COMPANY LAW-II

(Semester VIII)

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Dear Reader,

These notes consist of a total of 82 pages. The notes are a compilation of the Companies Act, the Slides
given in class, ND Kapoor and Avtar Singh. Please note that whatever is in bold has been taught in class
by way of slides either has no legal basis (no basis was found even in any of the text books) or has some
sort of minor error, which has been mentioned. Also, after the amendment to the Companies Act and
introduction of the NCLT as an authority in place of the CLB or the court, some confusion has been
created. Please note that the notes make a mention of the old authority (which must be followed as the
NCLT has not come into existence) and mention ‘NCLT’ in brackets showing that the section mentions
about the NCLT having the power. Further, please make note of any comments made in any part of the
notes (titled ‘note’). Please let me know in case you have any further queries. Hope this helps. Best of
luck and happy studying!

Regards,
Ankita

Note: A public company shall be deemed to include a private company being a subsidiary of a public
company, except where mentioned otherwise. Similarly, a private company shall be deemed to exclude a
private company being a subsidiary of a public company, except where mentioned otherwise.

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Unit I Company Management

1.1. Directors, Number of Directors, Position of Directors

1. A director is an officer of the company, as has been stated under S.2 (30).
2. S.2 (13) defines a director as including any person occupying the position of a director, by
whatever name called.
3. Thus, what needs to be seen is the nature of the office of the person and the duties he must
carry out. It is not necessary that he be called a director.
4. Thus, any person who has control over the direction, management, conduct or
superintendence of a company is a director.
5. He can also be a person on who instructions/advice the board functions provided that such
advice is not given in a professional capacity.
6. As a company is an artificial person, it cannot act on its own. It can act only through directors.
(Ferguson Wilson)
7. Similarly, Viscount Haldane in Lennard’s Carrying Co. Ltd. V. Asiatic Petroleum Co. Ltd
stated that “a company is an abstraction…the directors represent the directing mind and will
of the company.”
8. As per Gower, the company has two primary organs- the general meeting and the directorate.
9. A company has also been compared to a democratic state where the Memorandum (MoA) and
the Companies Act serve as the constitution. However, it may not be called perfectly
democratic as there are certain powers exercisable by the directorate which cannot be
interfered with by the members.
10. The members may however alter the articles of the company in order to exercise control over
the directors. They also have the power to appoint and dismiss the directors.
11. Directors are not only officers and employees of the company, they are also its agents and
trustees.
12. In GE Railway v. Turner, it was stated that directors are mere trustees or agents of the
company, trustees of the company’s money and agents in the transactions which they enter
into on behalf of the company.
13. As per S.253, only individuals and not firms, associations of persons or bodies corporate may
become directors. This is done primarily so that a particular person may be made accountable
for the acts of the company and there is no confusion in this regard.
14. The section also provides that a company may appoint or reappoint a director only when he is
allotted a Director Identification Number (DIN) in terms of S.266B.
15. Where the articles of the company provide that the Board must act collectively, no
individual member may act on his own in this regard except where power has been
delegated upon such individual and the delegation in this case is permissible.
16. Further, S.252 stipulates that every public company, other than a deemed public company as
under S.43A1 shall have a minimum of 3 directors.
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S.43A has been repealed- check effect of repeal, private company which is a subsidiary of a public company is now under
the definition of a public company
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17. It also states that in a company having a paid-up share capital of more than Rs.5 crores and
having at least 1000 small shareholders, a director may be appointed by such small
shareholders. As the term used here is ‘may’, it is not compulsory to appoint a small
shareholders director.
18. A small shareholder is one holding shares whose nominal value is Rs.20,000 or less in a
company to which this provision applies, i.e. a public company, not being a deemed public
company under S.43A.
19. A company may elect a small shareholders director either suo moto or on the notice of at
least 1/10th of the total small shareholders in the company.
20. Such person whose name has been proposed must sign and file his consent to act as such
director.
21. In case of a listed company, a small shareholders director shall be appointed by way of
postal ballot.
22. A small shareholders director has a maximum term of 3 years. He may again be
appointed after the expiry of such period.
23. He shall be considered to be a director for all purposes, other than for appointment as a
whole-time director or managing director.
24. He cannot hold office as a small shareholders director in more than 2 companies.

25. For every other company (private companies, deemed public companies, etc.), the minimum
number of directors shall be 2. Where a private company is converted into a public company,
it must comply with the statutory requirement as regards the minimum number of directors at
all times.
26. However, a company may by ordinary resolution, in its general meeting, increase or reduce
the number of its directors, within the limits prescribed by its articles (S.258). This is however
subject to the provisions of Ss. 252, 255 and 259.
27. Article 75 of Table A of Schedule I of the Act provides that the continuing director(s) may act
where the number of directors is less than the quorum fixed by the Act, only for increasing the
number to fulfil such requirement of quorum or to convene a general meeting of the company,
and for no other purpose.
28. S.259 provides that Central Government approval is required where the number of directors
of a public company needs to be increased, except where the number of directors is to be
increased to 12 or less than 12.
29. This provision is not applicable where the increase is within the limits prescribed by the
articles of the company. Articles here in case of a company in existence on July 21, 1954
would mean the articles which were in existence on such date and articles with respect to a
company which came into existence at a later date, would mean the articles as were first
registered.
30. S.186- check slides and bareact
31. The office of director thus comes into existence when the company comes into existence. It
also ceases to exist when the company ceases to exist, i.e. it is wound up.

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 32. In Re Union Accident Insurance Co. Ltd., it was upheld that a winding up order terminates the
appointment of a director, except for certain special purposes. In such cases, powers of the
directors are assumed by the Official Liquidator.
33. In Anil Kumar Sachdeva v. Four ‘A’ Asbestos Pvt. Ltd., it was upheld that the directors still
retain some residuary powers in spite of the appointment of an Official Liquidator.

1.2. Appointment/Reappointment of Directors, qualifications and disqualifications, remuneration,

removal, powers and duties, liabilities of director, contracts in which directors are interested,
disabilities of directors

1. S.254 provides that the subscribers to the memorandum shall be deemed to be directors of the
company until new directors are appointed in a general meeting as under S.255. This shall be
subject to the articles of the company.
2. Thus, generally the articles of the company fix the number and names of the first directors.
3. It has also been stated under Article 64 of Table A of Schedule I that the subscribers to the
memorandum or a majority of them, shall determine in writing the number directors and the
first directors of the company. This will obviously be subject to S.254 and thus will be
applicable only if the articles of the company do not stipulate the number of directors and
names of the first directors.
4. S.255 is a mandatory statutory requirement which provides that two-thirds of the directors of
every public company shall retire by rotation. Such directors are called rotational directors
and they are to be appointed by shareholders in the AGM.
5. If the total number of directors is not a multiple of 3, the number nearest to the value of such
2/3rd of the total shall be considered.
6. This provision however is not applicable where the articles of the company provide for
retirement of all directors every AGM.
7. In case of the directors of a private company and the remaining one-third of the directors of a
public company, shall unless the articles provide otherwise, be appointed by the shareholders
in the AGM.
8. The articles of most companies provide for exclusion of the managing director and
whole-time director from the rule of retirement by rotation.
9. S.256 lays down the procedure as regards appointment of directors in an AGM, in case of a
public company. It provides the following rules-
(a) One-third of the rotational directors shall retire every AGM
(b) The directors who are to retire every AGM must be those holding the longest
tenure out of the rotational directors.
(c) When there arises a situation wherein the directors who are to retire by rotation
had been appointed on the same day and thus the principle given in (b) is not applicable,
such director(s) shall issue shall be resolved by mutual agreement between the directors or
by draw of lots where there is no such agreement.
(d) Every retiring director is eligible for reappointment in the AGM. Another person
may also be appointed in his place.

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 (e) If the vacancy made is not filled and no resolution is passed not to fill the
vacancy, the meeting shall be adjourned to the same day in the next week (where the same
day is a public holiday, to the next subsequent day which is not a public holiday).
(f) On such later date if the vacancy is not filled and no resolution has been passed
in the AGM not to fill the vacancy, the retiring director shall be deemed to have been
reappointed, unless-
i. A resolution for reappointment of the retiring director has been put to vote and the
same has been rejected.
ii. The retiring director expresses his unwillingness to continue as director by a notice in
writing addressed to the Company or the Board.
iii. The retiring director is not qualified or is disqualified from holding the position of
director.
iv. A special or ordinary resolution must be passed for his reappointment.
v. Where the case falls under the proviso to S.263 (2). S.263 (2) provides that a single
resolution appointing more than one director shall be void unless another resolution is
passed in the AGM allowing such single resolution. In such case, there shall be no
automatic reappointment of a retiring director in default of another appointment.

8. The provisions of Ss. 255 and 256 are not applicable to government companies where the
entire paid-up capital is held by one or more governments, which may either be the
Central Government or the State Government.
9. S.257 (typo- S.157) deals with appointment of a new director in case of a public company.
10. It provides that in such case, the person wishing to be appointed as a director or any other
member of the company proposing such person to be director, shall give a notice in writing at
the office of the company, at least 14 days prior to the AGM and shall also deposit Rs.500.
Such amount shall be refunded if and when the person is appointed as director.
11. The company shall thereafter inform its shareholders as regards the same, either by serving
individual notices or by making an advertisement in at least two newspapers, one English and
one in a regional language, circulated in the area where the registered office of the company is
located. However, such notice or advertisement must be made at least 7 days prior to the
AGM.
12. S.264 requires that in case of a public company, every person signifying his wish to be
appointed as a director under S.257 and not being a person retiring as director of the company,
shall file his consent in writing with the company to act as a director of such company.
Further, he shall not act as director, unless within 30 days of his appointment, he signs and
files his consent to act with the Registrar.
13. Further, a director retiring at an AGM, including an additional director shall not continue in
office after the last day on which the AGM ought to have been held in the year expires. This is
so that the directors cannot take advantage of their position by not summoning for an AGM.
(also opined by the Department of Company Affairs)
14. Ss. 260, 262 and 313 provides for methods of appointment of directors by the Board.

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15. S. 260 provides for appointment of an additional director, who shall retire at the next AGM.
Where an AGM is not held, he shall retire after the expiry of the last day in the year on which
the AGM ought to have been held.
16. An additional director is generally appointed by the board for expert advice or for any other
specific purpose.
17. If the additional director holds the post of managing director, he shall cease to be the
managing director where he ceases to be the additional director of the company.
18. Such additional director may be appointed as an ordinary director in the AGM.
19. Further, this provision is subject to the requirement that the total number of directors, after the
appointment of the additional director does not exceed the maximum prescribed by the
articles of the company.
20. S.262 provides for appointment of a director by the Board where a casual vacancy is created
before the expiry of the term of the original director, due to death, resignation, disqualification
or where such director is not able to accept office for any reason other than retirement by
rotation.
21. A person so appointed shall continue to remain in office till the term of the original director
comes to an end.
22. S.313 provides for appointment of an alternate director to act for an original director when he
leaves the state in which the meetings of the company are generally held for a period of at
least 3 months.
23. Such appointment shall be allowed only where it is sanctioned by the articles of the company
or by a resolution passed in the general meeting of the company.
24. The alternate director shall vacate office when the original director returns or when the term
of office of the original director comes to an end. However, the provisions relating to
reappointment of the original director are not applicable to the alternate director.
25. The articles of the company may also allow third parties such as debenture holders, creditors,
etc. to appoint directors on the board of the company. Such directors are called nominee
directors of the company.
26. The nominee directors of the company however cannot exceed one-third of the total number
of directors of the company.
27. The articles of a public company may also allow for appointment of directors by way of
proportional representation every 3 years as provided under S.265. (not important)
28. S.408 allows for appointment of such number of persons as directors of the company by the
Central Government, as suggested by the tribunal where the same is done in the interests of
the company or its shareholders or of the general public, for a period not more than 3 years.
(Not important).
29. As per S.276, no person may be appointed director of more than 15 companies. Such
companies shall not include the following companies (S.278)-
(a) A private company
(b) An unlimited company
(c) A company not carrying on business for profit or that which prohibits payment of
dividend
(d) A company in which such person is only an alternate director.

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 (e) Foreign companies

30. If such person becomes the director of more than 15 companies, such office shall be deemed
to not have taken effect unless within 15 days from his appointment, he does not vacate the
office of director from any of the 15 companies in which he was a director.
31. S.279 prescribes a fine of Rs.50, 000 for contravention of this provision, which shall be levied
each time the person assumes directorship of a company beyond 15 companies.
32. The qualifications of directors are as follows-
(a) Must be an individual
(b) Must be competent to contract
(c) Must hold the requisite number of qualification shares where required by the articles

33. S.270 deals with the qualification shares which a director of a public company must hold. The
person appointed to the post of director will be required to comply with this provision only
when it is required by the articles of the company.
34. This section states that the director must obtain such qualification shares within 2 months
from the date of his appointment. When a person accepts his appointment as director of a
company, knowing that the articles prescribe a particular number of qualification shares
which must be held by him, he is deemed to have contracted with the company that he will
obtain such shares within the stipulated period of 2 months.
35. He may acquire such shares either by transfer from the existing shareholders or by directly
purchasing them from the company. However, he cannot receive such shares as gift from the
promoters of the company as that would amount as a breach of trust.
36. Further, the section also provides that the articles of the company cannot state that the director
must acquire such qualification shares before his appointment or before the period of 2
months. Such a stipulation shall be treated as being void.
37. The nominal value of the qualification shares cannot exceed Rs.5000 or where the nominal
value of one share is Rs.5000, it cannot exceed the nominal value of one share of the
company.
38. For the purpose of qualification shares, the bearer of a share warrant shall not be deemed to
be the holder of the shares which are represented by the warrant.
39. S.272 provides a penalty of upto Rs.500 per day from the date the period of 2 months expires
till the time the contravention continues.
40. S.274 provides for the following disqualifications with respect to directorship-
(a) Where he is of unsound mind and a finding in this regard has been made by a court of
competent jurisdiction
(b) Where he is adjudged to be an undischarged insolvent
(c) Where he has applied to be adjudged an insolvent and such application is pending
(d) Where he is convicted of an offence involving moral turpitude and the punishment for
which is imprisonment at least for 6 months and 5 years have not elapsed after such
sentence
(e) Where he has not paid any calls with respect to shares held by him, either individually or
jointly and 6 months have elapsed from the last date of such payment

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 (f) Where he is disqualified under S.203. This section primarily deals with the court
disqualifying fraudulent persons from managing the company
(g) Where he holds directorship of a public company which (i) has not filed annual accounts
and annual returns for a period of 3 consecutive financial years, anytime after April 1,
1999 or (ii) which has not repaid its deposit or interest on the same before the due date or
has not redeemed its debentures on the due date or has not paid dividend, where such
contravention continues for a period of one year or more.

If (g) is satisfied, the person holding directorship of the public company mentioned above
shall not be eligible to be a director in any public company for a period of 5 years from the
date from which the contravention first starts.

41. The disqualification under (d) or (e) may be removed by the Central government by
notification either generally or specifically as regards the particular company/director.
42. Private companies may provide for any other disqualification in their articles in addition to
those mentioned in S.274.
43. Where a person is removed by the Central government from directorship, he cannot be
appointed as director for a period of 5 years from the date of removal.
44. S.283 provides for the following circumstances in which a director may be removed-
(a) He fails to acquire the requisite number of qualification shares as specified in the articles,
within the period of 2 months from his appointment.
(b) He is declared to be of unsound mind.
(c) He applies to be adjudged an insolvent.
(d) He is adjudged an insolvent.
(e) He is convicted of an offence involving moral turpitude, the punishment for which is not
less than 6 months.
(f) He fails to pay calls on shares, held by him either individually or jointly, for more than 6
months from the last date of payment, except when such a disqualification has been
removed by the Central government.
(g) He absents himself from 3 consecutive meetings of the Board or of the meetings of the
board for more 3 consecutive months, without notice to the Board.
(h) He, either on his own or for the benefit of or on account of another OR a firm in which he
is partner OR a private company in which he is director, obtains a loan from the company
(present company in question) without the prior approval of the Central Government.
(S.295)
(i) He fails to disclose any direct or indirect interest as regards the contracts or arrangements
with the company. (S.299)
(j) He is disqualified by the court due to an offence as regards the formation, management or
promotion of the company or for any other act involving fraud or misfeasance as regards
the company. (S.203)
(k) He is removed by a resolution under S.284.
(l) He was occupying the position of director by virtue of holding a post in the company and
he ceases to hold such post.

