necessary alternations in the certificate of incorporation.
III. On the basis of Control
On the basis of control, a company may be classified into :
1. Holding companies, and
2. Subsidiary Company
1. Holding Company [Sec. 4(4)]. A company is known as the holding company of another
company if it has control over the other company. According to Sec 4(4) a company is
deemed to be the holding company of another if, but only if that other is its subsidiary.
A company may become a holding company of another company in either of the
following three ways :-
a) by holding more than fifty per cent of the normal value of issued equity capital of the
company; or
b) By holding more than fifty per cent of its voting rights; or
c) by securing to itself the right to appoint, the majority of the directors of the other company
, directly or indirectly.
The other company in such a case is known as a “Subsidiary company”. Though the
two companies remain separate legal entities, yet the affairs of both the companies are
managed and controlled by the holding company. A holding company may have any number
of subsidiaries. The annual accounts of the holding company are required to disclose full
information about the subsidiaries.
2. Subsidiary Company. [Sec. 4 (I)]. A company is known as a subsidiary of another
company when its control is exercised by the latter (called holding company) over the former
called a subsidiary company. Where a company (company S) is subsidiary of another
company (say Company H), the former (Company S) becomes the subsidiary of the
controlling company (company H).
IV. On the basis of Ownership of companies
a) Government Companies. A Company of which not less than 51% of the paid up capital is
held by the Central Government of by State Government or Government singly or jointly is
known as a Government Company. It includes a company subsidiary to a government
company. The share capital of a government company may be wholly or partly owned by the
government, but it would not make it the agent of the government. The auditors of the

20
government company are appointed by the government on the advice of the Comptroller and
Auditor General of India. Report along with the auditor’s report are placed before both the
House of the parliament. Some of the examples of government companies are - Mahanagar
Telephone Corporation Ltd., National Thermal Power Corporation Ltd., State Trading
Corporation Ltd. Hydroelectric Power Corporation Ltd. Bharat Heavy Electricals Ltd.
Hindustan Machine Tools Ltd. etc.
b) Non-Government Companies. All other companies, except the Government Companies,
are called non-government companies. They do not satisfy the characteristics of a
government company as given above.
V. On the basis of Nationality of the Company
a) Indian Companies : These companies are registered in India under the Companies Act.
1956 and have their registered office in India. Nationality of the members in their case is
immaterial.
b) Foreign Companies : It means any company incorporated outside India which has an
established place of business in India [Sec. 591 (I)]. A company has an established place of
business in India if it has a specified place at which it carries on business such as an office,
store house or other premises with some visible indication premises. Section 592 to 602 of
Companies Act, 1956 contain provisions applicable to foreign companies functioning in
India.

Small Company
The concept of “Small Company” has been introduced for the first time by the Companies
Act, 2013. The Act identifies some companies as small companies based on their capital and
turnover position for the purpose of providing certain relief/exemptions to these companies.
Most of the exemptions provided to a small company are same as that provided to a one
person company. The Act also provides for a simplified scheme of arrangement between two
small companies, without requiring the approval of Tribunal, i.e. with the approval of Central
Governement (Regional Director).
Definition
Section 2(85) defines a Small Company as –
‘‘small company’’ means a company, other than a public company,—
(i) paid-up share capital of which does not exceed fifty lakh rupees or such higher
amount as may be prescribed which shall not be more than five crore rupees; or
(ii) turnover of which as per its last profit and loss account does not exceed two
crore rupees or such higher amount as may be prescribed which shall not be more
than twenty crore rupees:
Provided that nothing in this Section shall apply to—
(A) a holding company or a subsidiary company;
(B) a company registered under Section 8; or
(C) a company or body corporate governed by any special Act;
Producer Company
A producer company is basically a body corporate registered as Producer Company under
Companies Act, 1956 and shall carry on or relate to any of following activities classified
broadly:-

21
(a) Production, harvesting, processing, procurement, grading, pooling, handling, marketing,
Selling , export of *primary produce of the Members or import of goods or services for their
benefit :
(b) Rendering technical services, consultancy services, training, education, research and
development and all other activities for the promotion of the interests of its Members;
(c) Generation, transmission and distribution of power, revitalization of land and water
resources, their use, conservation and communications relatable to primary produce;
(d) Promoting mutual assistance, welfare measures, financial services, insurance of
producers or their primary produce;
*Primary produce has been defined as a producer of farmers arising from agriculture
including animal husbandry, horticulture, floriculture, pisciculture, viticulture, forestry,
forest products, re-vegetation, bee raising and farming plantation products: produce of
persons engaged in hand-loom, handicraft and other cottage industries: by – products of
such products; and products arising out of ancillary industries.
Number of members required for incorporation of a producer company after complying with
the requirements and provisions of the act in respect of registration.
 Any ten or more individuals, each of them being a producer or
 two or more producer institution or
 A combination of ten or more individual producer institution can form a producer
company provided that if a person ceases to be a primary producer, the board of
director is entitled to ask him to surrender his shares.
Association for Non Profit
A nonprofit organization (NPO, also known as a non-business entity[1]) is
an organization that uses its surplus revenues to further achieve its purpose or mission, rather
than distributing its surplus income to the organization's directors (or equivalents) as profit
or dividends. This is known as the distribution constraint.[2] The decision to adopt a nonprofit
legal structure is one that will often have taxation implications, particularly where the
nonprofit seeks income tax exemption, charitable status and so on.
The nonprofit landscape is highly varied, although many people have come to associate
NPOs with charitable organizations. Although charities do comprise an often high profile or
visible aspect of the sector, there are many other types of nonprofits. Overall, they tend to be
either member-serving or community-serving. Member-serving organizations include mutual
societies, cooperatives, trade unions, credit unions, industry associations, sports clubs, retired
serviceman's clubs and peak bodies – organizations that benefit a particular group of people
i.e. the members of the organization. Typically, community-serving organizations are focused
on providing services to the community in general, either globally or locally: organizations
delivering human services programs or projects, aid and development programs, medical
research, education and health services, and so on. It could be argued many nonprofits sit
across both camps, at least in terms of the impact they make.[3] For example, the grassroots
support group that provides a lifeline to those with a particular condition or disease could be
deemed to be serving both its members (by directly supporting them) and the broader
community (through the provision of a helping service for fellow citizens).

22
Many NPOs use the model of a double bottom line in that furthering their cause is more
important than making a profit, though both are needed to ensure the organization's
sustainability.[4][5]
Although NPOs are permitted to generate surplus revenues, they must be retained by the
organization for its self-preservation, expansion, or plans.[6] NPOs have controlling members
or a board of directors. Many have paid staff including management, whereas others employ
unpaid volunteers and even executives who work with or without compensation (occasionally
nominal). In some countries, where there is a token fee, in general it is used to meet legal
requirements for establishing a contract between the executive and the organization.
Designation as a nonprofit does not mean that the organization does not intend to make a
profit, but rather that the organization has no 'owners' and that the funds realized in the
operation of the organization will not be used to benefit any owners. The extent to which an
NPO can generate surplus revenues may be constrained or use of surplus revenues may be
restricted.

Illegal Association
According to Section 11
1. No company, association or partnership consisting more than 10 persons which has been
formed for carrying on the business in BANKING , unless registered as per Companies Act
or any other INDIAN law. In simple words, a company which is going to do a banking
business must not have more than 10 persons/ members in the formation of the company.
2. No company, association or partnership consisting 20 or more persons which is formed for
the purpose of carrying out any other business which has an object of GAIN/PROFIT, unless
registered under Companies Act or any or Indian Law. In simple words, a company carrying
any other business must not have more than 20 persons/Members at the time of incorporation
of the company.
When there is a contravention of Section 11 then every member carrying business shall be
personally liable for all its liabilities incurred in such business. In addition to this, every
person who is a member of the company is also liable for fine which can extend to ₹10,000.
An ILLEGAL ASSOCIATION cannot sue to recover any debt or other property also it
cannot be sued to recover any money lent to it to carry on any business.
___________________________________________________________________________
1.6 SUMMARY
___________________________________________________________________________
Company may be defined as group of persons associated together to achieve some
common objective. A company formed and registered under the Companies Act has certain
special features, which reveal the nature of a company. These characteristics are also called
he advantages of a company because as compared with other business organizations, these
are in fact, beneficial for a company. Companies can be classified into five categories
according to the mode of incorporation on the basis of number of members, on the basis of
control, on the basis of ownership and on the basis of nationality of the company.
___________________________________________________________________________
1.7 SELF ASSESSMENT QUESTIONS
___________________________________________________________________________

23
Check your progress
Exercise 1: True or False Statements
i) A company is created when it is registered under the Companies Act.
ii) A company is an artificial person. Negatively speaking, it is not a natural person.
iii) A company has a legal distinct entity and is independent of its members.
iv) A company is a stable form of business organization. Its life does not depend upon the
death, insolvency or retirement of any or all shareholder(s) or director (s).
v) As was pointed out earlier, a company being an artificial person has no body similar
to natural person and as such it cannot sign documents for itself.
Ans 1. (T) 2. (T) 3. (T) 4. (T) 5. (T)

Exercise 2: Fill in the blanks


i) A ………………………………………………….by shares or a company limited by
guarantee.
ii) In a public company,………………………... The right to transfer shares is a statutory
right and it cannot be taken away by a provision in the articles.
iii) As a company is a………………………………….., it is capable of owning, enjoying
and disposing of property in its own name.
iv) A …………………………………………. is an autonomous, self- governing
and self-controlling organization.
v) Abuse of company names or employment of
………………………………….directors.
Ans 1. Company may be company limited 2. the shares are freely transferable 3. legal
person distinct from its members 4. joint stock company 5. disqualified
Exercise 3: Mix and Match A with B
1 These are incorporated under a special Statutory Companies.
charter by a monarch. The East India
Company and The Bank of England are
examples of chartered incorporated in
England. The powers and nature of
business of a chartered company are
defined by the charter which incorporates
it. A chartered company has wide
powers. It can deal with its property and
bind itself to any contracts that any
ordinary person can. In case the company
deviates from its business as prescribed
by the charted, the Sovereign can annul
the latter and close the company. Such
companies do not exist in India.
2 These companies are incorporated by a Chartered companies.
Special Act passed by the Central or
State legislature. Reserve Bank of India,
State Bank of India, Industrial Finance
Corporation, Unit Trust of India, State
Trading corporation and Life Insurance

24
Corporation are some of the examples of
statutory companies. Such companies do
not have any memorandum or articles of
association. They derive their powers
from the Acts constituting them and
enjoy certain powers that companies
incorporated under the Companies Act
have. Alternations in the powers of such
companies can be brought about by
legislative amendments.
3 These types of companies have a share Registered or incorporated
capital and the liability of each member companies.
or the company is limited by the
Memorandum to the extent of face value
of share subscribed by him. In other
words, during the existence of the
company or in the event of winding up, a
member can be called upon to pay the
amount remaining unpaid on the shares
subscribed by him. Such a company is
called company limited by shares. A
company limited by shares may be a
public company or a private company.
These are the most popular types of
companies.

4 These types of companies may or may Companies limited by Shares :


not have a share capital. Each member
promises to pay a fixed sum of money
specified in the Memorandum in the
event of liquidation of the company for
payment of the debts and liabilities of the
company [Sec 13(3)] This amount
promised by him is called ‘Guarantee’.
The Articles of Association of the
company state the number of member
with which the company is to be
registered [Sec 27 (2)]. Such a company
is called a company limited by guarantee.
Such companies depend for their
existence on entrance and subscription
fees. They may or may not have a share
capital. The liability of the member is
limited to the extent of the guarantee and
the face value of the shares subscribed by
them, if the company has a share capital.
If it has a share capital, it may be a public
company or a private company.
5 These are formed under the Companies Companies Limited by Guarantee :

25
Act, 1956 or under the Companies Act
passed earlier to this. Such companies
come into existence only when they are
registered under the Act and a certificate
of incorporation has been issued by the
Registrar of Companies. This is the most
popular mode of incorporating a
company.

Ans 1. (2), 2. (1) , 3(4), 4(5), 5(3)

Exercise 4: Question Answers


1. Define ‘Company’. What are its essential characteristics ?
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2. Explain the special privileges of a private company as compared to a public company.
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3. Bring out the difference between partnership and company form of organization.
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4. Write notes on :
a) Chartered Companies
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b) Government Companies
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5. Classify company form of organization on the basis of liability of members.


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26
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27
LESSON : 2
INCORPORATION OF COMPANIES: MEMORANDUM OF ASSOCIATION
AND ARTICLES OF ASSOCIATION
___________________________________________________________________________
2. Structure
___________________________________________________________________________
2.0 Objective
2.1 Introduction
2.2 Incorporation
2.2.1Promotion
2.2.2Incorporation
2.2.3Capital Subscription
2.2.4Commencement of Business
2.3 Memorandum of Association
2.4 Articles of Association
2.5 Difference between Memorandum of Association and Articles of Association
2.6 Constructive Notice of Memorandum and Articles of Association
2.7 Summary
2.8 Self Assessment Questions
2.9 Suggested Readings

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2.0 OBJECTIVE
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After reading this lesson, you should be able to
(a) Describe the process of formation of a company.
(b) Explain the different clauses of memorandum of association and the alterations thereof.
(c) Discuss the contents of articles of association.
(d) highlight the importance of constructive notice of memorandum and articles
of association.
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2.1 INTRODUCTION
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We know that a company is a separate legal entity which is formed and registered
under the Companies Act. It may be noted that before a company is actually formed (i.e.,
formed and registered under the Companies Act), certain persons, who wish to form a
company, come together with a view to carry on some business for the purpose of earning
profits. Such persons have to decide various questions such as (a) which business they should
start, (b) whether they should form a new company or take over he business of some existing
company, (c) if new company is to be started, whether they should start a private company or
pubic company, (d) what should be the capital of the company etc. After deciding about the
formation of the company, the desirous persons take necessary steps, and the company is
actually formed. Thereafter, they start their business. Thus, there are various stage in the

28
formation of a company from thinking of starting a business to the actual starting of the
business.
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2.2 INCORPORATION OFCOMPANIES
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Company is an artificial person created by following a legal procedure. Before a
company is formed, a lot of preliminary work is to be performed. The lengthy process of
formation of a company can be divided into four distinct stages: (I) Promotion; (ii)
Incorporation or Registration; (iii) Capital subscription; and (iv) Commencement of business.
However, a private company can start business as soon as it obtains the certificate of
incorporation. It needs to go through first two stages only. The reason is that a private
company cannot invite public to subscribe to its share capital. But a public company having a
share capital, has to pass through all the four stages mentioned above before it can commence
business or exercise any borrowing powers (Section 149). These four stages are discussed as
follow:

2.2.1 Promotion
The term ‘promotion’ is a term of business and not of law. It is frequently used
in business. Haney defines promotion as “ the process of organizing and planning the
finances of a business enterprise under the corporate form”. Gerstenberg has defined
promotion as “the discovery of business opportunities and the subsequent organization of
funds, property and managerial ability into a business concern for the purpose of making
profits therefrom.” First of all the idea of carrying on a business is conceived by promoters.
Promoters are persons engaged in, one or the other way; in the formation of a company. Next,
the promoters make detailed study to assess the feasibility of the business idea and the
amount of financial and other resources required. When the promoters are satisfied about
practicability of the business idea , they take necessary steps for assembling the business
elements and making provision of the funds required to launch the business enterprise. Law
does not require any qualification for the promoters. The promoters stand in a fiduciary
position towards the company about to be formed. From the fiduciary position of promoters,
the following important results follow:
1.A promoter cannot be allowed to make any secret profits. If any secret profit is made in
violation of this rule, the company may, on discovering it, compel the promoter to account for
and surrender such profit.
2.The promoter is not allowed to derive a profit from the sale of his own property to the
company unless all material facts are disclosed. If he contracts to sell his own property to the
company without making a full disclosure, the company may either rescind the sale or affirm
the contract and recover the profit made out of it by the promoter.
3.The promoter must not make an unfair or unreasonable use of his position and must take
care to avoid anything which has the appearance of undue influence or fraud.
Promoter’s Remuneration
A promoter has no right to get compensation from the company for his services in
promoting it unless the company, after its incorporation, enters into a contract with him for

29
this purpose. If allowed, remuneration may be paid in cash or partly in cash partly in shares
and debentures of the company.
Promoter’s Liability
If a promoter does not disclose any profit made out of a transaction to which the
company is a party, then the company may sue the promoter and recover the undisclosed
profit with interest Otherwise, the company may set aside the transaction i.e., it may restore
the property to promoter and recover its money.
Besides, Section 62 (1) holds the promoter liable to pay compensation to every person
who subscribes for any share or debentures on the faith of the prospectus for any loss or
damage sustained by reason of any untrue statement included in it. Section 62 also provides
certain grounds on which a promoter can avoid his liability. Similarly Section 63 provides for
criminal liability for misstatement in the prospectus and a promoter may also become liable
under this section.
Promoter’s Contracts
Preliminary contracts are contracts made on behalf of a company yet to be
incorporated. Following are some of the effects of such contracts;
1.The company, when it comes into existence, is not bound by any contract made on its
behalf before its incorporation. A company has no status prior to its
incorporation.
2.The company cannot ratify a pre-incorporation contract and hold the other party liable. Like
the company, the other party to the contract is also not bound by such a contract.
3.The agents of a proposed company may sometimes incur personal liability under a contract
made on behalf of the company yet to be formed.
Kelner v Bexter (1886) L.R. 2 C.P.174.Ahotel company was about to be formed
and promoters signed an agreement for the purchase of stock on behalf of the proposed
company. The company came into existence but, before paying the price, went into
liquidation. The promoters were held personally liable to the plaintiff.
Further, an agent himself may not be able to enforce the contract against the other
party. So far as ratification of a pre-incorporation contract is concerned, a company cannot
ratify a contract entered into by the promoters on its behalf before its incorporation. The
reason is simple, ratification can be done only if an agent contracts for a principal who is in
existence and who is competent to contract at the time of the contract by the agent.
2.2.2 Incorporation
This is the second stage of the company formation. It is the registration that
brings a company into existence. A company is legally constituted on being duly registered
under the Act and after the issue of Certificate of Incorporation by the Registrar of
Companies. For the incorporation of a company the promoters take the following preparatory
steps:
i)To find out form the Registrar of companies whether the name by which the new company
is to be started is available or not. To take approval of the name, an application has to be
made in the prescribed form along with requisite fee;
ii)To get a letter of Intent under Industries (Development and Regulation) Act, 1951, if the
company’s business comes within the purview of the Act.

30
iii) To get necessary documents i.e. Memorandum and Articles of Association prepared and
printed.
iv) To prepare preliminary contracts and a prospectus or statement in lieu of a prospectus.
Registration of a company is obtained by filing an application with the Registrar of
Companies of the State in which the registered office of the company is to be situated. The
application should be accompanied by the following documents:
1. Memorandum of association properly stamped, duly signed by the signatories of the
memorandum and witnessed.
2.Ariticles of Association, if necessary.
3. A copy of the agreement, if any, which the company proposes to enter into with any
individual for his appointment as managing or whole-time director or manager.
4.A written consent of the directors to act in that capacity, if necessary.
5.A statutory declaration stating that all the legal requirements of the Act prior to
incorporation have been complied with.
The Registrar will scrutinize these documents. If the Registrar finds the document to
be satisfactory, he registers them and enters the name of the company in the Register of
Companies and issues a certificate called the certificate of incorporation (Section 34).
The certificate of incorporation is the birth certificate of a company. The company
comes into existence from the date mentioned in the certificate of incorporation and the date
appearing in it is conclusive, even if wrong. Further, the certificate is ‘conclusive evidence
that all the requirements of this Act in respect of registration and matters precedent and
related thereto have been fulfilled and that the association is a company authorized to be
registered and duly registered under this Act.
Once the company is created it cannot be got rid off except by resorting to provisions
of the Act which provide for the winding up of company. The certificate of incorporation,
even if it contains irregularities, cannot be cancelled.

2.2.3 Capital Subscription


A private company can start business immediately after the grant of certificate of
incorporation but public limited company has to further go through ‘capital subscription
stage’ and ‘commencement of business stage’. In the capital subscription stage, the company
makes necessary arrangements for raising the capital of the company. With a view to ensure
protection on investors, Securities and Exchange Boar of India (SEBI) has issued ‘guidelines
for the disclosure and investor protection’. The company making a public issue of share
capital must comply with these guidelines before making a public offer for sale of shares and
debentures.
If the capital has to be said through a public offer of shares, the directors of the public
company will first file a copy of the prospectus with the Registrar of Companies. On the
scheduled date the prospectus will be issued to the public. Investors are required to forward
their applications for shares along with application money to the company’s bankers
mentioned in the prospectus. The bankers will then forward all applications to the company
and the directors will consider the allotment of shares. If the subscribed capital is at least
equal to 90 percent of the capital issue, and other requirements of a valid allotment are
fulfilled the directors pass a formal resolution of allotment. However, if the company does

31
not receive applications which can cover the minimum subscription within 120 days of the
issue of prospectus, no allotment can be made and all money received will be refunded.
If a public company having share capital decides to make private placement of shares,
then, instead of a ‘prospectus’ it has to file with the Registrar of Companies a ‘ statement in
lieu of prospectus’ at least three days before the directors proceed to pass the first share
allotment resolution.
The contents of a prospectus and a statement in lieu of a prospectus are almost alike.
2.2.4 Commencement of Business
A private company can commence business immediately after the grant of certificate of
incorporation, but a public limited company will have to undergo some more formalities
before it can start business. The certificate for commencement of business is issued by
Registrar of Companies, subject to the following conditions.
1.Shares payable in cash must have been allotted upto the amount of minimum subscription
2.Every director of the company had paid the company in cash application and allotment
money on his shares in the same proportion as others.
3.No money should have become refundable for failure to obtain permission for shares or
debentures to be dealt in any recognized stock exchange.
4.A declaration duly verified by one of directors or the secretary that the above requirements
have been complied with which is filed with the Registrar.
The certificate to commence business granted by the Registrar is a conclusive evidence of the
fact that the company has complied with all legal formalities and it is legally entitled to
commence business. It may also be noted that the court has the power to wind up a company,
if it fails to commence business within a year of its incorporation [Sec. 433 (3)]
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2.3 MEMORANDUM OF ASSOCIATION
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The formation of a public company involves preparation and filing of several essential
documents. Two of basic documents are :
1.Memorandum of Association
2.Articles of Association
The preparation of Memorandum of Association is the first step in the formation of a
company. It is the main document of the company which defines its objects and lays down
the fundamental conditions upon which alone the company is allowed to be formed. It is the
charter of the company. It governs the relationship of the company with the outside world and
defines the scope of its activities. Its purpose is to enable shareholders, creditors and those
who deal with the company to know what exactly is its permitted range of activities. It
enables these parties to know the purpose, for which their money is going to be used by the
company and the nature and extent of risk they are undertaking in making investment.
Memorandum of Association enable the parties dealing with the company to know with
certainty as whether the contractual relation to which they intend to enter with the company is
within the objects of the company.
Form of Memorandum (Sec. 14)
Companies Act has given four forms of Memorandum of Association in Schedule
I. These are as follows :

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Table B Memorandum of a company limited by shares
Table C Memorandum of a company limited by guarantee and not having

a share capital

Table D Memorandum of company limited by guarantee and having share


capital.

Table E Memorandum of an unlimited company


Every company is required to adopt one of these forms or any other form as near there
to as circumstances admit.
Printing and signing of Memorandum (Sec. 15).
The memorandum of Association of a company shall be (a) printed, (b) divided into
paragraphs numbered consecutively, and (c) signed by prescribed number of subscribers (7 or
more in the case of public company, two or more in the case of private company
respectively). Each subscriber must sign for his/her name, address, description and
occupation in the presence of at least one witness who shall attest the signature and shall
likewise add his address, description and occupation, if any.
Contents of Memorandum
1.Name clause
Promoters of the company have to make an application to the registrar of Companies
for the availability of name. The company can adopt any name if :
i)There is no other company registered under the same or under an identical name;
ii)The name should not be considered undesirable and prohibited by the Central Government
(Sec. 20). A name which misrepresents the public is prohibited by the Government under the
Emblems & Names (Prevention of Improper use) Act, 1950 for example, Indian National
Flag, name pictorial representation of Mahatma Gandhi and the Prime Minister of India,
name and emblems of the U.N.O., and W.H.O., the official seal and Emblems of the Central
Government and State Governments.
Where the name of the company closely resembles the name of the company already
registered, the Court may direct the change of the name of the company.
iii) Once the name has been approved and the company has been registered, then
a) the name of the company with registered office shall be affixed on outside of the business
premises;
b) if the liability of the members is limited the words “Limited” or “Private Limited” as the
case may be, shall be added to the name; [Sec 13(1) (1)]: Omission of the word ‘Limited’
makes the name incorrect. Where the word ”Limited” forms part of a company’s name,
omission of this word shall make the name incorrect. If the company makes a contract
without the use of the word “Limited”, the officers of the company who make the contract
would be deemed to be personally liable [Atkins & Co v Wardle, (1889) 61 LT 23]
The omission to use the word ‘Limited’ as part of the name of a company must have
been deliberate and not merely accidental. Note the following case in this regard:

33
Dermatine Co. Ltd. Vs Ashworth, (1905) 21 T.L.R. 510.Abill of exchange drawn
upon a limited company in its proper name was duly accepted by 2 directors of the company.
The rubber stamp by which the word of acceptance were impressed on the bill was longer
that the paper of the bill and hence the word ‘Limited’ was missed. Held, the company was
liable to pay and the directors were not personally liable.
(c) the name and address of the registered office shall be mentioned in all letter- heads,
business letters, notices and Common Seal of the Company, etc. (Sec. 147).
In Osborn v The Bank of U. A. E., [9 Wheat (22 US), 738]; it was held that the name of a
company is the symbol of its personal existence. The name should be properly and correctly
mentioned. The Central Government may allow a company to drop the word “Limited” from
its name.
2. Registered Office Clause
Memorandum of Association must state the name of the State in which the registered office
of the company is to be situated. It will fix up the domicile of the company. Further, every
company must have a registered office either from the day it begins to carry on business or
within 30 days of its incorporation, whichever is earlier, to which all communications and
notices may be addressed. Registered Office of a company is the place of its residence for the
purpose of delivering or addressing any communication, service of any notice or process of
court of law and for determining question of jurisdiction of courts in any action against the
company. It is also the place for keeping statutory books of the company.
Notice of the situation of the registered office and every change shall be given to the
Registrar within 30 days after the date of incorporation of the company or after the date of
change. If default is made in complying with these requirements, the company and every
officer of the company who is default shall be punishable with fine which may extend to Rs.
50 per during which the default continues.
3. Object Clause
This is the most important clause in the memorandum because it not only shows the
object or objects for which the company is formed but also determines the extent of the
powers which the company can exercise in order to achieve the object or objects. Stating the
objects of the company in the Memorandum of Association is not a mere legal technicality
but it is a necessity of great practical importance. It is essential that the public who purchase
its shares should know clearly what are the objects for which they are paying.
In the case of companies which were in existence immediately before the
commencement of the Companies (Amendment) Act. 1965, the object clause has simply to
state the objects of the company. But in the case of a company to be registered after be
amendment, the objects clause must state separately.
i) Main Objects : This sub-clause has to state the main objects to be pursued by the company
on its incorporation and objects incidental or ancillary to the attainment of main objects.
ii) Other objects: This sub-clause shall state other objects which are not included in the
above clause.
Further, in case of a non-trading company, whose objects are not confined to one
state, the objects clause must mention specifically the States to whose territories the objects
extend. (Sec. 13)

34
A company, which has a main object together with a number of subsidiary objects,
cannot continue to pursue the subsidiary objects after the main object has come to an end.
Crown Bank. Re (1890) 44 Ch D. 634. A company’s objects clause enabled it to act
as a bank and further to invest in securities land to underwrite issue of securities. The
company abandoned its banking business and confined itself to investment and financial
speculation. Held, the company was not entitled to do so.
Incidental acts. The powers specified in the Memorandum must not be construed
strictly. The company may do anything which is fairly incidental to these powers. Anything
reasonable incidental to the attainment or pursuit of any of the express objects of the
company will, unless expressly prohibited, be within the implied powers of the company.
While drafting the objects clause of a company the following points should be kept in mind.
i)The objects of the company must not be illegal, e.g. to carry on lottery business.
ii)The objects of the company must not be against the provisions of the Companies Act such
as buying its own shares (Sec. 77), declaring dividend out of capital etc.
iii)The objects must not be against public, e.g. to carry on trade with an enemy country.
iv)The objects must be stated clearly and definitely. An ambiguous statement like “Company
may take up any work which it deems profitable” is meaningless.
v)The objects must be quite elaborate also. Note only the main objects but the subsidiary or
incidental objects too should be stated.
The narrower the objects expressed in the memorandum, the less is the subscriber’s risk, but
the wider such objects the greater is the security of those who transact business with the
company.
4. Capital Clause
In case of a company having a share capital unless the company is an unlimited
company, Memorandum shall also state the amount of share capital with which the company
is to be registered and division there of into shares of a fixed amount [Sec. 13 (4)]. The
capital with which the company is registered is called the authorized or nominal share capital.
The nominal capital is divided into classes of shares and their values are mentioned in the
clause. The amount of nominal or authorized capital of the company would be normally, that
which shall be required for the attainment of the main objects of the company. IN case of
companies limited by guarantee, the amount promised by each member to be contributed by
them in case of the winding up of the company is to be mentioned. No subscriber to the
memorandum shall take less than one share. Each subscriber of the Memorandum shall write
against his name the number of shares he takes.
5. Liability Clause
In the case of company limited by shares or by guarantee, Memorandum of
Association must have a clause to the effect that the liability of the members is limited. It
implies that a shareholder cannot be called upon to pay any time amount more then the
unpaid portion on the shares held by him. He will no more be liable if once he has paid the
full nominal value of the share.
The Memorandum of Association of a company limited by guarantee must further
state that each member undertakes to contribute to the assets of the company if wound up,
while he is a member or within one year after he ceased to be so, towards the debts and
liabilities of the company as well as the costs and expenses of winding up and for the

35
adjustment of the rights of the contributories among themselves not exceeding a specified
amount.
Any alteration in the memorandum of association compelling a member to take up
more shares, or which increases his liability, would be null and void. (Sec 38).
If a company carries on business for more than 6 months while the number of
members is less than seven in the case of public company, and less than two in case of a
private company, each member aware of this fact, is liable for all the debts contracted by the
company after the period of 6 months has elapsed. (Sec. 45).
6. Association or Subscription Clause
In this clause, the subscribers declare that they desire to be formed into a company and agree
to take shares stated against their names. No subscriber will take less than one share. The
memorandum has to be subscribed to by at least seven persons in the case of a public
company and by at least two persons in the case of a private company. The signature of each
subscriber must be attested by at least one witness who cannot be any of the subscribers.
Each subscriber and his witness shall add his address, description and occupation, if any. This
clause generally runs in this form: “we, the several person whose names and addresses are
subscribed, are desirous of being formed into a company in pursuance of the number of
shares in the capital of the company, set opposite of our respective name”.
After registration, no subscriber to the memorandum can withdraw his subscription on
any ground.
Alteration of Memorandum of Association
Alteration of Memorandum of association involves compliance with detailed
formalities and prescribed procedure. Alternations to the extent necessary for simple and fair
working of the company would be permitted. Alterations should not be prejudicial to the
members or creditors of the company and should not have the effect of increasing the liability
of the members and the creditors.
Contents of the Memorandum of association can be altered as under :
1. Change of name
A company may change its name by special resolution and with the approval of the
Central Government signified in writing. However, no such approval shall be required where
the only change in the name of the company is the addition there to or the deletion there
from, of the word “Private”, consequent on the conversion of a public company into a private
company or of a private company into a public company. (Sec. 21)
By ordinary resolution. If through inadvertence or otherwise, a company is registered
by a name which, in the opinion of the Central Government, is identical with or too nearly
resembles the name of an existing company, it may change its name by an ordinary resolution
and with the previous approval of the Central Government signified in writing. [Sec. 22(1)
(a)].
Registration of change of name. Within 30 days passing of the resolution, a copy of
the order of the Central Government’s approval shall also be field with the Registrar within 3
months of the order. The Registrar shall enter the new name in the Register of Companies in
place of the former name and shall issue a fresh certificate of incorporation with the
necessary alterations. The change of name shall be complete and effective only on the issue

36
of such certificate. The Registrar shall also make the necessary alteration in the company’s
memorandum of association (Sec. 23)
The change of name shall not affect any right or obligations of the company or render
defective any legal proceeding by or against it. (Sec. 23).

2.Change of Registered Office


This may involve :
a)Change of registered office from one place to another place in the same city, town or
village. In this case, a notices is to be give within 30 days after the date of change to the
Registrar who shall record the same.
b)Change of registered office from one town to another town in the same State. In this case, a
special resolution is required to be passed at a general meeting of the shareholders and a copy
of it is to be filed with the Registrar within 30 days. The within 30 days of the removal of the
office. A notice has to be given to the Registrar of the new location of the office.
c)Change of Registered Office from one State to another State to another State.
Section 17 of the Act deals with the change of place of registered office form one
State to another State. According to it, a company may alter the provision of its memorandum
so as to change the place of its registered office from one State to another State for certain
purposes referred to in Sec 17(1) of the Act. In addition the following steps will be taken.
Special Resolution
For effecting this change a special resolution must be passed and a copy there of must
be filed with the Registrar within thirty days. Special resolution must be passed in a duly
convened meeting.
Confirmation by Central Government
The alteration shall not take effect unless the resolution is confirmed by the Central
Government.
The Central Government before confirming or refusing to confirm the change will
consider primarily the interests of the company and its shareholders and also whether the
change is bonafide and not against the public interest. The Central Government may then
issue the confirmation order on such terms and conditions as it may think fit.

3. Alteration of the Object Clause


The Company may alter its objects on any of the grounds (I) to (vii) mentioned in Section 17
of the Act.
The alteration shall be effective only after it is approved by special resolution of the
members in general meeting with the Companies Amendment Act, 1996, for alteration of the
objects clause in Memorandum of Associations sanction of Central Government is dispensed
with.
Limits of alteration of the Object Clause
The limits imposed upon the power of alteration are substantive and procedural.
Substantive limits are provided by Section 17 which provides that a company may change its
objects only in so far as the alteration is necessary for any of the following purposes:
i) to enable the company to carry on its business more economically or more effectively;
ii) to enable the company to attain its main purpose by new or improved means;

37
iii) to enlarge or change the local area of the company’s operation;
iv) to carry on some business which under existing circumstances may conveniently or
advantageously be combined with the business of the company;
v) to restrict or abandon any of the objects specified in the memorandum
vi) to sell or dispose of the whole, or any part of the undertaking of the company;
vii) to amalgamate with any other company or body of persons.
Alterations in the objects is to be confined within the above limits for otherwise alteration in
excess of the above limitations shall be void.
A company shall file with the registrar a special resolution within one month from the
date of such resolution together with a printed copy of the memorandum as altered. Registrar
shall register the same and certify the registration. [Sec. 18].
Effect of non Registration with Registrar
Any alteration, if not registered shall have no effect. If the documents required to be
filed with the Registrar are not filed within one month, such alteration and the order of the
Central Government and all proceedings connected therewith shall at the expiry of such
period become void and inoperative. The Central Government may, on sufficient cause show,
revive the order on application made within a further period of one month [Sec. 19].

4. Alteration of Capital Clause


The procedure for the alteration of share capital and the power to make such alteration
are generally provided in the Articles of Association If the procedure and power are not given
in the Articles of Associational, the company must change the articles of association by
passing a special resolution. If the alteration is authorized by the Articles, the following
changes in share capital may take place :
1.Alteration of share capital [Section 94-95]
2.Reduction of capital [Section 100-105]
3.Reserve share capital or reserve liability [Section 99]
4.Variation of the rights of shareholders [Section 106-107]
5.Reorganization of capital [Section 390-391]

5. Alteration of Liability Clause


Ordinarily the liability clause cannot be altered so as to make the liability of members
unlimited. Section 38 states that the liability of the members cannot be increased without
their consent. It lays down that a member cannot by changing the memorandum or articles, be
made to take more shares or to pay more the shares already taken unless he agrees to do so in
writing either before or after the change.
A company, if authorized by its Articles, may alter its memorandum to make the
liability of its directors or manager unlimited by passing a special resolution. This rule
applies to future appointees only. Such alteration will not effect the existing directors and
manager unless they have accorded their consent in writing. [Section 323].
Section 32 provides that a company registered as unlimited may register under this
Act as a limited company. The registration of an unlimited company as a limited company
under this section shall not affect any debts, liabilities, obligations or contracts incurred or
entered into by the company before such registration.

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___________________________________________________________________________
2.4 ARTICLES OF ASSOCIATION
___________________________________________________________________________
Every company is required to file Articles of Association along with the
Memorandum of Association with the Registrar at the time of its registration. Companies Act
defines ‘Articles as Articles of Association of a company as originally framed or as altered
from time to time in pursuance of any previous companies Acts. They also include, so far as
they apply to the company, those in the TableA in Schedule I annexed to the Act or
corresponding provisions in earlier Acts.
Articles of Association are the rules, regulations and bye-laws for governing the
internal affairs of the company. They may be described as the internal regulation of the
company governing its management and embodying the powers of the directors and officers
of the company as well as the powers of the shareholders. They lay down the mode and the
manner in which the business of the company is to be conducted.
In framing Articles of Association care must be taken to see that regulations framed
do not go beyond the powers of the company itself as contemplated by the Memorandum of
Association nor should they be such as would violate any of the requirements of the
companies Act, itself. All clauses in the Articles ultra vires the Memorandum or the Act shall
be null and void.
Article of Association are to be printed, divided into paragraphs, serially numbered
and signed by each subscriber to Memorandum with the address, description and occupation.
Each subscriber shall sign in the presence of at least one witness who shall attest the
signatures and also mention his own address and occupation.
Contents of Articles of Association
Articles generally contain provision relating to the following matters; (1) the
exclusion, whole or in part of Table A; (ii) share capital different classes of shares of
shareholders and variations of these rights (iii) execution or adoption of preliminary
agreements, if any; (iv) allotment of shares; (v) lien on shares (vi) calls on shares; (vii)
forfeiture of shares; (viii) issue of share certificates; (ix) issue of share warrants; (x) transfer
of shares; (xi) transmission of shares; (xii) alteration of share capital; (xiii) borrowing power
of the company; (xiv) rules regarding meetings; (xv) voting rights of members; (xvi) notice to
members; (xvii) dividends and reserves; (xviii) accounts and audit; (xix) arbitration
provision, if any; (xx) directors, their appointment and remuneration; (xxi) the appointment
and reappointment of the managing director, manager and secretary; (xxii) fixing limits of the
number of directors (xxiii) payment of interest out of capital; (xxiv) common seal; and (xxv)
winding up.
Model form of Articles
Different model forms of memorandum of association and Articles of Association of
various types of companies are specified in Schedule I to the Act. The schedule is divided
into following tables.

39
Table A deals with regulations for management of a company limited by shares.
Table B contains a model form of Memorandum of Association of a company limited
by shares.
Table C gives model forms of Memorandum and Articles of Association of a
company limited by guarantee and not having a share capital.
Table D gives model forms of Memorandum and Articles of Association of a
company limited by guarantee and having a share capital. The Articles of such a company
contain in addition to the information about the number of members with which the company
proposes to be registered, all other provisions of Table A.
Table E contains the model forms of memorandum and Articles of Association of an
unlimited company.
A Public Company may have its own Article of Association. If it does not have its own
Articles, it may adopt Table A given in Schedule I to the Act. Adoption and application of
Table A (Section 28). There are 3 alternative forms in which a public company may adopt
Articles :
1.It may adopt Table A in full
2.It may wholly exclude Table A, and set out its own Articles in full
3.It may frame its own Articles and adopt part of Table A.
In other words, unless the Articles of a public company expressly exclude any or all
provisions of Table A shall automatically apply to it.
Alteration of Articles
Section 31 grant power to every company to alter its articles whenever it desires by
passing a special resolution and filing a copy of altered Articles with the Registrar. An
alteration is not invalid simply because it changes the company’s constitution. Thus in
Andrews v Gas Meter Co., A company was allowed by changing articles to issue preference
shares when its memorandum was silent on the point.
Alteration of articles is much easier than memorandum as it can be altered by special
resolution. However, there are various limitations under the Companies Act to the powers of
the shareholders to alter the articles.
In case of conversion of a public company into a private company, alteration in the
articles would only be effective after approval of the Central Government [Section 31]. The
powers are now vested with the Registrar of Companies.
Alteration of the articles shall not violate provisions of the Memorandum. It must be
made bonafide the benefit of the company. All clauses in the articles ultra vires the
Memorandum shall be null and void, and the articles shall be held inoperative. Alteration
must not contain anything illegal and shall not constitute fraud on the minority.
Alteration in the articles increasing the liability of the members can be done only with the
consent of the members.
The Court may even restrain an alteration where is likely to cause a damage which
cannot be adequately compensated in terms of money. Similarly, a company cannot by
altering articles, justify a breach of contract. Any alteration so made shall be valid as if
originally contained in the articles.