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45. As regards vacation of office where a director absents himself from the meetings of the
company, the vacation is automatic. This means that no resolution needs to be passed and the
director need not be given a chance to show cause as to why he should not be removed.
46. However, such abstention must be voluntary or deliberate. If a director is absent due to some
illness or any other cause beyond his control, he cannot be removed.
47. The section further provides that where a person is adjudged an insolvent or where he is
convicted of an offence involving moral turpitude or where he is convicted of an offence
under S.203, he shall not be removed from office till 30 days from the date of such
adjudication.
48. If within this 30 day period, an appeal is preferred to such decision, he shall not be removed
until 7 days from the date of decision in such appeal.
49. Where there is further appeal, within the 7 day period, and there is a possibility of removal of
such disqualification after such appeal, he shall not be removed till the appeal/petition is
disposed off.
50. The section also provides a penalty of Rs.5000 per day where a director knowing that he is
disqualified under the provisions of the section to act as director, continues to do so.
51. In case of a private company, a director may be removed from office for other grounds as
specified in its articles, in addition to the grounds mentioned in this section.
52. Where a director commits an offence under S.209A, which deals with inspection of books of
accounts of the company, he shall be removed from office and shall be disqualified to be
director of any company for a period of 5 years from such removal.
53. A director may either be removed by the shareholders or by the Central government or by the
Company Law Board (now National Company Law Tribunal (NCLT)).
54. S.284 provides for removal of a director by the shareholders by passing an ordinary
resolution.
55. This provision does not apply to the following cases-
(a) Where a director has been appointed by the Central government to prevent oppression and
mismanagement in accordance with S.408.
(b) Where the director in question is one appointed for life as director of a private company
prior to April 1, 1952.
(c) Where the company by its articles provides for appointment of two-thirds of the directors
by way of a system of proportional representation.
(d) Special directors appointed under SICA, 1985.
(e) Directors appointed by financial institutions under statutory powers.
(f) Nominee directors
(g) Directors appointed by the CLB (Now NCLT) under S.402.
56. A special notice needs to be given in such case which must be given to the director concerned.
Such director shall have the right to be heard in this regard.
57. The director may make representations either in a notice for a general meeting or by sending
notices to the members. Where he cannot make such representation due to delay, he may
require the representation to be read out in the general meeting.

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58. However, such representation need not be made where on the application of the company or
any other aggrieved person; the Central government is satisfied that there has in fact been an
abuse of this provision for a defamatory purpose.
59. Where a director is removed under this provision, another director may be appointed in his
place in the same meeting, provided the same is specified in the special notice. A director so
appointed shall hold office till the time his predecessor would have held office.
60. If no such appointment is made, the Board may appoint another person as director as a casual
vacancy being filled and the provisions of S.262 would become applicable in such case.
However, the director so removed cannot be reappointed.
61. If a person is removed under this provision, the same does not deprive him of compensation
to be received by virtue of termination of appointment.
62. A director/managerial personnel may also be removed by the Central Government on the
recommendation of the CLB (now NCLT). After a case is made out against the persons
involved, it may refer the case to the CLB (now NCLT). Where a person is so removed, he
shall not be eligible to hold any post relating to the management of the company for at least 5
years. This period may be relaxed by the Centre with the prior concurrence of the CLB (now
NCLT). He shall not be eligible to receive any compensation in this regard. (not important)
63. A director/managerial personnel may be removed by the CLB (now NCLT) under S.402 on
the grounds of oppression or mismanagement. In such case, the CLB (now NCLT) may alter
any agreement of the company with the person concerned, leading to the termination of his
appointment. He shall not be appointed for a period of 5 years in any managerial capacity in
the company nor shall he be entitled to any compensation/damages except with the leave of
the CLB (now NCLT). (not important)
64. There is no procedure for resignation of a director under the Companies Act. However, the
articles of the company may provide for such procedure.
65. Ss.198 and 308 of the Companies Act deals with the remuneration of directors.
66. S. 198 specifically states that such remuneration cannot exceed 11% of the net profits.
67. S.308 provides that remuneration shall be paid to directors only if the same is stated by the
articles or by a resolution, either ordinary or special (as stated in the articles) of the
shareholders.
68. This remuneration shall include remuneration for services provided by the director in any
other capacity, except when the same is provided in a professional capacity and the Central
Government certifies that the director possesses the requisite qualifications to practice such
profession.
69. A director may also be paid a fee for every meeting of the Board or any committee of the
Board that he attends.
70. A managing director or a whole-time director may also be paid a monthly fee or a part of the
net profits.
71. Any other director may be paid a monthly, quarterly or annual fee, with the sanction of the
Central Government or even a commission, as decided by special resolution.
72. A director who receives a commission, and is a managing or a whole-time director, cannot
receive any remuneration from the company’s subsidiary.
73. This provision (S.308) is not applicable to a private company.

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74. Remuneration also includes any other benefits provided by the company such as rent
free accommodation, expenditure for effecting any life insurance, any other
benefits/amenities for free or at concessional rates, etc.
75. S.318 deals with compensation payable to directors for termination of office.
76. Such compensation is available ONLY to managers, managing directors or whole-time
directors as compensation for loss of office or consideration for retirement.
77. However, compensation shall not be available in the following cases-
(a) Where the director resigns due to reconstruction or amalgamation of the company and
such director was to be appointed as director of the reconstructed or amalgamated
company.
(b) Where the director resigns for any other reason.
(c) Where he is removed from office by virtue of S.203 or S.283.
(d) Where he is removed from office due to winding up of the company by the tribunal or
voluntary winding up and such winding up is due to the negligence or default of the
director.
(e) Where he is guilty of fraud or breach of trust or gross negligence or gross mismanagement
of the affairs of the company or its subsidiary or holding company.
(f) Where the director has instigated or taken part directly in the termination of his
appointment.

78. Similarly, S.319 prohibits provision of compensation to directors where they have been
removed in connection with transfer of any or the entire property or undertaking of the
company to any person. S.320 prohibits compensation to directors when they have been
removed in connection with transfer of any or all the shares of the company to any person.
79. S.291 deals with the general powers of the board, which are co-extensive with that of the
company.
80. However, such powers shall be exercised subject to the Companies Act and any other statute,
the memorandum and articles of the company, any other regulations, including regulations
made by the company in a general meeting.
81. However, the directors are not empowered to do that which is specifically required to be done
in the general meeting by the shareholders and as stipulated in the memorandum or articles of
the company.
82. S.292 provides that the board may exercise the following powers by passing a resolution in a
board meeting-
(a) It may make calls with respect to money unpaid by shareholders on shares.
(b) It can authorise a buy-back of shares under S.77-A.
(c) It can issue debentures.
(d) It can authorise borrowing of money by the company by any other manner other than by
way of debentures.
(e) It may invest in the funds of the company, subject to the provisions of S.293 and S.372A.
(f) It may make loans, subject to the provisions of S.295 and S.372A.

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83. It may even delegate its powers under (d),(e) and (f) mentioned above to any committee,
manager, managing director or other principal officer of the company subject to the
conditions provided in the section.
84. As regards S.25 companies, the board may borrow, invest or make loans by way of
circulation rather than holding a meeting.
85. Directors also have the following powers-
(a) The power to fill casual vacancies in the board. (S.261)
(b) The power to give consent to any contract or arrangement in which a director or his
relatives may be interested. (S.297)
(c) To receive disclosures about a director’s interest in a contract or arrangement.
(d) To receive disclosure as regards a director’s shareholdings.
(e) To appoint as manager or managing director any person, who is already a manager or
managing director of a company. In such case the consent of all the members present in
the board meeting and entitled to vote must be given. (Ss. 316 and 386)
(f) To invest in a company in the same group.
(g) The board may also make loans to any other body corporate. (S.372A) In such case the
consent of all the members present in the board meeting and entitled to vote must be
given.
(h) To decide the rate of dividend payable at the AGM subject to shareholder approval.
(i) To make political contributions. (S.293A)

86. S.293 places restrictions on the powers of the board of a public company and states that the
board shall not exercise the following powers except with the authorisation of the company in
a general meeting-
(a) It shall not sell, lease or otherwise dispose off the whole or substantially the whole of the
undertaking of the company.
(b) It shall not remit or otherwise give a time for payment of debt due by a director to the
company except where there is a renewal or continuance of an advance made by a
banking company to its director.
(c) It shall not invest the compensation received due to compulsory acquisition of the
property or undertaking of the company, except in trust securities.
(d) It shall not borrow moneys where the money to be borrowed and the money already
borrowed exceeds the paid up capital and free reserves of the company, except where
temporary loans need to be raised by the company from banks.
(e) It shall not contribute to any charitable or other funds not connected with the business of
the company or the welfare of its employees where such contribution exceeds Rs.50, 000
in a financial year or 5% of the average net profits of the 3 preceding financial years,
whichever is higher. However, it can make contributions of less than Rs.50, 000, even
where the company is making a loss.

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87. S.293A deals with political contributions and states that contributions cannot be made to any
political party or for any other political purpose to any person, by a government company or a
company which has been in existence for less than 3 years.
88. Such contribution must be authorised by a resolution of the Board and cannot exceed 5% of
the net profits of the company in a financial year.
89. Every such contribution made must be disclosed in the profit and loss account of the
company.
90. Where any provision of this section is contravened, the company shall be liable to pay a fine
equal to 3 times the contribution made and every such officer in default shall be sentenced to
imprisonment upto 3 years and fine.
91. Contribution herein means payment without any consideration.
92. Directors have the following duties-
(a) To discharge their functions honestly and in a bonafide manner.
(b) To not enter into such transactions as would lead to a conflict between their duties and
their personal interest. (Self-dealing rule- No one who has a duty to perform shall place
himself in a situation to have his interest conflicting with that duty)
(c) To exercise due diligence, care and skill.
(d) To attend meetings of the board.
(e) Not to delegate their powers except as allowed under the Act.
(f) To disclose their interest.

93. S.297 deals with the Board’s sanction being required for contracts in which the directors are
interested.
94. It states that the following persons cannot enter into certain contracts with the company
without the consent of the Board-
(a) The director of the company.
(b) The director’s relative
(c) A firm in which such director or relative is a partner
(d) Any other partner of such firm
(e) A private company in which the director is a director or member

95. Such persons cannot enter into the following contracts without the prior approval of the
Board-
(a) A contract for sale, purchase or supply of materials, goods and services
(b) A contract for underwriting the subscription to the shares of or the debentures of the
company, after the commencement of the Act.

96. Where the company has a paid-up capital of more than Rs.1 crore, the approval of the Central
Government is required for such contract.
97. However, there are certain exceptional circumstances, which are as follows-
(a) Where there is a contract for purchase from or sale to the company of goods and materials
at prevailing market rates.

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 (b) Where there is a contract for sale, purchase or supply of goods, materials and services in
which the company or the other party regularly trades in or does business, provided the
aggregate value of the same does not exceed Rs.5000 in a given year in which the
contract(s) subsists.
(c) In case of a banking or insurance company, where any such contract is entered into in the
ordinary course of business of such company.

97. But, where such contract is one of urgent necessity, it may be entered into even without the
consent of the Board, even where the aggregate amount exceeds Rs.5000 in a given year.
However, in such cases the permission of the Board must be obtained within 3 months from
the date of the contract.
98. Every such consent of the Board shall be given by way of a resolution passed in a Board
meeting and where such consent is not given, the contract shall become voidable at the option
of the Board.
99. S.299 as stated earlier deals with disclosure of interest by a director as regards any interest in
a contract or arrangement entered into by the company. S.300 prohibits an interested director
to vote in the proceedings regarding the contract/arrangement. Thus, Ss. 297, 299 and 300 are
based on the fiduciary relationship of the Board with the company.

Note: The following topics under 1.2 have not been taught in class but are part of the syllabus.

Liabilities of Directors

1. Directors are liable to third parties in the following circumstances-

(a) Where the prospectus does not contain certain material particulars required by statute or
where there are material misrepresentations in the prospectus.
(b) Where there is no repayment of share application money where the minimum subscription
has not been subscribed.
(c) Where there is no repayment of share application money where an application for
securities to be dealt with in a recognised stock exchange has not been made or has been
refused.
(d) Where shares have been irregularly allotted.
(e) Where the company has not made payment as regards a bill of exchange or a hundi or
promissory note or other negotiable instrument.
(f) Where they have committed acts which are ultra vires the company.
(g) Where they have committed frauds and torts.

2. The liability of directors to the company may arise in the following circumstances-
(a) For ultra vires acts
(b) Breach of trust
(c) Negligence
(d) Misfeasance

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 3. A director is not liable for the acts of his co-directors provided he had no knowledge of the
same and was not party to it.
4. If there is a fraud committed by a director, the other directors cannot be made liable where
there are no circumstances which could have aroused their suspicion as regards the fraud.
5. However, where more than one director are found to have neglected their duty of care, all of
them shall be made liable.
6. S.322 provides that a director’s liability in a limited company may also be unlimited where
the memorandum provides that the liability of all or any of the directors shall be unlimited. In
such companies, the liability of a manager may also be unlimited.
7. Further, in such a limited company, the directors, manager and the person who proposes the
name of another as appointment to the post of such unlimited director must add a statement to
the proposal for appointment that such other person’s liability shall be unlimited.
8. The person to be appointed to such post shall also be given a notice that his liability is
unlimited.
9. If any person contravenes the provision of this section, he shall be liable to pay a fine of
Rs.10, 000 as well as any other compensation for loss caused to the director with unlimited
liability. However, this shall not affect the liability of such director.
10. S.323 provides that where the memorandum of the company does not provide for unlimited
liability of certain persons, a special resolution may be passed for alteration of the
memorandum. Such liability shall become effective against the person on the expiry of his
existing term, unless he gives his consent for the same.
11. Certain other statutory liabilities of the directors include-
(a) Criminal liability for misstatements in prospectus
(b) Fraudulently inducing persons to invest in the company
(c) Purchase by a company of its own shares
(d) Concealment of names of creditors entitled to object to a reduction of capital
(e) Not filing application with Registrar for registration of particulars of a charge created by
the company

12. However, the court under S.633 may at times excuse the director from liability where it is of
the opinion that such director has acted honestly, reasonably and having regard to all the
circumstances of the case, he ought to be excused.

Disabilities of Director-

1. One such disability is that any clause in the memorandum or any other agreement relieving a
director of his liability shall be void.
2. Further, an undischarged insolvent cannot become a director.
3. Thirdly, there are certain other restrictions placed on directors as under S.293.
4. Further, directors cannot enter into certain contracts without the consent of the Board or the
Central Government in specific cases under S.297.
5. No person can be a director of more than 15 companies.

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 6. Under S.295, a company shall not make a loan to the following persons, without prior
approval of the Central Government-
(a) A director of such lending company or of its holding company, or the relative or partner of
the director
(b) A firm in which the director or relative is a partner
(c) A private company in which the director is a director or member
(d) Any body corporate in which the director exercises 25% of voting power in its general
meeting
(e) Any body corporate whose board, manager or managing director are accustomed to follow
the instructions/directions of the Board or director(s) of the lending company

7. Any assignment of his office by a director shall be deemed void.

Note: Points 8 to 15 have been taught in class

8. S.314 prohibits the following persons from holding an office or place of profit in the company
without obtaining consent by way of special resolution from the company-
(a) A director of the company
(b) Any partner or relative of such director
(c) Any firm in which such director or relative is a partner
(d) Any private company in which such director is a director or member
(e) A director or manager of such private company, where the total monthly remuneration
from such office or place of profit is Rs.10, 000.

9. However, such persons may hold an office or place of profit in the company by being
managing directors or managers or trustees or bankers for the debenture-holders of the
company under the (a) Company or (b) under any subsidiary of the company where the
remuneration received from the office of profit is given to the company or its holding
company.
10. Where the total monthly remuneration from the office or place of profit is not less than Rs.20,
000, consent from the Central Government is required alongwith the consent by way of
special resolution, where the office or place of profit is occupied by-
(a) A partner or relative of the director or manager
(b) A firm in which such director or manager or their relative is a partner
(c) A private company in which such director or manager or their relative is a director or
member

11. The special resolution according consent to the person holding an office or place of profit
may be passed even in a general meeting. Such meeting may even be a meeting organised for
the first time after the person occupies such office or place.
12. Before his appointment to such place or office of profit, the person so appointed must declare
that he does not fall within the category of persons prohibited from holding such office.

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 13. Where such office or place is held without special resolution or without prior approval of the
Central Government, as the case may be, the person holding such office shall be liable to
refund the amount received as remuneration by him by way of holding such office. The
company cannot waive the receipt of such refund except with the prior permission of the
government.
14. Such person will also be deemed to have vacated such office or place.
15. This provision is not applicable to such persons appointed by the Central Government under
S.408 to prevent oppression.

1.3. Managing directors- Appointment, disqualification

1. The Managing Director (MD) is the executive head of the company who carries on the day to
day functioning of the company under the control, direction and superintendence of the
Board. He is essentially a part of the Board.
2. In G. Subba Rao v. Rasmi Die-casting, it was held that as an MD is an agent of the company,
he does not have all the powers to act for and on behalf of the company.
3. S.269 provides that for a public company with a paid-up share capital of Rs.5 crore or more, it
is mandatory that an MD or a manager or a whole-time director be appointed.
4. Such appointment requires the approval of the Central Government, unless it is made in
accordance with the conditions laid down in Schedule XIII of the Act.
5. Such application for approval of the Central Government must be made within 90 days from
the date of the appointment.
6. The Central Government may not give its approval in the following circumstances-
(a) Where the person is not fit to be appointed to such post
(b) Where such appointment is derogatory to public interest
(c) Where the terms and conditions of the appointment are not reasonable

7. Such appointment shall be terminated on the day of receipt of information as regards the same
by the company from the Central Government. Where the person continues to remain in office
inspite of refusal by the Central Government to grant its approval, he shall be liable for a fine
of Rs.5000 per day till the offence continues.
8. Where an appointment is made, not within the conditions specified under Schedule XIII and
without the approval of the Central Government, the Central Government shall refer the
matter to the CLB (now NCLT).
9. S.316 provides that a public company can have as its MD or manager, a person who is an MD
or manager of another company (which can also be a private company), provided the Board
passes a resolution to that effect, with the consent of all the members of the Board. Specific
notice of such board meeting must be given to all board members.
10. Where however the Central Government is satisfied that it is necessary for more than 2
companies to function as a single unit and under a single MD or manager, it may by order
allow such person to hold the post of MD or manager in more than 2 companies.

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 11. S.317 states that the MD of a public company shall hold office for a period of 5 years.
However, such person may be reappointed or his tenure may be extended, provided the same
is sanctioned at least 2 years before he is reappointed or his tenure is extended.
12. Remuneration of MD- as discussed earlier
13. S.267 prescribes the following disqualifications for being an MD-
(a) Where a person is an undischarged insolvent or has at any time been adjudged an
undischarged insolvent
(b) Where he suspends or has at any time suspended payment to his creditors OR he makes or
has at any time made composition with them
(c) Where he is or has at any time been convicted of an offence involving moral turpitude

14. The other disqualifications which are applicable to directors under S.274 also apply to an
MD.

1.4. Manager- Provisions of the Act regarding manager

1. Only individuals may be appointed as MDs and not a body corporate or a firm or an
Association of Persons.
2. Unlike an MD, a manager need not be part of the board. He may be any other person, whether
or not under a contract of service.
3. The disqualifications for being an MD are as follows-
(a) Where he is an undischarged insolvent or has been adjudged one at any time during the 5
years preceding his appointment
(b) Where he suspends or has at any time in the 5 years preceding his appointment, suspended
payment to creditors or makes or has made in such period, composition with them
(c) Where he is or is at any time within the 5 years preceding his appointment, convicted of
an offence involving moral turpitude

3. These disqualifications may at any time be removed by the Central Government by

notification in the Official Gazette, either generally or specifically for certain
companies/persons.
4. Remuneration- as discussed earlier
5. Number of companies a person can be Manager of- same provision as that applicable to MD
6. A manager can be appointed for a maximum period of 5 years at a time. The appointment or
reappointment of a manager requires approval of the Central Government.
7. Increase in his remuneration requires the sanction of the Central Government.
8. He cannot assign his office to anyone.

1.5. Board Meetings- Check notes for meetings

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1.6. Sole Selling Agents

1. A sole selling agent, though not defined in the act, is any individual, firm or company
who/which is given the exclusive right to sell the goods of a company in a particular area.
2. In Nanavati and Co. Ltd. v. RC Dutt, it was held that ‘an agreement of sole selling agency in
the real sense of the term as understood in the commercial world is only that contract where
the agent alone has the right to sell the goods.’
3. Agency has been defined under S.182 of the Contract Act. An agent in that sense would mean
a person who represents another in his dealings with third parties and does any other act for
such other.
4. S.294 deals with the appointment of sole selling agents.
5. It states that such agent may be appointed by the Board for an area, for a period not exceeding
5 years. However, he may be reappointed for further periods, not exceeding 5 years at a time.
6. Such appointment must be approved in a general meeting after the appointment was first
made. Where the shareholders do not approve the appointment in the general meeting, the
appointment shall be terminated from the date of the general meeting.
7. Where the Central Government has reasons to do so and is of the opinion that the terms and
conditions of appointment of the sole selling agent are prejudicial to the interests of the
company, it may call upon the company to furnish such terms and conditions.
8. Where the company does not furnish the same, it shall appoint a person to investigate into the
matter. After such person gives the Government a report on the terms and conditions of
appointment of the sole selling agent, it shall decide whether or not to vary/modify the same.
Where it varies/modifies the terms and conditions, the sole selling agent shall operate
according to the new terms and conditions as given by the Central Government.
9. Where there are more than one sole selling agents for a particular area(s), the Central
Government, if it has reason to do so, shall ask the company to furnish the terms and
conditions of appointment of all or any of the sole selling agents.
10. Where the company refuses to do so, it shall appoint a person to investigate the matter and
where it comes to a conclusion having regard to the terms and conditions of service and any
other information, that such sole selling agent(s) is in fact the sole selling agent for that
particular area, it shall declare the same by way of an order. It may also vary/modify the terms
and conditions of service of such sole selling agent(s).
11. Where any person is appointed by the Central Government, to investigate any of the
abovementioned matters, he must be furnished the required books, papers, information, etc.
by the company and must be provided assistance by the company.
12. Where the company refuses to furnish any information to the Central Government (before
appointment of the investigating officer) or refuses to furnish necessary books, papers,
information to the officer or provide him with necessary assistance, the company and every
other officer of the company in default shall be liable to pay a fine which may extend upto
Rs.50, 000 and Rs.500 per day where it is a continuing offence.
13. S.294-A deals with payment of compensation to a sole selling agent for loss of office. Such
compensation shall not exceed the amount he would have been paid for the remainder of his
term or the remuneration payable to him for a period of 3 years, whichever period is shorter.

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 14. He shall not be paid compensation in the following cases-
(a) Where he resigns on account of reconstruction or amalgamation of the company and he is
appointed as the sole selling agent of such reconstructed or amalgamated company
(b) Where he resigns on his own will
(c) Where his appointment is not approved by the shareholders in the general meeting
(d) Where he is guilty of fraud or breach of trust or gross negligence in the conduct of his
duty
(e) Where he has instigated or directly caused the termination of his office

13. The sole selling agent shall be paid remuneration on a contractual basis, subject to
approval in a general meeting.
14. S.294-AA provides that in the following cases, the approval of the Central Government is
required before appointing a sole selling agent-
(a) Where the goods for which the sole selling agent has been appointed have a greater
demand than their supply or production in the concerned area and thus it is not necessary
to appoint a sole selling agent
(b) Where the individual, company or firm to be appointed has a substantial interest in the
company as a sole selling agent

15. It also provides that where the paid-up capital of a company is more than Rs.50 lakhs, a
special resolution of the shareholders as well as approval of the Central Government shall be
required (Application in Form I). Where the paid up capital is not more than Rs.50 lakhs, an
ordinary resolution is sufficient.
16. Three copies of the notice of the general meeting in which the sole selling agent is to be
appointed and a copy of the proceedings of the general meeting shall be forwarded to
the stock exchange on which the shares of the company are listed.
17. If a sole selling agent is to be appointed in a foreign country, prior approval of the RBI is
required.
18. Where the appointment of the sole selling agent is not approved by way of a special
resolution, his office shall be terminated from the date of such general meeting.
19. The company seeking government approval shall furnish the particulars as may be prescribed.
20. The provisions of S.294-AA are also applicable to sole buying/purchasing agents.
21. There shall no sole selling agents for Sugar and Vanaspati, Cement and Paper and
Drugs.

1.7. Secretary- appointment, qualification

1. A company secretary (CS) (defined as a secretary under the Companies Act) is a person who
is a member of the Institute of Company Secretaries of India as under S.2 (1) (c) of the
Company Secretaries Act.
2. The definition under the Companies Act also includes any other person possessing necessary
qualifications for performing the duties of a secretary under the Act or other such ministerial
or administrative duties.

20
 3. He is an officer of the company under S.2(30) of the Act.
4. A CS is generally appointed by the Board at its meeting.
5. He may also be appointed by way of the articles. However, in such case, his appointment
must be confirmed by the Board by way of a resolution in their first meeting after his
appointment.
6. A copy of the resolution appointing a CS must be furnished to the Registrar.
7. Every company having a paid up share capital of more than Rs.5 crores (slides: Rs.2 crore)
shall have a whole-time secretary, who must be a member of the Institute of Company
Secretaries of India. Where the Board of the company consists of only 2 directors, neither of
them shall be the CS. (S.383A)
8. Every company not required to have CS and having a paid up capital of at least Rs.10 lakh
must file a certificate from any secretary in whole-time practice in the prescribed form stating
that the company has complied with the provisions of the Act. A copy of such certificate must
also be attached to the Board’s report.
9. Any person who fails to comply with the provisions of this section shall be liable to pay a fine
of upto Rs.500 till the day the default continues.

Note: The basis of the following points taken from the slides and ND Kapoor could not be found or have
not been taken from the Companies Act

1. Where the paid up capital of the company is less than Rs.50 lakhs (Rs. 2 crore in slides), any
other individual may be appointed by the company as the whole time secretary, subject to
fulfilment of certain conditions. (Read page 384 of ND Kapoor for conditions)

2. Such conditions include the following (as per the slides)-

(a) Member of ICSI
(b) Pass in intermediate in ICSI
(c) Post Graduate in Commerce
(d) Degree in law
(e) Member of ICAI
(f) Member of ICWAI
(g) PG degree or diploma in management from any university or institution in Ahmedabad,
Bangalore, Calcutta or Luckhnow
(h) Diploma in corporate laws and management from ILI
(i) Membership of the association of secretaries and managers in Calcutta
(j) PG Diploma in Company law and Secretarial Practice from the University of Udaipur

3. Where the paid up capital of the company is raised to what is required under
S.383A, the whole-time secretary of the company must become a member of the ICSI within
one year.
4. Other qualifications include the following-
(a) Sound general education
(b) Wide knowledge

21
 (c) Proficiency in language
(d) Knowledge of company law
(e) Knowledge of other laws
(f) Knowledge of office organisation and methods
(g) Knowledge of banking economics and finance
(h) Good personality

5. An exception shall be made to S.383A where even after reasonable efforts being made a CS
could not be appointed. In such a case, the company and its officers shall not be punished.
6. They can even show that a CS cannot be appointed as the financial position of the company is
bad.
7. In practice, he influences the Board to a large extent, even though he works under the control
of the Board.
8. He is regarded as being part of the managerial personnel of the company.
9. He acts as a link between the company and the outside world and can bind the company with
his acts.
10. However, he has no role in formulation of policy.
11. He has both general as well as statutory duties.
12. His statutory duties include the following-
(a) To verify and sign documents relating to any proceedings of the company which are
required to be authenticated
(b) To deliver for registration, returns of allotment and any contract relating to allotment of
shares
(c) To deliver share certificates within 3 months from allotment and within 2 months from the
registration of transfer
(d) To give notice to the registrar about the increase in share capital

13. Ss. 125-127, 147, 149, 160-163, 171, 192, 193, 196, 286, 307
14. Under the Income Tax Act, the CS has the following duties-
(a) To see to it that income tax is deducted at source from the salaries
(b) To see to it that certificates are issued for such deduction
(c) To see to it that the amount so deducted gets deposited in the government treasury or the
Bank

15. He also has the duty under the Stamp Act to ensure that all important documents are properly
stamped.
16. He also has other duties under the MRTP Act, FEMA, the SEBI Act, etc.

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Unit II Audits and Accounts in Companies

Note: Certain parts of 2.1 have been discussed under 2.2 and vice-versa. This is primarily due to the
structure of the slides and the Companies Act. However, all the information required has been given.

2.1. Accounts: Statutory books, forms and content of balance sheet, and profit and loss
accounts, disclosure of accounts of subsidiary companies, director’s report and liability, auditors’
report, director’s responsibility, audit committees

1. S.209 provides that a company shall maintain books of accounts in its registered office as
regards the following particulars-
(a) All the money received and expended by the company and all other matters relating to
such receipt or expenditure.
(b) All sales and purchases of goods made by the company.
(c) All assets and liabilities of the company.
(d) In case of a company engaged in production, processing, manufacturing or mining
activities, particulars relating to the cost of labour or material or the cost of other items as
may be prescribed by the Central Government.

2. Where the company has a branch office, books of accounts for transactions for such office
must be maintained by it and must be sent to the registered office of the company within an
interval of every three months. All the provisions of S.209 (as mentioned above) must be duly
complied with.
3. Books of accounts include journals, ledgers or supporting vouchers. It includes original books
and records used for recording a transaction.
4. Accounts consist of 2 sides, one to record the increases and the other to record the decreases.
5. They may be kept in the form of ledgers or loose cards or even on a computer.
6. The major books of account include day books, cash books and the journal.
7. The books of accounts must not only present a true picture of the transactions but must also
record them at the right value.
8. The books of accounts and profit and loss account must be maintained in the format as
prescribed by Schedule VI and the accounting standards as laid down in S.211 and provided
by the Institute of Chartered Accountants of India (typo: ICSI) must be adhered to.
9. The balance sheet may either be prepared in the vertical or in the horizontal form, as
prescribed by Schedule VI. However, no specific form has been provided for Profit and Loss
Accounts of the Company.
10. The Central Government may by notification in the gazette exempt certain companies from
compliance with Schedule VI.
11. S. 209 however does not provide as to what shall be taken to mean the ‘proper books of
account’ of a company.
12. Proper books of account as per S.209 shall be said to have been kept, if-

23
 (a) They present a true and fair view of the state of affairs of the company/its branch office
and explain the transactions therein and
(b) If such books have been kept on an accrual basis and as per the double entry system of
accounting (debit and credit sides).

11. S.514(2) gives an idea as to what proper books of account are as follows-
(a) That which is necessary to explain the transactions of the company, the financial position
of its business and includes entries made depicting the day to day business of the
company, of all the cash paid and the cash received.
(b) Where the company is engaged in dealings with goods, the annual stock takings with
respect to goods sold and purchased, indicating the goods, sellers and buyers involved,
except in case of goods sold or purchased in retail trade.