40
Where a special resolution has been passed altering the articles or an alteration has
been approved by the Central Government where required, a printed copy of the articles so
altered shall be filed by the company with the Registrar of Companies within one month of
the date of the passing of special resolution.
___________________________________________________________________________
2.5 DISTINCTION BETWEENARTICLES OFASSOCIATIONAND MEMORANDUM
OF ASSOCIATION
__________________________________________________________________________
The difference between memorandum of association and articles of association is as under:
S.No. Memorandum of Association Articles of Association
1. It is character of company indicating They are the regulation
nature of business & capital. for the internal management
It also defines the company’s relationship of the company and
with outside world are subsidiary to the memorandum.

2. It defines the scope of the They are the rules for


activities of the company, or carrying out the objects of
the area beyond which the the company as set out in
actions of the company cannot the Memorandum.
go.
3. It, being the charter of the company, is They are subordinate to the
the supreme document Memorandum.

4. Any act of the company which is ultra Any act of the company which is ultra
vires the Memorandum is wholly void vires the articles can be confirmed by the
and cannot be ratified even by the whole share holders if it is intra vires the
body of shareholders. memorandum.

5. Every company must have its own A company limited by Shares need not
Memorandum have Articles of its own. In such A case,
Table A Applies.

6. There are strict restrictions on its They can be altered by a special


alteration. Some of the conditions of resolution, to any extent, provided they
incorporation contained in it cannot be do not conflict with the Memorandum
altered except with the sanction of the and the Companies Act.
Central Government.
the Memorandum. If there is a conflict
between the Articles and the
Memorandum, the act of the company

41
___________________________________________________________________________
2.6 CONSTRUCTIVE NOTICE OF MEMORANDUM AND ARTICLES OF
ASSOCIATION
___________________________________________________________________________
The Memorandum and Articles of a company are registered with the Registrar.These are the
public documents and open to public inspection. Every person contracting with the company
must acquaint himself with their contents and must make sure that his contract is in
accordance with them otherwise he cannot sue the company.
On registration the memorandum and articles of association become public
documents. These documents are available for public inspection either in the office of the
company or in the office of the Registrar of Companies on payment of one rupee for each
inspection and can be copied (Sec. 610).
Every person who deals with the company, whether shareholder or an outsider is
presumed to have read the memorandum and articles of association of the company and is
deemed to know the contents of these document. Therefore, the knowledge of these
documents and their contents is known as the constructive notice of memorandum and
articles of association.
It is presumed that persons dealing with the company have not only read these
documents but they have also understood their proper meaning.
Where a person deals with the company in a manner, which is inconsistent with the
provisions of memorandum or articles, or enters into a transaction which is beyond the
powers of the company, shall be personally liable to bear the consequences regarding such
dealings.
___________________________________________________________________________
2.7 SUMMARY
___________________________________________________________________________
The whole process of formation of a company can be divided into four distinct stages namely
promotion incorporation, capital subscription and commencement of business. However, a
private company can start business as soon as it obtains the certificate of information. The
memorandum of Association of a company tells us the objects of the company's formation
and the utmost possible scope of its operations beyond which its actions cannot go. The
memorandum of association of every clause, objects clause, liability clause, Memorandum of
association cannot be altered by the sweet will of the members of the company. It can be
altered only by following the procedure prescribed in the Companies Act. Articles of
association contain the rules and regulations which are granted for the internal management
of the company. The company may alter its articles of association any time by following the
procedure as prescribed in the Companies Act. Every person dealing with the company is
presumed to have read the memorandum and articles of association and understood them in
their time perspective. This is known as doctrine of constructive notice.

42
___________________________________________________________________________
2.8 SELF ASSESSMENT QUESTIONS
___________________________________________________________________________
Check your progress
Exercise 1 : True and False
(a) The whole process of formation of a company can be divided into four distinct stages
namely promotion incorporation, capital subscription and commencement of business.
(b) However, a private company can start business as soon as it obtains the certificate of
information.
(c) The memorandum of Association of a company tells us the objects of the company's
formation and the utmost possible scope of its operations beyond which its actions
cannot go.
(d) The memorandum of association of every clause, objects clause, liability clause,
Memorandum of association cannot be altered by the sweet will of the members of the
company.
(e) It can be altered only by following the procedure prescribed in the Companies Act.
Articles of association contain the rules and regulations which are granted for the
internal management of the company.
Ans. 1(T), 2(T), 3(T), 4(T), 5(T)

Exercise 2 : Fill in the blanks

(a) The company may alter its articles of association any time by following the
procedure as prescribed in the ……………………….

(b) Every person dealing with the company is ………………………. and articles of
association and understood them in their time perspective. This is known as
doctrine of constructive notice.

(c) Any act of the company which is ultra vires the articles can be confirmed by the
share- holders if it is intra vires the……………………..
(d) A …………………………………need not have Articles of its own. In such A
case, Table A Applies.
(e) They can be altered by a special resolution, to any extent, provided they do not
conflict with the ………………………………………..
Ans 1. Companies Act, 2. presumed to have read the memorandum 3. Memorandum, 4.
company limited by Shares 5. Memorandum and the Companies Act

43
Exercise 3 : Mix and Match (A) with (B)

S.No. (A) (B)


1 Promotion means the discovery of business Promoter
opportunities and the subsequent organization of
funds, property and managerial ability into a business
concern for the purpose of making profits therefrom.

2 A promoter is a person who undertakes to form a Promotion


company with reference to a given object and brings
it into actual existence.

3 Preliminary contract refers to those agreements or Certificate of


contracts entered into between different parties on Commencement of Business
behalf and for the benefit of the company prior to its
incorporation.

4 A public company, having a share capital and issuing Preliminary Contract


a prospectus inviting the public to subscribe for
shares, will have to file a few documents with the
registrar who shall scrutinize them and if satisfied
will issue a certificate to commence business.

5 It is the document which defines the objects and lays Articles of Association
down the fundamental conditions upon which along
the company is allowed to be incorporated.

6 Articles of association are the rules, regulation and Memorandum of Association


bye- laws for governing the internal affairs of the
company.

Ans. 1(b), 2(a), 3(d), 4.(c), 5(f), 6(e)

Exercise 4: Questions
1. Explain the process of formation of a company under the Companies Act, 1956.
----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------

2. “A certificate of incorporation is conclusive evidence that all the requirements of the


Companies Act have been complied with”. Comment.
----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------

44
3. What is a Memorandum of Association ? Discuss its clauses
----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------

4. How the alteration in the different clauses of Memorandum of Association can be made?
----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------

5. What is Articles of Association ? What are its contents ?


----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------

6. Distinguish between Memorandum of Association and Articles of Association.


----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------

___________________________________________________________________________
2.9 SUGGESTED READINGS
___________________________________________________________________________
S.K. Aggarwal, Business Law, Galgotia Publishing Company, New Delhi. G.K. Varshney,
Elements of Business Law, S Chand & Co., New Delhi. R.H. Pandia, Priciples of Mercantile
Law, N.M. Tripathi Pvt. Ltd., Mumbai. S.R. Davar, Mercantile Law, Progressive Corporation
Pvt. Ltd., Mumbai.
K.R. Balchandari, Business Law for Management, Himalaya Publication House, New Delhi.

45
LESSON : 3
PROSPECTUS AND COMMENCEMENT OF BUSINESS
STRUCTURE
___________________________________________________________________________
3. STRUCTURE
___________________________________________________________________________

3.0 Objective
3.1 Introduction
3.2 Definition of Prospectus
3.3 Objects of Prospectus
3.4 Requirements regarding issue of Prospectus
3.5 Contents of Prospectus
3.6 Mis-statement in Prospectus
3.7 Statement in lieu of Prospectus
3.8 Minimum Subscription
3.9 Commencement of Business
3.10 Summary
3.11 Self Assessment Questions
3.12 Suggested Readings
___________________________________________________________________________
3.0 OBJECTIVE
___________________________________________________________________________

After reading this lesson, you should be able to:


(a)Define a prospectus and explain the requirement regarding issue of prospectus.
(b)Describe the contents of the prospectus.
(c)Explain the civil and criminal liabilities for mis-statement in prospectus.
(d)Discuss the conditions to be fulfilled by a public company to get certificate of
commencement of business.
___________________________________________________________________________
3.1 INTRODUCTION
___________________________________________________________________________
The promoters of a public company will have to take steps to raise the necessary
capital for the company, after having obtained the Certificate of Incorporation. A public
company may invite the public to subscribe to its shares or debentures. Prospectuses are to be
issued for this purpose. To issue a prospectus is very essential for a public company. If the
promoters of the company are confident of raising the required capital privately from their
friend or relatives, they need not issue a prospectus. In such a case, a statement in lieu of
prospectus must be filed with the Registrar. A private company is not allowed to issue a
prospectus since it cannot invite the general public to subscribe to its shares and debentures.
It is not required to file a statement in lieu of prospectus.

46
___________________________________________________________________________
3.2 DEFINITION OF PROSPECTUS
___________________________________________________________________________
Section 2(36) defines a prospectus an “any document described as issued as a
prospectus and includes any notice, circular, advertisement or other docu- ment inviting
deposits from the public or inviting orders from the public for the subscription or purchase of
any share in, or debentures of, a body corporate”. In simple words, a prospectus may be
defined as an invitation to the public to subscribe to a company’s shares or debentures. By
virtue of the Amendment Act of 1974, any document inviting deposits from the public shall
also come within the definition of prospectus. The word “Prospectus” means a document
which invites deposits from the public or invites offers from the public to buy shares or
debentures of the company.
A document will be treated as a prospectus only when it invites offers from a public.
According to Section 67 the term “public” is defined as, “It includes any section of the
public, whether selected as members or debenture holders of the company concerned or as
clients of the person issuing the prospectus or in any other manner”. It further provides that
no offer of invitation shall be treated as mode to the public if, (i) the same is not calculated to
result in the shares or debentures becoming available other than those receiving the offer or
invitation; (ii) it appears to be a domestic concern of the person making and receiving the
offer or invitation. The ‘public’ is a general word. No particular numbers are prescribed. The
point is that the offer makes the shares and debentures available for subscription to anyone
who brings his money and applies in due form, whether the prospectus was addressed to him
on behalf of the company or not. A private communication does not satisfy the above point.
Where directors make an offer to a few of their friends, relatives or customers by
sending them a copy of the prospectus marked “not for publication” it is not considered an
offer to the public.
The provisions of the Act relating to prospectus are not attracted unless the prospectus
is issued to the public. Issued means issued to the public. Whether the prospectus has been
issued to the public or not is a matter of fact. The leading case of this point is Nash v Lynde
(1929) A.C. 158. In this case the managing director of a company prepared a document that
was marked “strictly private and confidential” and did not contain the particulars required to
be disclosed in a prospectus. A copy of the document along with application forms was sent
to a solicitor who in turn sent it to the plaintiff. The document was held not be prospectus and
as such the claim of the plaintiff for compensation was dismissed.
In the case Re South of England Natural Gas and Petroleum Co. Ltd. (1911) 1 Ch.
573, the distribution of 3,000 copies of a prospectus among the members of certain gas
companies was held to be an offer to the public because person other than those receiving the
offer could also accept it. One may note that under Section 67 an offer or invitation to any
section of the public, whether selected as members or debenture holders of the company or as
clients of the person making the invitation, will be deemed to be an invitation to the public.
The term “subscription of purchase of shares” means taking or agreeing to take shares
for cash. Any document to be called a prospectus must have the following ingredients :
I. There must be an invitation offering to the public;
II. The invitation must be or on behalf of the company or in relation to an intended company;

47
III. The invitation must be to subscribe or purchase.
IV. The invitation must relate to shares or debentures.
___________________________________________________________________________
3.3 OBJECTS OF PROSPECTUS
___________________________________________________________________________
The main objects of a prospectus are as follows:
1. To bring to the notice of public that a new company has been formed.
2. To preserve an authentic record of the terms of allotment on which the public have been
invited to but its shares or debentures.
3. The secure that the directors of the company accept responsibility of the statement in the
prospectus.
___________________________________________________________________________
3.4 REQUIREMENTS REGARDING ISSUE OF PROSPECTUS
___________________________________________________________________________
The relevant requirements regarding issue of prospectus are given below:
1. Issue after Incorporation
Section 55 of the Act permits the issue of prospectus in relation to an intended
company. A prospectus may be issued by or on behalf of the company.
a) by a person interested or engaged in the formation company or
b) through an offer for sale by a person to whom the company has allotted shares.
2. Dating of Prospectus
A prospectus issued by a company shall be dated and that date shall be taken as the
date of publication of the prospectus (Section 55). Date of issue of the prospectus may be
different from the date of publication.
3. Registration of Prospectus
A copy of every prospectus must be delivered to the Registrar for registration before
it is issued to the public. Registration must be made on or before the date of its publication.
The copy sent for registration must be signed by every person who is named in the prospectus
as a director or proposed director of the company or by his agent authorized in writing.
Where the prospectus is issued in more than one language, a copy of its as issued in each
language should be delivered to the registrar. This copy must be accompanied with the
following documents:
a) If the report of an expert is to be published, his written consent to such publication;
b) A copy of every contract relating to the appointment and remuneration of managerial
personnel;
c) A copy of every material contract unless it is entered in the ordinary course of business or
two years before the date of the issue of prospectus;
d) A written statement relating to adjustments; if any, made by the auditors or accountants in
their reports relating to profits and losses, assets and liabilities or the rates of dividends, etc.;
and
e) Written consent of auditors, legal advisers, attorney, solicitor, banker or broker of the
company to act in that capacity.
A copy of the prospectus along with specific documents must been filed with the
Registrar. The prospectus must be issued within ninety days of its registration. A prospectus

48
issued after the said period shall be deemed to be a prospectus, a copy of which has not been
delivered to the Registrar for registration. The company and every person who is knowingly a
party to the issue of prospectus without registration shall be punishable with fine which may
extend to five thousand rupees (Section 60).

4. Expert to be unconnected with the Formation of the Company


A prospectus must not include a statement purporting to be made by an expert such as
an engineer, valuer, accountant etc. unless the expert is a person who has never been engaged
or interested in the formation or promotion as in the management of the company (Section
57).
A statement of an expert cannot be include in the prospectus without his written
consent and this fact should be mentioned in the prospectus. Further, this consent should not
be withdrawn before delivery of the prospectus for registration Section (58).

5. Terms of the contract not to be varied


The terms of any contract stated in the prospectus or statement in lieu of prospectus
cannot be varied after registration of the prospectus except with the approval of the members
in the general meeting (Section 61).

6. Application Forms to be accompanied with the Copy of Prospectus


Every form of application for subscribing the shares or debentures of a company shall
not be issued unless it is accompanied by a copy of prospectus except when it is issued in
connection with a bona fide invitation to a person to enter into an underwriting agreement
with respect to shares or debentures or in relation to shares or debentures which were not
offered to the public [(Section 56(3)].
Section 56(5) provides that the prospectus need not contain all the details required by
the Act where the offer is made to exiting members or debenture holders of the company or if
such shares or debentures are in all respect uniform with shares or debentures already issued
and quoted on a recognize stock ex-change.

7. Personation for Acquisition etc. of Shares


The provision, consequences of applying for shares in fictitious names to be
prominently displayed must be reproduced in every prospectus and every application form
issued by the company to any person.
A person who makes in a fictitious name to a company for acquiring shares or
subscribing any shares or subscribing any shares shall be liable to imprisonment which may
extend to five years similarly, a person who induces a company to allot any shares or to
register any transfer of shares in a fictitious name is also liable to the same punishment.
[Section 68(a)].

8. Contents as per Schedule II


Every prospectus must disclose the matters as required in Schedule II of the Act. It is
to be noted that if any condition binding on the applicant for shares or debentures in a
company to waive compliance with any requirements of the Act as to disclosure in the

49
prospectus or purporting to affect him with notice of any contract, document or matter not
specifically referred to in the prospectus shall be void [Section 56(2)].
If a prospectus is issued without a copy thereof, the necessary documents or the
consent of the experts the company and every person, who is knowingly a part to the issue of
the prospectus, shall be punishable with fine which may extend to Rs.5,000/-.
___________________________________________________________________________
3.5 CONTENTS OF PROSPECTUS
___________________________________________________________________________
We know that a prospectus is issued to the public to purchase the shares or debentures
of the company. Every person wants to invest his money in some sound undertaking. The
soundness of a company can be known from the prospectus of a company. Thus, the
prospectus must disclose the true nature of company's activities which enable the public to
decide whether or not to invest money in the company. In fact, the public invest money in the
company on the faith of the representation contained in the prospectus. Therefore, everything
should be stated with strict accuracy, and the complete and true position of the company
should be disclosed to the public.
Section 56 lays down that every prospectus issued (a) by or on behalf of a company,
or (b) by on behalf of any person engaged or interested in the formation of a company, shall :
1. State the matters specified in Part I of Schedule II, and.
2. Set out the reports specified in Part II or Schedule II both Part I and II shall have effect
subject to the provisions contained in Part III of that Schedule II.
Part I of Schedule II
1. The main objects of the company with names, descriptions, occupations and addresses of
the signatories to the Memorandum of association, and number of shares subscriber by them.
2. The number and classes of shares, and the nature and extent of the inter- ests of the
shareholders in the property and profits of the company.
3. The number of redeemable preference shares intended to be issued with particulars as
regards their redemption.
4. The number of shares fixed by the articles of company as the qualification of a director.
5. The names, addresses, description and occupation of directors, managing director or
manager or any of those proposed person.
6. Any provisions in the articles or any contract relating to appointment, remuneration and
compensation for loss of office of directors, managing director or manager.
7. The amount of minimum subscription.
8. The time of the opening of the subscription list cannot be earlier than the beginning of the
fifth day after the publication of prospectus.
9. Amount payable on application and allotment on each share shall be stated. If any
allotment was previously made within two preceding years, the details of the shares allotted
and the amount; if any, paid thereon.
10. Particulars about any option or preferential right to be given to any person to subscribe
for shares or debentures of the company.
11. The number, description and amount of shares and debentures which, within the last two
years, have been issued or agreed to be issued as fully or partly paid up than in cash.

50
12.The amount paid or payable as a premium, if any, on such share issued within two years
preceding the date of the prospectus or is to be issued stating the necessary particulars.
13.The names of the underwriters of shares or debentures, if any, and the opinion of the
directors that the resources of the underwriters are sufficient to discharge their obligations.
14. The names or addresses description and occupations of the vendors from whom the
property has been purchased or is to be purchased, and the amount paid or payable in cash,
shares or debentures respectively.
15. The amount of underwriting commission paid within two preceding years or payable to
any person for subscribing or procuring subscription for any shares or debentures of the
company.
16. Any benefit given to any promoter or officer in preceding two years and the consideration
for giving of the benefit.
17. Particulars as to the date, parties and general nature of every contract appointing or fixing
the remuneration of managing director or manager, whenever entered into.
18. Particulars of every material contract not entered into in the ordinary course of business
carried on or intended to be carried on by the company or a contract entered into more than
two years before the date of the prospectus.
19. Names and addresses of the auditors of the company.
20. Full particulars of the nature and extent of interested of the directors or promoter in the
promotion of the company or in the property acquired by the company within two years of
the issue of the prospectus.
21. If the share capital of the company is divided into different classes of shares, the rights of
voting at meeting of the company and the rights in respect of capital and the dividends
attached to several classes of shares respectively.
22. Where the articles of the company impose any restriction upon the members of the
company in respect of the rights to attend, speak or vote at meetings of the company or the
rights to transfer shares or on the directors of the company in respect of their powers of
management, the nature and extent of these restrictions.
23. Where the company carries on business, the length of time during which it has been
carried on. If the company proposes to acquire a business which has been carried on for less
than three years, the length of time during which the business had been conducted.
24. If any reserves or profits of the company or any of its subsidiaries have been capitalized,
particulars of the capitalization and particulars of the surplus arising from any revaluation on
the assets of the company.
25. A reasonable time and place at which copies of all balance sheets and profits and loss
accounts, if any, on which the report of the auditors under part II below is based, may be
inspected.
Part II of Schedule II
I General Information
1. Names and address of the Company Secretary, Legal Adviser, Lead Managers, Co-
managers, Auditors, Bankers to the company. Bankers to the issue and Brokers to the issue.
2. Consent of Directors, Auditors, Solicitors/Advocates, Managers to issue, Registrar of
Issue, Bankers to the company, Bankers to the issue and Experts.
3. Expert’s opinion obtained, if any.

51
4. Change, if any, in directors and auditors during the last 3 years, and rea- sons thereof.
5. Authority for the issue and details of resolution passed for the issue.
6. Procedure and time schedule for allotment and issue of certificates.
II. Financial Information
1. Report by the Auditors
A report by the auditors of the company as regards (a) its profits and losses and assets
and liabilities of the company and (b) the rates of dividend, if paid by the company during the
preceding 5 financial years.
If no accounts have been made up in respect of any part of the period of 5 years
ending on a date 3 months before the issue of the prospectus, the report shall, in addition, deal
with either the combined profits and losses and assets and liabilities of its subsidiaries or each
of the subsidiary, so far as they concern the members of the company.

2. Reports by the Accountants


(a) A report by the accountants on the profits or losses of the business for the preceding 5
financial years, and on the assets and liabilities of the busi- ness on a date which shall not be
more than 120 days before the date of the issue of the prospectus. This report is required to be
given, if the proceeds of the issue of the shares or debentures are to be applied di- rectly on
the purchase of any business.
(b) A similar report on the account of a body corporate by an accountant if the proceeds of
the issue are to be applied in the purchase of shares of a body corporate so that body
corporate becomes a subsidiary of the acquiring company.
(c) Principal terms of loans and assets charged as security.

3. Statutory and other Information


Statutory and other information minimum subscription, underwriting com- mission
and brokerage; date of allotment, closing date, date of refund, option to subscribe, material
contracts and inspection of documents, etc. are required to set out in the prospectus.
Part III of Schedule II
Part III of the schedule consists of provisions applying to Part I and II of the said
schedule.
A. Every person shall, for the purpose of this schedule, be deemed to be a vendor who has
entered into any contract, absolute or conditional, for the sale or purchase of any property to
be acquired by the company, in any case where (a) the purchase money is not fully paid at the
date of the issue of the prospectus (b) the purchase money is to be paid or satisfied, wholly or
in part, out of the proceeds of the issue offered for subscription by the prospectus; (c) the
contract depends for its validity or fulfillment on the result of that issue.
B. In the case of a company which has been carrying on business for less than 5 financial
years, reference to 5 financial years means reference to that number of financial years for
which business has been carried on.
C. Reasonable time and place at which copies of all balance sheets and profit and loss
accounts on which the report of the auditors is based, and material contracts and other
documents may be respected.
“Term year” wherever used herein earlier means financial year.

52
Declaration
That all the relevant provision of the Companies Act, 1956 and the guide lines issued by the
Government have been complied with and no statement made in the prospectus is contrary to
the provisions of the Companies Act, 1956 and rules there under. The prospectus shall be
dated and signed by the directors.

Statement by Experts
1. Experts to be unconnected with formation or management of company (Section 57). Where
a prospectus includes a statement made by an expert, he shall not be engaged or interested in
the formation, promotion or management of the company. The expression ‘expert’ includes
an engineer, accountant, a valor and, any other person whose profession gives authority to a
statement made by him.
2. Expert’s consent to issue of prospectus containing statement by him (Section 58). A
prospectus including a statement made by an expert shall not be issued, unless (a) he has
given his written consent to be issued of the prospectus with the statement included in the
form and context in which it is included and; (b) statement that he has given and has not
withdrawn his consent as aforesaid appears in a prospectus.
A wholesome rule intended to protect intending investors by making the expert a party to the
issue of the prospectus and making him liable for untrue statements (Section 58). Penalty
[Section 59 (1)], if any, prospectus is issued in contravention of Section 57 or 58, the
company, and every person who is knowingly a party to the issue thereof, shall be punishable
with fine which may extent to Rs. 5,000/-
___________________________________________________________________________
3.6 MIS-STATEMENT IN THE PROSPECTUS
___________________________________________________________________________
A prospectus is an invitation to the public to subscribe to the shares or debentures of a
company. Every person authorizing the issue of prospectus has a primary responsibility to
seed that the prospectus contains the true state of affairs of the company and does not give
any fraudulent picture to the public. People invest in the company on the basis of the
information published in the prospectus. They have to be safeguarded against all wrongs or
false statements in prospectus. Prospectus must give a full, accurate and a fair picture of
material facts without concealing or omitting any relevant fact. This is known as the ‘Golden
Rule’ for framing prospectus as laid down in New Brunswick etc. Co. V. Muggeridge [(1860)
3 LT 651]. The true nature of company’s venture should be disclosed. The statements which
do not qualify to the particulars mentioned in the prospectus or any information is
intentionally and willfully concealed by the directors of the company, would be considered
as misstatement.
Thus, the term ‘venture statement’ as ‘misstatement’ is used in a broader sense. It
includes not only false statements which produce a impression of actual facts. Concealment
of a material fact also comes within the category of misstatement.
A statement included in a prospectus shall be deemed to be untrue, if
•The statement is misleading in the form and context in which it is included; and
•the omission from a prospectus of any matter is calculated to mislead (Section 65).

53
If there is any misstatement of a material fact in a prospectus as if the
prospectus is wanting in any material fact, this may arise-
1.Civil Liability
2.Criminal Liability
1.Civil Liability
A person who has induced to subscribe for shares (or debentures) on the faith of a
misleading prospects has remedies against the company, directors, promoters, and experts.
Every person who is a director and promoter of the company, and who has authorized the
issue of the prospectus [Section (2)].
a) Compensation
The above persons shall be liable to pay compensation to every person who
subscribes for any shares or debentures for any loss or damage sustained by him by reason of
any untrue statement included therein [Section 62(1)].
In McConnel V. Wright (1903 1 Ch 5460 it has been held that the measure of the
damages is the loss suffered by reason of the untrue statement, omissions, etc. the difference
between the value which the shares would have had and the true value of the shares at the
time of the allotment.
b) Recession of the Contract for Misrepresentation
Avoiding the contract is recession. Any person can apply to the court for recession of
the contract if the statements on which he has taken the shares are false or caused by
misrepresentation whether innocent or fraudulent.
The contract can be rescinded if the following conditions are satisfied:
1) The statement must b a material misrepresentation of fact
2) It must have induced the shareholder to take the shares.
3) The deceived shareholder is an allottee and he must have relied on the statement in the
prospectus.
4) The omission of material fact must be misleading before recession is granted.
5) The proceedings for recession must be started as soon as the allottee comes to know of a
misleading statement.
c) Damages for Deceit as Fraud
Any person induced to invest in the company by fraudulent statement in a prospectus
can sue the company and person responsible for damages. The share should be first
surrendered to company before the company is used for damages.
Fraud occurs when any statement is made without belief in the truth or carelessly. A
statement made with knowledge that it is false, will constitute fraud or deceit. In the leading
case on the point - Derry V. Peek (1889 14 AG 337). It has been held that if the person
making the statement honesty believes it to be true, he is not guilty of fraud even if the
statement is not true. The facts of this
case were:
The Tramway company had power by special Act to make tramways and to use steam
power with the consent of the Board of Trade. The plants of the company are approved
honesty. The directors of the company believed that since the plans were approved,
permission to use steam power from Board of Trade was only a formality and would be
granted. Prospectus was issued wherein the directors stated that the consent to use steam

54
power was obtained by the company. Subsequently, the consent was refused and company
had to be wound up. On the action by plaintiffs for deceit it was held that the directors were
not liable for fraud as they honesty believed that the consent would be obtained, though the
statement was untrue.

d) Liability for non-compliance


A director or other person responsible shall be liable for damage for non- compliance
with or contravention of any of the matters to be stated and reports to be set out in the
prospectus as provided [by Section 56(41)].

e) Damages for Fraud under General Law


Any person responsible for the issue of prospectus may be held liable under the
general law or under the Act for misstatements or fraud.

f) Penalty for Contravening Section 57 & 58


If any prospectus is issued is contravention of Section 57, (experts to be unconnected
with formation or management of company), or Section 58 (expert’s consent to issue of
prospectus containing statement by him) the company and every person who is knowingly
party to the issue thereof, shall be punishable with fine which may extend to Rs. 5,000/-.

g) Penalty for issuing the Prospectus without Registration


If a prospectus is issued without a copy of thereof being delivered to the Registrar, the
company and every person who is knowingly a party to the issue of the prospectus shall be
punishable with fine which may extent to Rs 5,000 [Section 60(5)].

Defence against Civil Liability


Every person made liable to pay compensation for any loss or damages may escape
such liability by proving that :
I. Having consented to become a director of the company, he withdrew his consent before the
issue of the prospectus and that it was issued without his authority or consent.
II. The prospectus was issued without his knowledge or consent and that on becoming aware
of its issue he forth with gave reasonable public notice that it was issued without his
knowledge or consent.
III. After the issue of prospectus, and before allotment there under he, on becoming aware of
any untrue statement therein withdrew his consent to the prospectus and gave reasonable
public notice of the withdrawal.
IV. If a director, etc.. has reasonable ground to believe that the statement was true and he, in
fact, believed it to be true up to the time of allotment, he is not liable. But it is not enough for
a director to say that he was honest, he has to show that his honest belief was based on
reasonable grounds.

55
V.If statement is a correct and fair representation or extract or copy of the statement made by
an expert who is competent to make it and had given his consent and had not withdrawn it,
the director, etc., is not liable. Like- wise, if the statement is a correct and fair representation
or extract or copy of an official document or is based on the authority of an official person,
no liability attaches to the director etc.

2. Criminal Liability
Every person who authorized the issue of prospectus shall be punishable for untrue
statement with imprisonment for a term which may extend to 2 years or with fine which may
extend to Rs. 5,000/- or with both [Section 63(1)].
Penalty for Fraudulently inducing Persons to Invest Money [Section 68]
Any person who either knowingly or recklessly makes any statement, promises or forecast
which is false, deceptive or misleading or by any dishonest concealment of material facts,
induces or attempts to induce another person to enter into;
•Any agreement with a view to acquiring, disposing of, subscribing for, or underwriting
shares or debentures;
•An agreement to secure to any of the parties from the yield of shares or debentures; or by
reference to fluctuation in the value of shares or debentures; shall be punishable for a term
which may extend to 5 years of with fine which may extend to Rs. 10,000/- or with both.
Defence against Criminal Liability
Any person made criminally liable can escape the same as proving that
• the statement was true [Section 63(i)]. statement was immaterial; or
•he had a reasonable ground to believe and did up to the time of the issue of prospectus that
the statement was true [Section 63(i)].
___________________________________________________________________________
3.7 STATEMENT IN LIEU OF PROSPECTUS (SECTION 70)
___________________________________________________________________________
A company having a share capital which does not issue a prospectus or which has
issued a prospectus but has not proceeded to allot any of the shares offered to the public for
subscription, shall not allot any of its shares or debentures, unless at least three days before
the allotment of shares or debentures, this has been delivered to the Registrar for registration
a ‘statement in lieu of prospectus’ signed by every person who is named therein as a director
or a proposed director of the company or by his agent authorized in writing, in the form and
containing the particulars set out in Part I of Schedule III and setting out the reports specified
in Part II of Schedule III subject to the provisions contained in Part III of that Schedule
(Section 70).
A private company on becoming a public company shall deliver to the Registrar a
statement in lieu of prospectus in the form containing the particulars specified in Part I of
Schedule IV with report set out in Part II of Schedule IV subject to the provisions contained
in Part III of that Schedule [Section 44(2) (b)].

56
If the company acts in contravention of the provisions, the company and every
director who is at fault shall be punishable with fine which may extent to Rs.1,000/-.
If the ‘statement in lieu of prospectus’ include any untrue statement, any person who
authorized the delivery of the statement in lieu of prospectus shall be, punishable with
imprisonment up to two years or with fine which may extent to Rs. 5,000/- or with both. He
can avoid liability if he proves either that the statement was immaterial or that he had
reasonable ground to believe that the statement was immaterial or that he had reasonable
ground to believe that the statement was true. The civil and criminal liability for mis-
statements or misrepresentations is the same as in the case of a prospectus [Section 70(5)].
___________________________________________________________________________
3.8 MINIMUM SUBSCRIPTION (SECTION 69)
___________________________________________________________________________

When shares are offered to the public the amount of minimum subscription has to be
mentioned in the prospectus. It means the amount which, in the opinion of the directors, is
enough to meet the purchase price of any property, preliminary expenses and working capital.
No allotment shall be made until at least so much amount has been subscribed for. If the
minimum subscription has not been received within 120 days, of the issue of the prospectus,
the money received from the applicants must be repaid without interest. If the money is not
paid back within 130 days, the directors become personally liable to pay it with interest,
unless they can show that default was not due to any negligence or misconduct or their part.
___________________________________________________________________________
3.9 COMMENCEMENT OF BUSINESS
___________________________________________________________________________
A private company can commence business immediately on its incorporation. A
public company has to, however, comply with certain additional formalities before it can
commence its business. This can be grouped under the following three heads.
1. Public Company Issuing a Prospectus
No public company having a share capital and issuing a prospectus inviting
the public to subscribe for its shares, shall commence business or borrow unless it has
obtained ‘certificate of commencement of business’ from the Registrar of Companies. The
certificate of commencement of business will be issued after the following formalities are
complied with -
a) At least minimum subscription has been raised;
b) every director of the company has paid to the company, on each of the shares taken by him
or agree to be taken by him the amount payable by him on application and allotment of the
shares;
c) Obtain or apply for permission for dealing of the shares or debentures on the recognized
stock exchange so that no money is repayable to application for an shares of debentures
offered for public subscription by reason of any failure to apply for, or to obtain stock
exchange permission;
d) A duly verified declaration has been filed with the Registrar by one of the director or the
secretary or of the secretary in whole time practice that the above provisions have been
complied with [Section 149(1)].

57
2. Public Company Not Issuing a Prospectus
Where a company having a share capital has not issued a prospectus inviting the
public subscribe for its shares, it can commence business or exercise any borrowing powers if
the following conditions are fulfilled:
•A statement in lieu of prospectus has been filled in the Registrar.
•Every director of the company has paid to the company, on each of the shares taken or
contracted to be taken by him for cash, the application and allotment money.
•There has been filed with the Registrar a duly verified declaration by one of the directors or
the secretary, a secretary in whole time practice, in the prescribed form, that the above
provisions have been complied with.
When the company fulfils the above conditions, the Registrar shall certify that it is
entitled to commerce business and that the certificate shall be conclusive evidence that the
company is so entitled [Section 149(3)].
Any contract made by a public company after incorporation but before the date on which it is
entitled to commence business shall be provisional only and shall not be binding on the
company until the certificates is obtained [Section 149(4)].
Thus where goods are supplied to the company which never become en- titled to
commence business not one can sue the company for the price of goods supplied to it.
3. Failure to Commence business
It may also be noted that the court has the power to wind up a company, if it does not
commence its business within a year of its incorporation [Section 433(3).
___________________________________________________________________________
3.10 SUMMARY
___________________________________________________________________________
A prospectus means any invitation issued to the public inviting it to de- posit money
with the company or to take share or debentures of the company such invitation may be in the
form of a document or a notice, circular, advertisement etc. Section 55 states that every
prospectus must be dated, and that date is deemed to be the date of publications of the
prospectus, prospectus should neither contain any misstatement i.e. untrue or misleading nor
omit to disclose any material fact. It there is any misstatement or omission of material facts,
then the directions promoters, the persons responsible for the issue of prospectus, and the
company incur a liability for the same. The company can also allot shares or debentures
without issuing the prospectus. However, in such a case, a statement known as 'Statement in
lieu of Prospectus' is required to be prepared and field with the Registrar of Companies.
___________________________________________________________________________
3.11 SELF ASSESSMENT QUESTIONS
___________________________________________________________________________

Check your progress


Exercise 1 : True and False
(a) A prospectus means any invitation issued to the public inviting it to de- posit money
with the company or to take share or debentures of the company such invitation may
be in the form of a document or a notice, circular, advertisement etc.

58
(b) Section 55 states that every prospectus must be dated, and that date is deemed to be
the date of publications of the prospectus, prospectus should neither contain any
misstatement i.e. untrue or misleading nor omit to disclose any material fact.
(c) It there is any misstatement or omission of material facts, then the directions
promoters, the persons responsible for the issue of prospectus, and the company incur
a liability for the same.
(d) The company can also allot shares or debentures without issuing the prospectus.
(e) However, in such a case, a statement known as 'Statement in lieu of Prospectus' is
required to be prepared and field with the Registrar of Companies.

Ans 1(True), 2(True), 3(True), 4(True), 5(True)

Exercise 2: fill in the blanks


In case of Public Company Not Issuing a Prospectus
(a) Where a company having a share capital has …………………inviting the public
(b) subscribe for its shares, it can commence business or exercise …………………if the
following conditions are fulfilled:
(c) A statement ………………………….has been filled in the Registrar.
(d) ……………………………………., on each of the shares taken or contracted to be
taken by him for cash, the application and allotment money.
(e) There has been filed with the …………………………………………………..a
secretary in whole time practice, in the prescribed form, that the above provisions
have been complied with.
Ans . 1. not issued a prospectus 2. any borrowing powers 3. in lieu of prospectus 4. Every
director of the company has paid to the company, 5 Registrar a duly verified declaration by
one of the directors or the secretary

Exercise 3: Mix and Match


Sr. No (A) (B)
1 A document inviting offers from the public for Minimum Subscription
the subscription of shares in on debentures of a
company is known as a prospectus.

2 Minimum subscription is the amount which, in Prospectus


the opinion of the board of directors, must be
raised by the issue of share capital.

3 If a public company makes a private arrangement Civil Liability


for raising capital then it must file a statement in
lieu of prospectus with the Registrar three days
before any allotment of shares or debentures can
be made.

4 It means the liability to pay damages or Criminal Liability


compensation.

59
5 Criminal liability means the liability which Statement in lieu of
improve punishment of imprisonment or fine or Prospectus
both.

Ans1. (2), 2. (1), 3.(5), 4.(3), 5.(4)


Exercise 4: Questions
1. What is a prospectus? Explain the requirements regarding issue of prospectus.
----------------------------------------------------------------------------------------------------------------
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----------------------------------------------------------------------------------------------------------------

2.Is it compulsory for a company to issue prospectus?


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----------------------------------------------------------------------------------------------------------------

3.Explain the civil and criminal liabilities for misstatement in the prospectus of a company.
----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------

4.Write short notes on the following:


A)Minimum subscription
----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------

B)Statement in lieu of prospectus


----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------

5.Explain the conditions that a public company is required to fulfill in order to obtain a
certificate of commencement of business.
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----------------------------------------------------------------------------------------------------------------

60
___________________________________________________________________________
3.13 SUGGESTED READINGS
___________________________________________________________________________
S.R. Davar, Mercantile Law, Progressive Corporation Pvt. Ltd., Mumbai.
K.R. Balchandari, Business Law for Management, Himalaya Publication House, New
Delhi.eeh
S.S. Gulshan & G.K. Kapoor, Business Law, New Age International Publishers, New Delhi.
S.C. Kuchhal, Mercantile Law, Vikas Publishing House, New Delhi.
Nirmal Singh, Business Law, Deep and Deep Publication Pvt. Ltd., New Delhi. M.C.
Kuchhal, Mercentile Law, Vikas Publishing House Pvt. Ltd., New Delhi.

61
LESSON: 4
ALLOTMENT OF SHARES AND DEBENTURES; TRANSFER AND
TRANSMISSION OF SHARES; SHARE WARRANT AND SHARE CERTIFICATE
___________________________________________________________________________
4.0 STRUCTURE
___________________________________________________________________________
4.0 Objective
4.1 Introduction
4.2 General Principles regarding allotment
4.3 Rules of Allotment
4.4 Transfer and Transmission of Shares
4.5 Share warrant and share certificate
4.6 Difference between a share certificate
4.7 Summary
4.8 Self assessment questions
4.9 Suggested readings
___________________________________________________________________________
4.0 OBJECTIVE
___________________________________________________________________________
After reading this lesson, you will be conversant with
a)General principles regarding allotment.
b)Rules of allotment of shares and debentures.
c)Procedure for transfer of shares and powers of directors to refuse transfer.
d)Transmission of shares.
e)Procedure for issuing share warrant and share certificate.
___________________________________________________________________________
4.1 INTRODUCTION
___________________________________________________________________________
When a company issues a prospectus inviting the public to subscribe for the shares of a
company, it is merely an invitation rather than an offer. An application for shares is an offer
by the prospective shareholders to take the shares of the company. Such offers are made on
application forms supplied by the company. When an application is accepted, it is called
allotment. Allotment is the acceptance by the company of the offer made by the applicant.
Allotment results in a binding contract between the parties. The term allotment has not been
defined in the Companies Act.
In Sri Gopal Jalan & Co. v. Calcutta Stock Exchange Association Ltd., (1963), allotment of
shares was explained by the Supreme Court as "the appropriation, out of the previously
inappropriate capital of the company, of a certain number of shares to a person. It is only
after allotment that shares come into existence. Reissue of forfeited shares is not an
allotment'.

62
___________________________________________________________________________
4.2 GENERAL PRINCIPLES REGARDING ALLOTMENT
___________________________________________________________________________
The provisions of the law of contract regarding the acceptance of an offer apply to the
allotment of shares by a company. The general principles relating to the allotment of shares
are as follows:
1. Proper Authority
Allotment must be made by a resolution of the Board of Directors or by a committee
authorized to allot shares on behalf of the Board if permitted by the articles.

2. Absolute and unconditional


The allotment must be absolute and unconditional. If an application for shares in made
subject to a condition, then that condition has to be fulfilled in order to make the allotment
effective. In case that condition is not fulfilled, the applicant is not bound to take the shares.