12. Accrual basis of accounts where income and expenditure are recorded by depicting every item
as earned or incurred, without actually showing the date on which payment was received or
made. However, this does not really show a true and fair picture of the company’s transactions
as there may be cases where goods have been sold but have not been paid for or goods have
been purchased and payments have not been made.
13. In case of government companies engaged in the business of financing industrial
projects, the books of accounts need not be maintained on accrual basis and they need
not follow the double entry system.
14. The books of account must ordinarily be kept in the registered office of the company.
However, the board may decide (decision to keep them at any other place in India) otherwise
and within 7 days from the decision of the board, the company must communicate such
decision to the Registrar in writing.
15. The books of account shall be open to inspection by any director during business hours.
However, such right may be taken away by the articles of the company.
16. They may even be inspected by the agent of such director, where there is no reasonable
objection made as regards the same and where the agent undertakes not to utilise the
information for any purpose other than that of the principal/director.
17. Members are not permitted to inspect the books of account of the company. However,
the provision does not forbid conferring on the members, the power to inspect the books
of account by the company.
18. In S.25 companies, members are allowed to inspect such books of account subject to
reasonable restrictions as regards the time and manner.
19. Books of accounts and all vouchers relevant to the entries in such books of 8 years
immediately preceding the current year must be preserved and kept in good order.
20. Here, current year means the current financial year.
21. In case of a company formed less than 8 years before the current year, books of accounts and
vouchers relating to all such years preceding the current year must be preserved.
22. In case of S.25 companies, the books of accounts and vouchers must be preserved for 4
years immediately preceding the current year.

24
23. Books and papers of a company which has amalgamated with another or whose shares
have been acquired by another shall not be disposed off without the prior approval of
the Central government.
24. The following persons shall be made responsible for compliance with the provisions of S.209-
(a) Where the company has a manager or MD, such manager or MD
(b) Where there is no such manager or MD, all the other directors of the company
(c) Other officers and employees of the company
(d) Any other person charged with such duty by the Board by way of a resolution or by the
MD/manager by way of a memo or office order

23. Where such abovementioned person does not take reasonable steps to comply with the
provisions of S.209 or commits a wilful default, he shall be liable for a fine of Rs.10, 000 or
for imprisonment for 6 months or both.
24. However, he must have committed such act wilfully.
25. S.209A provides that the books of account and other books of the company may be inspected
by the Registrar or any government officer who has been authorised in this regard by the
Central Government or any officer of the Securities and Exchange Board of India (SEBI) who
has been authorised by the SEBI in this regard.
26. Such person need not give any notice to the company or to its officer(s) prior to such
inspection.
27. It shall be the duty of every director and officer or employee of the company to furnish to
such persons, the books of account and other necessary books and such other information or
explanation relating to the affairs of the company as may be required by the inspecting officer
from time to time.
28. All assistance shall be provided to such inspecting officer, who may even cause to be made
copies of such books of accounts, papers, etc. or put marks of identification on such books,
papers, etc.
29. The officer inspecting such documents shall have the same powers as that of a civil court
under the CPC.
30. He shall, after inspection, make a report to the Central government or the SEBI as the case
may be.
31. Any officer authorised by the Central government or SEBI shall have the same powers as that
of the Registrar as regards making enquiries.
32. Where any officer or employee of the company contravenes the provisions of this section, he
shall be liable to pay a fine of Rs.50, 000 and he shall be imprisoned for a period not
exceeding one year.
33. Every director or officer convicted of an offence under this provision shall be deemed to have
vacated his office from the date of such conviction and he shall not hold the same office for a
period of 5 years thereafter.
13. S.212 provides that the balance sheet of a holding company must also have the following
particulars attached to it-
(a) Balance sheet of the subsidiary
(b) Profit and loss account of the subsidiary

25
 (c) Report of the subsidiary’s board of directors
(d) Report of the auditors of the subsidiary
(e) A statement pertaining to the interest of the holding company in the subsidiary
34. There is no distinction between a local subsidiary and an overseas subsidiary.
35. The auditors of the holding company do not have the duty of reporting on the
documents of the subsidiary which are attached.
36. Non-compliance with this provision attracts a penalty of Rs.10, 000 or 6 months
imprisonment or both.
37. Under S.215, the balance sheet and profit and loss account must be authenticated and signed
by the manager or secretary, if any and at least 2 directors, including the MD, where there is
one.
38. The balance sheet and profit and loss account shall first be approved by the Board and then
signed and sent to the auditors for their report.
39. However, where all but one of the directors is in India at the time of signing, such person shall
sign the balance sheet and profit and loss account and shall attach a statement thereto stating
the reasons for non-compliance with the general rule.
40. The power to approve the balance sheet and profit and loss account cannot be delegated
to any individual director or to a committee of directors. It is not considered to be part
of the ordinary day-to-day working of the committee.
41. Listed companies must furnish their unaudited quarterly financial results to the stock
exchange (one month of the last financial quarter). Such financial results are to be put
on record by the Board once they are signed by the MD or any other director.
42. There must not be a substantial difference between the audited and unaudited accounts.
Where there is a difference of more than 20%, the company has to give reasons for the
same to the stock exchange.
43. The profit and loss account as well as the auditor’s report shall be attached to the balance
sheet.
44. As per S.217, a board report must be attached to every balance sheet presented before a
general meeting of the company.
45. It should consist of the following particulars-
(a) The state of affairs of the company
(b) Amounts in the balance sheet which are proposed to be carried to the company’s reserves
(c) Amounts proposed to be distributed by way of dividend
(d) Any material changes and commitments affecting the financial position of the company, at
the end of the financial year to which the balance sheet relates.
(e) Conservation of energy, technology, absorption, foreign exchange earnings and outgoings,
etc. as may have been prescribed.

46. The board report shall also disclose the names of the employees who have been in receipt of
annual remuneration of more than Rs.24 lakhs in aggregate.
47. The report shall also contain a Director’s responsibility statement stating the following-
(a) The directors had adhered to the necessary standards of accounting while preparing the
accounts.

26
 (b) They had formed a judgment on the accounts reasonably and prudently so as to present a
true and fair view of the company.
(c) They had maintained all accounting records properly so that there is no fraud committed
and the assets of the company are protected.
(d) They had prepared the accounts on a going concern basis.

48. The report shall also disclose about any Employees’ Stock Option Schemes.
49. The annual report (typo: board report) of the company shall also disclose the composition of
the audit committee under S.292A.
50. An annual report is not defined anywhere. It is ordinarily known as one that contains the
board report, the annual financial statements and the audit report.
51. S.218 provides a penalty of Rs.5000 where such accounts are not signed as required before
being issued, circulated or published or where the necessary documents (board report, profit
and loss account, and auditor’s report) are not attached to the balance sheet before it is issued,
circulated or published.
52. A copy of the balance sheet, auditor’s report, profit and loss account and the board report
must be sent to every member and every trustee of a debenture holder at least 21 days before
the AGM in which the same is to be approved is held, whether or not such member or trustee
is entitled to receive such notice. (S.219)
53. In the following circumstances, a copy of the balance sheet with the necessary documents
attached need not be sent-
(a) In case of a company not having a share capital, copies of the documents need not be sent
to members and debenture trustees who are not entitled to receive a notice for the
meeting.
(b) In case of any company, copies of the documents need not be sent to member and
debenture trustee who are not entitled to receive the notice and whose address is not
known.
(c) In case of joint holders of shares or debentures, copies of the documents need not be sent
to more than one of such holders where none of them are entitled to receive the notice.
(d) In case of joint holders of shares or debentures, copies of documents need not be sent to
those who are not entitled to receive the notice, where some of such holders are entitled to
receive the notice while some of them are not entitled to receive the notice.
(e) In case of listed companies, where copies of the documents are made available for
inspection at the registered office of the company at least 21 days before the AGM and a
statement containing the salient features of the documents or copies of the documents as
may be deemed fit by the company, are sent to the members and debenture trustees at least
21 days before the AGM.

54. Companies can even circulate their abridged financial statements.

55. The accounts shall be adopted at the AGM.
56. It is generally difficult to adjourn AGMs as can be seen from the provisions of Ss. 159 (annual
returns to be made by company having share capital), 166 (AGMs), 210 (annual accounts and
balance sheet), 220 (three copies of annual accounts to be filed with Registrar).

27
 57. As per S.220, when the balance sheet and profit and loss accounts of the company have been
laid before an AGM, 3 copies of such balance sheet and profit and loss account alongwith
other documents required to be attached to the same shall be filed with the Registrar within 30
days from the date of the meeting and where an AGM is not held in any year, within 30 days
from the last date on which the AGM should have been held.
58. A registrar can thus take a balance sheet and profit and loss account on record even if it is not
placed before an AGM. (Question)
59. It is also necessary to file the board’s report alongwith the balance sheet and profit and loss
account as it is a document required to be attached with the same. (Question)
60. In case of any default in complying with the provisions of S.220, every officer of the
company responsible for the same shall be liable to a fine of Rs.500 for every day the default
continues.
61. A person who has ceased to be director at the time of default shall not be held liable.

2.2. Auditors: Appointment, resignation and removal of auditors, rights, duties and liabilities
of auditors, powers of central government to direct special audit and cost audit

1. Auditors are needed in a company primarily to detect frauds, technical errors and errors of
principle.
2. An auditor’s opinion helps in giving a true and fair picture of the financial position and
operating results of the company. However, it is not an assurance as regards the future
viability of a company and does not guarantee the efficiency or effectiveness with which the
management has managed the affairs of the company.
3. An auditor is an agent of the company. However, the definition of an officer of the company
as under S.2(30) does not mention auditors.
4. S.226 provides for the qualifications and disqualifications of auditors.
5. It states that the following persons are qualified to be auditors of a company-
(a) Any person who is qualified to be a chartered accountant within the meaning of the
Chartered Accountants Act.
(b) Any auditing firm, where all the partners are qualified (as mentioned in (a)). Such firm
may be represented by any of the partners.

5. The appointments mentioned in point 4 are subject to the ethical conduct contained in
the Chartered Accountants Act.
6. The following persons are disqualified from being auditors-
(a) A body corporate
(b) Any officer or employee of the company (whose accounts are to be audited)
(c) Any partner or employee of an officer or employee of the company
(d) Any person who is indebted to the company for an amount exceeding Rs.1000 or any
person who gives any guarantee or security as regards the indebtedness of another person
to the company for an amount exceeding Rs.1000
(e) Any person who holds any security having voting rights in the company

28
 7. A body corporate which is disqualified under the conditions provided above ((a) to (e)) to be
the auditor of any subsidiary or holding company of the company concerned or of any other
subsidiary of the holding company of the company concerned, shall be disqualified from
being the auditor of the company as well.
8. The abovementioned disqualification (under point 6) shall be applicable even where the body
corporate is a company and is so disqualified.
9. If an auditor becomes disqualified after his appointment, he shall be deemed to have vacated
his office on the date he gets disqualified.
10. The first auditors are appointed by the Board within 1 month from the date of registration of
the company. Such person shall hold office till the first AGM, unless reappointed. (S.224)
Sometimes, it may so happen that the articles of the company name the first auditor.
11. Where the company wishes to remove the first auditor and appoint another person who has
been nominated by a member, a notice of such nomination must be given to the members at
least 14 days before the AGM.
12. Where the board fails to appoint an auditor within a month from the date of registration of the
company, the company may appoint such first auditor in the first AGM.
13. As per S.224, an auditor shall be appointed at every AGM. He shall commence office from
the date of the end of such AGM till the date the next AGM ends.
14. Where an auditor is appointed in such AGM, the concerned auditor must be intimated about
his appointment within 7 days from the date of such appointment.
15. The auditor shall within 30 days of such intimation inform the Registrar in writing (in form
23B) of his decision either to accept or refuse such appointment.
16. The restrictions on an auditor have been given as follows.

Note: Specified number of companies here means 20 companies where the paid up share capital of not
more than 10 such companies is more than Rs.25 lakhs.

15. Where an individual is appointed or reappointed as an auditor, he cannot be in full-time

employment as an auditor for the specified number of companies or more than the specified
number of companies. (General rule)
16. Where a firm is appointed or reappointed as an auditor, it cannot be in full-time employment
as an auditor for the specified number of companies or more than such specified number.
Here, the specified number of companies shall be taken to mean the number specified for
every partner of the firm who is not in full-time employment elsewhere. (General rule)
17. Where any partner of the firm is in full-time employment in any other firm(s), the aggregate
of the number of companies that may be taken in this regard by the firms concerned shall not
exceed the specified number of companies.
18. Where any partner of the firm is in full-time employment in an individual capacity, the
aggregate of the number of companies that may be taken in this regard shall not exceed the
specified number of companies.
19. The cap on the number of companies of which a firm or auditor can be an auditor is not
applicable to a private company.

29
20. Where an auditor is appointed or reappointed by the company, a written certificate shall be
obtained from such auditor that he is not in whole-time employment as auditor for the
specified number of companies or more than the specified number of companies as the case
may be.
21. For calculating such cap, the following shall not be included-
(a) Audits of private companies
(b) Branch audits
(c) Audits of foreign companies
(d) Audits of guarantee companies without a share capital
(e) Special audits, investigations and audits of corporations set up under a separate Act

22. At every AGM, a retiring auditor shall be reappointed by whatsoever authority he was
appointed, subject to the cap as regards the number of companies he may be auditor for.
23. However, he shall not be reappointed where-
(a) He is not qualified
(b) He expresses his unwillingness to be reappointed
(c) A resolution is passed appointing any other person in his place or where his reappointment
is expressly objected to by way of a resolution
(d) Where an intention is expressed as regards a resolution appointing another person in his
place and such person is disqualified or dies or does not have the required capacity to be
appointed and thus the resolution cannot be proceeded with.
(e) Where he is an auditor for the specified number of companies or more on the date of
reappointment
(f) Where 25% of the subscribed capital of the company is held by financial institutions,
government companies, etc. or by a combination of them, unless the retiring auditor is
appointed by special resolution. (See S.224A)

23. Where no appointment or reappointment is made in an AGM and a vacancy is created, the
company must inform the Central Government within 7 days from the date of creation of such
vacancy and the Central Government shall appoint a person to fill the vacant post.
24. Where the Central Government is not intimated within the prescribed time period, the
company and every officer of the company in default shall be punishable with a fine which
may extend to Rs.5000.
25. The Board may fill in a casual vacancy created in the post of auditors of the company.
However, such person shall hold office only till the conclusion of the next AGM. Where
however such casual vacancy continues, the remaining auditors may act for the auditor whose
post has been so vacated.
26. Where a vacancy is created due to resignation of an auditor, an appointment to the post shall
be made only in the AGM.
27. However, an auditor may be removed from his post before expiry of his term by the company
in a general meeting with the prior approval of the Central Government.
28. Where 25% or more of the subscribed capital of a company is held either by (a) a financial
institution or a government company or the Central Government or a State Government OR

30
 (b) by a financial or other institution established under a provincial/state Act, 51% subscribed
capital of which is held by the State Government OR (c) a nationalised bank or an insurance
company carrying on general insurance business, any auditor in such company shall be
appointed or reappointed by way of a special resolution passed in the AGM. (S.224A)
29. Where such special resolution is passed, the post shall be deemed to be vacant and the
company will have to intimate the Central Government of the same within 7 days from the
date of vacancy. The Central Government shall thereafter appoint a person to the post.
30. S.224 also provides for the remuneration of an auditor. It states that an auditor shall be
provided such remuneration as is decided by the company in its general meeting or in such a
manner as may be decided in the general meeting. This is however subject to the provision
that where the auditor is appointed by the Central Government or the Board, the remuneration
of the auditor shall be fixed by the Central Government or the Board.
31. It is not necessary that the remuneration be fixed in the same meeting as the auditor is
appointed.
32. The remuneration includes any other expenses paid by the company for the auditor or
payments made for other services such as advising on tax matters, etc.
33. The profit and loss account should make separate disclosures of such remuneration.
34. Where the auditor is appointed by the Comptroller and Auditor General of India, his
remuneration shall be fixed by the company in its general meeting or shall be fixed in a
manner as decided in the general meeting.
35. Under S.619, the auditor of a government company shall be appointed by the Comptroller and
Auditor General of India (CAG) and the auditor shall submit a copy of the audit report to the
CAG.
36. S.225 provides that where a resolution is intended to be introduced in the general meeting for
replacement of the retiring auditor or expressly stating that such retiring auditor shall not be
reappointed, a special notice of the same shall be sent out and the copy of the notice shall be
sent to the concerned auditor as well.
37. The retiring auditor has the following rights in such case-
(a) Right to notice of such resolution
(b) Right to make a representation in this regard and have the same notified to the members
(c) Right to circulate his representation
(d) Right to have his representation read out in the meeting, in a case where it hasn’t been
sent out to the members
(e) Right to be heard at the meeting

38. The general rights of auditors may be stated as follows-

(a) The right to receive the books, accounts and vouchers of the company as may be required
by him
(b) The right to obtain information and explanations as may be required from the officers of
the company
(c) The right to enter the branch office of the company and inspect its accounts
(d) The right to get notices for the general meetings of the company and attend such meetings
(S.231)

31
 (e) Right to receive remuneration
(f) Auditor’s lien

39. It shall be the duty of the auditor to ensure that an auditor’s report is made and presented
before the company depicting that on examination of the balance sheet and all other necessary
documents to be attached to the same and according to the explanation and information
received by him, such accounts of the company present a true and fair picture of the affairs of
the company according to him.
40. He shall state the following in his report-
(a) Whether or not the balance sheet depicts the true state of affairs of the company
(b) Whether or not the profit and loss account depict the profit and loss of the company for
that year
(c) Whether or not the information and explanation required by him for the purpose of audit
were provided to him
(d) Where the accounts of a branch office of the company have been dealt with by another
person, whether or not such report has been forwarded to him and he must also state as to
how he dealt with them
(e) Whether the company’s balance sheet and profit and loss account dealt with by the report
are in agreement with the books of account and returns
(f) Whether the relevant accounting standards (as mentioned earlier) have been adhered to
(g) Whether any person is disqualified from being a director under S.274
(h) Whether the company has paid the necessary amount of cess required under S.441 of the
Act
(i) Any other comments as regards a factor which may have an adverse effect on the
functioning of the company. Such adverse comments must be stated in thick type or
italics.

41. An auditor is not to go into the management functions of the company.

42. The auditor must give a report on the accounts after duly verifying the same.
43. The powers and duties of the auditors under S.227 cannot be limited by way of the articles of
the company or by any resolution. This is applicable even to private companies.
44. Certain other duties of the auditor include-
(a) The auditor shall after the statutory report has been certified by at least 2 directors, certify
such report where it relates to shares allotted by the company, payments as regards such
shares and receipts and payments of the company. (except in case of private companies as
they are not required to hold statutory meetings)
(b) The auditor shall make a report on the profits and losses of the company, dividend to be
paid on the shares, assets and liabilities, etc. which shall be mentioned in the prospectus of
the company.
(c) The auditor shall assist an officer of the Central Government (as under S.235) in
investigation where such person requires the books of account and other papers of the
company or provide such person with assistance in any other manner.

32
45. As a general rule, the auditors owe a duty only to the company and such persons with whom
they are in a contractual relationship. They do not owe a duty to prospective investors of the
company. (Caparo Industries v. Dickman)
46. S.292A provides that every public company having a paid up share capital of at least Rs.5
crores shall have an audit committee which is part of its Board.
47. This committee shall consist of a minimum of 3 members.
48. It shall consist of as many members as may be determined by the board. However, 2/3 rd of the
members of the committee shall be directors who are not managers or whole-time directors of
the company.
49. The annual report of the company shall disclose the composition of the audit committee.
50. The committee shall elect a chairman from amongst themselves.
51. So that there is some objectivity, a manager or whole-time director shall not be
appointed as the chairman of the company.
52. The audit committee shall act in accordance with the terms of the reference as specified by
the board in writing. Mere recording of such terms in the minutes of the board shall not
be sufficient.
53. The auditors of the company, internal auditors, if any and the director in charge of finance
shall have the right to attend the meetings of the committee. But, they shall not have the right
to vote in such meetings.
54. The audit committee shall periodically discuss with the auditors as regards the internal control
systems and the scope of audit, including the observations of the auditors.
55. They shall review the quarterly and annual reports before submissions to the board and ensure
compliance with the internal control systems.
56. They shall have access to all the records of the company as may be required by them and may
even seek external assistance.
57. Their recommendations shall be binding on the Board. Where the Board does not follow their
recommendations, it shall state the reasons for the same and such reasons shall be
communicated to the shareholders.
58. The chairman of the committee shall attend the company’s general meetings to issue
clarifications, if required as regards the audits of the company.
59. Any person who contravenes the provisions of this section shall be liable to be imprisoned for
a period of upto 1 year or for a fine upto Rs.50, 000 or both.
60. The section is silent on the following important aspects-
(a) Quorum of the committee
(b) Frequency of its meetings
(c) Qualification for chairmanship
(d) Qualification for membership- as it is erroneous to have left the same entirely upto the
board

60. S.228 provides for audits of the accounts of the branch office of the company.
61. Generally speaking, such audits shall be done by the company’s auditor, However, the
company in its general meeting may decide to appoint any other person duly qualified under

33
 S.226 to audit the accounts of the branch office or where the branch office is located outside
India, by a person competent to be an auditor under the laws of such country.
62. The company’s auditor, where he is not the auditor for the branch office, shall have the right
to visit the branch office and inspect the accounts of such office as and when he deems
necessary.
63. The company’s auditor shall receive a report on the accounts of the branch office as prepared
by the auditor of such office. Thereafter the company’s auditor shall deal with it as he deems
necessary and include such information in the auditor’s report.
64. The branch auditor shall receive such remuneration and shall be subject to such terms and
conditions of service as may be decided by the company in its general meeting or by the
Board where it is so authorised by the company in its board meeting.
65. The Central Government however may make rules exempting a particular branch office(s)
from the provisions of this section.
66. Any person in default of the provisions of Ss.225 to 231 shall be liable to a fine upto Rs.5000.

67. Under S.233A, the Central Government shall have the powers to direct special audit of the
company in the following cases-
(a) Where it is of the opinion that the affairs of the company are not being conducted in
accordance with sound business or commercial principles.
(b) Where it is of the opinion that the affairs of the company are being conducted in a manner
that can seriously damage the business or industry or trade of which the company is a part
(c) Where it is of the opinion that the financial position of the company can endanger its
solvency

68. In such case, it may by order either appoint a person qualified to be a chartered accountant
under the Chartered Accountants Act or the auditor of the company to conduct the audit of the
company’s accounts and submit a report to it other than in the general meeting of the
company. Such report may even deal with matters specifically asked for by the Government
rather than just the accounts of the company.
69. The auditor so appointed shall have the same powers as the company’s auditor under S.227.
70. The Central Government may even order any person to furnish necessary documents to the
auditor.
71. The Central Government shall thereafter proceed to take any action in terms of such report.
Where it does not take any action within 4 months from the date of the report, it shall send a
copy of the report or of extracts of the report to the company which shall be circulated
amongst the members.
72. S.233B empowers the Central Government to direct the audit of cost accounts of the company
where it deems necessary by a Cost Accountant appointed by it under the Cost and Works
Accountants Act and where it is of the opinion that there aren’t many cost accountants in the
country, by a Chartered Accountant under the Chartered Accountants Act.
73. Such audit shall not be conducted by the company’s auditor and shall be in addition to the
company’s audits.

34
74. The appointment shall require the approval of the board and the person so appointed shall
certify that he is not in whole-time appointment of the specified number of companies or
more than the specified number of companies.
75. After conducting such audit, such person shall submit a report to the government. The
government shall thereafter take action on the report provided as well as any other
information as may be provided by the company. It may also require the report to be
circulated amongst the members of the company.

35
Unit III Company Meetings

3.1. Different kinds of meetings

1. Meeting is a gathering or assembly of two or more persons for transacting a lawful business,
entertainment etc.
2. Kinds of meetings in a company:
(a) Shareholder meetings
(b) Board meetings
(c) Meetings of the board sub committees
(d) Meetings of debenture holders
(e) Meetings of the creditors
(f) Meetings of contributories in winding up

3. The shareholder meetings include:

(a) General meetings which include:
i. Statutory meetings
ii. Annual General Meetings (AGMs)
iii. Extraordinary meetings

(b) Class meetings of shareholders of different classes of shares.

4. Board meetings: directors of the company take decisions in these meetings.

5. Meetings of debenture holders and creditors take place during the lifetime of the company
and at the time of winding up of the company.
6. Requisites of a valid meeting:
(a) Must be duly convened by proper authority.
(b) A proper notice must be served in the prescribed manner.
(c) A quorum must be present and it must be properly constituted.
(d) A chairman must preside.
(e) It must be properly conducted.
(f) Minutes must be kept of the proceedings.

7. The proper authority to convene a general meeting of a company is:

(a) BODs:
i. Under AOA
ii. Common law right available
iii. On the request of the members

(b) Shareholders: Under certain circumstances can call for the extraordinary general meeting
(c) Central government and Tribunal: When AGM is not held- suo moto or on application of the
members or directors of the company. (S.167) The tribunal may call for a meeting other than
an AGM under S.186.

Notice of Meeting:

36
1. Proper and adequate notice has to be given.
2. Notice should sufficiently convey the information enabling the persons to attend the meeting
and take part in the deliberations.
3. The date, time and venue should be specified. It must state the complete agenda with the
nature of the business to be transacted.
4. Notice should be served in accordance to the AOA and Co act.
5. It must be clear, explicit and unconditional.
6. Where meetings are fixed to be held on a specified date, time and venue, the notice must take
the form of reminders only or may be avoided.
7. S.53 states that where a notice for a meeting is sent by post to a member, it is deemed to have
been received within 48 hours from the time of post. Where the notice is made by way of an
advertisement in a newspaper circulated in the neighbourhood where the registered office of
the company is located, it is deemed to have been received on the day of the advertisement.
8. The notice should be served 21days before the meeting. (S.171)
9. Incase a notice is served for less than 21 days, it will be valid if all members entitled to vote at
the AGM give consent to the same. Incase of meetings other than AGMs, it shall be valid
incase consent is given by members holding 95% paid up capital and voting rights.
10. Such consent for shorter notice period will be given either at or before the meeting- form
22A.
11. The period of 21 days excludes day of serving of notice and day on which meeting is being
held.
12. The proportion of members eligible for voting shall be determined against each item of the
agenda where members with varying voting rights attend. This means that where certain
members who attend the meeting have the right to vote only on certain matters in the agenda,
they shall not have the right to vote on other matters.
13. In Self Help Private Industries Estate Pvt . Ltd., held that post consent validates a special
resolution passed without proper notice.
14. A private company can provide for shorter notice period in its articles.
15. Proviso (c) to S.219 which deals with sending of the balance sheet to the members, debenture
trustees, etc. within less than 21 days before the meeting is not in conflict with S.171.
16. Incase of joint holders, one of the joint holders can be served the notice. (S.53) Such joint
holder is generally one whose name is first mentioned in the register.
17. The number of days in each case shall be 21 days+48 hours (time taken to post).
18. Effect of shorter notice period:
(a) Resolution passed will not be effective unless ratified by all members (entitled to vote?)
in case of AGM and such members holding 95% voting rights (and paid up share
capital?) for other meetings.
(b) A person who is present and votes in the meeting cannot challenge the resolution on
grounds of invalidity of the notice.

19. Notice is to be served to:

(a) Every member of the company entitled to vote;
(b) Persons on whom shares of any deceased or insolvent member may have devolved;
(c) The auditor or auditors of the company.

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20. Deliberate omission to give notice even to a single member may invalidate the meeting. An
accidental omission or non-receipt of notice does not invalidate the proceedings of the
meeting.
21. The notice shall contain a statement of business to be transacted at the meeting. This business
may be ordinary or special business. (S.173) This is a mandatory provision.
22. Ordinary business relates to:
(a) Consideration of the accounts, balance sheets and reports of BODs and auditors
(b) Declaration of dividend
(c) Appointment of director to replace retired ones
(d) Appointment of auditors and fix remuneration.

23. In all other cases, the business shall be deemed to be special. Special business may include
removal of directors, issue of rights or bonus shares and election of person as director.
24. Where special business is to be transacted at the meeting, the notice must also have attached
to it such explanatory statement stating the material facts in relation to the special business.
25. However, such statement need not be annexed where the notice is circulated by way of
advertisement. In such cases, it is sufficient to mention in the advertisement that the
explanatory statement has been sent to the members.
26. Where any item of business consists of according of approval to any document by the
meeting, the time and place where the document may be inspected shall be mentioned in the
statement.
27. Special business does not require a special resolution unless specifically stated by the Act.
28. In Sunil Mills Ltd. v. Official Liquidator of Sri Ambika Mills Ltd., it was seen that the
explanatory statement did not mention about the Supreme Court injunction not to alienate,
create a charge on or encumber any assets of the company.
29. If a meeting is adjourned bonafidely, it is deemed to be a continuation of the meeting and the
notice given for the first meeting holds good for all meetings that follow. If the meeting is
adjourned sine die then a fresh notice must be given.

Quorum: (S. 174)

1. It is the minimum number of members who must be present at a meeting required by law in
order to constitute a valid meeting and transact business. It is generally fixed by the articles.
2. If the articles do not provide for a larger quorum, the following rules apply:
(a) Public companies- 5 persons personally present
(b) Public companies- 2 persons personally present
(c) If within half an hour from the time appointed for holding the meeting a quorum is not
present, the meeting if called on the requisition of the members shall stand dissolved
(d) In any other case, the meeting is adjourned to the same day, time and place in the next
week or to such other time and place as determined by BODs
(e) If no quorum present within half an hour at the adjourned meeting then the members
present will constitute the quorum

3. The articles cannot provide for a lesser quorum than the statutory minimum.
4. If 2 or more body corporates are represented by a single individual, each of them will be
treated personally present and the person carries more than one set of opinions on the
resolution as he represents more than one body corporate. (S.187- a body corporate may

38
 be represented by an individual at such meeting who shall act on behalf of the body
corporate)
5. Joint shareholders are treated as single members.
6. Preference shareholders and shareholders without voting rights present in the meeting are not
counted for quorum. Unless, the proposed business includes any item directly affecting
preference shareholders or have earned voting rights.
7. Only members present in person and not proxies will be counted. S.176 provides that proxies
are not allowed to speak in a meeting and they cannot vote unless by poll.
8. If the total number of members of the company is less than the quorum fixed by the articles,
then the rule is satisfied if all members of the company attend the meeting in person.
9. One man meetings: one person cannot constitute a meeting. The exceptions to this rule;
(a) One person holds all the equity or preference shares of the company (case of L. Opera
Photographic Ltd.)
(b) Where there is a class meeting of shareholders where one person holds all shares of the class
(c) Incase where the meeting is adjourned and at such adjourned meeting, there is only one
member present after half an hour
(d) CLB directs one person to represent the company in a meeting in case of an AGM (S.167) or
in any other meeting (S.186)
(e) Where the board of directors delegates a task to a committee and the committee consists of
only one member
10. The quorum must be available at the beginning of the meeting. It is not necessary that the
quorum be present throughout the meeting.
11. The articles of the company may at times provide that the requisite quorum must be present at
the time when the meeting proceeds to transact business. This is also provided under
Regulation 49(1) of Table A.
12. However, Regulation 41 of Table A of the Companies (Tables A to F) Regulations, 1985 under
the English Companies Act, 1985 provides that the meeting shall be adjourned where at any
point of time the requisite quorum is not available.
13. The quorum shall be presumed unless it is questioned at the meeting or where the records
show otherwise.
14. Voting at the meeting shall take place by show of hands, by poll or by ballot.

39
Chairman of the Company:
1. The chairman is the presiding officer of the meeting who is elected or designated under S.
175.
2. Such person is usually a member of the company and may be designated by the articles.
Incase there is no designation or chairman is absent then the meeting itself elects the chairman
by show of hands or poll, where the meeting decides against electing the chairman by way of
a show of hands.
3. The board may decide elect a new chairman, unless the articles specifically provide
otherwise.
4. Powers of the chairman:
(a) To maintain order and decorum
(b) To give ruling on points of order
(c) To decide priority of speaker
(d) To maintain relevancy and order in debate
(e) To adjourn a meeting; to exercise the casting vote
(f) To ascertain the sense of a meeting and declare the result of voting.