3. Within a reasonable time


The allotment must be made within a reasonable time after the receipt of the application.
Otherwise the applicant shall not be bound to accept it.
In Ramasgate Victoria Hotel Co. v. Monterfiore, Monterfiore applied for shares on June 28.
But allotment was made on November 23 and he refused to take the shares. In this case it was
held that the offer had lapsed and the applicant was not liable to pay for the allotment.

4. Must be communicated
The allotment must be communicated to the person making the application so that it is legally
complete. Communication need not be in a particular form unless the articles of the company
provide otherwise. Whatever is the mode of communication, it must be made to the applicant
or his agent who is duly authorized to receive it. In case of postal communication, allotment
is complete as soon as the letter of allotment is posted even though it is never received
(Household Fire Insurance Co. v. Grant ).

5. Revocation of the offer


An offer to take shares can be revoked at any time before the allotment is communicated.
H applied for shares in a company which were allotted to him. The letter of allotment was
sent by the company's agent to be delivered by hand to H. Before the delivery of the letter of
allotment, H withdrew his application. It was held that H was not a shareholder of the
company. [Re National Savings Bank Association (1867) L.R. 4E9.9]
In the same way, the allotment can be withdrawn by the company before it is communicated
completely to the applicant.
___________________________________________________________________________
4.3 RULES OF ALLOTMENT
___________________________________________________________________________
The Companies Act, 1956 does not prescribe any restriction as to the allotment of shares and
debentures when issued by private companies. However, the Companies Act prescribes

63
certain restrictions regarding the allotment of shares and debentures by public companies.
Such restriction may be discussed under the following two heads :
(A)When no public offer is made.
(B)When public offer is made.

(A)When no public offer is made


A public company having share capital, which does not issue a prospectus or has issued a
prospectus but has not proceeded to allot any of the shares offered to the public for
subscription, shall not allot any of its shares or debentures unless a statement in lieu of
prospectus has been delivered to the Registrar at least three days before the first allotment of
shares or debentures. The statement must be signed by every person who is a director or
proposed director of the company or by his agent authorized in writing. (Section 70 (1)]
If the company contravenes the above provision, the allotment shall be irregular and voidable
at the option of the allottee. Further, the company, and every director of the company who
willfully authorizes or permits the contravention, shall be punishable with fine which may
extend to Rs. 1000. [Section 70(4)]

(B)When public offer is made


In the case of public company offering shares or debentures to the public for subscription, the
provisions relating to allotment may be discussed under the following three heads :
1.First allotment of shares.
2.Subsequent allotment of shares.
3.Allotment of debentures.
1. First allotment of shares
The Companies Act, 1956 imposes the following restrictions which must be complied with
by a public company which offers shares to the public for the first time :
(i)Registration of prospectus: The company must deliver a copy of the prospectus to the
Registrar for registration on or before the date of its publication. It must be signed by every
director or proposed director of the company or by his agent authorized in writing. [Sec.
60(1)]
(ii)Minimum subscription: No allotment shall be made of any share capital of the company
offered to the public for subscription unless the amount stated in the prospectus as the
minimum amount has been subscribed and the sum payable on application for such amount
has been paid to or received by the company. [Sec.69(1)]
The amount stated in the prospectus shall be reckoned exclusively of any amount payable
otherwise than in cash. [Sec.69(2)]
A company making any rights or public issue of shares, debentures etc. must receive a
minimum of 90 per cent subscription against the entire issue before making an allotment of
shares or debentures to the public. If the amount of minimum subscription is not received
within 120 days of the issue of the prospectus, all amounts received from the applicants shall
be refunded to them immediately without interest. However, if the refund is not made within
130 days after the issue of the prospectus, the directors of the company shall be jointly and
severally liable to repay the money with interest @ 6% p.a. for the delayed period.

64
(iii) Application money: The amount payable on application for each share shall not be less
than 5% of the nominal amount of the share [Sec.69(3)]. SEBI guidelines prescribe that in the
case of mega issues (exceeding Rs. 500 crore), the amount payable with the application on
allotment or any one call should not exceed 25% of the value of shares.
All moneys received from the applicants for shares shall be deposited and kept
deposited in a scheduled bank:
(a) until the certificate of commencement of business is obtained, or
(b)where such certificate has already been obtained, until the entire amount payable on
application for shares in respect of the minimum subscription has been received by the
company. [Sec. 69 (4)]
If the conditions aforesaid have not been complied with, all moneys received from the
applicants for shares shall be forthwith repaid to them without interest. If any such money is
not so repaid within one hundred and thirty days after the issue of the prospectus, the
directors of the company shall be jointly and severally liable to repay that money with
interest at the rate of 6% p.a. from the expiry of 130 days. A director shall not be liable if he
proves that default in the repayment of the money was not due to any misconduct or
negligence on his part. [Sec. 69 (4)]
Any condition which requires or binds any applicant for shares not to comply with any
requirement of Section 69 shall be void. [Sec. 69(6]
(iv) Subscription list: No allotment shall be made until the beginning of the 5th day after a
date on which the prospectus is issued or such later time as may be specified in the
prospectus. This day is known as the 'opening of the subscription list'.
Where after the issue of the prospectus, a public notice is given by some responsible person,
disclaiming his responsibility for the issue of the prospectus, no allotment shall be made until
the beginning of the fifth day after that on which such public notice is first given [Sec. 72(1)]
A company may proceed to allot shares soon after the opening of the subscription list. In case
of listed shares, however, the subscription list must be kept open for at least 3 days under the
rules of recognized stock exchanges. The prospectus generally states the time when the
subscription lists will be closed. The allotment of shares in contravention of these provisions
is valid. But the company and every officer who is in default shall be liable to a fine upto Rs.
5,000 [Section 72(3)].
An application for shares shall not be revocable until after the expiry of the fifth day after the
opening of the subscription list.[Section 72 (5)]. The object of these provisions is to
discourage the activities of stags.
(v) Shares and debentures to be dealt on a stock exchange: Where a prospectus states that
an application has been, or will be, made for permission for the shares or debentures offered
thereby to be dealt in one or more recognized stock exchanges, the allotment made under
such prospectus be void :
(i)if the permission has not been applied for before the 10th day after the issue of the
prospectus, or
(ii)if permission has not been granted by the stock exchange, as the case may be, before the
expiry of 10 weeks from the date of the closing of the subscription list.
If the allotment becomes void, the company must forthwith repay without interest all moneys
received from applicants in pursuance of the prospectus and if any such money is not repaid

65
within 8 days after the company becomes liable to repay it, the directors shall be jointly and
severally liable to repay that money with interest between 4 to 15% per annum from the
expiry of the eighth day [Sec. 73(2)].

Return of excess money where permission is granted


Where permission has been granted by the recognized stock exchange or stock exchanges for
dealing in any shares or debentures and moneys received from the applicants for shares or
debentures are in excess of the aggregate of the application moneys relating to the shares or
debentures in respect of which allotments have been made, the company shall repay the
moneys to the extent of such excess forthwith without interest. If such money is not repaid
within eight days from the day the company becomes liable to repay it, the company and
every director of the company who is an officer in default shall, on and from the expiry of the
eighth day, be jointly and severally liable to repay that money with interest at such rate, not
less than 4% and not more than 15%, as may be prescribed, having regard to the length of the
period of delay in making the repayment of such money. [Sec. 73(2A)]
If default is made in complying with the provisions of Section 73(2A), the company and
every officer of the company who is in default shall be punishable with fine which may
extend to Rs. 5000 and where the repayment is not made within 6 months from the expiry of
the eight day, also with imprisonment for a term which may extend to one year. [73(2B)]

All moneys to be kept in a separate bank account in a scheduled bank


Where a prospectus states that an application has been made to stock exchange for permission
for the shares to be dealt in on the stock exchange, all moneys received shall be kept in a
separate bank account maintained with a Scheduled Bank until the permission has been
granted and where an appeal has been preferred against the refusal to grant such permission,
until the disposal of the appeal. Where the permission has not been applied for or has not
been granted, the moneys shall be repaid within the time and in the manner specified in
Section 73(2). If default is made in complying with this Section, the company and every
officer of the company who is in default, shall be punishable with fine which may extend to
Rs. 5000. [Sec. 73(3)]

2.Subsequent allotment of shares


In case of subsequent allotment of shares all the 'statutory provisions' regarding 'first
allotment of shares' apply equally, except:
(a) minimum subscription [Sec. 69 (1)]; and
(b) application money must be deposited in a scheduled bank. [Sec 69(4)]

3.Allotment of debentures
In case of issue of debentures all the statutory provisions
regarding 'first allotment of shares' apply equally, except :
(a)minimum subscription [Sec. 69(1)];
(b)the amount payable on application; [Sec.69(3)] and
(c)application money must be deposited in a scheduled bank. [Sec.69(4)]

66
___________________________________________________________________________
4.4 TRANSFER AND TRANSMISSION OF SHARES
___________________________________________________________________________
A. Transfer of Shares
The shares in a company are movable property and they can be transferred in the manner
provided by the articles of the company. A private company with a share capital, by its very
nature as provided by Section 3(1)(iii) of the Act restricts the right of transfer in shares by its
articles. Transfer of shares is less strict in a public company.
In a public company, every shareholder has right to transfer his shares to any person without
the consent of other shareholders subject to such express restrictions as are found in the
articles of the company. A restriction on transfer of shares which is not specified in the
articles is not binding on the company or the shareholders. A transfer of share is valid if it is
not forbidden under the articles of the company, even if it has been made with the object of
escaping liability on the shares.

Procedure for Transfer of Shares


Ordinarily, shares can be transferred by a person whose name appears in the register of
members and who is the holder thereof. As per Section 109, a legal representative of a
deceased member, although not a member at the time of transfer, can also transfer shares.
Shares may be transferred by executing an instrument of transfer (called the 'transfer deed').
The instrument of transfer must be in the prescribed form. Before it is signed by or on behalf
of the transferor and before any entry is made therein, it shall be presented to the prescribed
authority which shall stamp or otherwise endorse on it the date of presentation.
The instrument of transfer shall then be executed by the transferor and the transferee and
completed in all respects. Thereafter, it shall be presented to the company for registration
within the following time limits:
(i)Where the shares of the company are listed/dealt in/quoted on a recognized stock
exchange, the instrument of transfer must be presented for registration at any time before the
register of members is closed for the first time after the date of presentation of the instrument
to the prescribed authority or within 12 months thereof, whichever is later.
(ii)In any other case, the instrument of transfer shall be presented to the company within 2
months of the date of presentation to the prescribed authority. [Section 108 (1A)]
The Central Government may, however, on application extend the period by such further
time as it may think fit to avoid any hardship [Section 108(1-D)]
When a duly executed and stamped transfer deed is delivered to the company within the
prescribed time, the transfer is complete irrespective of whether the company registers it or
not. But the transferee becomes a member only when the transfer is registered. Pending
registration, the transferor is a trustee of the shares for the transferee. The transferor continues
to be the holder of the shares until his name is struck off the register and that of the transferee
substituted in its place. The transferor must pay over to the transferee any dividends or other
rights which he may receive from the company after the date of the transfer deed.
The application for transfer of shares may be made either by the transferor or the transferee.
In case any application is made by the

67
transferor and relates to partly paid shares, the transfer shall not be registered unless the
company gives notice of application to the transferee and the later raises no objection to the
transfer within two weeks from the receipt of such notice. No such notice needs to be given
where fully paid shares are transferred or where the application for the registration of transfer
is made by the transferee.
In case a company refuses to register the transfer of shares, it must give notice to the
transferor and the transferee within 2 months from the date of which the instrument of
transfer was delivered, giving reasons for such refusal.
The transferor or the transferee may prefer an appeal to the Central Government within 2
months of the receipt of such notice of refusal. In case the notice of refusal has not been
given by the company, the appeal must be filed within 4 months from the date on which the
instrument of transfer was delivered to the company. On its appeal, the Central Government
must give an opportunity to the company, the transferor and the transferee to make their
representation before issuing any order. If the refusal of the company seems to be unjustified,
the Central Government may issue an order to the company to register the transfer.

Issue of new share certificate (Sec. 113)


On the approval of the transfer, the company shall cancel the old share certificate and issue a
new one made out in the name of the transferee. Normally, it is done by making an
endorsement on the back of the share certificate.
The transfer when registered has retrospective effect from the time when the transfer was first
made. It should be noted that the seller of the shares is not bound to procure registration. He
will simply hand over to the transferee a duly executed transfer form and the share certificate
or the letter of allotment.

Power of Directors to refuse transfer


Where the articles do not contain any clause, allowing the directors to reject the transfer, the
shareholder may freely transfer his share and can compel the directors for registering of
shares. On the other hand, if the articles contain a clause empowering the directors to reject
the transfer, the directors can reject such transfer but subject to the following conditions :
(a)Power must be exercised by the directors in the interest of the company as a whole and not
in the interest of a section of shareholders.
(b)For rejection, the conditions given in the articles must be followed.
(c)Refusal must be exercised within a reasonable time.
(d)Refusal must be exercised by the board and not by one of the directors.
(e)The court cannot compel the directors to supply the reasons of rejection but if supplied can
examine and if inadequate can reject the order of the directors.
The following are the grounds on which the board may refuse
registration of transfer :
(a)If partly paid up shares are being transferred and transferee is known to be financially
incapable of paying balance calls.
(b)Where partly paid up shares are being transferred to a minor incapable of entering into a
contract.
(c)When the transferor is a debtor of the company and the company has lien on such shares.

68
(d)When the transferor has not paid the due call money.
(e)Where the instrument of transfer is incomplete, irregular and defective and not properly
stamped.
(f)On any other reasons which are just and equitable and are in the general interest of the
company.

Grounds on which the company may refuse to register transfer in the case of the listed
companies
The Companies Act does not specify the grounds on which the board of directors may refuse
to register a transfer of shares. But after the insertion of Section 22-A in the Securities
Contract (Regulation) Act, 1956, the Board of Directors of a company, the shares of which
are listed on a stock exchange, can refuse to register a transfer on only one or more of the
four grounds provided for in Section 22-A (3).
Thus in the case of listed securities, the absolute powers with the directors to refuse
registration of transfer are no longer available. There are now only four grounds (and no
other) on which transfer can be refused in the case of listed shares. The four grounds under
Sec. 22-A (3) are :
(a)Where there are defects or deficiencies in the transfer deed, i.e., instrument of transfer is
not proper or the certificate relating to the securities has not been delivered to the company or
that any other requirement under the law relating to registration of such transfer has not been
complied with. This is a technical ground on which transfer of shares can be refused.
(b)The transfer of shares is likely to result in such a change in the composition of the Board
of Directors as would be prejudicial to the interests of the company or to the public interest.
(c)The transfer of shares is in contravention of any law.
(d)The transfer of shares is prohibited by any court, tribunal or other authority under any law
for the time being in force.

Certification of transfer
Where a person purchases a number of shares, only one certificate of shares is issued in
respect of the whole lot of shares so that when he desires to transfer a part of his shares, he is
required to produce before the company his certificate of shares along with the instrument of
transfer for the purpose of certification. The company then endorses on the instrument of the
transfer the fact of the certificate having been lodged with the company. The company will
cancel the old certificate and prepare two new share certificates to be delivered to the
transferor and the transferee. This is known as the certification of transfer and is provided for
in Section 112 of the Companies Act.
The certification of shares amounts to a representation by the company that the document
which evidences the title to the transferor has been produced to the company. It gives neither
warranty of the transferor's title nor any guarantee on the part of the company.

Forged Transfer
A forged document never has any legal effect. If a forged transfer is lodged with the company
for registration, the position of the parties affected is as follows :

69
(i) If the true owner has been removed from the register, he can compel the company to
replace him.
(ii) If the company has issued a new certificate to the so called transferee, it can not deny
his title to the shares, the certificate stops it (the company) from doing so.
(iii)The person lodging the transfer must indemnify the company against loss by forgery.
Companies normally notify the transferor of the transfer so that he can object if he wishes.
The transferor is, however, under no legal obligation to reply and therefore no estoppel can
be raised against the owner on his failure to reply.

Blank Transfer
A blank transfer is an instrument of transfer signed by the transferor in which the name of the
transferee is not filled.
Since the name of the transferee is not filled, the shares in such cases may further be
transferred merely by delivering the blank instrument of transfer. Thus, stamp duty and
registration fee is saved. Only the last transferee has to bear these expenses. The results are :
(i) this helps in avoiding or reducing liability of tax thereon; and
(ii) these may act as clear security for creditors.
But blank transfer does not confer the ownership of shares on the transferee. If he wants to
retain the shares, he can fill in his name and date in the transfer deed and get himself
registered as shareholder. Until such registration, the original transferor continues to be the
owner and remains liable for any amount remaining unpaid on the shares. Morally, he is a
trustee for the dividends declared and received. But it does not confer
any right on the transferee to prefer any claim against the company in the event of the
transferor's failure to pay him the dividends etc.
A blank transfer, however, can remain in circulation only for 12 months after its signing by
the prescribed authority or up to the time of closure of the register of members by the
company, whichever is later. This provision has been made to curb the abuse of this system.

B. Transmission of shares
When a registered shareholder dies or becomes bankrupt his share are transmitted to his legal
representative or the Official Assignee or Receiver, This is called transmission of shares. It
takes place when a registered shareholder (a) dies or (b) becomes bankrupt.

Transmission of death : When a registered shareholder dies, his shares vest in his legal
representative. If they wish, they may ask the company to register them as the holder of these
shares and for this purpose no instrument of transfer is required and the company is bound to
accept the probate of will or letters of administration as sufficient evidence of the title to
those shares. When they are registered as the holder of these shares and their names are put
on the company's register of members, they become personally liable on the shares. Thus if
the shares are not fully paid, they will be liable to pay the unpaid value of the shares.
However, if the legal representatives do not wish to be registered as the holder of the shares,
they may transfer them without being so registered. Section 109 enables the legal
representative to transfer the shares even if he is not himself a member of the company. Thus
the transfer of shares of a deceased member made by his legal representative, although the

70
legal representative does not get himself registered as the holder of these shares, (i.e., the
member of the company) is perfectly valid and the transferee acquires a good title to the
shares.

Transmission on bankruptcy: If a registered shareholder is adjudged an insolvent, his


shares vest in the Official Assignee or Receiver who may either get himself registered as the
holder of the these shares or transfer them to another person. The Official Assignee or
Receiver can also disclaim the shares if they contain liability. Usually the articles of the
company contain provisions relating to the transmission of shares. Clauses 25 to 28 of Table
A in Schedule I contain regulation governing the transmission of shares. If the transmission is
not accepted by the company, the same remedies are available against the company as in the
case of the refusal of a transfer of shares.
Distinction Between Transfer And Transmission of Shares
The following are the points of difference between transfer and transmission of shares :
(a) A transfer is a deliberate act of the holder, while transmission results by operation of law.
(b) A transfer requires an execution of an instrument of transfer, while transmission requires
evidence showing the entitlement of the transferee.
(c) For the execution of transfer, stamp duty is payable, while no stamp duty is payable in
case of transmission.
(d) The company charges for registering a transfer, while no charges are levied for registering
a transmission.
(e) In case of transfer, the liability of the transferor ceases as soon as the transfer is complete,
while in transmission, the shares continue to be subject to original liabilities.
___________________________________________________________________________
4.5 SHARE WARRANT AND SHARE CERTIFICATE
___________________________________________________________________________
A. Share Warrants
A public company limited by shares may issue share warrants under its common seal in the
following circumstances :
(i) if it is authorized by its articles ;
(ii) shares are fully paid up ; and
(iii) previous approval of the Central Government is obtained.
A share warrant is a document which shows that the bearer of the warrant is entitled to the
shares specified therein. It is a substitute for the share certificate. A shares warrant may have
coupons attached to it to provide for the payment of future dividends on the shares specified
in the warrant. A shares warrant shall entitle the bearer thereof to the shares specified therein.
The shares may be transferred by delivery of the warrant.
On issue of a share warrant, the company shall strike out of its register the name of the
member then entered therein as holding the shares specified in the warrant as if he had ceased
to be a member. The following particulars shall be entered in the register:
(i) the fact of the issue of the warrant ;
(ii) a statement of the shares specified in the warrant, distinguishing each share by its
number ; and
(iii) the date of the issue of the warrant.

71
The bearer of a share warrant shall subject to the articles of the company be entitled to
have his name entered as a member in the register of members on surrendering the warrant
for cancellation and paying such fee to the company as the Board of Directors may from time
to time determine.
The bearer of the share warrant may, if the articles of the company so provide, be deemed to
be a member of the company.

B.Share Certificate
The holder of share or shares is issued a share certificate by the company. A certificate under
the common seal of the company, signed by one or more of directors, specifying shares held
by the member and the amount paid up on the shares shall be prima facie evidence of the title
of the member to such share or shares.
Every company shall deliver the certificates to the allottee within three months from the date
of allotment and to the transferee within two months of making of the application for the
registration of the transfer of shares, debentures or debenture stock.
If default is made, the company and every officer of the company who is in default, shall be
punishable with fine which may extend to Rs. 5,000/- for every day during which the default
continues. The person may make an application to the court if default is not made good by the
company within 10 days after the service of the notice. The court may order the company and
any officer of the company to make good the default.

Objects and Advantages: Since a share certificate is prima facie evidence of title, a
shareholder is able to show his title to the shares by producing his share certificate. Thus it is
very easy for a shareholder to sell his shares in the market by producing a share certificate
showing his title to these shares. Besides it would be very easy for a lender to lend money to
the shareholder taking the possession of his share certificate by way of security.

Duplicate Certificate
Section 84(2) provides that a company may renew or issue a duplicate certificate if it is
proved to have been lost or destroyed or having been defaced, mutilated or torn; is
surrendered to the company. The articles may provide other terms and conditions like
requiring the allottee to give an indemnity bond (Clause 89 Table A).
If a company with the intent to defraud renews a certificate or issues a
duplicate thereof, the company shall be punishable with fine which may extend to Rs. 10,000
and every officer of the company who is in default shall be punishable with imprisonment for
a term which may extend to six months, or with fine which may extend to Rs. 10000 or with
both [Sec.84(3)].
The Central Government may prescribe rules regarding the issue or renewal of
certificates and duplicates, fees, etc. (Sec. 84(4)). The rules so made override the provisions
in the articles.

72
___________________________________________________________________________
4.6 DIFFERENCE BETWEEN A SHARE CERTIFICATE AND A SHARE
WARRANT
___________________________________________________________________________

1. The holder of a share certificate is a registered member of the company whereas the
bearer of a share warrant is not. The bearer of a share warrant can be a member only
when the Articles so provide and only for the purposes defined in the Articles.
2. A share certificate may be issued in respect of partly or fully paid shares, whereas a
share warrant can be issued only when shares are fully paid up.
3. Only public companies are authorised to issue share warrants but share certificates are
issued by both public and private companies.
4. A share warrant is transferable by delivery only and no transfer deed and registration
of transfer with the company is required. But a share certificate is transferred only in
pursuance of a transfer deed alongwith the delivery of the share certificate. The
transfer of a share certificate must be registered with the company.
5. A share warrant is a negotiable instrument as it is transferable by delivery only. But a
share certificate is not a negotiable instrument.
6. Stamp duty is payable for the transfer of a share certificate but no stamp duty is
payable in the case of transfer of a share warrant.
7. The permission of the Central Government is not necessary for the issue of share
certificates but share warrants can be issued only if allowed by the Articles and with
the prior permission of the Central Government.
8. The holder of a share warrant does not qualify to become a director of the company
(where qualification share are required for directorship). But the holder of a share
certificate is so qualified.
9. The petition for the winding up of the company can be presented by the holders of
share certificates only. Holders of shares warrants cannot do so.
10. Payment of dividend on a share warrant is made by way of coupons attached with it.
But in the case of share certificates, the company issues dividend warrants to the
holders by name.
___________________________________________________________________________
4.7 SUMMARY
___________________________________________________________________________
Allotment means and implies a division of the share capital into defined shares of a particular
value or of different classes and assignment of such shares of different persons. An allotment
is the acceptance of an offer in purchase relating to valid acceptance of an offer must be
followed. The shares can be transferred by any person who is the holder of shares and whose
name appears in the Register of Members or by anyone with his authority. However, the legal
representative of a deceased member can validly transfer the shares even if he is not the
member. The transmission of shares takes place on the death or insolvency of the
shareholder. Every person whose name is entered as a member in the register of members, is
entitled to receive share certificate from the company. A share warrant is a document

73
specifying certain shares and stating that the bearer of the document is entitled to the shares
specified in it.
___________________________________________________________________________
4.8 SELF ASSESSMENT QUESTIONS
___________________________________________________________________________
Exercise 1: True and False
(a) Allotment means and implies a division of the share capital into defined shares of a
particular value or of different classes and assignment of such shares of different
persons.
(b) An allotment is the acceptance of an offer in purchase relating to valid acceptance of
an offer must be followed.
(c) The shares can be transferred by any person who is the holder of shares and whose
name appears in the Register of Members or by anyone with his authority. However,
the legal representative of a deceased member can validly transfer the shares even if
he is not the member.
(d) The transmission of shares takes place on the death or insolvency of the shareholder.
Every person whose name is entered as a member in the register of members, is
entitled to receive share certificate from the company.
(e) A share warrant is a document specifying certain shares and stating that the bearer of
the document is entitled to the shares specified in it.
Ans. (a) T (b) T (c) T (d) T (e) T

Exercise 2: Fill in the blanks


(a) Allotment means and implies a division of the share capital into defined shares of a
particular value or of different classes and assignment of
such……………………………………….
(b) An allotment is the acceptance of an offer in purchase relating to
……………………………..of an offer must be followed.
(c) The shares can be ………………….by any person who is the holder of shares and
whose name appears in the Register of Members or by anyone with his authority.
(d) The …………………..of a deceased member can validly transfer the shares even if he
is not the member.
(e) The transmission of shares takes place on the death or insolvency of the shareholder.
Every person whose name is entered as a member in the register of members, is
entitled to receive ………………..from the company.
(f) A ………………………………………….specifying certain shares and stating that
the bearer of the document is entitled to the shares specified in it.
Ans (a) shares of different persons, (b) valid acceptance (c) transferred (d) legal
representative (e) share certificate (f) share warrant is a document

74
Exercise 3: Mix and Match

S.NO (A) (B)


1 It is a document which shows that Share Certificate
the bearer of the warrant is entitled
to the shares specified therein.
2 As soon as a shareholder is allotted Share Warrant
shares, he must be issued a share
certificate by the company within
the specified time.
3 is the acceptance by the company Application Money
of the offer made by the applicant.
4 The amount payable on application Transmission of Shares
for each share is known as
application money.
5 When a registered shareholder dies Allotment
or becomes bankrupt, his shares are
transmitted to his legal
representative or the official
assignee or receivers, and this is
called transmission of shares.

Ans. (1) 2, (2) 1, (3) 5, (4) 5, 5(3)

Exercise 4: Questions

1. What restrictions have been imposed by the Companies Act, 1956 on the allotment of
shares ?What is the effect of irregular allotment?
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
2. What is a share certificate? What is the object and effect of the share certificate? When can
a company renew a share certificate or issue a duplicate?

___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________

75
3. What is a share warrant? Distinguish between a share certificate and a share warrant. What
legal formalities are to be complied with for the issue of a share warrant?
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________

4. is the transfer of shares effected ? What course is open to a transferee if the company
refuses to register a transfer?
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________

5. What is a forged transfer? If a forged document is lodged with a company, what is the
position of the affected parties?
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________

___________________________________________________________________________
4.9 SUGGESTED READINGS
___________________________________________________________________________

M.C. Kuchhal, Mercentile Law, Vikas Publishing House Pvt. Ltd., New Delhi. Avtar Singh,
The Principles of Mercantile Law, Eastern Book Co., Lucknow. M.C. Shukla, A Manual of
Mercantile Law, S. Chand & Co., New Delhi.
R.S.N. Pillai and Bagavathi, Business Law, S. Chand & Co., New Delhi.

76
LESSON : 5
MEETINGS: MANAGERIAL REMUNERATION
___________________________________________________________________________
5. STRUCTURE
___________________________________________________________________________
5.0 Objective
5.1 Introduction
5.2 Kinds of Meeting
5.3 Statutory Meeting
5.4 Annual General Meeting
5.5 Extra Ordinary General Meeting
5.6 Class Meetings
5.7 Requisites of a valid meeting
5.8 Voting and Poll
5.9 Resolutions
5.10 Managerial Remuneration
5.11 Summary
5.12 Self Assessment Questions
___________________________________________________________________________
5.0 OBJECTIVE
___________________________________________________________________________
After reading this lesson, you should be able to-
(a) Define a meeting and explain the kinds of meeting.
(b) Discuss the statutory provision regarding the various types of meeting of shareholders.
(c) Explain the requisites of a valid meeting.
(d) Describe the provisions regarding voting and poll, proxies and resolutions.
(e) Discuss the statutory provisions regarding payment of management remuneration.

___________________________________________________________________________
5.1 INTRODUCTION
___________________________________________________________________________
The company is an artificial person created by law having a separate entity distinct from its
members. Being an artificial person, it cannot take decisions on its own. It has to take
decisions on matters relating to its well being by way of resolutions passed at properly
constituted and convened meetings of its shareholders or directors. The decisions about a
company's management are taken by the directors in their meetings and they are to be ratified
in the general meetings of the company by the shareholders.
There in an old proverb that "Two heads are always better than one". When two or more than
two persons come together to discuss matters of common interest, there is said to be a
meeting. It follows that to constitute a meeting there must be two or more persons. Generally,
the purpose of a meeting is to consider issues of common interests to its attendants.

77
__________________________________________________________________________________
5.2 KINDS OF MEETINGS
___________________________________________________________________________
The meetings of a company are of three kinds :
1. Meetings of the shareholders
(i) General meetings
(ii) Class meetings
2. Meetings of the Directors
3. Meetings of the Creditors
In this lesson, the discussion will be confined to the meetings of the shareholders.
__________________________________________________________________________________
5.3 STATUTORY MEETING
___________________________________________________________________________
Every public company limited by shares and every company limited by guarantee and having
a share capital, shall, within a period of not less than one month nor more than six months
from the date on which the company is entitled to commence business hold a general meeting
of the members of the company. This meeting is called 'the statutory meeting'. [Sec. 165 (1)]
A meeting held prior to the statutory period of one month from the date of entitlement of a
company to commence business cannot be called the statutory meeting. The notice for such a
meeting should state it to be statutory. The statutory meeting is held only once in the life time
of a company.
Private companies, public companies limited by guarantee and not having a share capital and
unlimited companies are not required to hold the statutory meeting. However, a private
company which becomes a public company by the application of Sec. 43 will have to comply
with the provisions of the Act which are applicable to public limited companies from the date
of its becoming a public limited company. A private company can commence business on the
date of its incorporation. If the date of its becoming a public company is within 6 months of
its incorporation, it must hold a statutory meeting in accordance with the provision of Section
165
(1). If it becomes a public company after 6 months of its incorporation, it is not required to
hold the statutory meeting.

Notice
The company must give notice to its members 21 days before the holding of the statutory
meeting. The notice convening the statutory meeting must specifically state that the meeting
is the statutory meeting. The time, date and place of the meeting must be mentioned in the
notice. However, a shorter notice may be sufficient if consent is accorded by the members of
the company:
(a) If the company has a share capital, holding not less than 95% of such part of the paid up
share capital of the company as gives a right to vote at the meeting.
(b) If the company has no share capital, holding not less than 95% of the total voting power
exercisable at the meeting.

78
Statutory Report
The Board of Directors is required to prepare a report which is known as the “statutory
report" and must send this report to the members at least 21 days before the day on which the
meeting is to be held [Section 165(2)]. If the report is sent later than is required, it will be
deemed to have been duly forwarded if it is so agreed to by all the members entitled to attend
and vote at the meeting. Thus the delay in sending the report can be condoned by unanimous
consent of all the members present at the meeting. The statutory report is required to be
certified as correct by at least two directors of the company, one of whom must be a
Managing Director, if there is any. Thereafter the auditor must certify the report to be correct
in so far as it relates to the shares allotted by the company, the cash received in respect of
such shares and the receipts and payments of the company [Section 165(4)]. A copy of the
report must be sent to the Registrar also [Section 165(5)].

Contents of Statutory Report


The statutory report shall set out:
(a)The total number of shares allotted, distinguishing those allotted as fully or partly paid-
up otherwise than in cash, the extent to which they are partly paid up and the consideration
for which they have been allotted.
(b)The total amount of cash received by the company in respect of all the shares allotted.
(c)An abstract of the receipts and payments made thereout up to a date within 7 days of the
date of the report.
(d)The name, address and occupations of the directors of the company and of its auditors and
also if there be any, of its manager and secretary.
(e)The particulars of any contract which , or the modification or the proposed modification of
which is to be submitted to the meeting for its approval.
(f)The extent to which each underwriting contract (if any) has not been carried out and the
reason therefore.
(g)The arrears due on cash from every director and from the manager.
(h)Particulars of any commission or brokerage paid or to be paid in connection with the issue
or sale of shares or debentures to any director.

Procedure at the meeting


A list showing the names, addresses and occupation of the members of the company and the
number of shares held by them must be produced by the Board of Directors at the
commencement of the statutory meeting. The list is to remain open and accessible to any
member of the company during the continuance of the meeting [Section 165 (6)].
It is to be noted that the members of the company present at the meeting are at liberty to
discuss any matter relating to the formation of the company or arising out of the statutory
report, whether previous notice has been given or not but one resolution may be passed of
which notice has not been given in accordance with the provisions of Companies Act. [Sec.
165 (7)]

79
Adjournment of Statutory Meeting
The meeting may adjourn from time to time and at any adjourned meeting any resolution of
which notice has been given in accordance with the provisions of the Companies Act may be
passed and the adjourned meeting will have the same power as an original meeting. [Sec.
165(8)]

Penalty
If any default is made in complying with the above provisions, every director or other officer
of the company who is in default shall be liable to a fine which may extend to Rs. 500.
Besides, if default is made in delivering the statutory report to the Registrar or in holding the
statutory meeting, the Court may order the compulsory winding up of the company. [Sec. 433
(b)]

Objects
The obvious purpose of the statutory meeting with its preliminary report is to put the
shareholders of the company as early as possible in possession of all the important facts
relating to the new company what shares have been taken up, what moneys received, what
contracts entered into, what sums spent on preliminary expenses, etc. Furnished with these
particulars the shareholders are to have an opportunity of meeting and discussing the whole
situation in the management methods and prospects of the company. If the shareholders fails
to do so, they have only themselves to blame.
__________________________________________________________________________________
5.4 ANNUAL GENERAL MEETING
___________________________________________________________________________
Every company must in each year hold in addition to any other meeting a general meeting, as
its annual general meeting and must specify the meeting as such in the notices calling it
[Section 166 (1)]. The annual general meeting is to be held in addition to any other general
meeting that might have been held in a year. It appears that holding of an annual general
meeting in every calender year is a statutory necessity. Calendar year is to be calculated from
Ist January to 31st December and not twelve months from the date of incorporation of the
company.

First annual general meeting


A company must hold its first annual general meeting within a period of not more than 18
months from the date of its incorporation and if such general meeting is held within that
period, 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 [Section 166(1)]. For example a company is
incorporated in October 1994. Its first annual general meeting is required to be held within 18
months from the incorporation, i.e. up to March 1996 and if such a meeting is held within this
period, no other meeting will be necessary either for 1995 or 1996.

Subsequent annual general meeting


As already discussed a company is required to hold an annual general meeting in each year.
Where a meeting called and held on a day in one year is adjourned to a date in the next year

80
and held on that date, the meeting held on the latter date is not a different meeting and does
not comply with the requirements of Section 166. However, the gap between one annual
general meeting and the next should not be more than fifteen months.
In the case of Shree Meenakshi Mills Company Limited v. Astt. Registrar of Joint Stock
Companies Madurai AIR 1938 Mad. 640, the annual general meeting of a company called in
December 1934 was adjourned and held in March 1935. The next annual general meeting
was held in January9,1936, no other meting being held in 1935. The company was prosecuted
for failure to call the annual general meeting in 1935. It was held that there should be one
meeting per year and as many meetings as there are years.
The Registrar can, for any special reason, extend the time within which any annual general
meeting is required to be held by a period not exceeding 3 months but the time for holding
the first annual general meeting cannot be so extended. [Sec. 166(1)]

Power to convene an annual general meeting


The proper authority to convene an annual general meeting is the Board of Directors, and if
the managing director, manager, secretary or other officer calls a meeting without such
authority, it will not be effectual unless the Board ratifies the act before the meeting is held.

Notice
A public company must give at least 21 days notice for convening any general meeting
including annual general meeting. Annual general meeting may be called after giving a
shorter notice than 21 days if it is so agreed by all the members entitled to vote in the meeting
(Section 171). In calculating 21 days, the date on which the notice is served and the day of
the meeting are excluded.

Date, time and place of holding the annual general meeting


Every annual general meeting shall be called at any time during the business hours, on a day
that is not a public holiday. It shall be held either at the registered office of the company or at
some other place within the city, town or village in which the registered office of the
company is situated [Section 166(2)]. The Central Government may exempt any class of
companies from the provisions of Sec. 166 subject to such conditions as it may impose.
(a) A public company or a private company which is a subsidiary of a public company, may
by its Articles fix the time for its annual general meetings and may also by a resolution
passed in preceding annual general meeting fix the time for its subsequent annual general
meetings and
(b) A private company which is not a subsidiary of a public company may in like manner and
also by a resolution agreed to by all the members thereof, fix the time as well as the place for
its annual general meetings [Sec. 166(2)]

Adjournment
Where an annual general meeting is held but adjourned, the adjourned meeting is nothing but
continuance of the earlier meeting and therefore if in the adjourned meeting the Balance
Sheet and the Profit and Loss Account of the company are laid and adopted and thereafter
sent to the Registrar, Section 220(I) is not violated.

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Holding of annual general meeting where the annual accounts are not ready
According to Central Government instructions, in case the annual accounts are not ready for
laying at the appropriate annual general meeting, the company must hold the annual general
meeting within the time limit, transact all business other than the consideration of the
accounts, announce when the accounts are expected to be ready for laying and pass a suitable
resolution adjourning the said annual general meeting to a specific date or to a date to be
specified later on. Thus the company cannot take the plea that the annual general meeting was
not held because the accounts were not ready.

Power of Central Government to call annual general meeting


The Central Government may, on the application of any member of the company, call or
direct the calling of a general meeting of the company. However, it is to be noted that the
Court has no power to call such meeting. A general meeting held in pursuance of this order
will be deemed to be an annual general meeting of the company.
The Central Government may direct that only one member of the company present in person
or by proxy shall be deemed to constitute a meeting. [Section 167]

Penalty
If a default is made in holding an annual general meeting in accordance with the above
provisions or in complying with the directions given by the Central Government, the
company and every officer of the company who is in default shall be punishable with fine
which may extend to Rs. 5000 and in the case of a continuing default, with a further fine
which may extend to Rs. 250 for every day after the first during which the default continues.
(Section 168)

Importance
It is the annual general meeting at which the shareholders can exercise control over the affairs
of the company. At this meeting some directors retire and come up for re-election and thereby
the shareholders find an opportunity to refuse to re-elect a director of whose action and policy
they disapprove. Appointment of auditors is also made at this meeting.
Annual accounts are presented at this meeting for the consideration of the shareholders and
the shareholders can ask any question relating to the account. It is at this meeting that
dividends are declared. At this meeting the shareholders can discuss any other matters
relating to the company's business.

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__________________________________________________________________________________
5.5 EXTRAORDINARYGENERALMEETING
___________________________________________________________________________
Regulation 47 of the Table A provides that all general meetings other than annual general
meetings shall be called extraordinary general meetings. An extraordinary general meeting is
called to consider those transactions or business which cannot be postponed till the next
annual general meeting. Hence, it is a meeting of a company which is held between two
consecutive annual general meetings for transacting some urgent or special business. An
extraordinary general meeting may be convened :
1. By the Board of Directors on its own or on the resolution of members; or
2. By the requisitionists themselves on the failure of the Board to call the meeting; or
3. By the Central Government.

1 Extraordinary meeting convened by the Board of Directors


(A) On its own
Regulation 48(1) of Table A provides that the board may, whenever it thinks fit, call an
extraordinary general meeting. An extraordinary general meeting may be convened by the
Board of Directors if some business of special importance requires the approval of the
members and which in the opinion of the Board of Directors can not be postponed till the
next annual general meeting. The directors can call an extraordinary general meeting by
passing a resolution in a properly convened board meeting or by a circular resolution.
Regulation 48(2) of Table A provides that "If at any time, they are not present within India,
the number of directors capable of acting and forming a quorum, any director or any two
members of the company may call an extraordinary general meeting in the same manner, as
nearly as possible, as that in which such a meeting may be called by the Board”.

(B)On the requisition of members


The directors are bound to call an extraordinary general meeting of the company if
the requisition is made :
(i) in the case of a company having a share capital, by the holders of at least one-tenth paid up
capital having the right to vote on the matter of requisition; or
(ii) in the case of a company not having a share capital, by members representing not less
than one-tenth of the total voting power in regard to the matter of requisition.
The Board of Directors is under a legal obligation to proceed within 21 days of the deposit of
the requisition to call a meeting. The meeting shall be held within 45 days of such deposit of
the requisition with the company [Sec. 169(6)]. On receipt of the requisition, the Board shall
send out notices for the meeting giving not less than 21 days' time.