5. Duties of the chairman:

(a) To see that the meeting is properly convened and duly constituted
(b) To see that the proceedings of the meeting are conducted in accordance with the rules
(c) The business is discussed in the order set out in the agenda
(d) No discussion is allowed unless there is a specific motion
(e) To see that all members get an equal chance to express their opinion
(f) To exercise judicially his power of adjournment
(g) Act in bona fide interest of company
(h) Take care that rights of minorities are not ignored

Minutes of the Meeting:

1. Company shall keep record of all the proceedings of every meeting and this should be done
within 30 days of conclusion of the meeting. These records are called minutes. (S.193)
2. There should be a separate book kept for the minutes of the meeting known as the minutes
book. It should provide fair and correct summary of the meeting.
3. The chairman has a right to exclude any defamatory or irrelevant matters or such matters as
are detrimental to the interests of the company. Each page should be initialled or signed by the
chairman of the meeting.
4. Where there are any appointments made, the minutes must mention the same.
5. The contents of the minutes in a board meeting shall be as follows-
(a) Names of all board members present
(b) Each resolution passed and name of each member dissenting the same or not concurring with
the same

6. Where the provisions of S.193 (as mentioned in points 1 to 5) are contravened, every officer
of the company in default shall be liable to pay a fine of Rs.500.
7. Chief uses of minutes:
(a) Record of the business transacted and decisions at the meetings;
(b) Available for inspection by interested parties;
(c) They can be produced as evidence in the court.

40
8. Minutes of the meetings are evidence of the proceedings of the meeting. They should be kept
in the registered office and open to inspection during business hours for at least 2 hours in a
day.
9. Every member shall be furnished within a period of 7 days from the date of request, a copy of
the minutes.
10. Where a copy of the minutes is not furnished or where they are not provided to the members
for inspection, the company and every officer in default shall be liable to a fine of Rs.5000.

3.2. Laws and procedures relating to various meetings

Statutory Meetings (S.165)

1. This provision is applicable to every public company which has a share capital.
2. A statutory meeting is mandatory only for the public company, and not applicable to the
private and government companies.
3. Within a period of not less than 1 month and not more than 6 months from the date on which
business is to be commenced, company has to hold a general meeting of the members of the
company. This is called statutory meeting.
4. This is the first meeting of the company and is held only once in a lifetime of the company. If
not held the company may be wound up.
5. After 1980 the English law abolished the requirement of statutory meeting.
6. A statutory report has to be sent to the members of the company within 21 days before the
meeting and such report has to be signed and certified as correct by atleast 2 members, 1 of
whom is a managing director, where there is one.
7. Contents of the statutory report:
(a) Total shares allotted including the number of shares which are fully paid up and the number of
shares which are partly paid up
(b) Cash received in respect of the shares allotted
(c) Abstract of receipts and payments of the company upto a date within 7 days of the report
(d) The names, addresses and occupations of directors and auditors
(e) Contracts which may have been entered into by the company
(f) The extent to which an underwriting contract has not been carried out
(g) Arrears of calls on shares held by directors or the manager
(h) Commission and brokerage payable to any director in relation to issue or sale of shares or
debentures

8. The report has to be certified by the auditor where it deals with matters relating to allotment
of shares, cash received by virtue of such allotment and receipts and payments of the
company.
9. After copies of the report have been sent to the members of the company, it shall be sent to
the Registrar for registration.
10. At the beginning of the meeting, a list of the members of the company with their addresses,
occupations and shares held by them shall be made and the same shall be open for inspection
by the members at any time during the continuance of the meeting.
11. The meeting may discuss matters relating to the formation of the company or any such other
matters, even without giving a notice for the same. However, where notice is not given, a
resolution cannot be passed on the matter.

41
12. The meeting may be adjourned from time to time. Where notice is given as regards a matter
and a resolution was to be passed in a meeting that was adjourned, it may be passed in the
next meeting after adjournment which shall have the same powers as the adjourned meeting.
13. Any contravention of the provisions of this section shall attract a penalty of Rs.5000.
14. The object of the meeting is to put members in possession of all important facts relating to the
company, to provide members opportunity to meet and discuss, and to approve any
modifications of the terms of the contract.

Annual General Meetings: (Ss. 166 and 167)

1. Any company in addition to all other meetings each year has to hold a general meeting as an
AGM and shall specify the same in the notice.
2. The first AGM has to take place within the first 18 months from the date of incorporation.
There is no provision to provide for an extension of this time period.
3. Where the first AGM is held within 18 months from the date of incorporation, the company
need not hold any further AGMs in the year of its incorporation and in the year that follows.
Thereafter, an AGM must be held every year.
4. The gap between two consecutive AGMs can be a maximum of 15 months. The Registrar may
for any special reason extend the time gap between the AGMs by a maximum of 3 months.
This however does not pertain to the first AGM.
5. In Shree Minakshi Mills v. Asst. Registrar, Madurai, it was held that an AGM must be held
every year.
6. An AGM is a statutory requirement. It is called even when the company was not functioning
during the year. (Madan Gopal Dev v. State of West Bengal)
7. Unlike an EGM, an AGM cannot be held on a public holiday but during business hours. Also
it should be held at the registered office of the company or some other place in the city, town
or village where the registered office is located.
8. Where a meeting was held at a different place than what was specified in the notice, the
meeting was held to be illegal. (Sikkim Bank Ltd. v. RS Chowdharu)
9. The Central Government may however exempt a particular class of companies from holding
the meeting during business hours at its registered office or in such place/area where its
registered office is situated.
10. In case of a public company, the articles of the company may fix the time within which the
meeting may be conducted. Thereafter, even a resolution passed at such AGM may fix the
time for the subsequent meeting.
11. In case of a private company, its articles or a subsequent resolution may fix the time and place
for the AGMs.
12. There is a requirement that the meeting be held at the registered office even in case of
adjourned meetings. Adjourned meetings also should be held within time limit prescribed by
the section. (Mundhra (MD) v. Asst. Registrar of Company, West Bengal)
13. The meeting must be held irrespective of the fact that accounts have not been prepared.
14. The power to extend the time within which the meeting may be held is upto the Registrar and
not the Central Government.
15. In holding of an AGM, no distinction is made between private and public companies.
16. A 21 day notice has to be given for holding an AGM but a shorter notice is will be allowed
where the same is consented to by the members. (S.171)

42
17. An AGM convened for a date can be cancelled or postponed by the Board on the day of the
meeting if proper reasons are given (Rajpal Singh v. State of Uttar Pradesh)
18. Under S.167, where an AGM is not convened as per the provisions of S.166, the Central
Government may call for an AGM by way of an order may also give directions as regards
certain other matters.
19. S.167 as per the slides (this provision was amended in 2002)- Where an AGM is not
convened as per the provisions S.166, the Company Law Board, may on the application
made by a member call for an AGM and give other directions in this regard.
20. Default may be said to have been done only after the period mentioned in S.166 expires.
21. CLB may exercise power of calling an AGM only on the application of a member and not the
company after the expiry of period given in the section. This cannot be ratified by impeding a
member subsequently. (Cannore Whole Body CT Scan and Research Centre Pvt. Ltd. v.
Saibunisa)
22. In Dinkar Rai Desai v. P. Bhasin, the Board failed to conduct the AGM despite CLB
directions and a new Board was elected. This Board cannot be held responsible for failures of
earlier Board.
23. Where there is a default in holding an AGM under 166 or failure to comply with S. 167, the
company and any officer in default shall be punishable with a fine upto Rs. 50,000 and if
continued to a further fine of 2500 per day of default.

Extraordinary General Meeting: (S. 169)

1. AGM and statutory meetings are ordinary meetings, any other general meetings are EGMs.
2. The meeting shall be called by the BODs of the company by requisition by such shareholders-
(a) Where the company has a share capital, on the requisition of the shareholders that hold
not less than 1/10th in value of the paid up capital and voting rights
(b) Where the company does not have a share capital, on the requisition of the shareholders
holding not less than 1/10th of the voting rights

3. In Kuldip Singh Dhillon v. Paragon Utility, it was held that where any member who has not
paid calls is and is not entitled to vote, he cannot requisition a meeting. If done then the
proceedings will be invalid.
4. A requisition signed by one of the joint owner has same effect as that signed by all.
5. The requisition sets out the matters of consideration for which meeting has been called and
must be signed by the requisitionists.
6. The board shall proceed to call a meeting within 21 days from the date of deposit of a valid
requisition. The meeting shall be held within 45 days from the date of the deposit of the
requisition.
7. If the board does not conduct the meeting, it may be called by the (a) requisitionists
themselves, (b) where the company has a share capital by such of the requisitionists as hold
1/10th of the paid up capital and voting rights and (c) where the company does not have a
share capital, by such requisitionists as hold 1/10th of the voting rights.
8. This meeting shall be held within 3 months from date of requisition and reasonable expenses
shall be repaid to the requisitionist by the company from the remuneration receivable by the
directors.
9. Where the meeting is duly commenced within the period of 3 months, it shall be valid even
where it is adjourned and held again after such period.
43
10. Institutional shareholders also hold same rights to requisition an EGM. The same procedure
shall be followed in such cases.
11. Refusal by the directors to call a meeting on requisition does not amount to an offence as
requisitionists have their own alternative. (Anantha Hegde v. Captain TS Gopala Krishna)
12. An EGM can be held at any place unlike an AGM.
13. The CLB (now NCLT) can also order an EGM incase it is impractical for the company to call
hold or conduct it under S.186.

3.3. Voting- ordinary resolution, special resolution, resolution requiring special notice,
resolution by Postal Ballot

1. Voting rights of equity shareholders: (Ananthalaxmi v. HI & F Trust)

(a) Every equity shareholder shall have a right to vote
(b) This right cannot be prohibited on the ground that he has not held his shares for a
specified period before the meeting.

2. Grounds for denying equity shareholders right to vote:

(a) Non-payment of calls by a member;
(b) Other sums due against a member;
(c) Where the company has exercised the right of lien on his shares.

3. Preference shareholders will have a right to vote only on matters which directly affect the
rights attached to their shares
4. Voting rights are not affected by the fact that his shares have been attached or pledged or
receiver has been appointed. (Balkrishna Gupta v. Swadeshi Polytex Ltd.)
5. Voting can be done by:
(a) Show of hands
(b) By way of a poll

6. In case of voting by a show of hands, motions are decided by show of hands at the first
instance, the chairman has to count and declare the result and an entry shall be made into the
books without regard to the number of votes that a member raising the hand possesses.
7. Voting by poll may be carried out in the following cases-
(a) Before or on declaration of result of show of hands on a resolution, a poll may be ordered
by the chairman on his own motion.
(b) It can also be taken by demand, incase of a public company having share capital by any
members who are present or are voting by proxy and holds-
i. Power to vote on the resolution and where such voting power is not less than 1/10th
of total voting power.
ii. Where the aggregate sum paid by such members as regards their shares having
voting rights with respect to the resolution is at least Rs.50,000
(c) In case of private company having a share capital, the demand may be made by one
member present or voting by way of a proxy, if not more than 7 members are personally
present and by 2 members present or voting by way of proxy if more than 7 members are
personally present.
(d) For any other company, the demand may be made by any member present or voting by
way of proxy who holds 1/10th the total voting power with respect to the resolution
44
 (e) Where voting rights are to be exercised with respect to shares held in trust, the demand
may be made by the public trustee personally or through a proxy.
(f) Voting by companies and government can be done through representative elected by
resolution of the BOD or governing body.

8. If in a poll a member is entitled to more than one vote, then he or his proxy can cast vote in
whatever manner and all do not need to be cast in the same manner. He may not even cast all
his votes.

Proxy:
1. A proxy is entitled to attend and vote at a meeting on behalf of the member. If the articles do
not otherwise provide-
(a) A proxy can vote only on a poll
(b) A member of a private company cannot appoint more than one proxy to attend on the
same occasion
(c) A member of a company not having share capital cannot appoint proxy.

2. The proxy cannot speak at the meeting.

3. The proxy must have been appointed by a written instrument signed by the appointer or his
duly authorised attorney. Where the appointer is a body corporate, such instrument must have
the seal of such body corporate or must be signed by an officer or attorney of the body
corporate.
4. The form for the Instrument of proxy has been prescribed in Schedule IX.
5. Each meeting requires a separate proxy. Such person need not be a member.
6. The members have a right to inspect the proxy and 3 day notice is to be given for the intention
of inspection. The inspection shall be allowed during business hours starting 24hours before
the meeting till the conclusion of the meeting.
7. Notice of the meeting should provide for right of member to appoint a proxy.
8. Where the notice does not provide for the same, a fine of Rs.5000 shall be levied on every
officer in default.
9. Proxy can be filed through a fax and has to be filed atleast 48hrs before the meeting or within
48 hours before an adjourned meeting.
10. In case of joint trustees or joint members, all such persons have to sign the proxy form.
11. Mistakes in the proxy which affect the exercise of the voting right in any way will render it
invalid if they are likely to mislead.
12. Creditors in the winding up of a company may vote by proxy.(S.500)
13. Stamp duty can be paid on proxy.
14. S.176 only allows a proxy to attend and vote in place of the member. Thus, a Proxy cannot
vote by post. (view held by Ramaiya) But Kunwar Brij Bhushan v. Dehradun Tea Company,
held the opposite.
15. Rights of insolvent and minor to vote. (chk)

Resolutions:
1. The questions that generally come for consideration at the general meeting of the company
are presented in the form of proposals called motions. This shall be seconded by another
member to be presented to the chairman. If the motion is carried after the poll then it becomes
a resolution.
45
2. Kinds of resolutions:
(a) Ordinary resolutions
(b) Special resolutions
(c) Resolutions requiring special notice.

3. An ordinary resolution is a resolution passed at the general meeting of a company by a simple

majority of votes, including the casting of the chairman, wherever required. The notice to be
given must be as required under the Act.
4. Ordinary resolution is enough unless a special resolution needs to be passed.
5. If the Companies act states certain resolutions to require special resolution or resolution by
notice then the Memorandum or Articles cannot validate otherwise.
6. A special resolution is one which satisfies the following:
(a) The intention to propose the resolution as a special resolution has been duly specified in the
notice calling the general meeting.
(b) The notice has been duly given of the general meeting.
(c) The votes cast in favour of the resolution are not less than 3 times the votes cast against it.
(d) An explanatory statement setting out all material facts concerning subject matter of the
special resolution shall be annexed to the notice.
7. A copy of the special resolution together with the explanatory statement shall within 30 days
of passing of the resolution be filed with the registrar.
8. A resolution requiring special notice is not an independent class of resolution. It is only a
different kind of an ordinary resolution of which notice of intention to move the notice shall
be given atleast 14 days before the meeting at which such resolution shall be moved to the
company.
9. The Companies Act makes a mention of instances wherein such special notice must be given.
10. After receipt of the notice within the 14 day period, the company shall immediately notify its
members about such a resolution in the ordinary manner.
11. This may even be done by way of an advertisement in a newspaper having appropriate
circulation or by any other method as specified in the articles, within 7 days before the
meeting.
12. Certain instances in which a resolution requiring special notice may be given include
appointment of an auditor other than the one retiring, provision that a retiring auditor cannot
be reappointed, removal of a director before expiry of his term, appointment of a director in
place of a director so removed, etc.

3.4. Division of powers between board and general meetings

1. Board meetings must be held once in every three calendar months and at least 4 such board
meetings in a year are required to be held.
2. ICSI through its secretarial standards suggests one Board meeting every 3 months with a
maximum interval of 120 days interval between any two meetings.
3. S 286 provides that a notice to be given in writing to every director for the time being in India
and at his usual address in India to every director who is not in India for the time being.
Notice by fax is adequate.

46
4. Where a notice is not sent out for such meeting, every officer in default shall be liable to pay a
fine of Rs.1000.
5. In Khemka v. Deccan Enterprises, it was held that the telephonic or oral invitations cannot
amount to notice.
6. No form of notice is specified and usually a week’s notice is considered sufficient unless a
specific period provided by the AOA. The notice should be given to all directors including
interested directors.
7. Proper authority to call a meeting rests with the Board.
8. Law does not require an agenda for the meeting of directors.
9. It is not required to be held in the registered office and can be held on a public holiday.
10. The quorum shall be 1/3rd of the total strength or two directors, whichever is higher or
according to the AOA.
11. An interested director under S.300 shall not be counted for the purpose of quorum.
12. Where the number of interested directors is 2/3rd or more of the total strength, the number of
the directors not interested (being at least 2) shall form the quorum.
13. A meeting may be adjourned for want of quorum till the same date in the next week. Where
such date in the next week is a public holiday, it shall be held on the day after such holiday
which is not a holiday.
14. A resolution shall not be deemed to have been passed unless it is sent to the board members in
India by post and to such members outside India, to their usual address in India. The
resolution must be approved by a majority of the members.
15. The company must maintain an attendance register containing the names of directors present
in the meeting.
16. The minutes of the meeting must be recorded in the minutes book and each page of such
minutes must be initialled by the Chairman. Date when the minutes were entered must also be
recorded.
17. The minutes shall be circulated to the Board members within 7 days of the conclusion of the
meeting and they shall send in their comments within 15 days.
18. The minutes may be inspected only by the Board meeting.
19. Minutes of an earlier meeting must be noted in the subsequent meeting.