3. Extraordinary meeting covered by the Central Government


If due to any reason it is impracticable to call or conduct an extraordinary general meeting,
the Central Government may, either on its own or on the application of any director or any
member who would be entitled to vote, order a meeting to be called, held and conducted in
such manner as the Central Government thinks fit and may give such directions as it thinks

83
expedient, including a direction that one member present in person or by proxy shall be
deemed to constitute a meeting.
Any meeting called, held and conducted in accordance with any such order of the Central
Government will, for all purposes, be deemed to be a meeting of the company duly called,
held and conducted.
The word 'impracticable' may be taken to mean impossible to hold a peaceful or useful
meeting. It has been held that the word 'impracticable' should be taken to mean impractical
from a reasonable point of view.
In Opera Photographic Ltd. Re; 1989 BCL [763 (1989)] case, there were only two directors
and one of them who was holding 51% of the shares wanted to remove his fellow director.
The Articles required the quorum of two. The fellow director did not attend the meeting to
frustrate him. The Central Government ordered a meeting to be called with the presence of
one as a sufficient quorum.
__________________________________________________________________________________
5.6 CLASS MEETINGS
___________________________________________________________________________
Class meetings are the meetings of the shareholders and the creditors. Class meetings are held
to pass resolutions which will bind only the members of the particular class concerned.
According to regulation 3(1), if the rights attached to any class of shares are to be varied, it
can be done with the consent of the holders of 3/4 of the issued shares of that class in a
separate meeting of that class of holders. Similarly, under Sec. 394, where a scheme of
arrangement or compromise is proposed, the meetings of several classes of shareholders and
creditors are required to be held. Class meetings can only be attended by the members of that
class. Whenever it is necessary to alter or change the rights or privileges of a class as
provided by the Articles, a class meeting must be called.
__________________________________________________________________________________
5.7 REQUISITES OFAVALID MEETING
___________________________________________________________________________
A meeting to be in order must fulfill certain requirements.
1. Proper Authority
The Board of Directors is the proper authority to convene a general meeting of
a company and for this purpose the board should pass a resolution at a duly convened
meeting of the board. However, if the board fails to call a general meeting of the company,
the members or the Central Government or the Central Government may call such a meeting.
Some defects in appointment or qualification of the directors present at the meeting of the
board will not necessarily be fatal to the validity of the resolution passed at the meeting
provided the board has acted bonafide.
2. Notice of Meetings (Sec. 171)
A proper notice of the meetings must be given to the members of the company. The notice
must be given 21 days before the date of the meeting. The period of 21 days excludes the day
of service of the notice and also the day on which the meeting is to be held.
The length of the notice may be waived :
(a) in the case of an annual general meeting by the consent of all members;

84
(b) in the case of any other meeting by the consent of the holders of not less than 95% of
the paid-up share capital or the total voting power where the company has no share capital.

Notice to whom (Sec. 172)


The notice is required to be given to
(a) All the members of the company who are entitled to vote on the matters which are
proposed to be dealt with at the meeting;
(b) All the persons who are entitled to a share in consequences of the death and insolvency of
a member;
(c) The auditor or auditors of the company. Deliberate omission to give notice of the meeting
to members or to a single member will make the meeting invalid, but an accidental omission
to give notice to or the non-receipt of notice by any member will not invalidate the
proceedings at the meeting [Sec. 172 (3)].

Contents of Notice
Every notice of a meeting is required to specify the place and the day and hours of the
meeting and must contain a statement of the business to be transacted at the meeting. If the
time of holding meeting and other essential particulars are not specified in the notice, the
meeting will be invalid and all resolutions passed at the meeting will be of no effect.
The notice of general meeting must contain a statement of the business to be transacted at the
general meeting of the company. The business to be transacted at a meeting may be general
business or special business.
Section 173 provides (a) in the case of an annual general meeting, all business to be
transacted at the meeting will be deemed special except the business relating to the
consideration of accounts, Balance Sheet and reports of the Board of Directors and auditors,
the declaration of dividends, the appointment of directors in the place of those retiring and the
appointment of and the fixing of the remuneration of the auditors and
(b) in the case of any other meeting, all business will be deemed special.
If any special business is to be transacted at an annual general meeting a statement to that
effect must be annexed to the notice of the meeting. The statement must set out all material
facts concerning each item of business including in particular the nature of the concern or
interest therein of every director or other managerial personnel. Thus every notice calling a
meeting is required to specify the business to be transacted at the meeting.
A notice of meeting must give a sufficiently full and frank disclosure to the members of the
fact upon which they are asked to vote otherwise the resolution passed at the meeting will be
invalid.
In Kaye v. Croydon Tramways Co., there was a provisional agreement between two
companies for the sale of the undertaking of the one company to the other. Under the
agreement the buying company agreed to pay, in addition to the sum payable to the selling
company, certain amount to the directors of the selling company as compensation for the loss
of office. The notice calling the meeting of the shareholders to consider the agreement for
sale of the undertaking did not disclose that there was a provision in the agreement for the
payment of compensation to the directors. The Court held that the notice could not make the

85
full and fair disclosure of all the material facts to the considered and voted upon at the
meeting and therefore the resolutions passed at the meeting were invalid and ineffective.

3.Quorum
Quorum means the minimum number of members that must be present at the meeting. The
quorum is generally fixed by the company's article. Unless the articles provide for a large
number, five members personally present in the case of a public company (other than a public
company which has become such by virtue of Section 43-A) and two members personally
present in the case of any other company will be the quorum for a meeting of the company. If
within half an hour from the time appointed for holding a meeting of the company, a quorum
is not present, the meeting will stand dissolved if it was called upon the requisition of
members but in any other case it stands adjourned to the same day in the next week, at the
same time and place or to such other day as the Board may determine. If at a adjourn meeting
also the quorum is not present within half an hour from time appointed for holding the
meeting the members present sufficient will be quorum [Section 174(5)].
Section 174 clearly indicate that the meeting must be attended by more than one member so
as to constitute it as a meeting. But a few exceptions to this general rule may also be noted :
(a)Under Section 167, the Central Government may, on the application of any member of the
company, call a general meeting of the company and may direct that even one member of the
company present in person or by proxy shall be deemed to constitute a meeting.
(b)Under Section 186, the Central Government may call a meeting of the company other than
an annual general meeting and may give direction that even one member of the company
present in person or by proxy shall be deemed to constitute a meeting.
(c)In East v. Bennet Bros. Ltd., one shareholder held all these preference shares in the
company. A meeting of preference shareholders attended by him only was held to be a valid
meeting.

4.Chairman of meeting
Before a meeting of a company can start its business, it is required to have a Chairman. It is
the Chairman who is to preside at the meeting of the company. He is to conduct the meeting
and to maintain theorder. It is the Chairman who is to put up the resolution, count the votes
and declare the result. Usually the articles provide for the appointment of a Chairman but if
there is no provision in the articles to this effect, the members present in the meeting shall
elect one of themselves to be the Chairman of such meeting on a show of hands [Section
175(1)]. If a poll is demanded on the election of the Chairman, it shall be taken forthwith
[Section 175(2)] and in such a case the Chairman elected on the show of hands will exercise
all the powers of the Chairman. If some other person is elected Chairman as a result of the
poll, he will be the Chairman for the rest of the meeting [Section 175(3)]. He can adjourn the
meeting in the event of disorder but he should do so only as a last resort, if his attempts to
restore order have failed.
A Chairman is not entitled to close the meeting prematurely and if he does so, a new
Chairman may be elected and the meeting of the company may be continued. However, it is
to be noted that where a meeting is called but it is not held due to pandemonium and
confusion and a note to this effect is made in the minute book by the Chairman, the

86
shareholders cannot elect a new Chairman because in such a case no meeting has actually
been commenced and consequently no question of dissolving the meeting permanently by the
Chairman arises.
Duties of the Chairman
(a)He must take care that the minority is not oppressed in any way.
(b)He must give the members who are present a reasonable opportunity to discuss any
proposed resolution and it must be ensured that all the views are adequately aired. But at the
expiry of a reasonable time, if he thinks fit, he should stop the discussion on any resolution.
(c)He must see that the meeting is properly convened and constituted i.e. proper notice was
given to every person entitled to attend the meeting and his own appointment is in order. It is
the Chairman who is to see whether a quorum is present before proceeding with the business.
(d)The Chairman must conduct the proceedings in accordance with the provisions of the Act,
the company’s Articles of Association or Table A or in the absence thereof, the common law
relating to the meetings.
(e)He should adjourn the meeting when it is impossible, by reason of disorder or other like
cause, to conduct the meeting and complete its business. He must not use this power in a
malafide manner.
(f)He must take care that the opinion of the meeting is properly ascertained with regard to the
questions before it. He must do so by putting the resolution in a proper form before the
members and then declaring the result.
(g)He must keep order in the meeting. He must decide all questions which arise at the
meeting and which require decision at the time.
(h)He should exercise his casting vote, if any, provided by the articles for the benefit of the
company.
(i)The minutes of the meeting should be properly recorded and signed by the chairman.

5. Minutes of the meeting:


Every company must keep a record of all proceedings of every general meeting and of all
proceedings of every meeting of its Board of Directors and of every committee of the board.
These records are known as minutes and the books in which these records are written are
called 'minute books'.
Rules of Keeping Minutes (Sec. 193-196)
(a)Within 30 days of every such meeting, entries of the proceedings must be made in the
books kept for that purpose. [Sec. 193 (1-A)]
(b)Each page of minutes book which records proceedings of a board meeting must be
initialed or signed by the Chairman of the same meeting or the next succeeding meeting. In
the case of minutes of proceedings of a general meeting, each page of the minute book must
be initialed or signed by the Chairman of the same meeting.
(c)The minutes of each meeting must contain a fair and correct summary of the proceedings
at the meeting.
(d)All the appointments of officers made at any of the meetings aforesaid must be included in
the minutes. In the case of a meeting of the Board of Directors or of a committee of the
board, the minutes must contain the names of the directors present at the meeting and the

87
names of the directors dissenting from or not concurring in the resolution passed at the
meeting [Sec. 193 (4)].
(e)The Chairman may exclude from the minutes, matters which are defamatory of any
person, irrelevant or immaterial to the proceedings or which are detrimental to the interests of
the company. Minutes of meetings kept in accordance with the above provisions are evidence
of the proceedings recorded therein.
(f)The minutes books must be kept (i) at the registered office of the company; and (ii) be
open during business hours to the inspection of any member without charge subject to
reasonable restrictions but at least two hours each day must be allowed for inspection.

Penalty
If default is made in complying with the provision of Section 193 in respect of any meeting,
the company and every officer of the company who is in default shall be punishable with fine
which may extend to Rs. 50.
__________________________________________________________________________________
5.8 VOTING AND ROLL
___________________________________________________________________________
A vote is the formal expression of the will of the members of the house either for or against a
proposal. The matters proposed and duly recommended in a general meeting of the company
are decided by the voting of the members of the company.
The procedure of voting is regulated by the Articles subject to the provisions of the Act.
Members holding any share capital of the company have the right to vote on every motion
placed before the company. However, the members holding preference shares can vote only
on those motions which affect the rights attached to their capital. Share warrant holders,
executors of a deceased member, receiver of an insolvent member cannot exercise any voting
right unless registered as members. The voting rights of an equity shareholder at a poll are in
proportion to his share of the paid up equity capital.
Voting may take place in either of the following two ways :

1. Voting by a show of hands


At any general meeting, unless the Articles otherwise provide, a resolution put to the vote is
in the first instance decided by a show of hands except when a poll is demanded [Sec. 177].
While voting by a show of hands, one member has one vote irrespective of the shares held by
him. Proxies can not be counted unless the Articles otherwise provide. The
Chairman will count the hands raised and will declare the result accordingly. Chairman's
declaration of the result of voting by the show of hands to be conclusive evidence [Sec. 178].

2. Voting by poll [Sec. 179]


If there is dissatisfaction among the members about the result of voting by the show of hands,
they can demand a poll. 'Poll' means counting the number of votes cast for and against a
motion. The voting rights of a member on a poll shall be in proportion to his share of
the paid-up equity capital of the company. Before or on the declaration of the result of voting
on any resolution by a show of hands, a poll may be ordered to be taken by the Chairman of

88
the meeting of his own motion, and shall be ordered to be taken by him on a demand made in
that behalf by the person or persons specified below :
(a)In the case of a public company having a share capital, by any member or members
present in person or by proxy and holding shares in the company:
(i)which confer a power to vote on the resolution not being less than one tenth of the total
voting power in respect of the resolution, or
(ii)on which an aggregate sum of not less than fifty thousand rupees has been paid-up,
(b)In the case of a private company having a share capital, by one member having the right to
vote on the resolution and present in person or by proxy if not more than seven such members
are personally present, and by two such members present in person or by proxy, if more than
seven such members are personally present,
(c)In the case of any other company, by any member or members present in person or by
proxy and having not less than one tenth of the total voting power in respect of the resolution
[Sec. 179(1)].
The demand for a poll may be withdrawn at any time by the person or persons who made the
demand. [Sec. 179(2)]. The provisions of Section 179 apply to a private company, which is
not a subsidiary of a public company unless the articles provide otherwise.
A poll demanded on the question of adjournment or the election of the Chairman shall be
taken forth with. A poll demanded on any other question shall be taken at such time not being
later than forty eight hours from the time when the demand was made, as the Chairman may
direct. Where a poll is taken, the meeting will be deemed to continue until the ascertainment
of the result of the poll. Even a voter who was not present at the meeting when the poll was
demanded to be taken, may vote personally in a poll held on the next day.
The Chairman of the meeting shall have the power to regulate the manner in which a poll
shall be taken [Sec. 185(1)]. Where a poll is to be taken, the Chairman of the meeting shall
appoint two scrutiniser to scrutinise the votes given on the poll and to report thereon to him
[Sec. 184 (1)]. Of the two scrutiniser, one shall always be a member present at the meeting,
provided such a member is available and willing to the appointed [Sec.184 (3)].
The Articles of a company may provide that no member shall exercise any voting right in
respect of any shares registered in his name on which calls or other sums presently payable
by him have not been paid (Sec. 181).

Proxies
A meeting has right to vote either in person or by proxy. Any member of a company who is
entitled to attend and vote at a meeting of the company can appoint another person (whether a
member or not) as his proxy to attend and vote instead of himself but a proxy so appointed
will have no right to speak at the meeting. Unless the articles otherwise provide, a proxy will
not be allowed to vote except on a poll. A member of a private company, unless the articles
provide otherwise is not entitled to appoint more than one proxy to attend on the same
occasion. Besides unless the articles provide otherwise a member of a company not having a
share capital is not entitled to appoint a proxy. The instrument appointing a proxy is required
to be in writing and signed by the appointer or his attorney duly authorized in writing. A
proxy is revocable but it should be revoked before the proxy has voted. If the member who
has appointed a proxy personally attends and votes at the meeting, the proxy is revoked by

89
such conduct of the member [Section 189]. Death of the member who has appointed a proxy
revokes the authority of his proxy but if the company has no notice of such death, then the
vote given by the proxy will be valid.
__________________________________________________________________________________
5.9 RESOLUTIONS
___________________________________________________________________________
The decisions of a meeting take the form of resolutions carried by a majority of votes. A
question on which a vote is proposed to be taken is called a 'motion'. Once a 'motion' has
been put to the members and they have opted in favour of it, it becomes a resolution. A
resolution may, thus, be defined as the formal decision of a meeting on a particular proposal
before it.

Types of Resolutions
Resolutions are of the following types :
1.Ordinary Resolutions ;
2.Special Resolutions ; and
3.Resolutions requiring special notice

Ordinary Resolution
At a general meeting of which notice has been given, if votes cast in favour of the resolution
by members exceed the votes, if any, cast against the resolution by members, the resolution
so passed is an ordinary resolution [Sec. 189(1)]
Unless the Companies Act or the memorandum or the articles expressly require a special
resolution or resolution requiring special notice, an ordinary resolution is sufficient to carry
out any matter.

Transactions where ordinary resolution is required


Important matters for which an ordinary resolution is enough are as follows :
(i)Issue of shares at a discount (Sec. 79)
(ii)Alteration of the share capital (Sec. 94)
(iii)Approval of the statutory report (Sec.165)
(iv)The consideration of accounts, the Balance Sheet and the report of the Board of Directors
and of the auditors (Sec. 210)
(v)Appointment of auditors and fixation of their remuneration [Sec. 224(1)].
(vi)Appointment of the first directors who are to retire by rotation [Sec. 255(1)].
(vii)Increase or decrease in the number of directors within the limits prescribed by the
Articles [Sec. 258].
(viii)Adoption of the appointment of sole selling agents [Sec. 294].
(ix)Removal of a director and appointment of another director in his place [Sec. 284(1)].
(x)Declaration of dividend [Sec. 205].
(xi)Appointment of liquidator in case of voluntary winding up and fixing his remuneration
[Sec. 490(1)].
(xii)To rectify the name of company [Sec. 22].
(xiii)To cancel or redeem debentures [Sec. 21].

90
(xiv)To cancel directors by rotation [Sec. 256].
(xv)To approve the remuneration of directors [Sec. 309].
(xvi)To fill the vacancy in the office of Liquidator [Sec. 492].

Special Resolution
The resolution is a special resolution, if
(i)the intention to propose the resolution as a special resolution has been duly specified in the
notice calling the general meeting ;
(ii)the notice required has been duly given of the general meeting; and
(iii)the votes cast in favour of the resolution by members are three times the number of the
votes, if any, cast against the resolution by the members [Sec. 189 (2)].
A copy of the special resolution must be filed with the Registrar within 30 days of its passing.

Special Resolution Matters


In addition to the matters given in the articles of the company, the Companies Act specifies
certain matters for which a special resolution must be passed ; for example,
(i)to alter the memorandum of the company [Sec. 17];
(ii)to alter the articles of the company [Sec. 31];
(iii)to issue further shares without pre-emptive rights [Sec. 81];
(iv)for creation of a reserve capital [Sec. 99];
(v)to reduce the share capital [Sec. 100];
(vi)to pay interest out of the capital to members [Sec. 208],
(vii)for authorizing a director to hold an office or place of profit [Sec.314];
(viii)for voluntary winding-up of a company [Sec. 484].

Resolutions Requiring Special Notice


A resolution requiring special notice is not an independent class of resolutions. It is a kind of
ordinary resolution, with the only difference that here the mover of the proposed resolution is
required to give a special notice of 14 days to the company before moving the resolution, and
the company shall then immediately give its members notice of the resolution in the same
manner as it gives notice of the meeting. If that is not practicable, the company shall give not
less than seven days notice before the meeting either by advertisement in a newspaper or in
any other mode allowed by the articles (Sec. 190).
In addition to the purposes enumerated in the articles requiring special notice, under the Act,
special notice has to be given for the following matters:
(a) for a resolution at an annual general meeting appointing as auditor a person other than a
retiring auditor and for a resolution providing expressly that a retiring auditor shall not be re-
appointed (Sec. 225).
(b) for certain persons who shall not be eligible for appointment as directors whose period of
office is liable to determination by retirement of directors by rotation (Sec. 261).
(c) for removing a director before the expiry of his period of office; and
(d) of any resolution to appoint a director in place of a director so removed (Sec. 284).

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__________________________________________________________________________________
5.10 MANAGERIAL REMUNERATION
___________________________________________________________________________
Directors have no right to claim remuneration for their services unless there is a specific
provision to that effect in the Articles or the company resolves for the same in a general
meeting as per the provisions of Section 309. The resolution may be ordinary or special as the
Articles may require.
As per Section 198, the total managerial remuneration payable by a public company or a
private company which is a subsidiary of a public company, to its directors and its managing
agent, secretaries and treasurer or manager in respect of any financial year shall not exceed
11% of the net profit of that company for that financial year. This percentage shall be
exclusive of the fees payable to the directors under Section 309.
If in any financial year, a company has no profits or its profits are inadequate, the company
shall not pay any remuneration to its directors except with the previous approval of the
Central Government. The word remuneration shall include the following :
(i)any expenditure incurred on providing free accommodation and other amenities connected
therewith ;
(ii)any expenditure incurred on providing any other amenity either absolutely free or at a
concessional rate ;
(iii)any expenditure incurred in providing any obligation or service which in the absence of
provision by the company would have to be borne by that person ;
(iv)any expenditure incurred in providing life insurance, pension, annuity or gratuity to such
person or his spouse or child.
According to Section 249, in computing the net profits of a company in any financial year for
the purpose of Section 348, credit shall be given for bounties and subsidies received from any
government, or any public authority constituted or authorized in this behalf, by any
government, unless and except in so far as the Central Government otherwise directs.
However credit shall not be given for the following sums :
(i)Profits, by way of premium, on the shares or debentures of the company, which are issued
or sold by the company,
(ii)Profits on the sales by the company of the forfeited shares;
(iii)Profits of a capital nature including profits from the sale of the undertaking or any of the
undertakings of the company or of any part thereof ;
(iv)Profits from the sales of any immovable property or fixed assets of a capital nature
comprising in the undertaking or any of the undertakings of the company, unless the business
of the company consists, whether wholly or partly, of buying and selling any such property or
assets.
In making the aforesaid computation, the following sums shall be deducted :
(i)all the usual working charges ;
(ii)director's remunerations ;
(iii)bonus or commission paid or payable to any employees of the company whether on a
whole time or on a part time basis ;
(iv)any tax notified by the Central Government as being in the nature of a tax on excess or
abnormal profits;

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(v)any tax on business profits imposed for special reasons or in special circumstances;
(vi)interest on debentures issued by the company ;
(vii)interest on mortgages executed by the company and on loans and advances secured by a
charge on its fixed or floating assets ;
(viii)interest on unsecured loans and advances ;
(ix)expenses on repairs to immovable or movable property provided the repairs are not of a
capital nature ;
(x)contributions to charitable and other funds ;
(xi)depreciation to the extent specified in Section 350;
(xii)past losses arising after Ist April, 1956 to the extent not already deducted in any year
preceding that in which net profits have to be ascertained ;
(xiii)any compensation or damages under a legal liability or arising from breach of contract ;
(xiv)any sum paid by way of insurance against the risk of meeting any liability as specified in
clause (iii) above ; and
(xv)bad debts written off or adjusted during the year of account.
The following sums shall not be deducted in computing the profits :
(i)Income tax and super tax payable by the company or any other tax on the income of the
company not falling under clauses (d) and (e) of Section 399 (4);
(ii)any compensation, damages or payments made voluntarily ; and
(iii)loss of a capital nature.
It is pertinent to note that according to Section 309, a whole time director or managing
director may be paid remuneration either by way of a monthly payment or at a specified
percentage of the net profits of the company, or partly by one way and partly by the other.
Except with the approval of the Central Government, such remuneration shall not exceed 5
per cent of the net profits for one such director, or 10 per cent for all of them in case there are
more than one such director.
A part time director may be paid remuneration either by way of a monthly, quarterly, or
annual payment with the approval of the Central Government, or by way of commission if the
company by a special resolution authorizes such payment with the approval of the Central
Government, or by a special resolution authorizes such payment.
The remuneration paid to part time directors shall not exceed per cent of the net profits of the
company if the company has a managing or whole time director or a manager and 3 per cent
of the profits in any other case. However, the company in a general meeting may, with the
approval of the Central Government, increase these rates of remuneration.
__________________________________________________________________________________
5.11 SUMMARY
___________________________________________________________________________
A meeting is a gathering or assembly of a number of persons for transacting any lawful
business. But every gathering of persons does not constitute a meeting. A meeting would be
valid if it is held by following the prescribed rules and regulations. The meetings of a
company are of three kinds namely meetings of shareholders directors and creditors.
Statutory meeting is the first meeting of the members of the company after its incorporations
and must be held within six months from the date at which the company is entitled to start
business. Annual general meeting is the regular meeting of the members of the company and

93
the purpose of this meeting is to provide an opportunity to the members of the company
express their views on the management of company's affairs. Any meeting other than the
statutory and the annual general meeting of the company is known as extra-ordinary general
meeting, class meeting is the meeting of a particular class of shareholders. The business of
the meeting is conducted in the form of resolutions passed at the meeting and the resolutions
proposed in the meeting are decided on the votes of the members of the company. The
remuneration payable to directors is determined by the articles of association of the company,
or by a resolution of the company passed in its general meeting. The overall maximum limit
of management remuneration in fixed by Section 198 of the Companies Act.

__________________________________________________________________________________
5.12 SELF ASSESSMENT QUESTIONS
___________________________________________________________________________
Check your progress
Exercise 1 : True or False
The following aforesaid computations are True or false.
In making the aforesaid computation, the following sums shall be deducted :
(i)all the usual working charges ;
(ii)director's remunerations ;
(iii)bonus or commission paid or payable to any employees of the company whether on a
whole time or on a part time basis ;
(iv)any tax notified by the Central Government as being in the nature of a tax on excess or
abnormal profits;
(v)any tax on business profits imposed for special reasons or in special circumstances;
(vi)interest on debentures issued by the company ;

Ans . 1(T), 2(T), 3(T), 4(T), 5(T), 6(T)

Exercise 2 : Fill in the blanks


(a) A meeting is a gathering or assembly of a …………………….for transacting any
lawful business. But every gathering of persons does not constitute a meeting.
(b) A meeting would be valid if it is held by following the
prescribed……………………….
(c) The meetings of a company are of three kinds namely meetings of shareholders
directors and creditors.
(d) ………………………………………of the members of the company after its
incorporations and must be held within six months from the date at which the
company is entitled to start business.
(e) ………………………………………………of the members of the company and the
purpose of this meeting is to provide an opportunity to the members of the company
express their views on the management of company's affairs.
(f) Any meeting other than the statutory and the annual general meeting of the company
is known as ………………………………………. class meeting is the meeting of a
particular class of shareholders.

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Ans (1) number of persons, (2) rules and regulations, (3) Statutory meeting is the first
meeting, (4) Annual general meeting is the regular meeting, (5) extra-ordinary general
meeting,

Exercise 3: Mix and Match (A) with (B)


Sno (A) (B)
1 A meeting may be defined as gathering or Statutory Meeting
assembly of a number of persons for transacting
any lawful business.
2 Every public company limited by shares and Meeting
every company limited by guarantee and having
a share capital, shall, within a period of not less
than one month nor more than six months from
the date on which the company is entitled to
commence business hold a general meeting of the
members of the company. This meeting is called
the statutory meeting.
3 Every company must in each year hold in Extra Ordinary General
addition to any other meeting, a general meeting Meeting
as its annual general meeting.
4 Any meeting other than a statutory and an annual Annual General Meeting
general meeting is called an Extra Ordinary
General Meeting.
5 Class meetings are separate meetings of holders Quorum
of different classes of shares. They are held in
cases where their rights are sought to be affected.
6 It means the minimum number of members that Class Meeting
must be present at the meeting.
7 A vote is the formal expression of the will of the Ordinary Resolution
members of the house either for or against a
proposal.
8 It is the resolution which is passed, at a valid Managerial Remuneration
meeting by simple majority of the members, i.e.,
where the votes cast in favour of resolution
exceed the votes cast against it.
9 The total managerial remuneration payable by a Vote
public company or a private company which is a
subsidiary of a public company to its directors,
managing agent, secretaries and treasurer or
manager in respect of any financial year shall not
exceed 11% of the net profit of that company for
that financial year.

Ans. 1(2), 2(1), 3(4), 4(3), 5(6), 6(5), 7(9),8(7), 9(8)

Exercise 4: Short Questions


1.What is a statutory meeting ? When and how is it held ? What are the objects of such a
meeting ? What business is transacted at such meetings ?

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___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________

2.What are the statutory provisions regarding the holding of an annual general meeting ?
What types of business are transacted in such meetings ?
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________

3.What are the requisites of a valid meeting ? Discuss in detail


___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________

4.What is a quorum ? What happens if there is no quorum at a meeting?


___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________

5. What are different types of resolutions which must be passed in the meeting of
shareholders ?
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________

6. Discuss the statutory provisions relating to payment of managerial remuneration of a


public limited company.
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________

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Unit- III
Management

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Chapter - 1

Management of a Company
__________________________________________________________________________________

BASIC OUTLINE OF CHAPTER


___________________________________________________________________________
1. Introduction to concept
2. Meaning of Director
3. Classification under Companies Act
4. Further classification
5. Classification under Listing Agreement
6. Appointment of Women Director
7. Independent director
8. Small Shareholder’s Director
9. Director Identification Number (DIN)
10. Director under Companies Act, 2013
11. Legal Position of Director
12. Powers of Directors
13. Duties of Directors
14. Liabilities of Directors
15. Key Managerial Personnel under New Companies Act, 2013
16. Difference between Managing Director and Manager
__________________________________________________________________________________

OBJECTIVES
___________________________________________________________________________
1. Get familiar with the concept of director
2. Examine the legal positions of director
3. To know the provisions of the appointment of small shareholder’s director
4. Be clear about procedure of acquiring of director identification number
5. To know the restriction upon director while exercising assign powers
6. To understand the circumstances where director remove from his position
7. Learning new concepts introduces under new companies act, 2013 (KMP)
8. Knowing distinctive role of Managing Director and Manager
__________________________________________________________________________________

1. INTRODUCTION TO CONCEPT
___________________________________________________________________________
The interest of various parties attach with company like shareholders, creditors, employee,
financial institutions and other Govt. agencies. But there is some person unable to participate

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in the working of the company actively. Therefore they appoint some person who protects
their right called Directors. Under the companies act it is mandatory to appoint some person
as Directors in the Company. Due to the increasing scam and frauds in companies the role of
Directors has increased those are legal representatives of shareholders. In recent years, the
concept of the board has become crucial for corporate governance because of the incidence of
several corporate scandals involving unethical conduct by the management.
__________________________________________________________________________________

2. MEANING OF DIRECTORS
___________________________________________________________________________
It has been seen that law does not precisely defines the term director. Section 2(34) of this act
define the director as “a director appointed to the Board of a Company.” But this is not
satisfactory definition. Director may be define as, a person who are responsible for directing,
governing or controlling the policy or management of a company and collectively directors
are called ‘Board.’ As we know the directors are top administrative organ of the company and
works as brain of the company because company is artificial person and unable to does any
act itself. It may be noted that a individual director cannot bind the company for his own act.
__________________________________________________________________________________

3. CLASSIFICATION UNDER THE COMPANIES ACT


___________________________________________________________________________
The Companies Act refers to the following two specific categories of Directors:

1. Managing Directors; and

2. Whole-time Directors.

A Managing Director is a Director who has substantial powers of management of the affairs
of the company subject to the superintendence, control and direction of the Board in question.
A Whole-time Director includes a Director who is in the whole-time employment of the
company, devotes his whole-time of working hours to the company in question and has a
significant personal interest in the company as his source of income.
Every public company and private company, which is a subsidiary of a public company,
having a share capital of more than Five Crores rupees must have a Managing or Whole-time
Director or a Manager.

__________________________________________________________________________________

4. FURTHER CLASSIFICATION OF DIRECTORS


___________________________________________________________________________
Based on the circumstances surrounding their appointment, the Companies Act recognizes
the following further types of Directors:
1. First Directors: Subject to any regulations in the Articles of a company, the subscribers to
the Memorandum of Association, or the company's charter or constitution

99
("Memorandum"), shall be deemed to be the Directors of the company, until such time when
Directors are duly appointed in the annual general meeting ("AGM").

2. Casual vacancies: Where a Director appointed at the AGM vacates office before his or her
term of office expires in the normal course, the resulting vacancy may, subject to the Articles,
be filled by the Board. Such person so appointed shall hold office up to the time which the
Director who vacated office would have held office if he or she had not so vacated such
office.

3. Additional Directors: If the Articles specifically so provide or enable, the Board has the
discretion, where it feels it necessary and expedient, to appoint Additional Directors who will
hold office until the next AGM. However, the number of Directors and Additional Directors
together shall not exceed the maximum strength fixed in the Articles for the Board.

4. Alternate Director: If so authorized by the Articles or by a resolution passed by the


company in general meeting, the Board may appoint an Alternate Director to act for a
Director ("Original Director"), who is absent for whatever reason for a minimum period of
three months from the State in which the meetings of the Board are ordinarily held. Such
Alternate Director will hold office until such period that the Original Director would have
held his or her office. However, any provision for automatic re-appointment of retiring
Directors applies to the Original Director and not to the Alternate Director.

5. 'Shadow' Director: A person, who is not appointed to the Board, but on whose directions
the Board is accustomed to act, is liable as a Director of the company, unless he or she is
giving advice in his or her professional capacity. Thus, such a 'shadow' Director may be
treated as an 'officer in default' under the Companies Act.

6. De facto Director: Where a person who is not actually appointed as a Director, but acts as
a Director and is held out by the company as such, such person is considered as a de facto
Director. Unlike a 'shadow' Director, a de facto Director purports to act, and is seen to the
outside world as acting, as a Director of the company. Such a de facto Director is liable as a
Director under the Companies Act.

7. Rotational Directors: At least two-thirds of the Directors of a public company or of a


private company subsidiary of a public company have to retire by rotation and the term
"rotational Director" refers to such Directors who have to retire (and may, subject to the
Articles, be eligible for re-appointment) at the end of his or her tenure.

8. Nominee Directors: They can be appointed by certain shareholders, third parties through
contracts, lending public financial institutions or banks, or by the Central Government in case
of oppression or mismanagement. The extent of a nominee Director's rights and the scope of
supervision by the shareholders, is contained in the contract that enables such appointments,
or (as appropriate) the relevant statutes applicable to such public financial institution or bank.
However, nominee Directors must be particularly careful not to act only in the interests of
their nominators, but must act in the best interests of the company and its shareholders as a
whole. The fixing of liabilities on nominee Directors in India does not turn on the
circumstances of their appointment or, indeed, who nominated them as Directors. Chapter 4
and Chapter 5 that follow set out certain duties and liabilities that apply to, or can be affixed
on, Directors in general. Whether nominee Directors are required by law to discharge such
duties or bear such liabilities will depend on the application of the legal provisions in

100
question, the fiduciary duties involved and whether such nominee Director is to be regarded
as being in control or in charge of the company and its activities. This determination
ultimately turns on the specific facts and circumstances involved in each case.

__________________________________________________________________________________

5. CLASSIFICATION UNDER THE LISTING AGREEMENT


___________________________________________________________________________
The Securities Contracts (Regulation) Act, 1956, read with the rules and regulations made
there under, requires every company desirous of listing its shares on a recognized Indian
stock exchange, to execute a listing agreement ("Agreement") with such Indian stock
exchange. This Agreement is in a standard format (prescribed by the Securities Exchange
Board of India ("SEBI")), as amended by SEBI from time to time. The Agreement provides
for the following further categories of Directors:

Categories under Listing Agreement:

1. Executive Director;

2. Non-executive Director; and

3. Independent Director.

Executive and non-executive Directors: An Executive Director can be either a Whole-time


Director of the company (i.e., one who devotes his whole time of working hours to the
company and has a significant personal interest in the company as his source of income), or a
Managing Director (i.e., one who is employed by the company as such and has substantial
powers of management over the affairs of the company subject to the superintendence,
direction and control of the Board). In contrast, a non-executive Director is a Director who is
neither a Whole-time Director nor a Managing Director. Clause 49 of the Agreement
prescribes that the Board shall have an optimum combination of executive and non-executive
Directors, with not less than fifty percent (50%) of the Board comprising non-executive
Directors. Where the Chairman of the Board is a non-executive Director, at least one-third of
the Board should comprise independent Directors and in case he is an executive Director, at
least half of the Board should comprise independent Directors. Where the non-executive
Chairman is a promoter of the company or is related to any promoter or person occupying
management positions at the Board level or at one level below the Board, at least one-half of
the Board of the company shall consist of independent Directors.

Independent Directors: The Agreement defines an "Independent Director" as a non-


executive Director of the company who:

101
(a)apart from receiving Director's remuneration, does not have material pecuniary
relationships or transactions with the company, its promoters, its Directors, its senior
management, or its holding company, its subsidiaries, and associates which may affect
independence of the Director;

(b) is not related to promoters or persons occupying management positions at the board level
or at one level below the board;
(c) has not been an executive of the company in the immediately preceding three (3) financial
years;
(d) is not a partner or an executive or was not a partner or an executive during the preceding
three (3) years, of any of the following:
(i) the statutory audit firm or the internal audit firm that is associated with the
company, and
(ii) the legal firms and consulting firms that have a material association with the
company;
(e) is not a material supplier, service provider or customer or a lessor or lessee of the
company, which may affect the independence of the Director; or
(f) he is not a substantial shareholder of the company, i.e., owning two percent (2%) or more
of the block of voting shares; and
(g) he is not less than twenty-one (21) years of age.
Nominee directors appointed by an institution that has invested in, or lent money to, the
company are also treated as independent Directors.
__________________________________________________________________________________

6. APPOINTMENT OF WOMEN DIRECTOR


___________________________________________________________________________
The society in our county is male inclined from the very inception. Women were always seen
as lower to men. But now, the time has drastically changed the thinking of society. Several
laws are framed for providing security and special status to women. From many years the
Central Government was providing even a special tax exemption to the women. Some
schemes of Central Government are specially designed only for the betterment, protection
and empowerment of the women. Here we can say that Companies Act, 2013 by second
proviso to section 149(1) which is providing for the appointment of the women director is an
effort for empowerment of the women in India.
Second Proviso to Section 149(1) runs as:
“Provided further that such class or classes of companies as may be prescribed, shall have at
least one woman director.”Earlier the draft rules in regard to the appointment of the Women
Director were not very clear as it was providing “The listed company and all other companies
which will fall under category of Rs. 100 crores Share capital or 300 crore sales shall appoint
the women director within one year and three years respectively from the commencement of
second proviso”. If we analyze the draft rules it clearly mentioned that government reserved
arbitrary rights in its hands for the appointment of the women director when it was providing
such class or classes of companies and on the other side from the commencement of second
provison.

102
But today as the rules got notified and enforced from 1st day of April, 2014, the position is
clear, but only to a limited extent which is providing a choice for company in regard to
appointment of the women director.
Section 149(1) clarifies that all the companies must have the Board of Directors, which shall
consist of individuals
In case of Private Company: Minimum 2 directors;
In case of Public Company: Minimum 3 directors;
In case of One Person Company: One director.
The Companies (Appointment & Qualification of Director) Rules, 2014 which come into
force on 1st April 2014 provides the class of companies which shall appoint at least one
woman director, these are-
(i) every listed company;
(ii) every other public company having -
(a) paid–up share capital of one hundred crore rupees or more; or
(b) turnover of three hundred crore rupees or moreas on the last date of latest audited
financial statements.
Provisions added to the rule are providing that a company, which has been incorporated
under the Act and is covered under provisions of second proviso to sub-section (1) of section
149 shall comply with such provisions within a period of six months from the date of its
incorporation.
So, we can make the difference for the purpose of compliance of the provisions between
companies:
Here, first category is of the companies which are incorporated under the current act, for
which the proviso is providing that they are to appoint the women director with in the period
of six months.
Second category is of those companies which were incorporated under the previous company
laws, for those companies the period shall be one year from 1st April 2014 i.e. until
31st March 2015.
But the main concern here is to see whether the companies will seriously appoint deserving
women director or the women director will also be coming out of the Promoter group. The
provision is not clear about the independence of the women director. So, uptil when there is
no restriction for the appointment of women director from the promoter group, there will be
no difficulty for the promoters to appoint a women director. But, we can interpret only that
this provision is a social measure so, the government will not take any step for independence
of the women director.
Moreover, if the women director will be independent, it will be more beneficial for the
companies because by appointing independent women director they will be complying two
provisions of section 149 i.e. by appointing the women director and Independent Director.
The second proviso to the rule 3 is further providing that if there is intermittent vacancy of a
woman director, it shall be filled-up by the Board at the earliest but not later than immediate
next Board meeting or three months from the date of such vacancy whichever is later. This
proviso can be analyzed as essential for maintaining the post of women directors as if this
provision would not have been made, the companies will be appointing a women director and

103
after appointment will try her removal and would have overcome law. But this provision has
ensured the enforcement of the appointment of Women Director in a Company.

__________________________________________________________________________________

7. INDEPENDENT DIRECTORS
___________________________________________________________________________
In India, the gravity of Independent Directors (referred as "ID's") was recognized with the
introduction of corporate governance. The Companies Act, 1956 (referred as "the Act, 1956")
do not directly talks about ID's, as no such provision exists regarding the compulsory
appointment of ID's on the Board. However, Clause 492 of the listing agreement which is
applicable on all listed companies mandates the appointment of ID's on the Board. A need
has been felt to update the Act and make it globally compliant and more meaningful in the
context of investor protection and customer interest.
The Companies Act, 2013 (referred as "the Act, 2013") came into force as Act no. 18 of 2013
after obtaining the assent of the President on August 29, 2013. The Ministry of Company
Affairs (referred as "MCA") enforced the 98 sections of the Act through the notification
dated September 12, 2013.

Terms and Conditions of Appointment of Independent Directors:


Schedule IV to the Companies Act, 2013 provides the ‘Code for Independent Directors’. The
appointment process of Independent Directors is independent of the company management.
During the selection process, the Board ensures that there is appropriate balance of skills,
experience and knowledge in the Board so as to enable the Board to discharge its functions
and duties effectively.