Extra points:

1. In Jain v. Delhi Flour Mills, held uncertainty about the constitution of the board.
2. In Lothian Jute Mills Co. Ltd., held board divided into fractions.
3. In Baptist Church Association v. Members, rival groups holding meetings at separate places
and appointing separate sets of office bearers.

47
Unit IV Oppression and Mismanagement

4.1. Majority powers and minority rights

Majority rule:
1. The management of a company is based on the majority rule. The principle that the will of the
majority should prevail and bind the minority is known as the principle of majority rule.
2. If a wrong is done to the company, the company has a right to institute a suit but an individual
member has no such right.
3. In Foss v. Harbottle,
(a) 2 minority shareholders of the company alleged that its directors were guilty of buying
their own land for the company’s use and paying higher prices than the value, resulting in
loss for the company.
(b) Court dismissed the suit on grounds that the acts of the directors were capable of
confirmation by the majority. Also the company can act only through its majority
shareholders.
(c) They held two distinct but linked propositions:
i. Court will not interfere with the internal working or irregularities if the company
can ratify the issue.
ii. Where a wrong has been done to the company, then the right plaintiff is the
company itself and no one else.

(d) It is a logical extension of the principle that a company is a separate distinct personality
from its members. Therefore only the company may sue.
(e) Principle laid down applies where a corporate right of a member is infringed and does not
apply where the individual rights of the member’s are infringed. Members’ rights include
the right to have one’s name included in the register, the right to payment of dividend, if
any, etc.
(f) The principle laid down in Foss v. Harbottle has been followed in the Indian case of
Bhajekar v. Shinkar.

4. On becoming a member of the company, the member agrees to submit to the will of the
majority of the members expressed in a general meeting and in accordance with law and
Memorandum and articles.
5. Advantages of rule in Foss v. Harbottle:
(a) Recognition of separate legal personality of the company.
(b) Need to preserve right of majority to decide affairs of the company. Therefore, will of the
majority should prevail.
(c) Multiplicity of futile suits avoided.
(d) Litigation at the suit of a minority is futile if the majority do not wish the same.

6. Rule of majority is a derivative and representative action.

7. Exceptions to the rule of majority-
(a) Where the act done is ultra vires the company and is illegal. Eg; using company funds to
do activities not authorised by the AOA, any member can institute a suit
48
 (b) Breach of fiduciary duties by directors or majority shareholders
(c) Fraud or oppression against minority or where there is mismanagement.
(d) Inadequate notice of resolution passed at a meeting of the members
(e) Qualified majority
(f) Where personal rights of individuals have been infringed.
(g) Statutory exceptions- variation of class rights (S. 106), scheme of reconstruction and
amalgamation, oppression and mismanagement.
(h) Resolution is passed by a simple majority and by an ordinary resolution when a special
resolution is required.
(i) Act of company is inconsistent with articles.

MINORITY PROTECTION:
1. The Companies Act attempts to maintain a proper balance between the rights of the majority
and minority shareholders.
2. Minority rights are protected by various rights of shareholders that related to:
(a) The variation of class rights (Ss. 106-107)
(b) Investigation by Central government (Ss. 235-250)
(c) Schemes of reconstruction and amalgamation (Ss. 391-395)
(d) Prevention of oppression and mismanagement (Ss. 397-398)

4.2. Provisions relating to oppression and mismanagement under the Companies Act, 1956

The oppression and mismanagement of minority calls for remedial action. The minority may
apply to:
(a) The CLB (now NCLT) for winding up of the company
(b) The CLB (now NCLT) for appropriate relief short of winding up
(c) The Central government for appropriate relief

OPPRESSION:
1. Oppression means not keeping the general standards of honesty and fairness and not having
regard of the interests of shareholders.
2. It includes any act which harsh and burdensome and it may be caused either by acting or not
acting in a particular manner.
3. Unwise, inefficient and careless conduct of the director in the performance of his duties does
not give rise to relief under S. 397.
4. There is a presumption by the courts that the directors acted in the best interest of the
company.
5. In English law, the word ‘oppressive’ has been replaced by ‘unfairly prejudicial’.
6. S. 397 provides that any member(s) of a company who complains that the affairs of the
company are being conducted in a manner prejudicial to the public interest or in a manner
oppressive to any member(s), may apply to CLB (now NCLT) for relief.
7. Public interest means general social welfare and interest of the general public and community.
It emphasises the idea of the company functioning for the public good or general welfare of
the community.
8. Relief by CLB (actually NCLT) is given based on the following factors-
(a) That the company’s affairs are being conducted unfairly
49
 i. in a manner prejudicial to public interest
ii. in a manner oppressive to any member(s)

(b) That the facts justify the compulsory winding up order on just and equitable grounds
(c) That to wind up the company would be unfairly prejudicial to applicants

9. Once a person’s name is entered as a member of the company in its register for members, he
is said to be a member. The shareholder of the company in whose favour share certificates are
issued can also exercise rights as members of the company even if their names are omitted in
the register.
10. Only the following persons shall be allowed to apply to the tribunal under S.399-
(a) Where a company has a share capital, at least 100 members or 1/10 th of the total number
of members, whichever is lesser OR by such member(s) holding not less than 1/10 th of the
issued share capital of the company
(b) Where a company does not have a share capital, 1/5th of the total number of members

11. Thus, the right to apply does not only lie with the minority.
12. The remedy under S. 397 is available to the members only in their capacity as members of the
company and not any other capacity. If the majority board of directors override the minority
directors it is outside the purview of the section. (Re Bellador Silk Ltd.)
13. In Shanti Prasad v. Kalinga Tubes, the following principles were laid down-
(a) It is not enough to show that there are just and equitable reasons for winding up of the
company, though this shall form part of the preliminary to an application under S.397
(b) The conduct of the majority shareholders must be oppressive upto the date of the
application. Such oppression must be a series of continuous acts. Thus, a mere general
allegation is not sufficient.
(c) It must involve acts which are harsh, burdensome and wrongful
(d) Mere lack of confidence between the minority and majority shareholders shall not be
sufficient, unless it involves oppression
(e) It must involve lack of probity or fair dealing with respect to proprietary rights of the
shareholders
(f) A petition for relief in case of oppression may include a prayer for relief of winding up in
the alternative

14. The terms ‘in a manner prejudicial to public interest’ were added in 1963 by way of an
amendment to enable the court or central government to interfere where there are acts
committed which are prejudicial to public interest.
15. Oppression is not said to be there where the majority carries on a competing business except
where they divert corporate opportunities or use corporate facilities.
16. It is not necessary for oppression to be for obtaining pecuniary benefit. It could be to retain
power or it may be vindictive or may manifest itself in the denial of rights.
17. Commercial misjudgments will not amount to oppression.
18. In Needle Industries v. Needle Industries New India Ltd., it was held that an act in
contravention of the law per se shall amount to oppression.
19. The mere apprehension that an act shall lead to oppression of the minority shareholders in the
future does not amount to oppression.
20. Oppression does not cover private enimosity.
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 21. In Tea Brokers Pvt. Ltd. v. Hemlata Prasad Barooah, it was held that a single act is sufficient
to constitute oppression in certain cases like when a majority was reduced to the position of
minority by allotting new shares only to the minority group.
22. In BR Kundra v. Motion Pictures Association, the Delhi High Court stated that in exercising
its jurisdiction it will consider the following-
(a) Need to maintain democratic rights of majority members within limits.
(b) Protect and safeguard minority rights.
(c) Limited interference by court in company affairs so that useful social services provided by
the company are not jeopardised.
(d) No exploitation or misuse of the provisions of the Act.

23. Thus, oppression is an equity relief left entirely upto the discretion of the court.
24. The minority shareholder approaching the court must come with clean hands.

MISMANAGEMENT:
1. S. 398 deals with application to CLB for relief against mismanagement. Relief provided if
CLB feels that:
(a) Affairs of the company are conducted in a manner prejudicial to the interests of the
company or public interest.
(b) Any material change in the management or control of the company has resulted or will
result in the affairs being conducted in manner prejudicial to the interests of the company
or public interest.

2. The change in management or control of the company may be due to an alteration in its BODs
or manager or ownership of shares and where it does not have a share capital, due to change
in its membership.
3. The CLB shall accordingly pass an order in this regards.
4. There should be present and continuous mismanagement.

4.3. Role of Tribunal and Central Government

1. Ss. 397 and 398 are intended to avoid winding up of a company and at the same time
relieving the minority shareholders from the acts of oppression or mismanagement or prevent
affairs from being conducted in a manner prejudicial to public interest.
2. Difference between ss.397 and 398 and Winding up

Ss. 397 and 398 Ss. 433(f)- winding up

(a) Petition to be made to the CLB Petition made to the tribunal (actually
(now NCLT). court).
(b) Remedy is of preventive nature Results in civil death of the company.
and provides continuity of
company.
(c) Notice to central government is No notice is required.
necessary.
(d) Share qualification is required for No minimum share requirement is
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 an application. needed.
(e) The central government can also The central government cannot, but
apply under the provisions. the registrar can apply.
(f) Nature of relief granted is much Nature of relief is narrow.
wider.
3. An article in the AOA to the effect of an arbitration in case of dispute between members and
the company will not lead to stay of petition under Ss. 397 and 398 by the CLB. (now NCLT)
4. The provisions give exclusive jurisdiction to the CLB (now NCLT) and matters dealt with
cannot be referred for arbitration.
5. The preference shareholders can also apply for appropriate relief under the provisions.
6. Joint owners are to be treated as one member.
7. If the number of members filing petition is less than the requisite number then they can apply
where the Central Government authorises them in this regard.
8. Notice has to be given to the Central government for every application under S. 400 and the
CLB (now NCLT) shall take into consideration the representations made by the Central
Government in this regard. Also under S. 401 the Central government has discretionary power
to apply to CLB (now NCLT) for an order under Ss.397 and 398.
9. Powers of the CLB (now NCLT) include the following-
(a) The regulation of the conduct of the company’s affairs in the future.
(b) The purchase of shares of any members of the company by other members or the
company.
(c) Reduction in share capital, incase of purchase of shares.
(d) The termination, setting aside or modification of contract between company and
management or third party where such third party has received a notice in this regard and
he has consented to the same.
(e) Setting aside any transfer, delivery of goods, payment, etc. with respect to any property
within 3 months before the date of the application.
(f) Any other matter the provisions of which are just and equitable in the eyes of the CLB
(now NCLT).

10. The CLB (now NCLT) may even make an interim order on the application of any party to the
proceedings which is required to regulate the conduct of the company. (S.403)
11. Where any order of the CLB (now NCLT) has the effect of altering the memorandum of the
company, the company shall not change such alteration made without the prior permission of
the CLB (now NCLT). The altered memorandum shall have the same affect as if the alteration
had been duly authorised by the company. (S.404)
12. S.404 also provides that where the order makes such an alteration or gives leave to make such
an alteration, a certified copy of the order must be deposited with the Registrar within 30 days
of the order and the Registrar shall thereafter register the alteration.
13. The penalty for contravention of this provision is Rs.50, 000 which is payable by the
company and every officer in default.
14. As per S.405, where a manager or MD or any other director or any other person applies to be
impleaded as a respondent to the proceedings and the CLB (now NCLT) deems the same fit,
he shall be added as a respondent.
15. S. 407 provides that no compensation is payable for loss of office of managerial personnel
resulting from termination or setting aside of an agreement due to an order under Ss. 397 and
52
 398. Further, such person shall not act for the company for 5 years thereafter, except by leave
of the CLB (now NCLT).
16. Where a person contravenes the provisions of S.407, a fine of Rs.50,000 shall be levied on
such person or such other person who is party to the contravention.
17. The Central Government has the following powers under S. 408 to prevent oppression or
mismanagement-
(a) Where an application is made to the CLB (now NCLT) by at least 100 shareholders or
shareholders holding 1/10th of the total voting power OR on a reference made by the
Central Government, the CLB (now NCLT) shall after conducting due enquiry
recommend the Central Government to appoint such persons as directors of the company
as it deems fit
(b) Such persons shall be appointed for a period of 3 years at a time
(c) The CLB (CLB) may even order the company to suitably amend its articles to appoint
new directors in place of making an order as mentioned in (a)
(d) Where the CLB (now NCLT) passes an order asking the company to amend its articles, it
may recommend the Central Government to appoint such additional directors for the time
the new directors are not appointed
(e) The directors appointed under this provision, not being the new directors elected by way
of alteration in the articles shall not be taken into account for the purposes of calculating
any sort of majority of the Board members required for passing a resolution, etc.
(f) The directors appointed under (a) or the additional directors appointed under (d) need not
hold any qualification shares
(g) Their office shall not be determined by way of rotation
(h) The Central Government may even require the removal of the auditors of the company
and appointment of new auditors in their place or alteration of the articles of the company
by virtue of this provision
(i) The directors appointed by the Central Government may be required to report to the
Government as regards the affairs of the company

18. The CLB (now NCLT) has power to prevent change in the Board under S. 409 where such
change may occur due to a change in the shareholding pattern of the company. This is
applicable only to a public company.
19. For the same, the directors may make an application to the CLB (now NCLT) stating that such
a change would prejudicially affect the affairs of the company.
20. Where the CLB (now NCLT) is satisfied that such a change in the Board is not desirable, it
may make an order stating that no resolution passed or that which may be passed and no
action may be taken to affect a change in the Board, unless the CLB (now NCLT) confirms
the same.
21. Such an order shall be effective even if there is anything contrary in the Act or the
memorandum or articles or any resolution passed by the general meeting or the Board.

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Unit V Compromises, Arrangement, Reconstruction and Amalgamation

5.1. Statutory provisions

5.2. Court’s powers and discretion
5.3. Schemes to be presented
5.4. Trans-national mergers and amalgamation- not taught in class

1. A compromise is when there exists a dispute and such dispute is settled by way of the
compromise.
2. An arrangement on the other hand has a wider import and includes situations which need not
involve a dispute. It includes situations such as reorganisation of the share capital, takeover of
shares, etc. An arrangement should not be taken to mean the same thing as a compromise.
3. An arrangement may even alter the rights of members or creditors of the company. However,
it will not be termed as an arrangement where the rights of a member are taken away
completely without adequately compensating him.
4. A reconstruction or reorganisation or a scheme of arrangement generally pertains to a single
company where the rights of the members and/or creditors are altered in some way or the
other.

Note: S.391 states that the tribunal/NCLT shall have the required jurisdiction for dealing with such cases.
However, as the NCLT has not come into existence yet, such power lies with the High Court. Thus, the
term ‘High Court/Court’ has been used in place of NCLT in the sections that follow.

5. S.391 is the broad provision which deals with such compromises and arrangements.
6. It deals with reorganisations where there has to be a consolidation of shares of different
classes or a division of such shares.
7. It also deals with an arrangement between the company and its shareholders as regards
distribution of surplus assets of the company by way of gift or otherwise, where the
memorandum of the company allows such distribution.
8. A scheme under the section cannot be regarded as an alternate mode of liquidation. Further,
where a scheme appears workable, feasible and consistent with commercial morality, it should
be preferred to a winding up order.
9. Where a reduction of the share capital of the company is possible within the scheme under
S.391, the provisions of the Act relating to the reduction of share capital shall not apply in
such case as the court can sanction such reduction as part of the scheme.
10. A scheme under S.391 does not automatically attract proceedings under Ss.397 and 398 which
relate to oppression and mismanagement.
11. S.391 is thus very wide in its import and thus as will be seen from the points as follow, it may
even help the court rescue a company where a winding up petition has been filed or a winding
up order has been passed against the company.