The appointment of Independent Director(s) of the Company is approved at the meeting of


the shareholders. The Board always ensures that the Independent Director proposed to be
appointed fulfils the conditions specified in the Act and the Rules made there under and that
the proposed director is independent of the management and a statement to that effect is
included in the explanatory statement attached to the notice of the meeting.

The terms and conditions for the appointment of the Independent Director are enumerated
below:

Appointment

 The appointment is for a term of 5 (five) years commencing from the date of
appointment and ending (‘Termination Date’) on 6th Annual General Meeting of the
Company following the date of appointment and shall not be liable to retirement by
rotation. Unless the appointment is renewed on or prior to the Termination Date, the
appointment shall come to an end on the Termination Date. The appointment is as per
the Company’s Articles of Association.
 Notwithstanding the other provisions of the terms and conditions of the appointment

104
of the Independent Director, the appointment may be terminated with or without
cause at any time by the Company with immediate effect, in accordance with the
Companies Act, 2013 and Rule and Regulations made there under and the Company’s
Articles of Association or, as applicable, or upon the resignation of the Independent
Director, or the Board of Directors (excluding the concerned Independent Director) is
of opinion that the continued appointment is not in the interest of the Company. Upon
such termination or resignation of the appointment for any reason, the Independent
Director shall not be entitled to any damages for loss of office and no fee will be
payable in respect of any unexpired portion of the term of the appointment or any
damages whatsoever. Upon such termination or resignation, the Independent Director
will have to undertake to sign all appropriate paperwork that the Company may
require.
 During the term of the appointment, the Independent Director may be asked to serve
on one or more of the Board Committees including Audit Committee, Nomination
and Remuneration Committee, Stakeholders’ Relationship Committee, Corporate
Social Responsibility Committee or such committee of the Board of the Directors
from time to time and copies of the terms of Reference for each of those committees
will be provided to him.
 If circumstances change, and the Independent Director believes that his independence
may be in doubt, he should discuss this with the Chairman of the Company as soon as
possible.

Time Commitment

By accepting the appointment, the Independent Director confirms that he is able to allocate
sufficient time to perform his role as an Independent Director of the Company.

In terms of the Companies Act, 2013, he will have to attend at least one Board Meeting
during every Financial Year in-person. Also, he will strive to attend the Board / its
committees’ calls whenever scheduled as per the best convenience of all the attendees.

Role and responsibility

 As an Independent Director, he will be bound by the Code for Independent Directors


as mentioned under Schedule IV to the Companies Act, 2013.
 As an Independent Director, he has the same general legal responsibilities to the
Company as any other Director including all fiduciary duties, responsibilities,
statutory obligations and liabilities of directors prescribed in law including the
Companies Act, 2013.
 The Board as such is collectively responsible for promoting the success of the
Company by directing and supervising the Company’s affairs. The brief description of
the terms of reference of the Board of Directors are as follows:
o To manage and direct the business and affairs of the Company;
o To manage, subject to the Articles of Association of the Company, its own
affairs, including planning its composition, selecting its Chairman, appointing
Committees, establishing the terms of reference and duties of Committees and
determining Directors’ compensation;
o To act honestly and in good faith in the best interests and objects of the
Company, its employees, its shareholders, the community and for protection

105
of environment;
o To exercise due care, diligence and skill that a reasonably prudent person
would exercise in comparable circumstances and shall also exercise
independent judgment;
o To participate directly or through its Committees, in developing and approving
the mission of the business, its objectives and goals and the strategy for their
achievement;
o To ensure congruence between shareholders’ expectations, Company’s goals,
objectives and management performance;
o To monitor the Company’s progress towards its goals and to revise and alter
its direction in light of changing circumstances;
o To approve and monitor compliance with all significant policies and
procedures by which the Company is operated;
o To ensure that the Company operates at all times within applicable laws and
regulations and ethical and moral standards;
o To ensure that the performance of the Company is adequately reported to
shareholders, other stakeholders and regulators on a timely and regular basis;
o To ensure that the audited annual financial statements are reported fairly and
in accordance with the Accounting Standards issued by the Institute of
Chartered Accountants of India;
o To ensure that any developments that have a significant and material impact
on the Company are reported from time to time to the concerned authorities;
o Not to involve in a situation which may have a direct or indirect interest that
conflicts, or possibly may conflict with the interest of the Company;
o Not to achieve or attempt to achieve any undue gain or advantage either to
himself or to his relatives, partners or associates and if such director is found
guilty of making any undue gain, he shall be liable to pay an amount equal to
that gain to the Company;
o Not to assign his office and any assignment so made shall be void; and
o To act in accordance with the laws and regulations of the country and the
Memorandum and Articles of Association of the Company.
 In addition to the above responsibilities, the role of the Independent Directors shall
also have the following key elements:
o Strategy and Business Development: The Independent Director should
constructively challenge and contribute to the overall strategy and to the
business development initiatives of the Company by getting actively engaged
with the Company in making introductions to potential clients in the key
service areas of the Company;
o Performance: The Independent Director should scrutinize the performance of
management in meeting agreed goals and objectives and monitor the
reporting of performance; and
o Risk: The Independent Director should satisfy himself that financial
information is accurate and that financial controls and systems of risk
management are robust and defensible.

Other obligations and compliances

The Independent Director will be required to execute / confirm with respect to the following
documentation on a periodic basis:

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 Confirmation that he is not disqualified to act as a Director of the Company in terms
of the Companies Act, 2013
 Declaration of Independence in terms of the Companies Act, 2013
 Disclosures under the Company Code for Prevention of Insider Trading
 Code of Conduct for Directors of the Company
 Code of Conduct for Independent Directors as per Schedule IV of the Companies Act,
2013
 Disclosure of change in interest in companies where he is appointed / ceased as a
Director or Key Managerial Personnel
 Confirmation that his directorships in companies do not conflict with the interest of
the Company.

Remuneration

 The aggregate remuneration to be paid to all the Independent and Non-Executive


Directors would not exceed 1% of the total net profits of the Company during any
Financial Year.
 Subject to provisions of the Companies Act, 2013 and other applicable Indian laws,
Fixed Commission of Rs. 13,00,000 (Rupees Thirteen Lakhs only) per annum is paid
to each Independent Director.
 The Company pays sitting fee of Rs. 20,000 (Rupees Twenty Thousand only) for
attending each Board Meeting / its Committee meetings in-person except for the
Audit Committee Meeting for which the sitting fee is Rs. 40,000 (Rupees Forty
Thousand only) for attending the same in-person. Attendance through video-
conferencing or by other audio visual means in terms of the Companies Act, 2013 and
the Rules made there under is also considered as valid presence and qualifies for the
payment of above sitting fees.
 The remuneration described above is the gross amount payable per financial year,
which is subject to deductions of applicable taxes and any other deductions required,
if any by any applicable laws. The Independent Director shall be responsible for the
personal taxation. However, the Company will assist him in tax filings if any and
compliance requirements in India.
 If the term comes to an end or due to resignation or termination; any amounts due
shall be paid on a pro-rata basis.
 The Company has made provisions for Directors and Officers (D&O) insurance
policy which covers the risk of breach of duty, neglect or omission to act, error or
misstatement or misleading statement and failure to supervise, etc.

Expenses

In addition to the compensation described in above, the Company will reimburse the official
travel expenses, hotel expenses, and all other reasonable out of pocket expenses borne by the
Independent Director for participating in Board and other Committee meetings and other
Business meetings.

Other directorships and Business Interests

 The Company acknowledges that Independent Director may have business interests in
other companies. In the event that he becomes aware of any potential conflicts of

107
interests, these should be disclosed to the Chairman and Company Secretary as soon
as they become apparent.
 During the appointment, he should consult with the Chairman prior to accepting any
such other (or further) directorships of Indian companies or any major external
appointments which may affect his interest in the Company.

Code of Conduct

During the period of the appointment, the Independent Director will be bound by the
Company Code of Directors and such other codes of conduct under applicable laws including
the Companies Act, 2013 and the Securities and Exchange Board of India Act, 1992.

Confidentiality and Non-Disclosure

 The Independent Director must apply the highest standards of confidentiality and not
disclose to any person or company (whether during the course of the appointment or
at any time after its termination) any confidential information concerning the
Company and any Group Companies (including wholly owned subsidiaries) with
which he comes into contact by virtue of his position as an Independent Director of
the Company.
 Any information concerning the Company’s business, its customers, suppliers, etc.
which is not in public domain and to which all employees do not have access, should
be considered confidential for the purpose and should be held in confidence, unless
authorized to do so and when disclosure is required as a requirement of law.
 The attention is drawn to the requirements under Indian regulations as to the
disclosure of price sensitive information. The Independent Director shall not provide
any information either formally or informally, to the press or any other publicity
media without prior written clearance from the Chairman or Company Secretary.
 The examples of confidential information are, but not limited to the following:
o Business plan, annual operations plan
o Software developed / under development
o Technical information about software and computer systems
o Performance against target
o Costing, pricing, profitability, financial budget and related issues
o Fees / stipend, evaluations, recommendations etc. related to any of the
employees of the Company
o Sales commission, third party commission and about reference agents
o Details of past, present and future contracts and proposals
o Information about suppliers and/or customers
o Communication facilities and equipment
o Proposed ventures and corporate plans
o Technical marketing and financial strategies of the Company and/or its
customers
o Core competencies and activities of the Company and/or its customers
o Any other information, which is likely to be crucial for the business operations
 On termination of the Appointment, the Independent Director will deliver to the
Company all books, documents, papers, and other property of or relating to business
of the company or any Group Company which are in their possession, custody or
power by virtue of their position as an Independent Director of the Company. The

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Company will arrange the disposal of papers that he no longer requires.
 If there is a breach or threatened breach of the provisions of Confidentiality, the
Company shall be entitled to injunctive relief.

Liability

An Independent Director will be liable only in respect of such acts of omission or


commission by a company which had occurred with his knowledge, attributable through
Board process, and with his consent or connivance or where he had not acted diligently

Section 151 of the Companies Act,2013and Rule 7 of the Companies (Appointment and
Qualification of Directors) Rules,2014 deals with the appointment of director elected by
small shareholder.

________________________________________________________________________________

8. SMALL SHAREHOLDER’S DIRECTOR:


___________________________________________________________________________
A listed company, may upon notice of not less than 1000 small shareholdersor1/10th of the
total number of such shareholders, whichever is lower, have a small shareholders’ director
elected by the small shareholders.
It shall not prevent a listed company to opt to have a director representing small
shareholders suomotu and in such a case the provisions for appointment of such director
shall not apply.
“Small shareholders” means a shareholders holding shares of nominal value of not more
than Rs.20,000/- or such other sum as may be prescribed.

Notice of Intention:

The small shareholders intending to propose a person as a candidate for the post of small
shareholders’ director shall leave a notice of their intention with the company at least 14
days before the meeting under their signatures specifying the name, address, shares held
and folio number of the person whose name is being proposed for the post of director and of
the small shareholders who are proposing such person for the office of director.

If the person being proposed does not hold any shares in the company, the details of shares
held and folio number need not be specified in the notice.

Accompanied by statement:

The notice shall be accompanied by a statement signed by the person whose name is being
proposed for the post of small shareholders’ director stating –

(a) His DIN

(b) That he is not disqualified to become a director under the Act; and

(c) His consent to act as a director of the company

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Such director shall be considered as an independent director subject to , his being
eligible under section 149(6) and his giving a declaration of his independence in
accordance with section 149(7) of the Act.

Appointment of Small Shareholder:

The appointment of small shareholders’ director shall be subject to the provisions of section
152 except that-

(a) Such director shall not be liable to retire by rotation;

(b) Such director’s tenure as small shareholders’ director shall not exceed a period of 3
consecutive years; and

(c) On the expiry of the tenure, such director shall not be eligible for re-appointment.

A person shall not be appointed as small shareholders’ director of a company, if the person is
not eligible for appointment in terms of section 164.

Holding of office:

A person shall not hold the position of small shareholders’ director in more than two
companies at the same time.

The second company in which he has been appointed shall not be in a business which is
competing or is in conflict with the business of the first company.

A small shareholders’ director shall not be appointed in or be associated with such


company in any other capacity, either directly or indirectly, for a period of 3 years from
the date on which he ceases to hold office as a small shareholders’ director in a company.

Vacation of office:A person appointed as small shareholders’ director shall vacate the office
if –

(a) The director incurs any of the disqualifications specified in section 164;

(b) The office of the director becomes vacant in pursuance of section 167;

(c) The director ceases to meet the criteria of independence as provided in section
149(6).

Small shareholder’s director under companies act, 1956 and companies act,2013:

Companies Act,1956 Companies Act,2013


It enables public companies with paid It enables a listed companies, mayupon
up capital of Rs.5 Crores or more and notice of not less than 1000 small
having 1000 or more small shareholdersor1/10th of the total
shareholders to have a director elected number of such shareholders,
by small shareholder. whichever is lower, have a small

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shareholders’ director elected by the
small shareholders
__________________________________________________________________________________

9.DIRECTOR IDENTIFICATION NUMBER


___________________________________________________________________________
Any person who is willing to become directors in the company must obtain Director
Identification Number (DIN) according to New Companies Rules, 2014 concerning with
appointment and qualification of directors. If he does not acquired the DIN he shall not be
eligible to become director in the company. The new companies act, 2013 has inserted the
section 153 to 159 which contains the provisions of allotment of unique number that is DIN
to directors. Sections specifying the following provisions:

(1) Section 153 states that if any person is intending to become director he must make an
application to the Central Govt. in such form and manner with prescribed fees.

(2) As per section 154 the Central Govt. after receipt the application within one month allots
the DIN to Applicant.

(3) Section 155 states that a person who has been obtain already DIN need not apply for fresh
DIN.

(4) Section 156 Prescribes the provisions that every director after receiving the DIN must
intimate to the company in which he is appointed.

(5) Section 157 specify that every company shall furnish the relevant information to Registrar
within 15 days from the date of receive the information from the director.

(6) The person who has obtained the DIN must quote on the information, documents or any
return etc.

(7) If any Director Fails to comply the provisions shall be punishable with fine for 50,000
rupees and in case of continue default rupees 500 every day and imprisonment also up to six
months.

The MCA has strictly declared that in case of resignation of the director does not
cancelled his DIN. In case of fraud committed by the director immediately track and one
thing should be noted that if DIN only obtain to raise the fund from public shall liable for fine
or imprisonment as per law. This is most important to note that only single DIN is sufficient
to hold the position as director more than one company.

Revised Procedure for Application and Allotment for Director Identification Number-
DIN under Companies Act, 2013
Form No. DIR-3 [Pursuant to section 153 of The Companies Act, 2013 and Rules 9(1) of
the Companies (Appointment and Qualification of Directors) Rules, 2014 and Rules 10
of Limited Liability Partnership Rules, 2009]

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Following causes has been identified by the MCA when Application for DIN is
identified:

Rejection Description
Code
1 Proof of identity has not been attested by an authorized person.
2 Proof of residential address has not been attested by an authorized person.
3 The supporting document for identity proof is not valid as it has not been issued
by any Government Authority
4 The enclosed evidence has handwritten entries.
5 Date of Birth is not matching with the date of birth mentioned in the proof
attached.
6 Applicant’s Name is not matching with the name mentioned in the proof
attached.
7 Address is not matching with the address details mentioned in the proof attached
8 Applicant’s Father’s Name is not matching with the father’s name mentioned in
the proof attached.
9 The submitted application is duplicate DIN application i.e. an approved DIN
already exists in this name.
10 Identification number entered in application does not match with the identity
proof enclosed.
11 The gender is not entered correctly in DIN form.
12 ID proof not attached with the application
13 Address proof not attached with the application
14 Non-submission of copy of passport (for foreign nationals)
15 Passport duly appostillised not enclosed (For foreign nationals)
16 Verification by applicant is not attached
17 Verification by applicant not in prescribed format
18 Verification by applicant is not signed
19 The prefixes/ suffixes like Mr. / Ms. / Kumari / Shri / Late or Ji etc. are used in
your name or your father's name field in DIN form.
20 The supporting documents attached not valid or current or has expired.
Others In case of others, description is written by the back office user.

As we are aware that Companies Act, 2013 is already in force from April 01, 2014, and every
professionals is trying his/her best to unlock and decode the provisions of Companies Act,
2013. In this regard an Attempts have been made from my side to compile the procedure for
appointment of Additional Director in Public Company/ Private Company (Purely Private)
taken the route of appointment of Director by Board.

__________________________________________________________________________________

10. DIRECTOR UNDER NEW COMPANIES ACT, 2013 AND CONCERNING


PROVISIONS
___________________________________________________________________________
With the new Companies Act, the law has become more stringent for private companies
than for public companies, Moving from the Companies Act 1956 to the Companies

112
Act 2013 is like shifting from your old house to a new one. In the old house, where you have
stayed for years, everything would have found its own place – the shoes, the clothes,
umbrella, first aid, brooms, and whatever else you need in your household. Your legs can find
their own way, even in pitch dark of night – they know the way to the bathroom, to the stairs,
they even know where the stairs end.
Directors of a company hold the most crucial position in the Company. With the new
Companies Act, 2013 (“New Act“) already in force, their position has become even more
significant than ever before. They are now formally included within the definition of “key
managerial personnel” or “KMP” under Section 2(51) of the New Act.
As per Section 149(1): Every Company shall have a Board of Directors Consisting of
Individuals as director. (It is clear to understand from this line that only an individual can
be director of company. Some persons have doubt that other than individual can be director
or not). According to this section Only AN INDIVIDUAL can be director of company. {The
Board shall consist of individuals not of other persons like firms, LLP, companies, gods or
other legal persons.}

Minimum No. of Directors as per Section 149(1)(a):

 Three in case of Public Company.


 Two in case of Private Company.
 One in case of One Person Company.

Maximum 15 Directors (If company want to appoint more than 15 directors Special
Resolution Required to pass in General meeting)- Procedure {Simple Process of Holding
of Extra-Ordinary General Meeting, which we use in other Matters also)

New Categories of Directors:

 Resident Director:

As per Section 149 sub section 3 of Companies Act 2013, Board of Directors of a company,
must have at least one resident director i.e. (A person who has lived at least 182 days in India
in the previous calendar year)

As per General Circular No. 25/2014 The residence requirement would be reckoned from
the date of commencement of section 149 of the Act i.e. 1st April, 2014, The first previous
calendar year, for compliance with these provisions would, therefore, be Calendar year 2014.
The period to be taken into account for compliance with these provisions will be the
remaining period of calendar year 2014 i.e. 1st April to 31st December).

 Therefore, on a proportionate basis, the number of days for which the director(s)
would need to be resident in India. During Calendar year.2014, shall exceed 136
days.
 Regarding Newly Incorporated Companies it is clarified that companies
incorporated between 01.04.2014 to 30.09.2014 should have a resident director
either at the time of incorporation OR within six months of their incorporation.
 Companies incorporated after 30.9.2014need to have the resident director from the

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date of incorporation itself.

 Women Director:

As per Section 149 (1) (a) second proviso requires certain categories of companies to have At
Least One Woman director on the board. Such companies are any listed company, and any
public company having-

1. Paid Up Capital of Rs. 100 cr. or more, or


2. Turnover of Rs. 300 cr. or more.

 Independent Director:

Independent Director is for the first time introduced in the Companies Act, 2013 under
section 149(6)

 Additional Directors:

Any Individual can be appointed as Additional Directors by a company under section 161 of
the New Act.(COMPLETE PROCESS OF APPOINTMENT OF ADDITIONAL
DIRECTOR ALONG WITH DRAFT GIVEN BELOW.)

 Nominee Director:

As per Section 161(3).Subject to AOA of company, the Board May appoint any person as
a director nominated by any institution in pursuance of the provisions of any law for the time
being in force or of any agreement or by the Central Government or the State Government by
virtue of its shareholding in a Government company.( According to term: Subject to AOA of
company mean there should be provisions in Articles of Association of Company for
appointment of Nominee Director, if there is no provision in Articles of company then alter
the provision in AOA).

 Alternate Directors:

As per Section 161(2) A company May appoint, if the articles confer such power on
company or a resolution is passed (if an Director is absentfrom India for atleast
threemonths).

 An alternate Director cannot hold the office longer than the term of the Director in
whose place he has been appointed.
 Additionally, he will have to vacate the office, if and when the original Director
returns to India.
 Any alteration in the term of office made during the absence of the original Director
will apply to the original Director and not to the Alternate Director.

Appointment of directors in private companies as per new law:

Practicing Company Secretary

The liberty given to private companies to self-regulate the appointment process has,

114
surprisingly, been completely taken away Under Companies Act-2013. This sounds
completely paradoxical, in view of the fact that in case of public companies, they still have
the liberty to self-regulate to the extent of one third of the board strength.

Sec 152 (6) (b) provides liberty, but only to public companies, to appoint one third of the
total board by a self-regulated process. While there was an exception to private companies in
Sec. 255 (2) of the 1956 Act, that exception has been dropped while transporting the
provisions into the new Act.

It could not be the case that such was the intent of the lawmaker – there is absolutely no case
for imposing more stringent regulations in case of private companies, than in case of public
companies.

Section 152 of the New Act governs the appointment of directors. Certain specific
requirements for appointment of director as lay down in the New Act are-

If different person are not named as first director in articles of the company, individual
subscribers shall be deemed to be first directors. Every director other than first directors of
company shall be appointed in general meeting as per Section 152(2). If company Want to
appoint a person as director in meeting other then General meeting Company can do this by
appointing such person as additional direct.

ADDITIONAL DIRECTOR:

Ensure that the director to be appointed by board of directors exercising the power so
conferred in them by the Articles of the company is not such a person who has failed to
get appointed as a director in a general meeting. (If A proposal is made in General
Meeting for appointment of a person as Director, if resolution got failed not passed in that
meeting and that person fails to get appointed as a director in a general meeting, then that
person can’t appoint as additional director). The additional director has to be appointed till
date of next AGM or last date, on which AGM should have been held, whichever is earlier.

PROCEDURE:

 First Check whether Articles (AOA) of the Company contain power/authorization to


appoint Additional Director read with Section 161(1) of the Companies Act, 2013. {If
there is no provisions in Articles of the Company then Alter the Articles of the
company to have enabling clause for appointment of Additional Director.
 Second Check whether such person have DIN No. or Not. If such person doesn’t have
DIN No. then Apply for DIN.
 Following documents are requiring from director to appointment him as additional
director.
o Consent in writing to act as Director in Form DIR-2 pursuant to Rule-8 of
Companies (Appointment & Qualification of Director) Rules, 2014-
o Intimation by Director in form DIR-8 in terms of Companies (Appointment &
Qualification of Directors) Rules, 2014, to the effect that he/ she is not
disqualified u/s 164(2) of Companies Act, 2014.-
o Disclosure of Interest in Form MBP-1 pursuant to Section 184(1) read with
Rule 9(1) of Companies (Meetings of Board and its Powers) Rules, 2014.
{One thing should be noted MBP-1 should not be dated earlier than date of

115
his/her appointment as Director}. –

However, if there is nothing to disclose on the part of new Director, even then also require to
take form MBP-1 from Director. (NIL disclosure is also a disclosure under section 184(1).

After receiving all the documents from the director:-

 Call the Board Meeting.


 Pass Resolution for appointment of Additional Director.
 Issue Letter of Appointment.
 File e-form DIR-12 [Along with CTC+ Consent + Letter of Appointment)
 File e-form MGT-14[For disclosure of interest in MBP-1]

Now this person will be Additional Director Till AGM of company. If company want to
appoint him as director then regularize the person as director in General Meeting by Share
holder Resolution. File form DIR-12 for Change in Designation of Director along with
ordinary resolution.

IF THE SECTION IS VIOLATED

Since the 8-lakh odd companies, sitting with more than 16-lakh directors, may not even be
aware of this change of law, what is the provision gets violated? There you have section 159
to take care of – which provides for a jail up to six months, of course with/without a fine too!

The law relating to companies in India is contained in the Companies Act, 1956. The
Companies Act, 1956 is a consolidation of existing laws, statutory rules and certain principles
laid down in decisions of the Courts in India and England. The Act of 1956 substantially
incorporates provisions of the English Companies Act, 1948.

A company means, a company formed and registered under the Companies Act, 1956 or
under any of the preceding Acts1. The word company is used to denote an association of
persons who have associated together to the conduct or to carry on a business for gain. The
persons associating together will contribute some money for the conduct of the business and
the amount is known as the share capital of the company. The association will be registered
under the Companies Act and thereafter it will be a legal person having an artificial
personality.

A company is a legal person who is leaving only in the eyes of law. It’s a creation of law
which lacks both body and mind. It cannot act, just like a human being. It can act only
through some human agency. Directors are those persons through whom company acts and
does business. They are collectively known as Board of Directors.

Section 252 – 323 of the Companies Act, 1956 deal with the appointment of directors,
remuneration of directors, disqualification of directors, vacation of office by directors,
Meeting of Board of Directors.

Board of Directors is the brain and the only brain of the company which is the body, and the
company can does act only through the board of directors. A director is a person who has
control over the direction, conduct, management, or superintendence of the affairs of the
company. Only an individual can be appointed as a director. An association or a firm cannot

116
be appointed as director of a company.

__________________________________________________________________________________

11. LEGAL POSITION OF DIRECTORS

___________________________________________________________________________

It is not easy to explain the position that a director holds in a corporate enterprise. A director
is not a servant of any master. He is the controller of the company’s affairs. Director of a
company is neither an employee nor a servant to the company. They are professional people
who were hired by the company to direct its affairs.

However there is no restriction under the Act, that a director cannot be an employee to the
company. In Lee v. Lee’s Air Farming Ltd2, it was held that, a director may, however, work
as an employee in different capacity. There is no definite definition for director under the
Companies Act, 1956. Director includes any person who is occupying the position of a
director, whatever name called. So in order to understand the position of a director in a
company. we have to look in to various decided cases.

In Judhah vs. Rampada Gupta, it was held that, director of a company registered under this
Act5 are persons duly appointed by the company to direct and manage the business of the
company. A director is sometimes described as agents, trustees, managing partners etc. 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.

Director as Agents

In Ferguson vs. Wilson6, the court clearly recognized that directors are in the eyes of law,
agents of the company. It was held that, the company has no person; it can act only through
directors and the case is, as regards those directors, merely the ordinary case of a principal
and agent. When the directors contract in the name, and on behalf of the company, it is the
company which is liable on it and not the directors.

In Elkington& Co. vs. Hurter7, where the plaintiff supplied certain goods to a company
through its chairman, who promised to issue him a debenture for the price, but never did so
and company went into liquidation, he was held not liable to the plaintiff. Similarly, a
director was held to be personally not liable in a suit against a private chit fund company.
Attachment of the property of the director was held to be not permissible8.

Like agents, directors have to disclose their personal interest, if any, in any transaction of the
company. In Ray Cylinders & Containers v. Hindustan General Industries Ltd9, held that, the
directors are the agents of the institution and not of its individual members, except when that
relationship arises due to the special facts of the case. Also granted permission to file a suit
against a company was not allowed to be treated as permission against directors as well.

In Sarathi Leasing Finance Ltd vs. B Narayana Shetty10, the articles of association
empowered the managing director to represent the company in legal proceedings. It was held
that a further authorization was not necessary to enable him to file a complaint for dishonor

117
of cheque under Sec. 138 of Negotiable Instrument Act.

Directors are the agents of a company. They are acting on behalf of the company. So the
directors cannot be held personally liable for any default of the company. It was held that, for
a loan taken by a company, the directors, who had not given any personal guarantee to the
creditor, could not be made liable merely because they were directors.

Director As Trustees

Directors are the trusties of the company’s money, property and their powers and such must
account for all the moneys over which they exercise control and shall refund any moneys
improperly paid away, and shall exercise their powers honestly in the interest of the company
and all the shareholders, and not their own sectional interest.

The directors of a company are trustees for the company, and for reference to their power of
applying funds of the company and for misuse of the power they could be rendered liable as
trustees and on their death, cause of action survives against their legal representatives11.
Directors are those persons selected to manage the affairs of the company for the benefit of
shareholders. It is an office of trust, which if they undertake, it is their duty to perform fully
and entirely. This peculiar nature of their office is one of the reason why the directors been
described as trusties.

In the real sense the directors are not trustees. A trustee is the legal owner of the trust
property and contracts in his own name. On the other hand, director is a paid agent or officer
of the company and contracts for the company12. In fact, the directors are commercial men
managing a trading concern for the benefit of themselves and of all the shareholders in it.

However we have to take the decision of Allen v. Hyatt15. It was held that, the directors are
trustees of the profit for the benefit of the shareholders. They cannot always act under the
impression that they owe no duty to the individual shareholders. But it is of no doubt that the
primary duty of the director is to the company.

But in such circumstances where the directors act as agents for the share holders, the later
would be liable to the purchasers of their shares for any fraudulent misrepresentation made by
the directors in the course of negotiations16.

The state of mind of these managers is the state of mind of the company and is treated by law
as such. The practical effects of these rules are that the directors’ personal fault in the
business of the company becomes the “fault of the company”; their reason to believe is
attributed to the company and the intention to occupy a premises as expressed by their
conduct is the intention of the company.

As Managing partners:

Basically the directors are elected representatives of the shareholders and therefore they are
in the position of managing partners. They also themselves are shareholders and make them
partners with other shareholders. They are supposed to done all the proprietor functions like
allotting shares, making calls, forfeitures and again reissue of forfeit shares.

But why should they have powers to bind the other directors and shareholders like partners in

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a firm? Directors are subject to retirement. This clearly shows that they are not managing
partners.

Conclusion
A Director is an agent of the Company for the conduct of the business of the company.
Directors of a company have fiduciary relationship with the company as well as the
shareholders when he acts as an agent or officers of a company.

The director as the Companies Act, 2013 indicates, holds an extremely important position in
the administration and management of a Company. It must be noted that the director actually
works in different capacities at different times to ensure that the company is run in a legal and
an efficient manner. The Act places immense responsibility on the soldiers of the directors.

Directors are bound to use their fair and reasonable diligence while discharging their duties
and they shall act honestly, and with such care as may be reasonably expected from, having
regard to their knowledge and experience.

The Companies Act has also seeks to introduce an element of objectivity in the office of a
director, for this purpose the act also introduced the office of independent directors. However,
the office of independent director has not been as successful in bringing efficient and honest
corporate governance as it was expected. The Satyam scam is the biggest example!

Therefore, it can only be concluded that the Companies Act should be suitably be amended to
introduce such in built checks and balances that the office of a director does not become an
absolute, which practically is the case.

__________________________________________________________________________________

12. POWERS OF DIRECTORS

___________________________________________________________________________
Nature and Extent of Directors’ Powers

Section 179(1) provides the provisions in companies act to exercising the powers to do all
such act. Shareholders of the company cannot intervene in the working of directors if they
working honestly and diligently to enhance the wealth and capability. But there are certain
cases where the majority of shareholders in a general meeting may intervene and exercise the
power vested in the board if:

(1) The directors become malafide (act for their personal interest)

(2) In case of deadlock (unable and unwilling to act)

(3) Becomes incompetent (all the directors are interested in dealing)

It should be noted that individual director cannot bind the company for his own act for
exercising power and if article authorize Board may delegate some powers to committee or
managing director or manager.

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Statutory Powers of Directors: Following powers can be exercised by the board of directors
but only when resolutions passed in the meeting:

(1) Power to make calls;

(2) Power to issue shares (Equity or Preference) and debentures;

(3) Power to buy back its own shares up to 10% of total paid up capital and reserves;

(4) Power to borrow money other than debentures;

(5) Power to invest surplus fund;

(6) Power to grant loan or give guarantee for any loan;

(7) Power to approve financial statements and ant other documents;

(8) Power to diversify business etc.

Besides the above mentioned powers, several other power also exercised by them according
to companies act. Following powers exercised by them:

(i) Power to fill casual vacancy which fall vacate due to death, insanity or insolvency;

(ii) Power to approve corporate policy

(iii) Power to make contribution to political party

(iv) Power to recommend the rate of dividends

(v) Power to appoint the first director in company

(vi) Power to make ‘Declaration of Solvency’

(vii) Power to fill casual vacancy in the office of key managerial person.

Restriction imposed on the powers of Directors: There certain powers which cannot be
exercised by the Board without getting the consent of the shareholders by a special resolution
under section 180 of companies act, 2013. These are the power listed below:

(1) To sell, lease or otherwise dispose of the whole or substantially the whole of the
undertaking of the company.

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(2) Investment of the compensation received by the company resulting from amalgamation or
merger in securities other than the trust securities.

(3) Restriction to borrow money exceeding the paid up capital and reserves.

(4) To remit or give extended time for the repayment of any debts due from directors.

It should be noted if the directors exceed their powers; their act cannot bind the company
toward third parties until the shareholders not ratified their act.

__________________________________________________________________________________

13. DUTIES OF DIRECTOR

___________________________________________________________________________
Duties of Directors

As discussed earlier that director has fiduciary positions in the company which is based
outmost good faith and trust. Thus certain duties according to section 166 of the this act has
been assign to him and he has to perform his best otherwise face some legal consequence.
The following duties of the director are:

1. A director of a company shall-

(i) act accordance to article of the company;

(ii) exercise his duties with due and reasonable skill and diligence;

(iii) act in good faith to promote the company and achieve the desired goals

(iv) Exercise independent judgment.

2. A director of company shall not-

(i) involve in any situation which he have any conflicts with the company

(ii) attempt to avail any unjust benefits or gains and if found guilty shall be
liable for any damages to the company;

(iii) transfer his own responsibility to other person.

Penalty in case of contravention- if any director found guilty for contravention of


provisions shall be punishable with fine which from one lakh rupees to five lakh rupees.

3.Duty not to delegate: Director being an agent is bound by the maxim


delegatusnonpotestdelegare, which means a delegate ca not further delegate. Thus,

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a director must perform his functions personally. However, he may delegate his in certain
conditions.

__________________________________________________________________________________

14. LIABILITIES TO THE COMPANY


__________________________________________________________________________________
1.Breach of fiduciary duty: where a director acts dishonestly to the interest of the company, he
will be held liable for breach of fiduciary duty. Most of the powers of directors are powers in
trust, and therefore, should be exercised in the interest of the company and not in the interest
of the directors or any section of members.

2.Ultra vires acts: D i r e c t o r s a r e s u p p o s e d t o a c t w i t h i n t h e p a r a m e t e r s o f


t h e provisions of the Companies Act, Memorandum and Articles of Association, since these
lay down the limits to the activities of the company and consequently to the powers of the
Board of directors. Further, the powers of the directors may be limited in terms
of specific restrictions contained in the Articles of Association . The directors shall
be held personally liable for acts beyond the aforesaid limits, being ultra vires the company or
the directors.

3.Negligence:As long as the directors act within their powers with reasonable skill and care as
expected of them as prudent businessman, they discharge their duties t o t h e c o m p a n y .
But where they fail to exercise reasonable care, skill and
diligence, they shall be deemed to have acted negligently in discharge of
their duties and consequently shall be liable for any loss or damage resulting there from.

4.Mala fide acts: D i r e c t o r s a r e t h e t r u s t e e f o r t h e m o n e ys a n d p r o p e r t y o f


t h e company handled by them, as well as exercises of the powers vested in them.
If they dishonestly or in a mala fide manner, exercise their powers and perform their duties,
they will be liable for breach of trust and may be required to make good the loss
or damage suffered by the company by reason of such mala fide acts. They are
also accountable to the company for any secret profits they might have made in
course of performance of duties on behalf of the company. Directors can also be held liable
for their acts of .misfeasance. i.e., misconduct or willful misuse of powers.

Liability to third parties: Liability under the Companies Act:

1. Prospectus: Failure to state any particulars as per the requirement of the section56 and
Schedule II of the act or misstatement of facts in prospectus renders a director
personally liable for damages to the third party. Section 62 provides that a director shall be
liable to pay compensation to every person who subscribes for any shares or
debentures on the faith of the prospectus for any loss or damage he may have sustained by
reason of any untrue or misleading statement included therein.

2.With regard to allotment: Directors may also incur personal liability for:

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(A) I r r e g u l a r a l l o t m e n t , i . e . , a l l o t m e n t b e f o r e m i n i m u m s u b s c r i p t i o n i s
received (Section 69), or without filing a copy of the statement in lieu
of prospectus (Section 70):

Under section 71(3), if any director of a company knowing contravenes or willfully


authorizes or permits the contravention of any of the provisions of section 69 or 70
with respect to all allotment, he shall be liable to compensate the company and the
allottee respectively for any loss, damages or costs which the company or the allottee may
have sustained or incurred thereby.

(B) For failure to repay application monies in case of minimum subscription


h a v i n g n o t b e e n r e c e i v e d w i t h i n 1 2 0 d a ys o f t h e o p e n i n g o f t h e i s s u e :

Under section 69(5) read with SEBI guidelines, in case moneys are not repaid
within 130 days from the date of the issue of the prospectus, the directors of the
company shall be jointly and severally liable to repay that money with interest at the rate
of 6 % per annum on the expiry of 130th day. However, a director shall not be liable if
he proves that the default in repayment of money was not due to any misconduct or
negligence on his part.

(C) F a i l u r e t o r e p a y a p p l i c a t i o n m o n i e s w h e n a p p l i c a t i o n f o r l i s t i n g
of securities are not made or is refused:

Under section 73(2) .Where the permission for listing of the shares of the company has
not been applied or s u c h p e r m i s s i o n h a v i n g b e e n a p p l i e d f o r , h a s n o t
b e e n g r a n t e d , t h e company shall forthwith repay without interest all monies
received from the applicants in pursuance of the prospectus, and, if any such
money is not repaid within eight days after the company becomes liable to repay,
the company and every director of the company who is an officer in
d e f a u l t s h a l l , o n a n d f r o m t h e e x p i r y o f t h e e i g h t h d a y, b e j o i n t l y a n d
severely liable to repay that money with interest at such rate, not less than four per cent
and not more than fifteen per cent, as may be prescribed, having regard to the length
of the period of delay in making the repayment of such money.

3. Unlimited liability: D i r e c t o r s w i l l a l s o b e h e l d p e r s o n a l l y l i a b l e t o t h e
t h i r d parties where their liability is made unlimited in pursuance of section
322(i.e., v i d e M e m o r a n d u m ) o r s e c t i o n 3 2 3 ( i . e . , v i d e a l t e r a t i o n s o f
Memorandum by passing special resolution). By virtue of section 322,
t h e M e m o r a n d u m o f company may make the liability of any or all directors, or manager
unlimited. In t h a t c a s e , t h e d i r e c t o r s , m a n a g e r a n d t h e m e m b e r w h o
p r o p o s e s a p e r s o n f o r appointment as director or manager must add to the proposal for
appointment as a statement that the liability of the per son holding the office will
be unlimited. Notice in writing to the effect that the liability of the person will
be unlimited must be given to him by the following or one of the following
persons, namely: t h e p r o m o t e r s , t h e d i r e c t o r s , m a n a g e r a n d o f f i c e r s o f
t h e c o m p a n y b e f o r e h e accepts the appointment. Further, in case of limited liability

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Company, the company may, if authorized by t h e a r t i c l e s , b y p a s s i n g r e s o l u t i o n
a l t e r i t s M e m o r a n d u m s o a s t o r e n d e r t h e liability of its directors or of any
director or manager unlimited. But the alteration making the liability of director or directors
or manager unlimited will be effective only if the concerned officer consents to his liability
being made unlimited.

__________________________________________________________________________________

15. KEY MANAGERIAL PERSONNEL UNDER NEW PROVISIONS OF


COMPANIES ACT, 2013

___________________________________________________________________________
Companies Act, 2013 (Act) has introduced many new concepts and Key Managerial
Personnel is one of them. While the Companies Act, 1956 recognized only Managing
Director, Whole Time Director and Manager as the Managerial Personnel, the Companies
Act, 2013 has brought in the concept of Key Managerial Personnel which not only covers the
traditional roles of managing director and whole time director but also includes some
functional figure heads like Chief Financial Officer and Chief Executive Officer etc. These
inclusions are in line with the global trends. “Company Secretary” has also been brought
within the ambit of Key Managerial Personnel giving them the long deserved recognition of a
Key Managerial Personnel of the Company. Another noteworthy feature of this concept is
that it combines the important management roles as a team or a cluster rather than as
independent individuals performing their duties in isolation to others.

In the current write up, we have explored this concept of Key Managerial Personnel as put
forth in the Companies Act, 2013 read with the relevant rules made there under.

WHO IS A KEY MANAGERIAL PERSONNEL?

The definition of the term Key Managerial Personnel is contained in Section 2(51) of the
Companies Act, 2013. The said Section states as under:

“key managerial personnel”, in relation to a company, means—

(i) the Chief Executive Officer or the managing director or the manager;

(ii) the company secretary;

(iii) the whole-time director;

(iv) the Chief Financial Officer; and

(v) such other officer as may be prescribed;

The above definition is an exhaustive definition but point number (v) gives the power to the
legislature to include some other personnel also within the definition of Key Managerial
Personnel as may be deemed fit by them from time to time. As of now, no further
prescription has been made pursuant to point number (v) and therefore, as on date, the
definition is confined to the six personnel mentioned above.

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Let us now proceed to understand how these six personnel are defined under the Act.

The above definitions depict that in the case of CEO and CFO, the designation is crucial to
deem the person as CEO and CFO whereas in the case of MD and Manager the functions

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discharged or the role performed by an individual is taken as the test to deem them as the MD
or Manager. The definition of whole time director is an inclusive definition and CS is defined
to mean a CS as per the Company Secretaries Act, 1980who is duly appointed to perform the
functions of a company secretary.

WHICH COMPANIES ARE MANDATORILY REQUIRED TO APPOINT KEY


MANAGERIAL PERSONNEL

As per Section 203 of the Companies Act, 2013 read with the Companies (Appointment and
Remuneration of Managerial Personnel) Rules, 2014, the following class of Companies,
namely

 Every listed company, and


 Every other public company having paid up share capital of Rs. 10 Crores or more

shall have the following whole-time key managerial personnel,—

(i) Managing Director, or Chief Executive Officer or manager and in their absence, a whole-
time director;

(ii) Company secretary; and

(iii) Chief Financial Officer

Further, as per recently notified Rule 8A of the Companies (Appointment and Remuneration
of Managerial Personnel) Rules, 2014, a company other than a company which is required to
appoint a whole time key managerial personnel as discussed above and which is having paid
up share capital of Rs. 5 Crores or more shall have a whole time Company Secretary.

Manner of Appointment of Key Managerial Personnel

 Every whole-time key managerial personnel of a company shall be appointed by


means of a resolution of the Board containing the terms and conditions of the
appointment including the remuneration.

 If the office of any whole-time key managerial personnel is vacated, the resulting
vacancy shall be filled-up by the Board at a meeting of the Board within a period of 6

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months from the date of such vacancy.

RESTRICTIONS REGARDING APPOINTMENT OF KEY MANAGERIAL


PERSONNEL:

 Same person not to act as Chairman and MD/CEO

It has been provided under the Act that the role or designation of Chairman and Managing
Director or Chairman and Chief Executive Officer should not be assigned to the same person.
In other words, the same person should not act as both Chairman and Managing Director or
Chief Executive Officer of the Company.

However, in the following circumstances, the above restriction will not apply:

(a) the articles of the company contain provision for appointment of same person, or

(b) the company carries only a single business, or

(c) the company is engaged in multiple businesses and has appointed one or more
Chief Executive Officers for each such business as may be notified by the Central
Government

 Whole time KMP not to hold office in more than one company

It has been provided under the Act that a whole-time key managerial personnel shall not hold
office in more than one company at the same time, except:

(i) In the company’s subsidiary company,

(ii) As a director in any other company with the permission of the Board

(iii) As a MD, if he is the managing director or manager of one and of not more than
one other company and such appointment or employment is made or approved by a resolution
passed at a meeting of the Board with the consent of all the directors present at the meeting
and of which meeting, and of the resolution to be moved thereat, specific notice has been
given to all the directors then in India.

Further, it has also been provided that a whole-time key managerial personnel holding office
in more than one company at the same time on the date of commencement of this Act, shall,
within a period of 6 months from such commencement, choose one company, in which he
wishes to continue to hold the office of key managerial personnel.

OTHER PROVISIONS REGARDING KMP

 A KMP is included within the meaning of “Officer in Default” under the Act.

 A document or proceeding requiring authentication by a company; or contracts made


by or on behalf of a company, may be signed by any key managerial personnel or an
officer of the company duly authorized by the Board in this behalf.

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 Details regarding KMP, changes therein and the remuneration paid to them are
required to be disclosed in the Annual Return of the Company.

 Explanatory statement should disclose the nature of concern or interest, financial or


otherwise, of every key managerial personnel, in respect of each items of special
business to be transacted at a general meeting.

 A person whose relative is employed as a KMP in a company is disqualified to be


appointed as auditor in that company.

 A person is disqualified to be appointed as an independent director if he either himself


or through his relative holds or has held the position of a key managerial personnel of
the company or its holding, subsidiary or associate company in any of the 3 financial
years immediately preceding the financial year in which he is proposed to be
appointed.

 Company is required to maintain a register of the KMPs at its registered office


containing particulars which shall include the details of securities held by each of
them in the company or its holding, subsidiary, subsidiary of company’s holding
company or associate companies.

 A return of every appointment and change in KMP has to be filed with the ROC
within 30 days of the appointment or the change as the case may be.

 The key managerial personnel shall have a right to be heard in the meetings of the
Audit Committee when it considers the auditor’s report but shall not have the right to
vote.

 The remuneration policy of the KMP is to be recommended by the Nomination and


Remuneration Committee who should ensure that the policy involves a balance
between fixed and incentive pay reflecting short and long-term performance
objectives appropriate to the working of the company and its goals. Such policy shall
be disclosed in the Board’s report.

 Every key managerial personnel shall, within a period of 30 days of his appointment,
or relinquishment of his office, as the case may be, disclose to the company the
particulars specified in sub-section (1) of section 184 relating to his concern or
interest in the other associations which are required to be included in the register
under that sub-section or such other information relating to himself as may be
prescribed.

 Key Managerial Personnel are prohibited to make forward dealings and insider
trading in securities of the company.

 Financial statements of a company are required to be signed either by the Chairperson


of the company (where he is authorized by the Board) or by two directors out of
which one shall be managing director and the Chief Executive Officer, if he is a
director in the company, the Chief Financial Officer and the company secretary of the
company, wherever they are appointed.

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PENALTY FOR CONTRAVENTION

Fine which shall not be less than Rs. 1,00,000/-


On Company:
but which may extend to Rs. 5,00,000/-
Fine which may extend to Rs. 50,000/- and
On every director and key where the contravention is a continuing one, with
managerial personnel of the a further fine which may extend to Rs. 1,000/-
company who is in default for every day after the first during which the
contravention continues.

APPOINTMENT OF MANAGING DIRECTOR AND MANAGER

Managing Director is Key Managerial Personal of utmost importance. He is face of a


company and its decision-making mechanism. A person gain significant advantages as
Managing Director which may not be there, in case of his appointment as Manager or Chief
Executive Officer. While Chief Executive Officer has no special advantage except his
clubbing as Key Managerial Personnel with Manager and Managing Director, Manager has
some. Their definitions speak themselves. Appointment of Managing Director, Whole – Time
Director and Manager is governed by provision of Section 196 of the Bill. They all are a
different class of Key Managerial Personnel and has specific provision of appointment in
addition of Section 203, discussed under companies act, 2013.

APPOINTMENT OF MANAGING DIRECTOR, WHOLE – TIME DIRECTOR OR


MANAGER (SECTION 196):

A company can appoint either Managing Director or Manager not both. {Sub – section (1)}

Appointment of Managing Director, Whole – Time Director or Manager shall only be for a
term which must be less than five years. However, the company may re-appointment them for
next term before expiry of their present term but not earlier than one year before expiry of the
term. This means, company may re-appoint them for next term in last one year of current
term. {Sub – section (2)}.

The minimum age for appointment for these positions is twenty – one years and normal
retirement age is seventy years. Words used in this Section are “shall appoint or continue the
employment of”. A company may appoint a person on these positions, who has attained the
age of seventy years. Where it is proposed to appoint a person who has attained aged of
seventy years, an explanatory statement justifying such appointment shall be annexed to the
notice for motion of appointment. {Sub – section (3)}

Appointee should not be an un-discharged insolvent nor has any time been adjudged as an
insolvent. Appointee has not any time suspended payment to his creditors or has made a
composition with them. Appointee should not be a convict of an offence and sentenced for a
period of more than six months. {Sub – section (3)}

Board of Directors in its meeting shall appoint Managing Director, Whole Time Director or
Manager, subject to the approval of the company in its next General Meeting. This
appointment should be in accordance with provision of Section 197 and Schedule V. Where,

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such appointment is at variance to the conditions specified in the schedule, this appointment
shall also be subject to the approval of the Central Government. {Sub – section (3)}

The Notice convening Board or General Meeting for such appointment shall include terms
and conditions of such appointment, remuneration payable and other matter including
interests of directors in such appointment. {Sub – section (4)}

A return of such appointment shall be filed within sixty days of such appointment. {Sub –
section (4)}

Provisions of this Section 196 are applicable to all companies; while, provisions of next
Section 197 which deals with Managerial remuneration are to public companies.

There is a little difference in appointment of Manager, Managing Director or Whole – Time


Director, which reflect from definition clause. While drafting agreement and resolution for
such appointment, one should take care of respective definition. These positions solely
depend upon drafting of appointment documents not only on the designation mentioned in
these documents.

MANAGERIAL REMUNERATION (SECTION 197, 198):

There is no restriction relating to managerial remuneration for a private company. {Section


197(1)}

Total managerial remuneration payable by a public company to its directors (including


Managing Director and Whole Time Director) and Manager in a financial year shall not
exceed eleven percent of net profit of the company. Manner of calculation is given in Section
198. {Section 197(1)}

Any remuneration exceeding 11% of net profit limit may be payable subject to compliance of
conditions given in Schedule V. In case these requirements of Schedule are not fulfilled, such
remuneration will be subject to the approval of Central Government. {First Proviso to Section
197(1)}

The remuneration of any one Managing Director or Whole Time Director or Manager shall
not exceed 5% of net profit. Where, there is more than one Managing Director or Whole
Time Director, the overall limit is 10% of net profit. The remuneration may exceed this limit
only after approval by company in general meeting and after satisfying the conditions given
in this Section and Schedule V. {Second Proviso to Section 197(1)}

The remuneration to other directors shall not exceed 3% of net profit, where there is no
Managing Director, Whole – Time Director or Manager. In any other case, remuneration
shall not exceed 1% of net profit. {Second Proviso to Section 197(1)}

The percentage as mentioned in sub – section (1) shall be exclusive of remuneration


popularly known as sitting fee. {Section 197(2)}

Net profit for this section shall be computed as per method given in Section 198. {Section
197(8)}

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In case of no profit or inadequate profit, the company shall pay remuneration to directors,
Managing Directors, Whole Time Directors and Managers in accordance with Schedule V or
with previous approval of Central Government. {Section 197(3)} {Section 197(11)}

The remuneration payable to any director shall be determined either by articles of the
company or by resolution or by special resolution passed by the company where its articles
required for special resolution. The remuneration payable to directors shall be inclusive of all
remuneration payable to him for services rendered by him in any other capacity except
services rendered are of professional in nature and in opinion of Nomination and
Remuneration Committee or of Board of Directors as the case may be, director has requisite
qualification for practice of profession. {Section 197(4)}

A Director may receive remuneration by way of fee for attending meetings of the Board or
committee thereof. The amount of such remuneration shall not exceed the amount prescribed
by the Government. {Section 197(5)}

Remuneration of Director or Manager may be paid monthly payment or otherwise by way of


specified percentage of profit or partly by one and partly by other way. {Section 197(6)}

An Independent Director shall not be entitled of any stock option. Independent Director may
receive fee as per sub – section (5), reimbursement of expenses and profit related commission
as approved by members (in general meeting). {Section 197(7)}

If any director receives directly or indirectly by way of remuneration any sum in excess of
prescribed limit, he shall refund such sum. Until refund, he will keep this sum in trust for the
company. {Section 197(9)}

Without Central Government permission, the company shall not waive recovery of any such
sum. {Section 197(10)}

Every listed company shall disclose ration of remuneration of each director to the median
employees’ remuneration and such other details as prescribed. {Section 197(12)}

Premium paid for “Kay Managerial Personnel Liability Insurance” shall not be included to
the remuneration of any key managerial personnel. However, if such person found guilty,
such premium shall be treated as part of their remuneration. {Section 197(13)}

Any director, receiving commission from the company and Managing Director or Whole
Time Director may receive any remuneration or commission from holding company or
subsidiary company. This information shall be disclosed by company in the Board’s Report.
{Section 197(14)}.

DIFFERENCE BETWEEN MANAGING DIRECTOR AND MANAGER:

DIRECTORS MANAGERS
It is the board of directors who must provide
It is the role of managers to
the intrinsic leadership and direction at the
Leadership carry through the strategy
top of the organization; establish and
on behalf of the directors.
maintain its vision, mission and values
Decision making Directors are required to determine the future Managers are concerned

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of the organization, its strategy and structure with implementing the
and protect its assets and reputation. They decisions and the policies
also need to consider how their decisions made by the board.
relate to ‘stakeholders’ and the regulatory
framework. Stakeholders are generally seen
to be the company’s shareholders, creditors,
employees, customers, and increasingly, a
community in which it operates.
Directors, not managers, have the ultimate
responsibility for the long-term prosperity of
the company. Directors are required in law to
apply skill and care in exercising their duty to
Managers have far fewer
the company and are subject to fiduciary
legal responsibilities. See
Duties and duties. If they are in breach of their duties or
Factsheet “What are the
responsibilities act improperly, directors may be made
duties, responsibilities and
personally liable in both civil and criminal
liabilities of directors?”
law. On occasion, directors can be held
responsible for acts of the company.
Directors also owe certain duties to the
stakeholders of the company as listed above.
Directors are accountable to the shareholders
and other stakeholders for the company’s
Managers are usually
performance and can be removed from office
appointed and dismissed
Relationship by them or the shareholders can pass a
by directors or
with special resolution requiring the directors to
management and do not
shareholders act in a particular way. Directors act as
have any legal requirement
“fiduciaries” of the shareholders and should
to be held to account.
act in the best interests of the company (as a
separate legal entity).
Directors have a key role in the determination Managers must enact the
of the values and ethical position of the ethos,
Ethics and
company.
values
Taking their direction from
the board.
Summary

As company is artificial person and unable to does any act itself. Therefore some
persons are required to act on behalf of it. Usually they are the legal representative of the
shareholders appointed in the general meeting called Board of Directors and collectively they
called ‘Board’. They works as a brain and ensures to the shareholders to act for their benefits
and for the company and not for their personal benefits and if the found guilty for such act
shall be liable for fine and imprisonment also.

Powers and duties of the directors go hand in hand and they are authorized to exercise
only those powers mentioned in the memorandum and articles. For example if the director
wants to sell whole or substantial portion they must obtain the consent of the shareholders.
The directors must not be malafide and not to work for their personal benefits otherwise they
will face the legal consequences in form of fine and imprisonment.

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There are various new provision has been inserted under new companies act, 2013
like women director, small shareholder’s directors, independent director, whole time director
and meeting through video conferencing etc. As meeting through video conferencing need
not present personally at meeting venue but through the electronic it can be participated.

A person who is willing to act as an director must obtain Director Identification


Number (DIN). Without obtaining it person cannot dream to become and act as a director. As
per new laws quorum has changed according to numbers of members discussed earlier in the
chapter. A director cannot hold the position as director more than fifteen companies (15).
Concisely the director is all in company and played a different role like agent, managing
partners and trustee etc. to increase the economic value of company and wealth of
shareholders.

Check your progress

Exercise-I

Fill inthe blanks with right words in following statements: in the blanks with using
following words: Abide, Women, Dead lock, Organ, Till, Notice, DIN.

1. The Board of Director is the top administrative----- of the company.

2. Directors as an agent must conduct the business with reasonable care and diligence and-----
by the memorandum and articles.

3. Every listed company having paid up share capital Rs. 100 crores or more and turnovers of
Rs. 300 crores or more must appoint at least one----- director.

4. First Director shall hold the position------ the first annual general meeting.

5. A person cannot become director until he not acquire-----.

6. Resignation takes effect from the date on which the----- is received by the company.

7. When the directors are unable or not willing to act called-------.

Answer: (1) Organ (2) abide (3) women (4) Till (5) DIN (6) Notice (7) Deadlock

Exercise-ii

Put tick on the correct word from following:

1. Director is a person who managing the activities of:

(A) Firm

(B) Limited Liability Company

(C) Company

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(D) Proprietorship

2. Whole Time Director of the company is:

(A) Officer

(D) Servant

(C) Trustee

(D) Mere employee

3. Women Director is required to appoint in every listed company paid up Share


capital and turnover is:

(A) 200 and 400 crores

(B) 300 and 500 crores

(C) 100 and 300 crores

(D) 500 and 1,000 crores

4. A director can hold the position as director not more than:

(A) 5 companies

(B) 10 Companies

(C) 15 Companies

(D) 20 Companies

5. A Director may be remove from company even before expiry of tenure provided a
notice given to him before:

(A) 7 Days

(B) 14 Days

(C) 21 Days

(D) 30 Days

Answer: 1. (C) 2. (D) 3. (C) 4. (C) 5. (D)

Exercise-iii

True and False Statements:

1. Director works as a brain in the company.

2. Legal positions of director in the company is not like trustee.

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3. Academic qualification not mention in the law about appointment of director.

4. Director must not delegate any of the powers to some other person.

5. Unanimous consent of shareholders are required where assets of the company’s sale.

6. Director cannot be removed from his positions before expiry of the tenure.

7. Whole Time Director is just like simple employee.

8. M.D has more substantial powers than manager.

Answer: True-1, 3, 4, 5, 7, 8 False- 2, 6

Test Questions

1. Define the term director. Explain his legal position in company.

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2. State the qualification and disqualification of director for appointment.

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3. Can the directors of a company be removed during the terms of office?

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4. What are the powers which the board of directors cannot exercise without unanimous
consent?

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5. How the small shareholders may appoint the director in company?

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___________________________________________________________________________

6. (A) Distinguish between Managing Director and Whole Time Director. Is there any
significance difference in their power?

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(B) Distinction Managing Director and Manager

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7. A director can always be held liable for breach of his fiduciary duties. Explain with
examples.

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8. Only members can be appointed directors of a company. Comment on it.

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LESSON: 2

MEETINGS OF SHAREHOLDERS AND BOARD

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BASIC OUTLINE OF CHAPTER
__________________________________________________________________________________

1. Introduction
2. Kinds of Meetings-(A) Statutory Meeting (B) Annual General Meeting

(C) Extraordinary Meeting (D) Class Meeting

3. Requisites of valid meeting


4. Proxies
5. Quorum
6. Postal Ballot
7. Meeting through video conferencing
8. Rules to be observed while conducting the proceeding of the Board Meeting
9. Rules to be observed after the conclusion of the meeting mainly relating to the minutes of
the meeting
10. Circulation of Resolution
11. Electronic Voting

Understanding of concept:

1. Get familiar with concept meeting


2. Knowing the objectives of conducting different kinds of meetings in the company
3. Knowing the role chairman while conducting meeting
4. Examine the validity of resolution passed through postal ballot
5. Learning how the meeting conducting through video conferencing

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6. Develop clarity about e-voting

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1.INTRODUCTION
___________________________________________________________________________

A shareholders' meeting can be either ordinary or extraordinary. According to the By-Laws,


the ordinary shareholders' meeting of our Company will resolve on matters that are within its
power as set out by applicable laws and regulations and the By-laws itself. In particular, the
shareholders in an ordinary shareholders' meeting have the power to resolve on the following
matters:

(i) Approval of the financial statement and the distribution of profits;

(ii) Election and removal of the directors, election of the statutory auditors, as well as of
the external auditor;

(iii) Compensation of directors and statutory auditors

(iv) Determination of the liability of directors and statutory auditors; ;

(v) the purchase of its own shares for an amount not exceeding disposable profits and
distributable reserves as resulting from the last annual balance sheet duly approved and, in
any case, within the limit of 10% of the issued share capital at the time of the relevant
shareholders meeting;

(vi) The approval of the regulations, for the conduct of shareholders’ meeting;

(vii) Any other matters reserved to it by applicable laws and regulations as well as any
authorization required under the By-laws or by applicable laws and regulations for the
performance of directors’ actions.

According to the new companies’ laws, the shareholders in an extraordinary shareholders'


meeting have the power to resolve on the following matters:

(a) any amendment to the By-Laws;

(b) the appointment and replacement of the liquidators and the determination of their
powers;

(c) any other matters reserved to shareholders in an extraordinary shareholders’


meeting by Italian law, or laws and regulations applicable to companies whose shares
are listed on the Hong Kong Stock Exchange.

The fact of being a shareholder in itself constitutes the approval of each shareholder to be
bound by the by-laws.
The ordinary and extraordinary shareholders’ meeting will normally be held in the
municipality where the registered office of our Company is located, except as otherwise
resolved by the board of directors, and provided always that such meetings will be held in

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Italy or in country where our Company, directly or indirectly through its subsidiaries or
affiliates, carries out its business activities.
The ordinary shareholders’ meeting must be convened at least once a year for the approval of
the financial statements, within 120 days after the end of the financial year, or within 180
days after the end of the financial year if our Company is required to draw up consolidated
financial statements or is required by the particular circumstances related to the structure and
purpose of our Company. Not more than 15 months elapse between the date of one such
ordinary shareholders’ general meeting and the next.

Board to meet once in every three months

In the case of every company, a meeting of its Board of directors shall be held at least once
every three months and at least four such meetings must be held every year.

Notice of meetings:
Notice of every meeting of the Board of directors of a company shall be given in writing to
every director for the time being in India, and at his usual address in India to every other
director.

Every officer of the company whose duty it is to give notice as aforesaid and who fails to do
so shall be punishable with fine which may extend to one hundred rupees.

Quorum for meetings:

The quorum for a meeting of the Board of directors of a company shall be one-third of its
total strength (any fraction contained in that one-third being rounded off as one), or two
Directors, whichever is higher.

Provided that where at any time the number of interested directors exceeds or is equal to two-
thirds of the total strength, the number of the remaining directors, that is to say, the number of
the directors who are not interested, present at the meeting being not less than 2 shall be the
quorum during such time.

Interested director means any director whose presence cannot, by reason of his being
interested in some manner in the subject matter of discussion be counted for the purpose of
forming a quorum at a meeting of the Board, at the time of the discussion or vote on any
matter.

Procedures where the meeting adjourned for want of quorum:

If a 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 next week of same
day at same time and same place or if that day is holiday, till the next succeeding day which
is not a public holiday, at same place and time.
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2. KINDS OF COMPANY MEETINGS:
___________________________________________________________________________

Broadly, meetings in a company are of the following types:-

(A) Statutory Meeting

(B) Annual General Meeting

(C) Extraordinary Meeting

(D) Class Meeting

The detailed study of above meeting has been discussed as under:

(A) Statutory Meeting

A public company limited by shares or a guarantee company having share capital is required
to hold a statutory meeting. Such a statutory meeting is held only once in the lifetime of the
company. Such a meeting must be held within a period of not less than one month or within a
period not more than six months from the date on which it is entitled to commence business
i.e. it obtains certificate of commencement of business. It is just orientation type meeting in
which members of the company become familiar with the assets and liabilities. A notice at
least 21 days before must be convey to members and shorter notice also be given if the
members entitled to vote accorded their consent

Board of Director must prepare and send to every member a report called statutoty report
before at least 21 days on which the meeting is to be held. The prepare report must be
certified at least two directors that is correct in all respect and certified by the auditor also.

If the provisions are not complying every director and officer of the company shall be
punishable with fine which not less than rupees 500.

Contents of Statutory Report: The report must provide the following particular:

(a) Total number of shares allotted

(b) Total cash received against the securities issued

(c) An abstract of receipt and payment account

(d) Any commission or discount paid on issue of shares or sale of shares

(e) any other specified matters.

The auditors have to certify all the information regarding calls and allotment of shares are
correct.

(B) Annual General Meeting

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According to companies act, 2013 section 96(1) every company must hold a meeting at the
end of calendar year. This most important meeting of the members because the overall
progress of the is reviewing. But sometimes we called it only ordinary meeting because
‘ordinary business’ matters are discussed there.

The following ordinary business are transacted at annual general meeting of company:

(i) Declaration of dividends

(ii) Consideration of financial records and two reports namely board report and auditor report

(iii) Appointment of directors in place of retiring director and

(iv) Appointment of auditor and fixation his remuneration by the board.

But it is necessary to note that in case of one person company is not required to hold annual
general meeting. The logic is simple because there is only one person in the company.

Some other statutory requirements complying:

The companies act impose the following obligation upon every company whether private or
public regarding annual general meeting:

(i) The first annual general meeting of the company must be held with in 9 months from the
date of registration of company and there is not any extended period given by the Registrar
[sec. 96(1)].

(ii) Subsequent annual general meeting must be held within 6 months from the end of each
financial year.

(iii) The annual general meeting must be held during working hours (9 to 6 pm) at the
registered office or any other place decided by the Board members in same city.

(iv) At least 21 days clear notice must be given to every concerned member in writing or
electronic mode but shorter notice is also allowed if 95% of majority of members having
voting powers agreed to call meeting.

(v) A copy of Director Reports audited financial statement and auditor’s report must be
annexed to every such notice (sec.136(1)].

Default in holding the annual general company default general meeting: If a company fails to
conduct meeting within prescribed time the Tribunal may direct to hold meeting in company.
Further the company and every officer who is in default is liable for fine which may extended
to rupees 1 lakh and in case of continue default rupees 5,000 for every day during such
default.

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(C) Extraordinary General Meeting

All the general meeting other than the statutory and annual general meeting is called
extraordinary general meeting. Regulation 42 of ‘Table F’ is applicable according to bye-
laws.

The main objective hold this meeting to passed some special resolution because company
cannot wait till the annual general meeting. Change memorandum and articles, reduction in
share capital and buy back of own securities are the basic agenda to call such meeting.

Who may call such meeting?

The following are the authorize person to call this meeting:

1. By the Board of Directors: The Board of Director may call such meeting because they are
authorizing person and called it by passing resolution [sec 100(1)].

2. By the board on requisition: The board may also convene such meeting on requisition
means on written demand of members holding 10 percent of total voting powers. It must be
signed by the requisition and deposit at the registered office of the company. Then the
director shall convey a 21 days’ notice to members and held the meeting within 45 days from
the date of deposit of requisition [sec. 100(2)].

3. By the requisitionists themselves: If the director fails to call the meeting within
aforementioned time limit, the requisitionists themselves convene the meeting in within 90
days from the date of deposit the requisition at registered office of the company. The
reasonable expenses incurred by the requisitionists, company must repaid to them
[sec.100(4)].

4. By the Tribunal (sec. 98): If the company due to some impracticable reason not to call the
extraordinary meeting then the Tribunal may its own motion direct the company to convene
in the meeting.

Class Meeting:

A meeting which is held by a special class of shareholders in the company to defend or


enforce their right in the company is called class meeting. Sometimes the Board of Director
takes some decision in the company which affect the rights of a particular class whether
preference or equity shareholders then they comes together and held meeting to protect their
rights from the malafide acts of the directors. It is not necessary that meeting held only in the
registered office of the company. It may be held any convenient place decided by the
shareholders. But before convening this meeting a formal notice must convey to concerned
class of shares.

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3. REQUISITES OF A VALID MEETING

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The following conditions must be satisfied for a meeting to be called a valid meeting:

1. It must be convened by the proper authority (Board of Directors).

2. Proper and adequate notice must be given to all the members entitled to vote ( 21
days clear notice).

3. Contents of notice must specify in the notice (place, day and time) including
agenda.

4. Requisite quorum must be present at the meeting place to conduct it. Basically in
case of private company 2 members and in case of public company 5 but now as per new
companies act, 2013 quorum has changed according to numbers of members. Where the
members is up to 1,000-----5 members personally present and where members is more than
1,000 but less than 5,000-----15 members and lastly if the members is more than 5,000------
30 members must be present personally for transacting the legal business binding to the
company.

5. Adjourned meeting: Adjourned meeting must be held in same day, same time and
same place in next week from the date of adjourned meeting.

6. Proper chairman. The chairman must be present to preside over the proceeding of
the meeting. But if the chair person is not present within 15 minutes from the time appointed
then Board of Directors may elect any person as chair person who will preside over the
meeting.

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4. PROXIES

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In case of a company having a share capital and in the case of any other company, if the
articles so authorize, any member of a company entitled to attend and vote at a meeting of the
company shall be entitled to appoint another person (whether a member or not) as his proxy
to attend and vote instead of himself. Every notice calling a meeting of the company must
contain a statement that a member entitled to attend and vote is entitled to appoint one proxy
in the case of a private company and one or more proxies in the case of a public company and
that the proxy need not be member of the company.

A member may appoint another person to attend and vote at a meeting on his behalf. Such
other person is known as "Proxy". A member may appoint one or more proxies to vote in
respect of the different shares held by him, or he may appoint one or more proxies in the
alternative, so that if the first named proxy fails to vote, the second one may do so, and so on.

The member appointing a proxy must deposit with the company a proxy form at the time of
the meeting or prior to it giving details of the proxy appointed. However, any provision in the
articles which requires a period longer than forty eight hours before the meeting for

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depositing with the company any proxy form appointing a proxy, shall have the effect as if a
period of 48 hours had been specified in such provision.

A company cannot issue an invitation at its expense asking any member to appoint a
particular person as proxy. If the company does so, every officer in default shall be liable to
fine up to Rs1, 000. But if a proxy form is sent at the request of a member, the officer shall
not be liable. Every member entitled to vote at a meeting of the company, during the period
beginning 24 hours before the date fixed for the meeting and ending with the conclusion of
the meeting may inspect proxy forms at any time during business hours by giving 3 days
notice to the company of his intention to do so.

The proxy form must be in writing and be signed by the member or his authorized attorney
duly authorized in writing or if the appointer is a company, the proxy form must be under its
seal or be signed by an officer or an attorney duly authorized by it.

The proxy can be revoked by the member at any time, and is automatically revoked by the
death or insolvency of the member. The member may revoke the proxy by voting himself
before the proxy has voted, but once the proxy has exercised the vote; the member cannot
retract his vote. Where two proxy forms by the same shareholder are lodged in respect of the
same votes, the last proxy form will be treated as the correct proxy form.

A proxy is not entitled to vote except on a poll. Therefore, a proxy cannot vote on show of
hands.

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5. QUORUM

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Quorum refers to the minimum number of members who must be present at a meeting in
order to constitute a valid meeting. A meeting without the minimum quorum is invalid and
decisions taken at such a meeting are not binding. The articles of a company may provide for
a quorum without which a meeting will be construed to be invalid. Unless the articles of a
company provide for larger quorum, 5 members personally present (not by proxy) in the case
of a public company and 2 members personally present (not by proxy) in the case of a private
company shall be the quorum for a general meeting of a company. But now according to New
Companies Act, 2013 quorum has changed according to the number of members:

(A) In case of public company, the quorum shall be-

(i) If the members are less than 1000----5 members

(ii) If the members are more than 1000 but upto 5,000-----15 members

(iii) If the members are more than 5,000-----30 members.

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It has been held by Courts that unless the articles otherwise provide, a quorum need to be
present only when the meeting commenced, and it was immaterial that there was no quorum
at the time when the vote was taken. Further, unless the articles otherwise provide, if within
half an hour from the time appointed for holding a meeting of the company, a quorum is not
present in the person, the meeting :-

if called upon the requisition of members shall stand dissolved;


in any other case, it shall stand adjourned to the same day in the next week, at the same
time and place, or to such other day and time as the Board of Directors may determine.
If at the adjourned meeting also, the quorum is not present within half an hour from the time
appointed for holding the meeting, the members present shall a quorum.

In case the Company Law Board calls or directs the calling of a meeting of the company,
when default is made in holding an annual general meeting, the government may give
directions regarding the quorum including a direction that even one member of the company
present in person, or by proxy shall be deemed to constitute a meeting. Similarly the
Company Law Board may, direct a meeting of the company (other than an annual general
meeting) to be called and held where for any reason it is impracticable to call a meeting and
direct that even one member present in person or by proxy shall be deemed to constitute a
meeting.

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6. POSTAL BALLOT

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Postal Ballot under Companies Act,2013

Section 110 of the Companies Act,2013 and Rule 22 of the Companies (Management and
Administration ) Rules,2014 deals with Postal Ballot.

Postal Ballot – Business:

A company shall transact the following business only by means of Postal Ballot;

Section Description
Alteration of the objects clause of the memorandum and in the
case of the company in existence immediately before the
13
commencement of the Act, alteration of the main objects of the
memorandum
Alteration of articles of association in relation to insertion or
2 (68) removal of provisions which are required to be included in the
articles of a company in order to constitute it a private company
Change in place of registered office outside the local limits of any
12(5)
city, town or village.
13(8) Change in objects for which a company has raised money from

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public through prospectus and still has any unutilized amount out
of the money so raised
Issue of shares with differential rights as to voting or dividend or
43(a)(ii)
otherwise
Variation in the rights attached to a class of shares or debentures
48
or other securities
68(1) Buy-back of shares by a company
151 Election of a director
Sale of the whole or substantially the whole of an undertaking of
180(1)(a)
a company
Giving loans or extending guarantee or providing security in
186(3)
excess of the limit

A company may transact any other business by postal ballot instead of transacting at a
general meeting except:

 ordinary business and


 any business in respect of which directors or auditors have a right to be heard at any
meeting.

If a resolution is assented to by the requisite majority of the shareholders by means of


postal ballot, it shall be deemed to have been duly passed at a general meeting convened
in that behalf.

Procedure to be followed for conducting Postal Ballot:

Notice to Shareholders: Where a company is required or decides to pass any resolution by


way of postal ballot, it shall send a notice to all the shareholders, along with a draft resolution
explaining the reasons there for and requesting them to send their assent or dissent in writing
on a postal ballot because postal ballot means voting by post or through electronic means
within a period of 30 days from the date of dispatch of the notice.

Mode of dispatch: The notice shall be sent either:

 by Registered Post or speed post, or


 through electronic means like registered e-mail id or
 through courier service for facilitating the communication of the assent or dissent of
the shareholder to the resolution within the said period of thirty days.

Place notice on website: The notice of the postal ballot shall also be placed on the website of
the company forthwith after the notice is sent to the members and such notice shall remain on
such website till the last date for receipt of the postal ballots from the members.

Appoint Scrutinizer: The Board of directors shall appoint one scrutinizer, who is not in
employment of the company and who, in the opinion of the Board can conduct the postal
ballot voting process in a fair and transparent manner.

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Obligation of Scrutinizer:

 The scrutinizer shall be willing to be appointed and be available for the purpose of
ascertaining the requisite majority.
 Postal ballot received back from the shareholders shall be kept in the safe custody of
the scrutinizer and after the receipt of assent or dissent of the shareholder in writing
on a postal ballot, no person shall deface or destroy the ballot paper or declare the
identity of the shareholder
 The scrutinizer shall submit his report as soon as possible after the last date of receipt
of postal ballots but not later than seven days thereof
 The scrutinizer shall maintain a register either manually or electronically to record
their assent or dissent received, mentioning the particulars of name, address, folio
number or client ID of the shareholder, number of shares held by them, nominal value
of such shares, whether the shares have differential voting rights, if any, details of
postal ballots which are received in defaced or mutilated form and postal ballot forms
which are invalid.
 The postal ballot and all other papers relating to postal ballot including voting by
electronic means, shall be under the safe custody of the scrutinizer till the chairman
considers, approves and signs the minutes and thereafter, the scrutinizer shall return
the ballot papers and other related papers or register to the company who shall
preserve such ballot papers and other related papers or register safely.
 The assent or dissent received after thirty days from the date of issue of notice
shall be treated as if reply from the member has not been received.
 The results shall be declared by placing it, along with the scrutinizer’s report, on
the website of the company.

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7. MEETING THROUGH VIDEO CONFERENCING

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The Companies Act, 1956 gave the flexibility to the Board to pass the required resolutions
either through Board Meetings or through circular resolutions in case of emergency. But
Passing Circular Resolution had its own draw backs. Circular resolutions cannot be
considered as Board meeting per se while calculating the no of meetings to be held in year.
Besides certain provisions of the Companies Act, 1956 insist that the resolutions have to be
passed in a duly convened Board Meeting.

In recent times, the Information Technology made it viable to have all kinds of meetings
through Video Conferencing is it personal or business. A meeting through Video
conferencing has shrunk the World and has made it look smaller than ever before. Now
throughout the world, everybody is approachable at the click of the mouse. Realizing this fact
and keeping in pace with the new technology, the Ministry of Corporate Affairs gave a push
under the Companies Act, 1956 to conduct Board Meetings through video conferencing vide
its notification bearing no.28/11 dated 28.5.2011.

Under the new Companies Act, 2013, the Government has attempted to bring in more
regulations by notifying a set of rules to be observed for conducting Board Meetings through
Video Conferencing. The Government has for the first time used through Sections 173 and
174 the words ‘Board Meeting through Video Conferencing and other audio visual means’.

147
The new rules announced by the Government for conducting Board Meetings through video
conferencing though covering all aspects of ‘Meetings through Video Conferencing’ lack
cohesiveness. Following provisions must comply before convening meeting through video
conferencing:

GENERAL RULES TO BE OBSERVED FOR CONDUCTING A BOARD MEETING


THROUGH VIDEO CONFERENCING

Before contemplating to conduct a Board meeting through Video Conferencing, the


management should adhere to the following general rules governing the conduct of such
meeting:

(1) The Company should ensure that there is an effective video or audio-visual connection. If
the broadband signals are weak, it would result in poor Audio and Video communication. An
agitated Board member could even take up the matter to Court and invalidate the poorly
recorded meeting.

(2) The Chairman/ Secretary shall take due and reasonable care –

(a) to safeguard the integrity of the meeting by ensuring sufficient security and identification
procedures. (The Rules itself lays down identification procedure through roll call and there is
wonder why there should be one more separate point in the rule for ensuring sufficient
security and identification procedure.)

(b) to ensure availability of proper video conferencing or other audio visual equipment or
facilities for providing transmission of the communications for effective participation of the
directors and other authorized participants at the Board meeting;

(c) to record proceedings and prepare the minutes of the meeting;

(d) to store for safekeeping and marking the tape recording(s) or other electronic recording
mechanism as part of the records of the company at least before the time of completion of
audit of that particular year. The recorded proceedings could be erased once the audit for the
particular financial year is over.

(e) to ensure that no person other than the concerned director are attending the Meeting or
have access to the proceedings of the meeting through video conferencing mode or other
audio visual means. (Though the rules allow that a person apart from the Director to be
present in the venue where the Board Meeting is held, it prohibits any third person to be with
an individual director except a disabled Director who could bring in an Assistant to be with
him while participating in the meeting.)

(f) to ensure that participants attending the meeting through audio visual means are able to
hear and see the other participants clearly during the course of the meeting.

148
(g) The notice of the meeting shall be sent to all the directors in accordance with the
provisions of sub-section (3) of section 173 of the Act.

(h) The notice of the meeting shall inform the directors regarding the option available to them
to participate through video conferencing mode or other audio visual means, and shall
provide all the necessary information to enable the directors to participate through video
conferencing mode or other audio visual means.

(i) The director intending to participate through video conferencing or other audio visual
means shall give prior intimation to that effect sufficiently in advance so that company is able
to make suitable arrangements in this behalf.

(j) The scheduled venue of the Board meeting should be in a place situated in India and all
recordings of the proceedings at the meeting shall be deemed to have been made only in that
place mentioned in the Notice.

(k) The statutory registers which are required to be placed in the Board meeting as per the
provisions of the Act shall be placed at the scheduled venue of the meeting and where such
registers are required to be signed by the directors, the same shall be deemed to have been
signed by the directors participating through electronic mode, if they have given their consent
to this effect and it is so recorded in the minutes of the meeting.

(l) From the commencement of the meeting and until the conclusion of such meeting, no
person other than the Chairperson, Directors, Company Secretary and any other person whose
presence is required by the Board shall be allowed access to the place where any director is
attending the meeting either physically or through video conferencing without the permission
of the Board.

(m) “Video conferencing or other audio visual means” has been explained as Audio- Visual
electronic communication facility employed which enables all the persons participating in a
meeting to communicate concurrently with each other without an intermediary and to
participate effectively in the meeting.

SPECIFIC RULES FOR THE INDIVIDUAL DIRECTOR WHO INTENDS TO


PARTICIPATE IN THE BOARD MEETING THROUGH VIDEO CONFERENCING

(a) A director intending to participate through video conferencing or audio visual means shall
communicate his intention to the Chairman/ Company Secretary of the Company.

(b) If the director intends to participate through video conferencing or other audio visual
means, he shall give prior intimation to that effect sufficiently in advance so that company is
able to make suitable arrangements in this behalf.

(c) The director, who desiring to participate may intimate his intention of participation
through the electronic mode at the beginning of the calendar year and such declaration shall

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be valid for one calendar year. (In the absence of any intimation it shall be assumed that the
director shall attend the meeting in person.)

MATTERS THAT ARE PROHIBITED IN A BOARD MEETING CONDUCTED


THROUGH VIDEO CONFERNCING:

By virtue of powers granted to Section 173(2) of the Companies Act, 2013, the Central
Government has prescribed that following matters not to be dealt in a Board Meeting though
Video Conferencing or through Audio Visual Means at least for the time being. The
Government may add some more items in the list over a period of time.

(i)the approval of the Annual Financial Statements;


(ii)the approval of the Board’s report;
(iii)the approval of the prospectus;
(iv)the Audit Committee Meetings for consideration of Accounts; and
(v) the approval of the matter relating to amalgamation, merger, demerger, acquisition and
takeover.

___________________________________________________________________________

8. RULES TO BE OBSERVED WHILE CONDUCTING THE PROCEEDINGS OF


THE BOARD MEETING:

__________________________________________________________________________

STEP1
A roll call should be taken at the commencement of the meeting by the Chairman/Secretary
of the Company. A roll call is nothing but calling out the name of each Director, the location
from where he is participating, confirming whether he has received the Agenda copy and the
relevant material for the meeting and also confirming that no one other than the Director is
participating or having access to the Meeting’s proceedings at the location where is presently
attending.

STEP 2

The Chairman/Secretary shall then read out the names of persons (other than the Directors
who are present at the meeting) to assist/guide/witness the proceedings of the Meeting the
Board. (A Non Director could attend at the request/permission of the Chairman.)

STEP 3

The Chairman/Secretary shall confirm that the required quorum is present throughout the
meeting.
(The rule says that a director participating either in person or through video conferencing or
other audio visual means shall be counted for the purpose of quorum. However none of the
Directors either present personally or through video conferencing or other audio visual means
shall be counted for the purpose of quorum for such item of business where his name should
be excluded for the purpose of quorum under any of the provisions of the Act or the rules).

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This is in line with Section 300 of the Old Companies Act, 1956 maintaining disinterested
quorum.)

STEP 4

Each item of business should be taken up one by one as per the Agenda specified in the
Notice.

Every participant shall identify himself for the record before speaking on each item of
business on the agenda.

If a statement of a director in the meeting is interrupted or garbled, the Chairperson or


Company Secretary shall request for a repeat or reiteration by the Director.

If a motion is objected to and there is a need to put it to vote, the Chairman shall call the roll
that is to say that he shall first announce that he shall be doing the roll call and call out the
name of each director who shall identify himself while casting his vote and the Chairman
shall then note the vote of each director.

The Chairman shall then announce the summary of the decision taken on such item along
with names of the directors, if any, who dissented from the decision taken by majority.

___________________________________________________________________________

9. RULES TO BE OBSERVED AFTER THE CONCLUSION OF THE MEETING


MAINLY RELATING TO THE MINUTES OF THE MEETING:

__________________________________________________________________________

(i) After completion of the meeting, the minutes shall be entered in the minute book as
specified under section 118 of the Act and signed by the Chairman.

(ii) The minutes shall disclose the particulars of the directors who attended the meeting
through video conferencing or other audio visual means.

(iii) The draft minutes of the meeting shall be circulated among all the directors within fifteen
days of the meeting either in writing or in electronic mode, which includes fax or e-mail, as
may be decided by the Board.

(iv) Every director who attended the meeting, whether personally or through video
conferencing or other audio visual means, shall confirm or give his comments in writing,
about the accuracy of recording of the proceedings of that particular meeting in the draft
minutes, within seven days or some reasonable time as decided by the Board, after receipt of
the draft minutes failing which his approval shall be presumed.

(v) Finally the minutes shall be entered in the minute book as specified under section 118 of
the Act and signed by the Chairman

___________________________________________________________________________

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10. CIRCULAR RESOLUTIONS:

__________________________________________________________________________

A. Section 175 lays down the following criteria for passing resolution by circulation:

(i) The draft resolution should be circulated to all the Directors or the members of the
committee together with the necessary papers if any for their perusal.
(ii) The said documents could be sent to the local Indian address registered with the Company
and the same be either hand delivered or sent by post or by courier.

(iii) The said documents could be sent through any electronic mode as prescribed by the
Government.

(iv) The circular resolution should be approved by majority of the Directors or the members
who are entitled to vote at the resolution.

(v) The circular resolution should be noted by the Board in the subsequent Board Meeting or
by the members in the subsequent committee Meeting thereof and it shall be made as a part
of the minutes of that meeting.

B. Circular resolution shall not be passed under the following circumstances:

(i) Certain provisions of the Act specifically lays down that certain matters shall be dealt with
only in a duly convened Board Meeting.

(ii) One third of the total no of Directors could insist that an intended circular resolution
should be dealt only in a duly convened Board Meeting.

___________________________________________________________________________
11. ELECTRONIC VOTING (E-Voting)

__________________________________________________________________________

Electronic voting (e-voting) is a term encircling several different types of voting,


implementing both electronic means of casting a vote and electronic means of counting votes.

Electronic voting technology can include punched cards, optical scan voting systems and
specialized voting kiosks (including self-contained direct-recording electronic voting
systems, or DRE). It can also involve transmission of ballots and votes via telephones, private
computer networks, or the Internet.

In general, two main types of e-Voting can be identified:

 e-voting which is physically supervised by representatives of governmental or


independent electoral authorities (e.g. electronic voting machines located at polling
stations);
 remote e-Voting where voting is performed within the voter’s sole influence, and is
not physically supervised by representatives of governmental authorities (e.g. voting
from one’s personal computer, mobile phone, television via the internet)

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Shareholders of a Company have been expressing their assent or dissent for the resolutions
requiring their approval by way of voting. It is impossible for the shareholders of the
company to be present physically for every general meeting, so “Passing of Resolutions by
Postal Ballot” under section 192A was introduced in the Companies Act, 1956 along with
The Companies (Passing of the Resolution by Postal Ballot) Rules, 2001.

Now the Companies Act,2013 has introduced new provision, voting through electronic
means under Section 108 read with Companies (Management and Administration)
Rules, 2014.

Voting through electronic means.-

(1) Every listed company or a company having not less than one thousand shareholders
shall provide to its members facility to exercise their right to vote at general meetings by
electronic means.

(2) A member may exercise his right to vote at any general meeting by electronic means and
company may pass any resolution by electronic voting system in accordance with the
provisions of this rule.

“voting by electronic means’’ or ‘‘electronic voting system’’ means a ‘secured system’


based process of display of electronic ballots, recording of votes of the members and the
number of votes polled in favour or against, such that the entire voting exercised by way of
electronic means gets registered and counted in an electronic registry in a centralized server
with adequate ‘cyber security’;

‘‘secured system’’ means computer hardware, software, and procedure that –

(a) Are reasonably secure from unauthorized access and misuse;

(b) Provide a reasonable level of reliability and correct operation;

(c) Are reasonably suited to performing the intended functions; and

(d) Adhere to generally accepted security procedures.

“Cyber security” means protecting information, equipment, devices, computer, computer


resource, communication device and information stored therein from unauthorised access,
use, disclosures, disruption, modification or destruction.

Procedure to be followed by the Company:

A company which opts to provide the facility to its members to exercise their votes at any
general meeting by electronic voting system shall follow the following procedure, namely;

(i) the notices of the meeting shall be sent to all the members, auditors of the company, or
directors either –

(a) by registered post or speed post ; or

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(b) through electronic means like registered e-mail id;

(c) through courier service;

(ii) the notice shall also be placed on the website of the company, if any and of the agency
forthwith after it is sent to the members;

(iii) the notice of the meeting shall clearly mention that the business may be transacted
through electronic voting system and the company is providing facility for voting by
electronic means;

(iv) the notice shall clearly indicate the process and manner for voting by electronic means
and the time schedule including the time period during which the votes may be cast and shall
also provide the login ID and create a facility for generating password and for keeping
security and casting of vote in a secure manner;

(v) the company shall cause an advertisement to be published, not less than five days before
the date of beginning of the voting period, at least once in a vernacular newspaper in the
principal vernacular language of the district in which the registered office of the company
is situated, and having a wide circulation in that district, and at least once in English
language in an English newspaper having a wide circulation in that district, about having
sent the notice of the meeting and specifying therein, inter alia, the following matters,
namely:-

(a) statement that the business may be transacted by e- voting;

(b) the date of completion of sending of notices;

(c) the date and time of commencement of voting through electronic means;

(d) the date and time of end of voting through electronic means;

(e) the statement that voting shall not be allowed beyond the said date and time;

(f) website address of the company and agency, if any, where notice of the meeting is
displayed

(g) contact details of the person responsible to address the grievances connected with the
electronic voting;

(vi) the e-voting shall remain open for not less than one day and not more than three
days.

In all such cases, such voting period shall be completed three days prior to the date of the
general meeting.

(vii) during the e-voting period, shareholders of the company, holding shares either in
physical form or in dematerialized form, as on the record date, may cast their vote
electronically.

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Once the vote on a resolution is cast by the shareholder, he shall not be allowed to change
it subsequently.

(viii) at the end of the voting period, the portal where votes are cast shall forthwith be
blocked.

(ix) the Board of directors shall appoint one scrutinizer, who may be chartered Accountant
in practice, Cost Accountant in practice, or Company Secretary in practice or an
advocate, but not in employment of the company and is a person of repute who, in the
opinion of the Board can scrutinize the e-voting process in a fair and transparent manner.

The scrutinizer so appointed may take assistance of a person who is not in employment of
the company and who is well-versed with the e-voting system.

(x) the scrutinizer shall be willing to be appointed and be available for the purpose of
ascertaining the requisite majority;

(xi) the scrutinizer shall, within a period of not exceeding three working days from the
date of conclusion of e-voting period, unblock the votes in the presence of at least two
witnesses not in the employment of the company and make a scrutinizer’s report of the
votes cast in favour or against, if any, forthwith to the Chairman;

(xii) the scrutinizer shall maintain a register either manually or electronically to record the
assent or dissent, received, mentioning the particulars of name, address, folio number or
client ID of the shareholders, number of shares held by them, nominal value of such shares
and whether the shares have differential voting rights;

(xiii) the register and all other papers relating to electronic voting shall remain in the safe
custody of the scrutinizer until the chairman considers, approves and signs the minutes and
thereafter, the scrutinizer shall return the register and other related papers to the company.

(xiv) the results declared along with the scrutinizer’s report shall placed on the website of
the company and on the website of the agency within two days of passing of the resolution
at the relevant general meeting of members;

(xv) subject to receipt of sufficient votes, the resolution shall be deemed to be passed on the
date of the relevant general meeting of members

Summary

A meeting is a place where all the members of the company comes together with the
Board members and review the progress or discuss any agenda or issue concerning with
company. But holding the company any general meeting for passing any resolution whether
any ordinary or special required proper quorum otherwise meeting not be convened by the
members. Thus for want of quorum is most required and the proper authority i.e. Board of
Directors also be available at the meeting place.

Generally there are three meeting namely Statutory, Annual General and
Extraordinary held in the company. Statutory meeting is just orientation type meeting in
which the members acquainted with the assets and liabilities and charge over them. Annual

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general meeting held at the end of the financial years to review and discuss the overall
progress of the company and declaration of the dividend for the shareholders. Extraordinary
meeting also call by the Board to pass some special class of business like change in capital,
alteration in memorandum and articles and buy back of shares. But it should be remembered
that special majority is most required (75% of total members).

Apart from above mentioned meeting, a meeting is held by a special class of


shareholders which is called ‘class meeting’ whenever the rights of any particular class of
shareholders are affected due the act of directors and promoters or any other officers. It is not
necessary that the meeting must held at the registered office of the company but it may be
convene any other place decided by the shareholders.

Sometimes a resolution is passed through the postal ballot. Postal ballot is a system
where the draft resolution sends to all the concerned members through registered post or
electronic modes at the registered address of the members. Members after read out reply in
written whether they are in the favour of that resolution or not. For evaluation of received
reply a scrutinizer is appointed to draw a result.

In many occasion it is not possible for the members to participate in the meeting. So if
articles authorize he may appoint a proxy. A proxy is a person who participates in meeting on
behalf of the members but it is required filled proxy form request at least 48 hours before
meeting but it is revocable. Proxy cannot speak in the meeting and separate proxy is required
to attend different meeting.

Concisely meeting is venue where the issues concerning with company settle down
through passing the meeting. But different meeting are held for different agenda.

Check your progress:

Exercise-i

Fill in the blanks with right words in given following statements: Quorum, Register,
Special, Class, Tribunal, Speak

1. Extraordinary meeting held to discuss-----business.

2. In addition to AGM and EGM one meeting is convene in the company called-----
meeting.

3. Minimum presences of number of members called-----.

4. One person shall constitute the quorum if it is called by-----for the welfare of
company.

5. Proxy does not have right to------in the meeting.

6. Shareholders need not to-----for e-voting.

Answer-1. (Special) 2. (Class) 3. (Quorum) 4. (Tribunal) 5. (Speak) 6. (Register)

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Exercise-ii

Put tick on correct answer from following.

1. How many types of general meetings are held in the company?

(A) 1

(B) 2

(C) 3

(D) 4

2. Gap between two annual general meetings must be:

(A) 10 Months

(B) 12 Months

(C) 15 Months

(D) 18 Months

3. Clear notice to call annual general meetings must be:

(A) 14 Days

(B) 21 Days

(C) 30 Days

(D) 45 Days

4. First annual general meeting must be held in the company within:

(A) 6 Months

(B) 9 Months

(C) 12 Months

(D) 15 Months

5. A meeting may be held even with shorter notice if the members entitled to vote
agreed at least:

(A) 50 Percent

(B) 60 Percent

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(C) 75 Percent

(D) 95 Percent

6. In case of public company if the members are less than 1000 the quorum (minimum
members present) shall be:

(A) 2 Members

(B) 5 Members

(C) 7 Members

(D) 10 Members

Answer- 1.(B) 2. (C) 3. (B) 4. (B) 5. (D) 6. (B)

True or False statements

1. Statutory meeting must be held during the life of company.

2. Annual General Meeting is held to review the overall progress of the company
during a year.

3.Ordinary business transacted in Extraordinary General Meeting.

4. One person company is not required to hold the AGM.

5. Adjourned meeting may be held any time by the Directors.

6. Resolution passed through postal ballot only through electronic means.

7. E-Voting is the more secure method to pass the resolution than other means.

Answer: True- 1, 2, 4, 7 False-3, 5, 6

Test Questions

1. State the provisions of the Companies regarding holding of an Annual General Meeting.
What are the consequences of default in holding an AGM?

___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________

2. What do you mean by Extra Ordinary Meeting? Who can call this meeting?

158
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________

3. Discuss the requisites of a valid general meeting as per the companies act, 2013.

___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________

4. Explain the procedure passing resolution through postal ballot.

___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________

5. What are the objectives of holding Annual General Meeting?

___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________

6. What matters are restricted to discussed through video conferencing?

___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________

7. Write a short note on E-Voting.

___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________

159
UNIT-IV

Miscellaneous Provisions

160
LESSON: 1

BOOKS OF ACCOUNTS AND REGISTER

___________________________________________________________________________
BASIC OUTLINE OF CHAPTER

__________________________________________________________________________

1. Introduction to concept

2. Books of Accounts

3. Financial Statement

4. National Financial Reporting Authority (Sec. 32)

5. Annual Return

6. Statutory Books and Register

___________________________________________________________________________
1.OBJECTIVES
___________________________________________________________________________

1. Getting knowledge about the proper maintenance of books of accounts

2. Enhancing knowledge to go through the new emerging concept

3. Familiar with filing annual return to registrar

4. Knowledge about the penalty in case of non-compliance of provisions

___________________________________________________________________________
2. BOOKS OF ACCOUNTS

_________________________________________________________________________

Introduction to concept:

As per companies act 2013, it is mandatory to prepare and keeps proper books of accounts
relating to its transactions which gives proper disclosure of its true and financial positions and
published for the internal and external users. This significant information help to potential
investors to decide whether they should invest in that particular company or not and internal
users also chalked the further future plan with help of these available information.

Books of Accounts:

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Basically companies’ act 2013 does mention anything expressly about what kind of books of
account need to maintain. Section 2(12) defines the books of papers and includes also books
of accounts, deeds, vouchers, documents, writing, minutes book and register maintain on
paper or in e-form.

Section 2(13) expressly defines the books of accounts and includes records maintained in
respect of:

(i) all sums of money received and expended by a company and the matters in respect
of which the receipt and expenditures takes place;
(ii) all sales and purchase of goods and services by the company;
(iii) assets and liabilities of the company; and
(iv) any item relating to cost record under section 148 of this act which belong to any
class of companies specified under this section.
Section 128(1) of this act laid the provision that every company must maintain the
proper books of accounts with respect to matters specified above and other relevant books
and papers, and these can be kept in electronic mode. It is clear that books of accounts must
be kept in registered office of the company and if the company having branch kept at the
branch office and summarized returns periodically send to company’s registered office. But it
may be noted that if Board of Directors have decided to any other place than registered office
with seven days notice must be filed with registrar from the date of such decision

Period of preservation of books of accounts


It is mandatory for every company to keep the record preserve for eight years period in goods
conditions as whenever its required may use for the same. If central govt. has ordered of
investigation period may be longer as it may deemed fit for the public welfare (Sec. 210).

Inspection of books of accounts by interested party


Section 128(3) contains the provisions of proper books of accounts, books and papers, shall
be open for inspection by any director during the working hours and if financial information
maintained outside of India then copies of such financial information shall be available to
director and in case subsidiary company inspection only may be done by the authorize person
by way of passing resolution of BOD.

Penalty for non compliance of provisions:


The responsibility has been laid upon the director, whole time director in charge of finance,
managing director, chief financial officer or any other person of a company to whom the duty
has been assigned by the board of director to complying the prescribed provisions of this
section and if the provisions contravene, such person shall be punishable with imprisonment
for a term which may extended to one year or with the fine which shall not be less than
rupees 50,000 but which may be extended to rupees five lakhs.
___________________________________________________________________________
3. FINANCIAL STATEMENT
_________________________________________________________________________

162
Financial Statement in relation to a company includes:
(i) a balance sheet at the end of the financial years;
(ii) a profit and loss account , or in the case of a company carrying on any activity not for
profit, an income and expenditure account for the financial year;
(iii) cash flow statement of changes in equity , if applicable; and
(iv) any explanatory note annexed to, or forming part of, any document reffered to in the
above clause.
It should be noted that the financial statement, with respect to one Person Company, small
company and dormant company, may not include the cash flow statement. Briefly financial
statement means balance sheet and statement of profit and loss account of a company and the
provisions concerning to financial statement has been laid down under section 129 are as
follows:
(i) The financial statement gives true and fair view of the financial position of the company.
(ii) Financial must comply the accounting standard and in case of any deviation from the
prescribed standard the company must disclosed in its financial statements and also specify
the reason for such deviation.
(iii) The financial must be in the forms set out in Schedule III of the Companies Act. But this
provision does not apply to banking company, insurance company and some other class of
companies.
(iv) In every financial years meeting the Board of Directors must ensured and disclosed that
the uniform provision enacted under companies act, 2013 has been comply.
(v) In case having subsidiary company the parent company must prepare the consolidate
financial statement.
(vi) The Central Govt. may its own motion exempt a class or classes of companies to prepare
of financial settlement.
Penalty for non –compliance: If company contravene the above stated provisions, the
managing director, whole time director, chief finance officer or any person authorized shall
be punishable with fine and in the absence of any concerned in charge officer, all the board of
director shall be punishable with fine which shall not be less than rupees 50,000 but which
may be extended up to rupees 5 lakh and also may punishable with imprisonment for a term
which may be extended to 1 year.
___________________________________________________________________________
4. NATIONAL FINANCIAL REPORTING AUTHORITY (SEC. 132)
___________________________________________________________________________

The Central Govt. may by notification, constitute a National Financial Reporting Authority
(NFRA) to provide for the manners relating to accounting and auditing standards. The
following functions are carried by the Authority as:
(a) Give recommendation to the Central Govt. to make regulation for making accounting and
auditing policies and standards which will be adopted by the companies;

163
(b) To monitor and enforce the compliance with accounting and auditing standards in such a
manner prescribed:
(c) To oversee the quality of service of the professional like CA etc;
(d) To perform such other functions relating above mention clauses (a), (b) and (c).
The NFRA is to consist of such numbers of members possessing such qualifications and
appointed on such terms and conditions as have been specified in sub section (2) of this
section 132 of this act.
The head office of the NFRA shall be at New Delhi and it may be meet any other place in
India as it they deemed fit.
The NFRA shall have the power to investigate the matters of Professionals or other
misconduct committed by any member or firm of Chartered Accountants. But it should be
noted that no other institute or body shall proceed any matter or case if N FRA has already
has taken the initiative to proceed against the person committed misconduct.
Appeal against the orders of NFRA: The section provides that if any person aggrieved with
order of NFRA may file appeal against the order of NFRA before Appellate Authority
constituted by the Central Govt. for hearing appeal of the aggrieved party.

Financial Statement comprising two parts:


Part-A: Authentication of financial statement etc.-The financial statement including
consolidated financial statements shall be authenticated by the board of directors by signing
before submission to auditor and conveying to chairperson. In case of one Person Company
only one director shall sign to authenticate.
Part-B-Board’s Report or Director’s Report:
Board report is the authentic and useful information to the shareholders and other interested
parties like creditors, employee govt. agencies etc. It must be attach with the financial
statements.
Penalty for non-compliance: If a company contravene the provisions of this section, the
company shall be punishable with fine which shall not be less than rupees 50,000 but which
may be extended to rupees 25 lakh and every officer who is default shall be punishable with
fine which shall not be less than rupees 50,000 and extended to rupees 25 lakh and also
punishable with imprisonment for the terms of 2 years.
Copies of the financial audited statement must be sent to the members with in 21 days
before annual general meeting. Not only members even trustee, debenture holders and to
auditor also. The Central Govt. may prescribe the manner of circulation of financial statement
of the companies having net worth and turnovers as may be prescribed.
Filing of financial statements etc. to Registrar (sec. 137): A copy of financial statement
including consolidated financial statements must be filed to the registrar within 30 days from
the closure of financial year. In case of one Person Company it must be filed to registrar
within 180 days from the colure of financial years.

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___________________________________________________________________________
5. ANNUAL RETURN:
___________________________________________________________________________

As per section 92 of this act every company is required to prepare an annual return in the
prescribed form containing the particular as they specify in close of financial year regarding
the following:
(i) Name of company;
(ii) Its registered office and principal activities carried on by it;
(iii) Its shares, debentures and other securities
(iv) Its indebtedness
(v)Its members and debenture holders and changes theirin since the close of the previous
financial years;
(vi) Its promoters, directors, KMP and any changes therein;
(vii) Meetings of the members;
(viii) Remuneration of directors and key managerial personnel;
(ix) Any other matters as may be prescribed.
Signing of annual return: The annual return must be signed by the company secretary, or
where there is no company secretary then director of the company.
Filing annual return to Registrar: Every company shall file the annual return with the registrar
of companies a copy of annual return within 60 days from the date on which the annual
general meeting is held.
___________________________________________________________________________
6. STATUTORY BOOKS AND REGISTERS
___________________________________________________________________________

According to new companies act, 2013 it is mandatory for all the companies to maintain
proper books of accounts and register at the register office of the company. Following list of
register which is the statutory obligation of the company to maintain as:
1. Register of investments made by the company but not held in its own name (e.g., where a
company hold shares in a wholly owned subsidiary company in the name of its nominee) as
per section 187(3)
2. Register of charge, under section 85
3. Register of members, under section 88.
4. Register of debenture holders, under section 88.
5. Register of any other security-holder under section 88.

165
6. Foreign Register of members and debenture holder and other security holder residing
outside of India under section 88.
7. Minutes Books, under section 118.
8. Books of Accounts, under section 128.
9. Register of Contracts with companies and firms in which the directors of the company are
interested, under section 189.
10. Register of Directors and key managerial personnel and their shareholding under section
186(9).
11. Register of Loans and Investments etc., made by the company in other companies under
section 186(9).
12. Books of Accounts to be kept by company liquidator in winding up by Tribunal under
section 293.

Summary
Every company incorporate companies act shall prepare its books of accounts according to
prescribed rules and provisions and in case of default company and authorize person held
responsible for that punishable with fine and imprisonment. Books are containing the detailed
of transactions of receipt and payment account and income and expenditure account including
assets and liabilities.
The basic purpose of maintenance and maintaining the books to know the true and fair view
of the financial position of the company and the company is capable to set out the further
plan for the future period.
All the books of accounts maintained must be kept safely at the registered office of the
company as whenever it is required it can be used as an evidence. If the board of directors has
decided to kept any other places it must be file a notice to registrar within 7 days from such
place determined.
Financial statements are mandatory to prepare on the basis of books os accounts maintained
like balance sheet, profit and loss accounts etc. because these statements shows the true and
fair view of the financial statement of the company. To watch and monitor the activities of
the company Central Govt. has established a body called National Financial Reporting
Authority. It should be noted that in case of not satisfaction of the order of the NFRA an
aggrieved person may file the appeal to the Appellate Authority.
Besides above mention books and accounts annual return must be prepare and file to registrar
and in case of default, the concerned person shall be punishable with fine extent to rupees 5
lakh.

Check your progress:


Exercise-i
Fill the right words in the following statement with given words: Accounting
standard, Appellate Authority, Books, Monitor, inspect

166
1. Every company must prepare proper--------of accounts relating with financial
transaction.
2. Every authorize person is entitled to---------the books of accounts.
3. The financial statement must comply the--------.
4. National Financial Reporting Authority is appointed by the Central Govt. to---------
- the activities of the companies.
5. Against the order of NFRA appeal may file to---------constituted by the Central
Govt.
Answer-1. (Books) 2. (Inspect) 3. (Auditing standard) 4. (Monitor) 5. (Appellate Authority)

Exercise-ii
Tick the right option from the following:
1. Period of preservation of proper books of accounts is:
(A) 2 Years
(B) 5 years
(C) 8 Years
(D) 10 Years
2. In case non-compliance of provisions of maintenance of books of accounts the
maximum fine imposed on authorized person is:
(A) 1 Lakh
(B) 2 Lakh
(C) 5 Lakh
(D) 10 Lakh
3. An authority is constituted by the Central Govt. to make recommendation and
policy for the accounting standard is called:
(A) RBI
(B) SEBI
(C) NFRA
(D) Companies Act
4. The head office of the NFRA is situated at:
(A) Pune
(B) Mumbai

167
(C) Delhi
(D) Chennai
5. Copy of audited financial statement must be file to registrar with:
(A) 14 Days
(B) 21 Days
(C) 30 Days
(D) 60 Days
Answer-1. (C) 2. (C) 3. (C) 4. (C) 5. (B)

Exercise-iii
True or false statements-
1. The financial statement must be in the form set out in schedule III of the
Companies Act.
2. The auditor’s report is not required to attach with financial statement.
3. A copy of financial statement must be filed to registrar within 30 days from the
closure of financial year.
4. Annual return only signed by the secretary of the company.
5. In case of one person company financial statement shall be sign by only one
director.
Answer- True-(1, 3, 5) False-(2, 4)

Test questions:
1. What are the statutory requirements as regard the maintenance of accounts under
companies act?
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________

2. Explain the Provisions relating with financial statement.


___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________

168
3. What are the provisions regarding National Financial Reporting Authority?
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________

4. State the provisions of the companies act,2013 regarding Annual Return.


___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________

5. Write a note on companies register.


___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________

6. What is financial Statements?


___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________

169
LESSON:2
ONLINE FILLING DOCUMENTS
________________________________________________________________________
BASIC OUTLINE OF CHAPTER
___________________________________________________________________________
1. Introduction
2. Services will be available under the MCA 21 Project
3 The process of e-filing works as discussed below:
3.1. Download a blank e-form from the MCA 21 portal.
3.2. Fill the online form properly that is free and widely available.
3.3. Digitally sign the form by one or more signatories.
3.4. Submit the e-form for processing to the MCA portal.
3.5. Payment to complete the transaction through internet banking or authorized bank branch.
4. Companies Act, 2013 provides the provisions for e-governance for various processes
which requires to complying as:
4.1 There is option to keep books of accounts in e-form;
4.2 Proper maintenance and inspection of records in e-form;
4.3 Conducting meeting through video conferencing;
4.4 Voting through e-voting;
4.5 Publishing financial statements on company’s website; and
4.6 Providing offer to hold the security to security holder in dematerialized form.

OBJECTIVES
1. Getting knowledge about Services will be available under the MCA 21 Project.
2. Knowing the provisions enacted under the process of e-filing works.
3. Getting knowledge about Digitally sign the form by one or more signatories.
4. Learning the Proper maintenance and inspection of records in e-form.
5. Knowledge about Payment to complete the transaction through internet banking or
authorized bank branch.
__________________________________________________________________________
1. INTRODUCTION
___________________________________________________________________________

170
Due to the limitations of paper based documents the need was felt to introduce the new
system to conduct the business transactions in easy way. It becomes possible only with the
introduction of MCA21 Project where entire work of company law done through the
computers. Every govt. agency and other users have easy access to transform the information
which has brought up transparency in dealing with other made more responsive to the
management towards stakeholders. Therefore MCA21 project mainly comprises of e-filing of
forms and documents required to be filed under the companies act, 2013 with the Registrar of
companies (ROC), Regional Directors and Ministry of Corporate Affairs. Services are being
made easy available to corporate, professionals and public without physically travel to ROC
at their choices place, their home etc.
_________________________________________________________________________
2. SERVICES WILL BE AVAILABLE UNDER THE MCA 21 PROJECT
___________________________________________________________________________

1. Registration and incorporation of companies


2. Filling of various returns and statutory documents under companies act, 2013
3. Registration and verification of charges created.
4. Securing copies of documents like MOA and AOA.
5. Inspection of public documents
6. Total transparency through e-governance.
7. Timely redressal of grievances
Online Filing Documents
Online filing of documents has made possible the filling of company returns by a simple click
on www.mca.gov.in and to make payment of fees by using credit card and internet banking.

The MCA has notified new e-forms under companies act, 2013. These forms are more
suitable e-filing. But only the notified e-forms shall be filed electronically.

171
These new e-forms shall be authenticated by the authorized signatures using digital signature
obtaining from Certifying Authority defined under Information Technology Act, 2000.

Quick Links
1. Prime Minister Office (PMO) shown in the figure above, if you click that it
will open the site of PM INDIA shown below

172
Website for PM India
Quick Line :
1. When You select CLB website the website of Company Law Board will open

Electronic filing documents using digital signatures has become mandatory and online
payment through credit card and internet banking also been provided under these provisions.

173
1. Quick Link : Invest India the above website will open

2. Quick Link : Institute of Chartered Accounts of India


_________________________________________________________________________
3. THE PROCESS OF E-FILING WORKS AS DISCUSSED BELOW
___________________________________________________________________________

1. Download a blank e-form from the MCA 21 portal.


2. Fill the online form properly that is free and widely available.
3. Digitally sign the form by one or more signatories.

174
4. Submit the e-form for processing to the MCA portal.
5. Payment to complete the transaction through internet banking or authorized bank branch.
_________________________________________________________________________
4. COMPANIES ACT, 2013 PROVIDES THE PROVISIONS FOR E-GOVERNANCE
FOR VARIOUS PROCESSES WHICH REQUIRES TO COMPLYING AS
___________________________________________________________________________

(i) There is option to keep books of accounts in e-form;


(ii) Proper maintenance and inspection of records in e-form;
(iii) Conducting meeting through video conferencing;
(iv) Voting through e-voting;
(v) Publishing financial statements on company’s website; and
(vi) Providing offer to hold the security to security holder in dematerialized form.
Concisely speaking MCA 21 project has providing the facility and opportunity to
communicate with ROC and other with the help of MCA portal without physically visit to the
ROC office and become easy to make online payment through credit card etc.

Summary of the chapter

Due to the limitations of paper based documents the need was felt to introduce the new
system to conduct the business transactions in easy way. It becomes possible only with the
introduction of MCA21 Project where entire work of company law done through the
computers. Every govt. agency and other users have easy access to transform the information
which has brought up transparency in dealing with other made more responsive to the
management towards stakeholders. Therefore MCA21 project mainly comprises of e-filing of
forms and documents required to be filed under the companies act, 2013 with the Registrar of
companies (ROC), Regional Directors and Ministry of Corporate Affairs. Services are being
made easy available to corporate, professionals and public without physically travel to ROC
at their choices place, their home etc. The process of e-filing works as discussed below,
Download a blank e-form from the MCA 21 portal, Fill the online form properly that is free
and widely available, Digitally sign the form by one or more signatories, Submit the e-form
for processing to the MCA portal, Payment to complete the transaction through internet
banking or authorized bank branch.

Check your progress

Exercise 1: Fill in the blanks

Due to the ……………of paper based documents the need was felt to introduce the new
system to conduct the business transactions in easy way.

It becomes possible only with the introduction of MCA21 Project where entire work of
company law done………….

175
………………………..and other users have easy access to transform the information which
has brought up transparency in dealing with other made more responsive to the management
towards stakeholders.

Therefore MCA21 project mainly comprises of e-filing of forms and documents required to
be filed under the companies act, 2013 with the Registrar of companies
(ROC),…………………………….

……………………………………, professionals and public without physically travel to


ROC at their choices place, their home etc

Ans (1) limitations (2) through the computers (3) Every government agency (4) Regional
Directors and Ministry of Corporate Affairs (5) Services are being made easy available to
corporate

Exercise 2: True /False

Following options are given please mark false statements only

1. The process of e-filing works as discussed below:


1. Download a blank e-form from the MCA 21 portal.
2. Fill the online form properly that is free and widely available.
3. Digitally sign the form by one or more signatories.
4. Submit the e-form for processing to the MCA portal.
5. Payment to complete the transaction through internet banking or authorized bank
branch.
6. E Commerce
2. Companies Act, 2013 provides the provisions for e-governance for various processes
which requires to complying as:
(i) There is option to keep books of accounts in e-form;
(ii) Proper maintenance and inspection of records in e-form;
(iii) Conducting meeting through video conferencing;
(iv) Voting through e-voting;
(v) Publishing financial statements on company’s website; and
(vi) Providing offer to hold the security to security holder in dematerialized form.
(vii) Online banking
3. MCA21 project mainly comprises of e-filing of forms and documents required to be
filed under the companies act, 2013
1. with the Registrar of companies (ROC),

176
2. Regional Directors and Ministry of Corporate Affairs.
3. Main Campus
Ans 1(6), 2(7), 3(3)
Exercise 3: Mix and Match

(A) (B)
1 of paper based documents the need was felt to limitations introduction of MCA21
introduce the new system to conduct the
business transactions in easy way.

2 Project where entire work of company law Due to the


done through the computers. Every govt.
agency and other users have easy access to
transform the information which has brought
up transparency in dealing with other made
more responsive to the management towards
stakeholders.
3 and documents required to be filed under the process of e-filing
companies act, 2013 with the Registrar of
companies (ROC), Regional Directors and
Ministry of Corporate Affairs.
4 made easy available to corporate, MCA21 project mainly comprises
professionals and public without physically of e-filing of forms
travel to ROC at their choices place, their
home etc.
5 works as discussed below, Download a blank Services are being
e-form from the MCA 21 portal, Fill the
online form properly that is free and widely
available, Digitally sign the form by one or
more signatories, Submit the e-form for
processing to the MCA portal, Payment to
complete the transaction through internet
banking or authorized bank branch.
Ans 1. (2), 2(1), 3(4), 4(5), 5(3)

Exercise 4: Question Answers

4. What are the provisions for e governance?

___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________

5. What are the processes of E-filling?

___________________________________________________________________________
___________________________________________________________________________

177
___________________________________________________________________________
___________________________________________________________________________

6. Voting through e-voting?

___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________

7. Digitally sign the form by one or more signatories

___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________

8. Conducting meeting through video conferencing

___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________

178
LESSON: 3
DIVIDENDS AND ITS LEGAL PROVISIONS
_________________________________________________________________________
1. BASIC OUTLINE OF CHAPTER
___________________________________________________________________________

1. Introduction
2. Legal provisions concerning with dividend
3.Unpaid and Unclaimed Dividends Account (Sec.124) (Sec.205A)
4. Investor Education and Protection Fund (Sec. 125) (Sec. 205C)
_________________________________________________________________________
OBJECTIVES
___________________________________________________________________________

1. Getting knowledge about relevance of dividend


2. Knowing the provisions enacted under new law
3. Getting knowledge about unpaid and unclaimed dividend
4. Learning the circumstances where declared dividend revoked
5. Knowledge about investor education and protection fund for the welfare of the
shareholders.
_________________________________________________________________________
1. INTRODUCTION
__________________________________________________________________________
Dividend is the part of profit distributing among member which is entitled to them formally
declared in the annual general meeting of members. But if there is no profits are made or
nothing available for distribution, there will be no declaration of dividends. It is the implied
power of the Board of Directors to declare dividend which does not require expressly in
memorandum of association or in article of association. Undoubtly it is the absolute rights of
board of directors to recommend the rate of dividend in annual general meeting. It should be
noted that approval of shareholders are most required for recommended such rate but they
cannot compel to directors to increase the rate of dividend.
_________________________________________________________________________
2. LEGAL PROVISIONS CONCERNING WITH DIVIDENDS
__________________________________________________________________________
Legal provisions relating with dividend has been laid down in section 123 and 127 as per
companies act as follow:

179
1. Dividends can be declared and paid out from:: (a) current profit (b) accumulated revenue
profits or (c) money provided by the govt. for the guarantee given in relation to dividends.
2. A fixed percentage of profits transfer to reserve which is manadatory
3. No dividend declared or paid from reserves but paid from general reserves
4. Amount of dividends most be deposit in separate schedule bank accounts within 5 days
from the date of declaration of dividends.
5. No dividends declared on the equity shares.
6. Only dividends to registered shareholders.
7. Dividends shall be paid only in cash through checque or dividend warrant.
8. According to the proportion of each share the dividends shall be paid.
9. Dividends must be paid within 30 days from the date of declaration.
Penalty in case of contravention to pay dividends-If the directors knowingly to makes a
default to pay the dividend shall be punishable with fine at least Rs.1,000 for every day and
imprisonment for 2 years also. Company shall held liable to pay 18% rate of interest to the
shareholder for such delay period.
_________________________________________________________________________
3. UNPAID AND UNCLAIMED DIVIDENDS ACCOUNT (SEC. 124) (SEC. 205A)
__________________________________________________________________________
(1)Where a dividend has been declared by a company but has not been paid or claimed within
thirty days from the date of the declaration to any shareholder entitled to the payment of the
dividend the company shall, within seven days from the date of expiry of the said period of
thirty days, transfer the total amount of dividend which remains unpaid or unclaimed to a
special account to be opened by the company in that behalf in any scheduled bank to be
called the Unpaid Dividend Account.
(2) The company shall, within a period of ninety days of making any transfer of an amount
under sub-section (1) to the Unpaid Dividend Account, prepare a statement amount under
sub-section (1) to the Unpaid Dividend Account, prepare a statement containing the names,
their last known addresses and the unpaid dividend to be paid to each person and place it on
the website of the company, if any, and also on any other website approved by the Central
Government for this purpose, in such form, manner and other particulars as may be
prescribed.

(3) If any default is made in transferring the total amount referred to in sub-section (1) or any
part thereof to the Unpaid Dividend Account of the company, it shall pay, from the date of
such default, interest on so much of the amount as has not been transferred to the said
account, at the rate of twelve per cent per annum and the interest accruing on such amount
shall accrue to the benefit of the members of the company in proportion to the amount
remaining unpaid to them.

180
(4) Any person claiming to be entitled to any money transferred under sub-section (1) to the
Unpaid Dividend Account of the company may apply to the company for payment of the
money claimed (S. 205B).

(5) Any money transferred to the Unpaid Dividend Account of a company in pursuance of
this section which remains unpaid or unclaimed for a period of seven years from the date of
such transfer shall be transferred by the company along with interest accrued, if any, thereon
to the Fund established under sub-section (1) of section 125 and the company shall send a
statement in the prescribed form of the details of such transfer to the authority which
administers the said Fund and that authority shall issue a receipt to the company as evidence
of such transfer.

(6) All shares in respect of which unpaid or unclaimed dividend has been transferred under
sub-section (5) shall also be transferred by the company in the name of Investor Education
and Protection Fund (IEPF) along with a statement containing such details as may be
prescribed: Provided that any claimant of shares transferred above shall be entitled to claim
the transfer of shares from Investor Education and Protection Fund in accordance with such
procedure and on submission of such documents as may be prescribed.

( 7) If a company fails to comply with any of the requirements of this section, the company
shall be punishable with fine which shall not be less than five lakh rupees but which may
extend to twenty-five lakh rupees and every officer of the company who is in default shall be
punishable with fine which shall not be less than one lakh rupees but which may extend to
five lakh rupees. (Company and every officer: Rs. 500 per day (CA 1956): Rs. 5000 per day
CAA. 2000)

_________________________________________________________________________
4. INVESTOR EDUCATION AND PROTECTION FUND (SEC. 125) (SEC. 205C)

_________________________________________________________________________
(1) The Central Government shall establish a Fund to be called the Investor Education and
Protection Fund (herein referred to as the Fund).

(2) There shall be credited to the Fund—

(a) the amount given by the Central Government by way of grants after due
appropriation made by Parliament by law in this behalf for being utilized for the
purposes of the Fund;

(b) donations given to the Fund by the Central Government, State Governments,
companies or any other institution for the purposes of the Fund; companies or any
other institution for the purposes of the Fund;

(c) the amount in the Unpaid Dividend Account of companies transferred to the Fund
under sub-section (5) of section 124;

181
(d) the amount in the general revenue account of the Central Government which had
been transferred to that account under sub-section (5) of section 205A of the
Companies Act, 1956, as it stood immediately before the commencement of the
Companies (Amendment) Act, 1999, and remaining unpaid or unclaimed on the
commencement of this Act;

(e) the amount lying in the Investor Education and Protection Fund under section
205C of the Companies Act, 1956;

(f) the interest or other income received out of investments made from the Fund;

(g) the amount received under sub-section (4) of section 38; (amount received by way
of punishment for impersonation for acquisition, etc., of securities)

(h) the application money received by companies for allotment of any securities and
due for refund;

(i) matured deposits with companies other than banking companies;

(j) matured debentures with companies;

(k) interest accrued on the amounts referred to in clauses (h) to (j);

(l) sale proceeds of fractional shares arising out of issuance of bonus shares, merger
and amalgamation for seven or more years;

(m) redemption amount of preference shares remaining unpaid or unclaimed for seven
or more years; and

(n) such other amount as may be prescribed: Provided that no such amount referred to
in clauses (h) to (j) shall form part of the Fund unless such amount has remained
unclaimed and unpaid for a period of seven years from the date it became due for
payment.

(3) The Fund shall be utilized for—

(a) the refund in respect of unclaimed dividends, matured deposits, matured


debentures, the application money due for refund and interest thereon;

(b) promotion of investors’ education, awareness and protection;

(c) distribution of any disgorged amount among eligible and identifiable applicants
for shares or debentures, shareholders, debenture-holders or depositors who have
suffered losses due to wrong actions by any person, in accordance with the orders
made by the Court which had ordered disgorgement;

(d) reimbursement of legal expenses incurred in pursuing class action suits under
sections 37 and 245 by members, debenture-holders or depositors as may be
sanctioned by the Tribunal; and

182
(e) any other purpose incidental thereto, in accordance with such rules as may be
prescribed: Provided that the person whose amounts referred to in clauses (a) to (d) of
sub- section (2) of section 205C transferred to Investor Education and Protection
Fund, after the expiry of the period of seven years as per provisions of the Companies
Act, 1956, shall be entitled to get refund out of the Fund in respect of such claims in
accordance with rules made under this section.

Explanation.—The disgorged amount refers to the amount received through disgorgement or


disposal of securities.

(4) Any person claiming to be entitled to the amount referred in sub-section (2) may apply to
the authority constituted under sub-section (5) for the payment of the money claimed.

(5) The Central Government shall constitute, by notification, an authority for administration
of the Fund consisting of a chairperson and such other members, not exceeding seven and a
chief executive officer, as the Central Government may appoint.

(6) The manner of administration of the Fund, appointment of chairperson, members and
chief executive officer, holding of meetings of the authority shall be in accordance with such
rules as may be prescribed.

(7) The Central Government may provide to the authority such offices, officers, employees
and other resources in accordance with such rules as may be prescribed.

(8) The authority shall administer the Fund and maintain separate accounts and other relevant
records in relation to the Fund in such form as may be prescribed after consultation with the
Comptroller and Auditor-General of India.

(9) It shall be competent for the authority constituted under sub-section (5) to spend money
out of the Fund for carrying out the objects specified in sub- section (3).

(10) The accounts of the Fund shall be audited by the Comptroller and Auditor-General of
India at such intervals as may be specified by him and such audited accounts together with
the audit report thereon shall be forwarded annually by the authority to the Central
Government. forwarded annually by the authority to the Central Government.

(11) The authority shall prepare in such form and at such time for each financial year as may
be prescribed its annual report giving a full account of its activities during the financial year
and forward a copy thereof to the Central Government and the Central Government shall
cause the annual report and the audit report given by the Comptroller and Auditor-General of
India to be laid before each House of Parliament.

Companies (Declaration and Payment of Dividend) Rules, 2014.( Rule 3 Declaration of


dividend out of reserves)-In the event of adequacy or absence of profits in any year, a
company may declare dividend out of surplus subject to the fulfillment of the following
conditions, namely:-

183
(1) The rate of dividend declared shall not exceed the average of the rates at which dividend
was declared by it in the three (five) years immediately preceding that year: Provided that this
sub-rule shall not apply to a company, which has not declared any dividend in each of the
three preceding financial year.

(2) The total amount to be drawn from such accumulated profits shall not exceed one- tenth
of the sum of its paid-up share capital and free reserves as appearing in the latest tenth of the
sum of its paid-up share capital and free reserves as appearing in the latest audited financial
statement.

(3) The amount so drawn shall first be utilized set off the losses incurred in the financial year
in which dividend is declared before any dividend in respect of equity shares is declared.

(4) The balance of reserves after such withdrawal shall not fall below fifteen per cent of its
paid up share capital as appearing in the latest audited financial statement.

(5) No company shall declare dividend unless carried over previous losses and depreciation
not provided in previous year are set off against profit of the company of the current year the
loss or depreciation, whichever is less, in previous years is set off against the profit of the
company for the year for which dividend is declared or paid.

Rule 4 Statement of amounts to be credited to investor education and protection fund shall be
filed in Form DIV 5.

Summary:

Every person makes some investment in the company expecting some rewards in form of
interest and dividend. Basically dividend is declared for the registered shareholders of the
company.

The dividend is declared by the Board of Directors in annual general meeting. It should be
remembered that once the dividend declared it becomes debts and company compelled to
paid to the shareholders. The shareholders of the company not intervene the declaration of
dividend and not force to declared more than fixed dividend but may make a request to Board
members to reduce some rate fixed by them logic behind this because after paying the outside
liabilities all left for equity shareholders.

The dividend always declared from the current or accumulated profit and must paid within 30
days from the date of declaration. Declared dividend never revoked until the conditions not
beyond the control like dispute among Board members and shareholders and war breakout
etc.

Many time companies declared interim dividend also and it is the part of final dividend. The
provisions applicable on dividend similar provisions applicable on interim dividends also. If
the interim dividend remain unpaid or unclaimed for seven years in the account opened on
the name of company must transfer to Investor Education and Protection Account which is
utilized for public welfare.

184
Concisely dividend is the legal rights of the members but at the time declaration of dividend
financial position of the company must not intact. It is true the heavy declaration dividend
attracts the potential investors and increases the earning per share and market price of shares.

Check your progress:

Exercise-i

Fill the right word in following statements with given word: interim, capital, profit,
debts, separate, registered

1. A dividend is the part of -------which is distributed among shareholders.

2. Once the dividend declared it becomes -------on the company.

3. The dividend which is declared by the directors in two annual general meeting is called-----
-- -dividend

4. Dividend cannot be paid out from-------of the company.

5. Dividend shall be paid to the-------shareholders.

6. The amount of dividend must be deposit in-----schedule bank within 5 days from the date
of declaration.

Answer-1. (Profit) 2. (Debts) 3. Interim 4. (Capital) 5. (Registered) 6. (Separate).

Exercise-ii

Please tick the right option in the following:

1. Declared dividend must be paid within:

A. 15 Days

B. 3O Days

C. 60 Days

D. Not specified

2. Dividend is declared in:

A. General Meeting

B. Statutory meeting

C. Annual general meeting

D. Class meeting

185
3. In case of default made by the company it shall be liable to pay the dividend with
rate of interest:

A. 10 Percent

B. 15 Percent

C. 18 Percent

D. 20 Percent

4. No dividend shall be paid or declared out of:

A. Equity capital

B. Reserve

C. Debt and equity

D. Preference and equity capital

5. If declared dividend remain unpaid and unclaimed it must be transfer it in Investor


Education and Protection Fund Account lying since:

A. 2 Years

B. 5 Years

C. 7 Years

D. 10 Years

Answer: 1. (B) 2. (C) 3. (C) 4. (B) 5. (C)

Exercise-iii

True or false statements:

1. Shareholders consent is not required at the time of declaring the dividends.

2. Dividend may be paid in any kind or form.

3. Dividend cannot paid out of capital.

4. Dividend may be freeze by operation of law.

5. Shareholders can compel to Board of Directors to increase the rate of


declare dividends.

Answer: True-(3, 4) False-(1,2,5)

186
Test Questions:

1. What is dividend? State the legal provisions concerning with dividend.

___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________

2. What do you mean by Interim Dividend? Are there any provisions of interim dividend?

___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________

3. What amounts are required to transfer in Investor Education and Protection Fund?

___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________

4. Dividend once declared cannot be revoked. Are you in favour of this statement?

___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________

5. No dividend can be paid out of capital except profit. Are you agree with this statement?

___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________

187
LESSON : 4

APPOINTMENT, REMUNERATION AND ROTATION OF AUDITOR

1. Introduction
2. Appointment of first auditor
3. Appointment of auditor in 1st AGM
4. Re-appointment of auditor
5. Rotation of auditor
6. Special right to shareholders
7. Casual vacancy
8. Resignation of auditor
9. Auditor’s report
_________________________________________________________________________
OBJECTIVE
__________________________________________________________________________
1. Familiar with the requirement of auditor to get account audit

2. Getting information about the terms of appointments

3. Knowledge about the right and duties of the auditor

4. Understanding the fact where the position is vacant due casual circumstances

5. Lastly knowing the prime responsibility of auditor to prepare audit report.

_________________________________________________________________________

1. INTRODUCTION
__________________________________________________________________________

The Companies Act, 2013 has changed the rules of the game. There has been a paradigm shift
in the provisions relating to appointment of Statutory Auditors. Unless otherwise expressly
provided all sections referred to are of Companies Act, 2013 and rules referred to are of
Companies rules, 2014.

_________________________________________________________________________

2. APPOINTMENT OF FIRST AUDITOR


________________________________________________________________________

As per section 139(6) the first auditor of the company shall be appointed by the Board within
30 days of Incorporation. In case of Board’sfailure, an EGM shall be called within 90 days
to appoint the first auditor. The law is silent regarding from when this time limit of 90 days
be reckoned, it is better to take a stricter view and interpret that the 90 days limit starts from
Incorporation rather than expiry of 30 days (i.e. failure of Board) from it.

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Tenure: – Till conclusion of 1st annual general meeting.

Remuneration: – As per proviso to section 142(1)remuneration of the first auditor can be


decided by the Board.

Does appointment of 1st auditor require obtaining written consent, certificate and filing of
form ADT-1?

The appointment of first auditor is governed through section 139(6) which starts with a non-
obstante clause [notwithstanding anything contained in sub-section (1)] and it is sub-section
(1) which requires obtaining consent & certificate from auditor and filing of form ADT-1
with ROC.

Interpretation of “notwithstanding anything contained….”:- As per Supreme court, the non-


obstante clause is used to avoid the operation and effect of all contrary provisions. In case
any departure between non-obstante clause and other provisions, no-obstante clause will
prevail.

Since section 139(6) does not speak anything contrary to section 139(1) as far as obtaining of
consent, certificate and filing of form is concerned therefore in can be interpreted that ADT-1
should be filed with ROC for first auditor also.

Procedure of appointment

1. Intimate the proposed auditor(s) regarding the intention of appointing him/it as


auditor and ask whether he/ it is eligible and not disqualified to be appointed as
auditor of the company.
2. Obtain consent & certificate from auditor.
3. If audit committee required to be constituted under section 177, then obtain its
recommendation (Section 139(11)).
4. Call Board meeting.
5. Approve the appointment of auditor at the first Board Meeting.
6. Intimate the auditor and file with ROC form ADT-1(to be attached in form GNL-2 as
per MCA circular 09/2014 dated 25th April, 2014) within 15 days.

________________________________________________________________________

3. APPOINTMENT OF AUDITOR AT 1ST AGM


________________________________________________________________________

As per section 139(1) every company shall appoint at its 1st annual general meeting an
individual or a firm as an auditor of the company who shall hold office who shall hold office
from the conclusion of that meeting till the conclusion of its sixth annual general meeting and
thereafter till the conclusion of every sixth meeting

Tenure subject to ratification: - The tenure of 5 consecutive years is subject to ratification


by shareholders at every AGM.

Remuneration: – As per section 142(1) remuneration of the auditor of a company shall be


fixed in its general meeting or in such manner as may be determined therein.

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Manner & Procedure for selection to be governed through rules: - it is prescribed in
rule 3, explained hereunder,

1. Consideration of the appointment – The Board or the Audit Committee (where it is


required to be constituted) shall consider the qualifications, experience of the auditor and
whether the aforesaid attributes are commensurate with the size and requirements of the
company. Further regard should also be given to professional matters of conduct against the
proposed auditor before the ICAI, Court or any competent authority.

2. Recommendation of name – The procedure depends upon whether audit committee is


required to be constituted or not.

 Constitution of audit committee required: In this case the committee shall


recommend the name of the auditor to the Board which if agrees with the
recommendation, will further recommend it to the members. If the Board does not so
agree, then it shall refer back the recommendation to the committee which may
reconsider its recommendation, however if the committee decides not to do so then
the Board shall record reasons for its disagreement with the committee and send its
own recommendation for consideration of the members.

 Audit Committee not required: The committee shall recommend the name of the
auditor to the members.

Written consent and certificate from the auditor:- As per 2nd proviso to section 139(1)
auditor has to give a written consent to become auditor of the company & a certificate stating
that appointment is in accordance with conditions prescribed.

Contents of the certificate (rule 4(1) of Companies (Audit and Auditor) rules, 2014) are:-

1. The person being appointed is eligible for appointment and is not disqualified for
appointment under the Act, the Chartered Accountants Act, 1949 and the rules or
regulations made thereunder.
2. The proposed appointment is as per the term provided under the Act.
3. The proposed appointment is within the limits laid down by or under the authority of
the Act.
4. The list of proceedings pending with respect to professional matters of conduct, as
disclosed in the certificate, is true and correct.

The Certificate should also state that the auditor is eligible and not disqualified for
appointment as per section 141(requirement of 3rd proviso).

Intimation to Auditor & ROC:-The company shall inform the auditor regarding
appointment and also file a form ADT-1 to ROC within 15 days of the meeting in which the
auditor is appointed.

Procedure for appointment:

1. Intimate the proposed auditor(s) regarding the intention of appointing him/it as auditor and
ask for the following information and documents:-

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 Qualification, experience and matters of professional conduct pending before ICAI,
Court or any other competent authority.
 Consent to become auditor.
 Certificate (contents discussed above)

2. Call Board meeting for the purpose of following:-

 Considering information and documents received in point 1.


 Considering that the qualification & experience are commensurate with the size &
operations of the company.
 Recommending the name of the auditor to the members.
 Calling of AGM.

3. Convene the AGM and gets the Ordinary resolution appointing the auditor passed at the
meeting.

4. Intimate the Auditor and file with ROC form ADT-1(to be attached in form GNL-2 as per
MCA circular 09/2014 dated 25th April, 2014) within 15 days.

Note: – In case the Company is required to constitute the Audit Committee, then the work of
consideration and recommendation vests with it. The concept of the same has been discussed
above.

___________________________________________________________________________

4. RE-APPOINTMENT OF AUDITOR
___________________________________________________________________________

After completion of tenure of 5 consecutive years the auditor may be re-appointed by


complying with the provisions of section 139(9) which states that subject to the provisions of
sub-section (1) & the rules made there under, a retiring auditor may be re-appointed at an
annual general meeting, if-

1. He is not disqualified for re-appointment.


2. He has not given the company a notice in writing of his unwillingness to be re-
appointed
3. A special resolution has not been passed at that meeting appointing some other
auditor or providing expressly that he shall not be re-appointed.

Does Re-APPOINTMENT or RATIFICATION of auditor at AGM require obtaining


written consent, certificate and filing of form ADT-1?

As per 2nd,3rd& 4thprovison to section 139(1) consent, certificate and filing of form is
required for appointment. Since as per explanation to section 139(1) appointment includes re-
appointment therefore the documentation & filing of form is also required at the time of re-
appointment but Ratification does not require filing of ADT-1 but it will be a better
practice if certificate of disqualification is obtained even in case of ratification.

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Procedure of reappointment:

The procedure for re-appointment of Auditor shall more or less be same as both, appointment
& re-appointment are goverened through provisions of Section 139(1). However, following
additional things shall be kept in mind :-

 Provisions of section 139(9) (discussed above)


 Provisions relating to rotation of auditors(discussed later)

___________________________________________________________________________

5. ROTATION OF AUDITORS

__________________________________________________________________________

As per section 139(2) no listed company or companies as prescribed shall appoint or re-
appoint :-

 An individual as auditor for more than one term of 5 consecutive years; and
 An audit firm as auditor for more than two terms of 5 consecutive years

Note: 1. Break in the term for a continuous period of 5 years will be considered as fulfillment
of criteria of rotation. (explanation 2 to rule 6(3)(ii)).

2. the period for which the individual or the firm has held office as auditor prior to the
commencement of the Act shall be taken into account for calculating the period of five
consecutive years or ten consecutive years, as the case may be(rule 6(3)(i))

Cooling period: – 5 years from completion of tenure as said above.

Other persons who cannot be appointed as auditor

 Firm having a common partner to the other audit firm, whose tenure has expired in a
company immediately preceding the financial year, shall be appointed as auditor of
the same company for a period of five years (1stprovison to section 139(2)).

 The incoming auditor or audit firm shall not be eligible if such auditor or audit firm is
associated with the outgoing auditor or audit firm under the same network of audit
firms(rule 6(3)(ii)). The “same network” includes the firms operating or functioning,
hitherto or in future, under the same brand name, trade name or common control
(explanation 1 to rule 6(3)(ii))

 If a partner, who is in charge of an audit firm and also certifies the financial
statements of the company, retires from the said firm and joins another firm of
chartered accountants, such other firm shall also be ineligible to be appointed for a
period of five years.

Companies prescribed (rule 5):-

Following companies excluding one person companies and small companies:-

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 Unlisted public companies having paid up capital of Rs.10 croresor more;
 Private limited companies having paid up capital of Rs. 20 crores or more;
 Companies having paid up capital less than as mentioned above, but having public
borrowings from financial institutions, banks or public deposits of rupees 50 crores or
more.

Note:- Rotation of auditors does not apply to dormant companies(proviso to rue 6 of


Companies(Miscellaneous) rules, 2014)

Manner of rotation:- to be prescribed by way of rules(section 139(4) read with rule)

 Recommendation of name:- The procedure depends upon whether audit committee


is required to be constituted or not. If constitution required then the Committee shall
recommend to the Board the name of the auditor who may replace the incumbent
auditor on expiry of his term. The Board shall consider the same and make its
recommendation to the members. In cases where committee not required then the
Board shall itself recommend to the members.

Transitional period: - For companies existing on commencement of this act, 3 years from
such commencement (2nd proviso to section 139(2))

___________________________________________________________________________

6. SPECIAL RIGHTS TO SHAREHOLDERS

__________________________________________________________________________

As per section 139(3) members have following rights after passing resolution in their
meeting:-

 In case of audit firm, auditing partner and his team shall be rotated at such intervals as
may be decided.
 Audit shall be conducted by more than auditor.

___________________________________________________________________________

7. CASUAL VACANCY

___________________________________________________________________________

As per section 139(8) any casual vacancy, shall be filled by the Board within 30 days. If the
vacancy has arisen due to resignation of auditor then such appointment shall also be approved
by the company at a general meeting convened within 3 months of the recommendation of
the Board.

Instances of casual vacancy:-

 Death
 Resignation

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 Disqualification – If an existing auditor gets disqualified under Section 141 then he
shall inform the company and the situation will be treated as casual vacancy (Section
141(4))
 Failure of ratification at AGM – If the ratification resolution fails at the AGM of
company then this also tantamount to casual vacancy (explanation to rule 3).

Tenure – Till conclusion of forthcoming annual general meeting.

Remuneration – Section 142 deals with remuneration of auditor. The section expressly
empowers the shareholders to fix the remuneration except in case of 1st auditor. The law is
silent for fixing remuneration for auditor being appointed in casual vacancy, since the law
being silent and going with the purposeful interpretation of law the remuneration can be
decided by the Board as the appointing authority is the Board itself moreover section 224(8)
of Companies Act, 1956 also enumerated the same principle. However, this shall not be the
case where casual vacancy has arisen due to resignation.

Does appointment of auditor in casual vacancy require obtaining written consent,


certificate and filing of ADT-1?

On reading section 139(8) prima facie it seems that the aforesaid is not required to be done,
but since an auditor is appointed by the board in place of existing auditor the regulator (ROC)
should be intimated of the same and consent, certificate should also be obtained so as to
prove that board has acted diligently.

Procedure

1. Intimate the proposed auditor(s) regarding the intention of appointing him/it as


auditor and ask whether he/ it is eligible and not disqualified to be appointed as
auditor of the company.
2. Obtain consent & certificate from auditor.
3. If Audit Committee required to be constituted under section 177, then obtain its
recommendation (Section 139(11)).
4. Call Board meeting.
5. Approve the appointment of auditor in casual vacancy at the Board meeting.
6. Intimate the Auditor and file with ROC form ADT-1(to be attached in form GNL-2 as
per MCA circular 09/2014 dated 25th April, 2014) within 15 days.

Procedure – where casual vacancy arises due to resignation of existing auditor:

1. Intimate the proposed auditor(s) regarding the intention of appointing him/it as auditor and
ask whether he/ it is eligible and not disqualified to be appointed as auditor of the company.

2. Obtain consent & certificate from auditor.

3. If Audit Committee required to be constituted under section 177, then obtain its
recommendation (Section 139(11)).

4. Call Board meeting for the purpose of following:-

 Appointment of auditor in casual vacancy.

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 Considering that the qualification & experience are commensurate with the size &
operations of the company.
 Recommending the members to approve the appointment.
 Calling of EGM(to be held within 3 months from date of Board meeting).

5. Intimate the Auditor and file with ROC form ADT-1(to be attached in form GNL-2 as per
MCA circular 09/2014 dated 25th April, 2014) within 15 days of EGM(since the appointment
is not final until approval of members).

___________________________________________________________________________

8. RESIGNATION OF AUDITOR

___________________________________________________________________________

As per section 140(2) the Auditor who has resigned from the company shall file within a
period of 30 days from the date of resignation, a statement in the prescribed form with the
company and ROC indicating the reasons and other facts as may be relevant with regard to
his resignation in form ADT-3(to be attached in form GNL-2 as per MCA circular 09/2014
dated 25th April, 2014). If the auditor does not comply with these requirements, he or it shall
be punishable with fine which shall not be less than 50,000/- rupees but which may extend to
5,00,000/-. After resignation the provisions of casual vacancy shall be triggered which has
been explained above.

Conditions for audit committee (section 179 read with rule 6 of Companies (Meetings of
Board and its Powers) Rules, 2014):-

 Listed Companies.
 Public companies with a paid up capital of Rs. 10 crore or more.
 Public companies having turnover of Rs. 100 crore or more.
 Public companies, having in aggregate, outstanding loans or borrowings or debentures
or deposits exceeding Rs. 50 crore or more.

Conditions for rotation of auditors (section 139(2) read with rule 5):-

 Listed Companies.
 Public companies having paid up capital of Rs. 10 crore or more.
 Private limited companies having paid up capital of Rs. 100 crore or more.
 All companies having paid up capital of below threshold limit mentioned above, but
having public borrowings from financial institutions, banks or public deposits of Rs.
50 crore or more.

Companies to which audit committee applies but not rotation:-

1. Public companies having turnover f more tanRs. 100 crores but paid-up capital less
than Rs. 10 crores.

2. Public companies which have issued debentures or have borrowed money from other
than bank/financial institution in excess of Rs. 50 crores.

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Companies to which rotation applies but not audit committee:-

1. Private companies having paid up capital of Rs. 100 crore or more.


2. Private companies which have borrowed money from financial institutions/banks in
excess of Rs. 50 crores.

___________________________________________________________________________

9. AUDITOR’S REPORT

__________________________________________________________________________

As discussed earlier that audit of accounts is systematic examination and evaluation of


records to know the true and fair view of the financial positions of the business concern.
After completion of audit works now it is mandatory obligation of auditor to prepare the audit
report which is evidence of authenticity of relevant records.

Under section 143(2) and (3), the auditor is required to prepare audit report submitted
to the members of the company related with accounts examined by him as:

1. Every balance sheet and profit and loss accounts

2. Any other accounts annexed with balance sheet or profit and loss accounts

3. Other important financial documents which are laid before the company in general
meeting during his employment period.

Auditor required to expressly states following points in his report:

1. Whether in his opinion and to best of his knowledge giving the true and fair view of the
company’s financial state of affairs as per information and explanation given to him;

2. Whether he has obtained all the information and explanations which to the best of his
knowledge and belief were necessary for the purpose of the audit proceeding;

3. Whether proper books of accounts as required by provisions have been maintained by the
company;

4. Whether n his opinion the profit and loss account and balance sheet complied with the
accounting standards framed by the Central Govt.;

5. Whether any director is disqualified from being appointed as director under section 164(2);

6. Whether the report on the accounts of any branch office audited by a person other than the
company’s auditor has been sent to him and the manner in which he has dealt with when
report prepared;

7. Any qualification, reservation or adverse remark relating to the maintenance of accounts


and other matters connected there with;

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8. Whether the company has adequate internal financial controls system in place and the
operating effectiveness of such control;

9. Such other matters as may be prescribed.

Where the auditor does not affirm the above fact with some qualification, reservation
or adverse remarks, his report is termed as ‘Qualified Report’ otherwise it will be ‘Clean and
Unqualified Report.’ But if auditor finds any irregularity or discrepancy in the books of
accounts he must disclosed this information to shareholders without any hesitation or fears.

Annexure to the audit report: According to section 143(11) which defines as the central govt.
with consultation of National Financial Reporting Authority (NFRA), may direct by the order
in respect of specified class of companies, the auditor report shall also include a statement on
the matters specified in the order.

Signing of Audit Report: Following is authorized to sign the audit report:

1. In case of individual auditor appointed by the company, only such person appointed

2. In case of audit firm appointed, only the partners who is chartered accountant.

Therefore chartered accountant who is auditor is authorized to sign and authenticate the
accounts and shall be read before the company in general meeting and open for inspection by
any member of the company. The auditor is allowed to attend general meeting and being a
part of any business which is concern him as auditor.

Concisely the auditor is not concerned with the planning and policy framing of
management. Simply he has been appointed to bring the notice of the shareholders any
irregularities and discrepancies which affect their rights and interests. It should be noted that
the auditors owe their duty to the shareholders and the company only but not liable toward
the third parties like potential investors because they had not any contract with them, unless
they made a adverse and fraudulent report and they has been deceived by it.

Summary:

It has been discussed earlier under the head of chapter maintenance of books of
accounts that it is mandatory for every company to maintain proper books of accounts. After
the task of preparation of financial statements like balance sheet and profit and loss account
and cash flow statement etc. the next step is to conduct the audit work in company to know
the exact financial position of the company whether it is giving true and fair view of the
financial position of the company or not.

This work can be done through a person called auditor. Auditor is a person who undertakes
the responsibility to examine the financial record by systematic way. It is required because
the true financial position can only be true when it is examined by the auditor and he prepares
the auditor report which must be clean and unqualified.

The auditor is appointed by the board of directors and in case of failure to appoint by them
the shareholders in the annual general may be appoint. The remuneration must be determined

197
by the board in the annual general meeting and he is liable to continue his till the 5 years
period.

But it does not mean that he cannot resign from his position. For this he has to convey a valid
notice at the registered office of the company and if he committed misconduct
misappropriated the fund may be removed from his position.

The retiring auditor is eligible for reappointment till the new appointment is not made.

Concisely the prime responsibility of the auditor to perform his duty in such manner
prescribed in the act. If he found guilty to negligent the irregularities which he has found
shall liable to face some legal consequences. He just watch dog not like blood hound.

Check your progress:

Exercise-i

Fill the right word in following from given word: Special, Communication, Examine,
Fradulent, blood.

1. An auditor is a person who--------the systematic way of financial record.

2. An auditor is a watch dog not the-------hound.

3. An auditor may be removed from expiry of his terms only by passing-------


resolution.

4. Tribunal may directed the company to change its auditor if he is acted------manner.

5. Auditor has right to receive all the notice and-------relating to any general meeting.

Answer- 1. (Examine) 2. (Blood) 3. (Special) 4. (Fraudulent) 5. (Communication)

Exercise-ii

Tick the right option from the following:

1. First auditor is appointed by the board of director with in:

(A) 15 Days

(B) 30 Days

(C) 60 Days

(D) 90 Days

2. Individual auditor is appointed for the term of:

(A) 2 Years

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(B) 5 Years

(C) 3 Years

(D) 10 Years

3. A auditor who resign from his position must gives the notice to company and
registrar before:

(A) 21 Days

(B) 30 Days

(C) 45 Days

(D) 60 Days

4. After completion of the audit work, a document is prepared by him is called:

(A) Note Book

(B) Summary

(C) Audit Report

(D) Audit Note Book

5. Remuneration of auditor is fixed by the:

(A) Shareholders

(B) Govt.

(C) Board of Director

(D) Third parties

Answer-1. (B) 2. (B) 3. (B) 4. (C) 5. (C)

Exercise-iii

True and false statement:

1. Auditor is not responsible to detect the errors and frauds.

2. Unqualified report is the evidence of error free financial statements.

3. Auditor cannot freely access over the books of accounts and documents.

4. Auditor must be a chartered accountant.

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5. Auditor is entitled to get the remuneration even before completion of audit
works.

Answer- True-(2, 4) False- (1, 3, 5)

Test Questions:

1. Discuss the provisions of the companies act, 2013 relating with appointment of auditors.

___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________

2. What are the qualification and disqualification of the auditors?

___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
_________________________________________________________________________

3. Explain the provisions concerning with removal, resignation and remuneration of auditors.

___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________

4. Discuss the rights and duties of the auditor while conducting activities.

___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________

5. Write a short note on filing up casual vacancy of auditor.

___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________

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LESSON: 5

WINDING UP OF COMPANY AND ITS MODES

__________________________________________________________________________

BASIC OUTLINE OF CHAPTER

_________________________________________________________________________

1. Introduction
2. Meaning of winding up
3. Distinguish between winding up and dissolution
4. Modes of Winding up
5.circumstances for winding up by tribunal (section 271)
6. Inability to pay debts
7. Winding up of company under just and equitable ground:
8. Petition for winding up
9. Powers of Tribunal
10. Direction for filing statements of affairs
___________________________________________________________________________

OBJECTIVES

__________________________________________________________________________

1. Familiar with the concept of winding up

2. Clarity about winding up and dissolution of company

3. Getting knowledge about the circumstances where company may be wound up

4. Learning how the liquidator proceed winding up process

5. Enhancing knowledge about the powers of Tribunal

__________________________________________________________________________

1. INTRODUCTION

__________________________________________________________________________

As we all know that a company comes in to existence by a legal process basically known as
incorporation and also cease by following legal process called dissolution. Therefore winding
up the prior process of dissolution of company and until all the winding formalities not
complied its existence cannot be comes to an end. The process is start from appointment of
liquidator from the panel maintained by the Central Govt. to dissolve the company.

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__________________________________________________________________________
2. MEANING OF WINDING UP

__________________________________________________________________________

Winding up or dissolution is the process where the life of the company brings to end.
Prof. Gower has define the winding up as, ‘It is a process where by its life is ended and its
property is administered for the benefits of its creditors and members. An administrator is
appointed who is called liquidator and he takes the control over the assets, pays its debts and
finally distributes any surplus among the members accordance with their rights.’

__________________________________________________________________________
3. DISTINCTION BETWEEN WINDING UP AND DISSOLUTION

__________________________________________________________________________

We do not understand both concepts in same meaning because there is wider difference
between both.

(A) Winding up is prior stage and dissolution is final stage

(B) In case of legal existence of the company remain continues but in dissolution the
existence of company is over. In other words name of company shall struck from
Register of company.

__________________________________________________________________________
4. MODES OF WINDING UP (SECTION 270)
__________________________________________________________________________

The winding up of a company may be either –

1. by the Tribunal; or compulsory winding under court order


2. Voluntary.

__________________________________________________________________________

5. CIRCUMSTANCES FOR WINDING UP BY TRIBUNAL (SECTION 271)


___________________________________________________________________________

A company may be wound up by the Tribunal on a petition filed under Section 272 of the
Act.

The company may be wound up by Tribunal –

(1) If the company is unable to pay its debts;

(2) If the company has resolved by special resolution that the company be wound up by the
Tribunal;

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(3) If the company has acted against the interests of the sovereignty and integrity of India, its
security of the State, friendly relations with foreign States, public order, decency or morality;

(4) If the Tribunal has ordered the winding up of the company under Chapter XIX i.e. in case
of a sick company;

(5) If, on application by the Registrar or the Government, the Tribunal is of the opinion that
the affairs of the company has been conducted in a fraudulent manner or the company was
formed for fraudulent and unlawful purpose or the persons concerned in the formation or
management of its affairs have been guilty of fraud, misfeasance or misconduct in connection
therewith and that it is proper that the company be wound up;

(6) If the company has made a default in filing with the Registrar its financial statements or
annual returns for immediately preceding five consecutive financial years; or

(7) If the Tribunal is of the opinion that it is just and equitable to wind up the company.

__________________________________________________________________________

6. INABILITY TO PAY DEBT (SUB – SECTION 2 OF SECTION 271)

___________________________________________________________________________

A company shall be deemed to be unable to pay its debts –

(A) If the company has to pay the sum within twenty – one days after the receipt of demand
or to provide adequate security or re – structure or compound the debt to the reasonable
satisfaction of the creditor. The demand may be served:

( i) A creditor by assignment or otherwise,

(ii) To whom company is indebted for an amount exceeding one lakh rupees then due,

(iii) By causing it to be delivered at its registered officer, by registered post or


otherwise,

(iv) A demand requiring the company to pay the amount so due.

(B) If any execution or other process issued on a decree or order of any court or tribunal in
favour of a creditor of the company is returned unsatisfied in whole or in part; or

(C) If it is proved to the satisfaction of the Tribunal that the company is unable to pay its
debt, and the Tribunal has taken into account the contingent and prospective liabilities of the
company while determining this.

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_________________________________________________________________________

7. WINDING UP OF COMPANY UNDER JUST AND EQUITABLE GROUND

___________________________________________________________________________

A company may also be ordered to be wound up if the Tribunal is opinion that it is just and
equitable that the company should be wound up. Following circumstances leads the company
to wind up:

1. Loss of substratum: When the main object of the company has failed or its substratum is
gone. In other words the whole or substantial part of capital has lost.

2. Deadlock in management: The directors are not taking the decision in the company due to
groupism in the company. They are not taking initiative to increase the value and wealth of
shareholders.

3. Fraudulent object: If the company was registered just to carried on the illegal activities.

4. Losses: Due the heavy losses sustained by the company and not capable to continue its
business activities.

5. Oppression minority: When the majority of the shareholders affect the rights of minority
shareholders.

6. Bubble company: When it is mere bubble company and it does not carry on any business
activities or does have any property.

_________________________________________________________________________

8. PETITION FOR WINDING UP (SECTION 272)

___________________________________________________________________________

A petition to the Tribunal for the binding up of a company shall be presented by –

a) The company;

b) Any creditor or creditors, including any contingent or prospective creditor or creditors;

c) Any contributory or contributories;

d) All or any of the person in above clauses (a), (b) and (c) together;

e) The Registrar;

f) Any person authorized by the Central Government in that behalf; or

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g) In case the company has acted against the interests of the sovereignty and integrity of
India, its security of the State, friendly relations with foreign States, public order, decency or
morality , by the Central Government or State Government.

A secured creditor, debenture holder and debenture trustee shall be deemed to be creditor for
this Section.

A contributory shall be entitled to present a petition for winding up of a company, whether –

(i)He hold fully paid – up shares, or

(ii) The company has no asserts at all

(iii) The company has no surplus assets left for distribution among shareholders.

The Shares in respect of which, a person is contributory or contributories were—

(i) Originally allotted to them, or

(ii) have been held by him and registered in his name for at least six months during the
eighteen months immediately before commencement of the winding up, or

(iii) Have devolved on him through the death of a former holder.

The Registrar shall not be entitle to present a petition for winding up on the grounds
specified in clauses (b), (d) or (g) of sub – section of Section 271. the Registrar shall not
present a petition on the ground that the company is unable to pay its debts unless it appears
to him either from the financial condition of the company as disclosed in its balance sheet or
from the report of an inspector appointed under section 210 that the company is unable to pay
its debts. The Registrar shall obtain the previous sanction of the Central Government to the
presentation of a petition. The Central Government shall not accord its sanction unless the
company has been given a reasonable opportunity of making representations.

A petition presented by the company for winding up before the Tribunal shall be admitted
only if accompanied by a statement of affairs in such form and in such manner as may be
prescribed.

Before a petition for winding up of a company presented by a contingent or prospective


creditor is admitted, the leave of the Tribunal shall be obtained for the admission of the
petition and such leave shall not be granted, unless in the opinion of the Tribunal there is a
prima facie case for the winding up of the company and until such security for costs has been
given as the Tribunal thinks reasonable.

A copy of the petition made under this section shall also be filed with the Registrar and the
Registrar shall, without prejudice to any other provisions, submit his views to the Tribunal
within sixty days of receipt of such petition.

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9. POWERS OF TRIBUNAL (SECTION 273)

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The Tribunal, on receipt of a petition for winding up, may pass any of the following orders,
namely—

1. dismiss it, with or without costs;


2. make any interim order as it think fit;
3. appoint a provisional liquidator of the company till the making of a winding up order;
4. make an order for the winding up of the company with or without cost; or
5. any other order as it think fit.

The Tribunal shall make the order within ninety days from the date of presentation of the
petition.

Before appointing a provisional liquidator, the Tribunal shall give notice to the company and
afford a reasonable opportunity to it to make its representations. However, for special reasons
to be recorded in writing, the Tribunal may dispense with such notice.

The Tribunal shall not refuse to make a winding up order on the ground only that the assets of
the company have been mortgaged for an amount equal to or in excess of those assets, or that
the company has no assets.

Where a petition is presented on the ground that it is just and equitable that the company
should be wound up, the Tribunal may refuse to make an order of winding up, if it is of the
opinion that some other remedy is available to the petitioners and that they are acting
unreasonably in seeking to have the company wound up instead of pursuing the other
remedy.

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10. DIRECTIONS FOR FILING STATEMENT OF AFFAIRS (SECTION 274)

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Where a petition for winding up is filed before the Tribunal by any person other than the
company, the Tribunal shall, if satisfied that a prima facie case for winding up of the
company is made out, by an order direct the company to file its objections along with a
statement of its affairs within thirty days of the order.

The Tribunal may allow a further period of thirty days in a situation of contingency or special
circumstances.

The Tribunal may direct the petitioner to deposit such security for costs as it may consider
reasonable as a precondition to issue directions to the company.

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A company, which fails to file the statement of affairs, shall forfeit the right to oppose the
petition and such directors and officers of the company as found responsible for such non-
compliance, shall be liable for punishment.

The directors and other officers of the company, in respect of which an order for winding up
is passed by the Tribunal, shall submit at the cost of the company, the books of account of the
company completed and audited up to the date of the order to liquidator within a period of
thirty days of such order.

If any director or officer of the company contravenes the provisions of this section, the
director or the officer of the company who is in default shall be punishable with
imprisonment for a term which may extend to six months or with fine which shall not be less
than twenty-five thousand rupees but which may extend to five lakh rupees, or with both. The
complaint may be filed in this behalf before the Special Court by Registrar, provisional
liquidator, Company Liquidator or any person authorized by the Tribunal

Summary

It is a very surprising question that how a company may wind up. A very simple reply to this
question that a company is artificial person, incorporate body means incorporate according to
law thus its life brings to an end by operation of law. Simply winding up a process where life
of the company comes to an end. But to satisfied this requirement liquidator must be
appointed in the company to realize the assets and settle down liabilities and whatever surplus
left that is distributed among the equity shareholders.

A company be wind up in different modes like voluntarily winding up and compulsory


winding up under Tribunal order. There is wider difference exist between both as under
voluntary winding up a company is solvent and capable to pay its full liabilities. In other
hand compulsory winding up is that where the company is compelled to wind up its due
inability to pay debts etc. According to new companies act, 2013 if the company fail to pay a
claim worth rupees one lakh within 1 month then the court may issue the order for decree in
the favour of claimant.

When liquidator is appointed in the company to perform the winding up proceeding then
certain right and obligation automatic imposed upon him. Some of the right he can exercise
with the sanction of courts but some right exercised by him without the sanction of court.

As soon as the liquidator is appointed in the court the powers of the Board of directors are
terminated and he become all in all in the company. Sometimes the court with its own
discretionary dismisses the petition and sometime it issued any interim order etc.

Concisely speaking winding up procceding only done through by following the companies
act provisions otherwise directors or any other officer concerned shall be punishable with
fine.

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Check your progress:

Exercise-i

Fill the right word in following from given words: Administered, initiative, brings,
compulsory, proceed

1. Winding up is that process where the life of the company---------to end.

2. When the company failed pay its outside liability is called-----------winding up.

3. Liquidator is a person who---------the assets of the company.

4. Winding up----------dissolution of the company.

5. Voluntary winding up is the--------of the company.

Answer-1 (Bring) 2. (Compulsory) 3. (Administered) 4. (Proceed) 5. (Initiative)

Exercise-ii

Tick right option of the following statement:

1. A person who is appointed to realize the assets of the company is called:

(A) Banker

(B) Secretary

(C) Liquidator

(D) Agent

2. In case of voluntary winding up consent of the members are required:

(A) 20 Percent

(B) 50 Percent

(C) 75 Percent

(D) 100 Percent

3. Popular modes of winding of the companies are:

(A) 2

(B) 3

(C) 4

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(D) 5

4. Company may be wind up under just equitable grounds under following situations:

(A) Deadlock in management

(B) Fraudulent object

(C) Losses

(D) Above all

5. Appointment of liquidator affect the powers of director as:

(A) Decrease

(B) Increase

(C) Intact

(D) Terminated

Answer: 1 (C) 2. (C) 3. (A) 4. (D) 5. (D)

Exercise-iii

True or false statements:

1. Dissolution is the last stage of winding up of company.

2. Liquidator is free to exercise any powers even without permission of the Tribunal.

3. Director may intervention in the working of the liquidator.

4. In case of voluntary winding up written consent of the creditors are required.

5. Compulsory winding shall be deemed from the date filling petition to Tribunal.

Answer- True-(1, 4, 5) False-(2, 3)

Test Questions

1. What do you mean by winding up? Distinguish between winding up and dissolution.

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2. Under what circumstances the company may wind up under just equitable ground.

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3. State the legal provisions of compulsory winding up under Tribunal order.

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4. In what circumstances a company may wound up voluntarily?

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5. Write short notes on following:

(i) Declaration of Solvency

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(ii) Inability to pay debts.

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