54
12. However, it has been held in General radio and Appliances Company Ltd. v. MM A Khader,
that an amalgamation cannot by-pass other statutes. In this case, it was decided that a tenant
could not sub-let a plot without prior permission of the landlord. Herein, under a scheme of
amalgamation, the plot of land was transferred to the company by the tenant and the
permission of the landlord was not taken. Thus, the transferee company was held liable to be
evicted from the premises.
13. S.391 provides for the power to make arrangements or compromises by a company with its
members or class of members OR its creditors or class of creditors.
14. In such case, an application shall be filed with the Court either by any member or creditor, as
the case may be or by the company or where the company is being wound up, by the
liquidator of the company.
15. In case of a liquidation of a company, the application may even be filed by the creditor
or a member.
16. The Court shall thereafter as it deems fit order that a meeting of the members/class of
members OR the creditors/class of creditors and the company be held. Clubbing of different
classes of persons for such purpose is not permitted.
17. Further, unless a different sort of compromise or arrangement is ordered for a sub-class
of a class no such sub-class shall be entitled to have a separate meeting.
18. Where in such a meeting, 3/4ths of the persons present and voting and where proxies are
allowed, persons voting by way of proxy are in favour of such compromise or arrangement,
the Court shall sanction the scheme if it deems fit. Thereafter, the scheme of compromise or
arrangement as sanctioned by the Court shall be binding on all the members or creditors and
the company. Where the company is being wound up, it shall be binding upon the liquidator
and the contributories.
19. However, the person who had in the first place filed an application for the compromise or
arrangement with the Court must furnish all necessary details as regards the financial position
of the company, the report of the auditor and any pending investigation proceedings against
the company under Ss.235 to 251. (investigation into the affairs of the company)
20. The Court must also make sure that all statutory requirements have been complied with.
21. In Miheer H Mafatlal v. Mafatlal Industries, it was upheld that the Court must look into the
following matters as well, in addition to the matters specified in points 19 and 20-
(a) Whether the scheme is supported by the requisite majority
(b) Whether the meeting has been properly convened and notices have been duly sent
(c) Whether the scheme is violative of any law
(d) Whether the members and creditors acted bonafidely and in good faith
(e) Whether the scheme appears just and fair from the point of view of a prudent man in
business
(f) The court however shall not enquire into the commercial wisdom behind such scheme

22. Further, Justice Ashbury had stated in re Anglo-Continental Supply Co. Ltd., that before
sanctioning such a scheme the following must be kept in mind-
(a) The scheme should comply with the statutory provisions

55
 (b) The concerned class is adequately represented in the meeting and the statutory minimum
acts in a bonafide manner and does not coerce the minority
(c) The scheme may be approved by a man of reasonable prudence

23. In re Bhavnagar Vegetable Products Ltd., a firm having 40 years experience in the textile
business proposed a scheme to revive a textile mill which was approved by all the parties. The
only opposition was by a cooperative society which lacked experience as regards the textile
business. The court decided to sanction such scheme.
24. In considering a scheme of arrangement or compromise, the court shall always look into the
welfare of the employees of the company. Such employees have the option whether or not to
join the new company formed as there is nothing contained in any statute which provides for
transfer of employees of an undertaking alongwith assets, liabilities, etc. in such cases. In fact
the employees may even oppose the scheme where it affects their rights.
25. The court however cannot enquire into matters such as entitlement of names, brands,
trademarks, etc. Such issues shall be left to the civil court.
26. The arrangement or compromise however shall not take effect unless a certified copy of the
order of the tribunal is filed with the registrar. (Slides: A compromise or arrangement shall
take effect from the date it is arrived at subject to the sanction of the court)
27. A copy of the order shall be attached to a memorandum of the company made after filing of
the certified copy of the order with the registrar. Where a memorandum has not been made, it
shall be attached to the instrument determining the constitution of the company.
28. Where there is default in complying with point 11, every officer of the company responsible
for the same shall be liable to pay a fine of Rs.100 per copy of the order.
29. The Court may even stay a suit or proceeding against the company which has been pending
and an application has been filed under S.391 until such application is disposed off. (Slides
and Avtar Singh: The court has no right under Ss.391-396 to stay any criminal or
revenue proceedings against the company)
30. The Court shall always be in favour of reviving a company rather than having it wound up.
31. Where a court feels that the scheme is not feasible and a majority of the creditors by
value oppose it, it may not even convene the meeting under S.391.
32. The court’s jurisdiction shall extend to foreign companies having an office within its
jurisdiction.
33. The court must be satisfied that the matter has been considered by an EGM as required under
S.391. The requirement of an EGM cannot be dispensed with by stating that the scheme has
been approved at an ordinary meeting. (Re Southern Automative Corporation P. Ltd.)
34. There is no restriction as regards the type of company one may merge with.
35. It is the duty of the court to sanction a scheme which has been approved at the statutory
meeting, the scheme is fair and reasonable and not adverse to the interests of the creditors,
employees or to the interests of the company and all other requirements have been complied
with.
36. However, the court will not sanction the scheme simply because it has been approved by the
statutory meeting and recommended by the board.

56
37. The court must not concern itself with matters relating to success or profitability of the
scheme.
38. It must however pay attention to matters relating to valuation of assets. (MG Investment and
Industrial Co. Ltd. v. New Shorrock Spg and Mfg Co. Ltd.)
39. Where the High Court makes an order under S.391, it shall have the power to supervise the
carrying out of the compromise or arrangement. It may even make directions as regards
modifications in the compromise or arrangement. (S. 392)
40. Where it is of the opinion that the scheme is unworkable, it may on its own motion or on
application made by any interested person, order that the company be wound up. Such a
winding up shall be deemed to be a winding up by tribunal under S.433A. (S.392)
41. In SK Gupta v. KP Jain, it was upheld that a person interested in the affairs of the company
may make an application under S.392.
42. The court cannot pass any directions under this section which do not related to the scheme
sanctioned or to the working of such scheme in relation to the company. However, the court
may even give directions to a third party provided that such direction given is necessary for
the compromise or arrangement.
43. Where the scheme is workable, no winding up order shall be made.
44. The court while sanctioning a scheme has the following limitations-
(a) The court can sanction a scheme only where had the court not sanctioned it and it
would have been approved by a majority of the members/creditors, it would still
have been valid
(b) The court cannot sanction a scheme where the arrangement or compromise must be
made subject to certain conditions and the company chooses to dispense with such
conditions
(c) The court cannot sanction a scheme which may be effected under any other
provisions of the Act

39. According to the Miheer Mafatlal case, the court may even enquire into any ancillary or
incidental matters to ascertain whether the scheme has the support of the requisite majority.
40. S.393 provides that the notice calling for the meeting of members or creditors as under S.391
must also have a statement attached to it which shall state the following-
(a) The terms of the compromise or arrangement
(b) Its effect
(c) Any material interests of any manager or director or MD in the capacity of a member or
creditor or otherwise
(d) The effect of such compromise/arrangement on such interest
(e) Where the rights of debenture holders are affected, information as regards trustees for the
deed for securing the issue of debentures (debenture trustees)

41. The notice where given by way of an advertisement may even contain a statement giving the
details of the place from where and the time at which the abovementioned statement may be
obtained.

57
42. Where any member or creditor approaches such place to obtain the statement within the time
provided, he shall be given a copy of the statement, free of cost.
43. Every director, manager, MD or debenture trustee shall give notice to the company as regards
matters relating to themselves and as are necessary for the purposes of this provision. If they
do not do so, they shall be liable to a fine of upto Rs.5000.
44. Full disclosure is a matter of public policy and such disclosure may be excused only
where it is of a de minimis nature. The court may even refuse to sanction a scheme
where full disclosure is not made.
45. The company shall also be intimated about the changes in interest from the time of
sending out the explanatory statement by the director or other person till the time the
class meetings are actually held.
46. The onus of showing that such change in interest shall not affect the scheme shall be on
the director or such other person making the disclosure.
47. Where any default is made as regards complying with the provisions of this section, every
officer of the company (which includes a debenture trustee and a liquidator) shall be liable for
a fine upto Rs.50, 000 except where they show that such default is caused as any manager or
MD or director or debenture trustee failed to disclose his material interest as regards the
scheme. (General penalty)
48. The notice for the meeting must also state the place for the meeting.
49. Where two amalgamating companies fall under the jurisdiction of different High
Courts, it is not necessary that they approach the same court.
50. In fact where two amalgamating companies are situated within the jurisdiction of
different High Courts, it becomes necessary for both courts to sanction the scheme so
that there is no conflict.
51. The reconstruction or amalgamation of a company may take place by way of sale of its
undertaking or by sale of its shares or by a scheme of arrangement.
52. S.394 deals with instances where under a scheme of amalgamation or reconstruction, the
whole or part of the undertaking of a company, its property and liabilities are being
transferred to another company.
53. In such circumstances, the court alongwith sanctioning the scheme may also make an order in
respect of the following matters-
(a) That the whole or part of the undertaking of the transferor company, its property and
liabilities be transferred to the transferee company
(b) That the transferee company allot any shares, debentures, policies or other similar
interests to any person
(c) That the transferee company proceed with any legal proceedings instituted by or against
the transferor company
(d) It may even order the dissolution of the transferor company without winding up
(e) It may make provision for any person dissenting to such scheme
(f) It may make any other order as regards matters that are incidental or ancillary to the
scheme

58
53. However, before sanctioning such a scheme where a company is being wound up, the court
shall receive a report from the Registrar or the Company Law Board stating that the affairs
of the company are not being conducted in a manner that are prejudicial to the interests of the
company.
54. In Union of India v. Ambalal Sarabhai Industries Ltd., it was upheld that the court may not
sanction the scheme for amalgamation where it is prejudicial to public interest.
55. In Oceanic Steam Navigation Company Ltd.’s case, it was upheld that a court cannot sanction
a scheme of amalgamation where it is ultra vires the memorandum.
56. Similarly, the Calcutta High Court upheld in Harikrishan Lohia v. Hoolungooree Tea Co. and
in the case of United India Credit Co. Ltd., that the court does not have the power to sanction
an arrangement when the company does not have the power to do so under the objects clause.
The same was upheld by the Bombay High Court in the case of Sir Mathrudas Vesanji
Foundation.
57. According to the courts, the power is vested in the courts by way of statute and need not
be derived from the object clause of the memorandum. (??)
58. Where an order has been made for dissolution of the company, the scheme shall not be
sanctioned by the court, unless it receives a report from the Official Liquidator that the affairs
of the company are not being carried on in a manner prejudicial to its interests.
59. Where an order under this provision provides for transfer of the property of the company,
such property shall be transferred to the transferor company. Sometimes, the court may even
free such property of any charge by way of the scheme.
60. Where an order is passed under this provision, the companies with respect to which such
order is passed shall submit to the Registrar within 30 days, a certified copy of the order.
Where there is a contravention of this requirement, a fine of Rs.500 shall be levied on every
officer in default.
61. Property as under this section includes all the powers, rights and property of every description
and liabilities include every kind of duty.
62. Further, the transferee company includes only a company within the meaning of the Act.
However, the transferor company includes any body corporate within the meaning of this Act.
63. Thus, a transferee company cannot be a foreign company as a foreign company is not
included within the definition of a company within the meaning of the Act.
64. Interveners who are not creditors or shareholders of the transferee company have no locus
standi to be heard on the petition of such transferee company.
65. The creditors and shareholders of the transferor company may agitate on the application of
the transferor company.
66. No modification of the scheme submitted by the transferee company can be done on the
behest of the transferor company.
67. The power to amalgamate is a statutory power and it cannot be refused on the grounds that the
transferor and transferee company are in dissimilar business.
68. Legal proceedings being continued as regards the transferor company may even be continued
as regards the transferee company.
69. The material on the basis on which the valuation of the shares has been arrived at in such case
shall be placed before the court and shall also be brought to the notice of shareholders.

59
70. In re Bihari Mills Ltd. and CWT v. Mahadeo Jalan, it was upheld that the following shall be
taken into consideration while fixing the share valuation-
(a) The stock exchange prices of the shares of the 2 companies before announcement of the
bid or commencement of negotiations
(b) The dividend paid by the 2 companies
(c) The cover for such dividend of the 2 companies
(d) The growth prospects of the 2 companies
(e) The value of the net assets of the 2 companies
(f) The strength of the voting in the merged enterprise of the shareholders of the 2 companies
(g) The past history of share prices of the 2 companies

71. Where there is an objection to such valuation, the court shall not interfere unless the person
who makes such an objection satisfies the court that the valuation is grossly unfair.
72. The tribunal/court shall notify the Central government as regards all applications under
Ss.391 to 394 and shall consider the representations made by the government while
sanctioning any scheme. (S.394A)
73. Reconstruction or amalgamation by way of sale of shares of one company by another does not
require intervention by the court. It depends on a contract between the transferor and
transferee company.
74. Where certain shareholders dissent, S.395 provides for compulsory acquisition by the
transferee company of the shares of such minority shareholders on the same terms as that of
the majority shareholders.
75. S.395 provides that where an offer is made to acquire the shares of the transferor company by
the transferee company and within 4 months from the date of the offer the transferee company
has acquired 9/10th of the shares it had offered to acquire, and this does not include the shares
held on the date of the offer by the transferee company or its nominee or subsidiary, it shall
within 2 months from the date of expiry of such 4 months give a notice to the dissenting
shareholder(s) that it wishes to acquire its shares.
76. The transferor company in such case shall when the notice is given acquire the shares of the
dissenting shareholder, unless the dissenting shareholder has within 1 month from the date of
the notice made an application to the tribunal/court and the tribunal/court thinks fit otherwise.
77. Where the transferee company has given a notice and the dissenting shareholder has not filed
an application with the tribunal/court and the tribunal/court has not decided otherwise within
the period of 1 month or where the dissenting shareholder has made an application and the
same is pending, and such application is disposed off, the transferee company shall give to the
transferor company the following-
(a) A copy of the notice sent
(b) An instrument executed on behalf of the dissenting shareholder by the transferee company
between such shareholder and the transferee company for the acquisition of his shares.
Such an instrument shall not be required for a share whose share warrant is outstanding.
(c) The transferee company shall also deposit the amount payable as consideration for the
shares acquired

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78. Thereafter, the transferor company shall register the transferee company as being the holder
of such shares and within one month from the date of registration, send a notice regarding the
same to the dissenting shareholders as well as the amount payable to them.
79. The acquisition shall be on such terms as have been specified in the same contract or scheme
as has been entered into with the approving shareholders.
80. Where the transferee company already holds more than 1/10th in value of a class of shares in
the transferor company, the abovementioned provisions (points 75, 76, 77) shall not apply.
81. Where in pursuance to a scheme or contract, the transferee company or its nominee acquires
certain shares or class of shares of the transferor company which together with the shares or
class of shares held by the transferee company in the transferor company previously form
9/10th of such shares, the transferee company shall give a notice to the remaining shareholders
within 1 months from the date of transfer, who have not assented to the scheme.
82. Any such dissenting shareholder may within 3 months require that the transferee company
acquire the shares held by him. Thereafter, the shares shall be acquired at the same terms as
that decided for the approving shareholders or on such other terms as the court may order on
application by the dissenting shareholder or the transferee company.
83. In re Brooke Bond Lipton India Ltd., it was stated that the stake of the objectors is very small
and the interests of the majority shareholders must be taken into consideration.
84. The consideration payable under this section shall be held in a separate bank account and the
company shall hold the same in trust for the shareholders who are entitled to such
consideration.
85. Every offer made or every circular containing the offer or every recommendation to accept
the offer by the directors to the members shall be accompanied by such information as may be
prescribed by the Central government.
86. The transferee company shall also state the steps it has taken to ensure that the necessary cash
to be paid as consideration will be made available.
87. However, no circular containing a recommendation to accept the offer shall be effective
unless it is registered with the Registrar.
88. The Registrar may refuse to register the same where it is of the opinion that necessary
information as prescribed by the Central government has not been mentioned or that the
information mentioned in the circular is likely to give a false impression. However, an appeal
shall lie against such order of the registrar to the court.
89. Where any person issues a circular which has not been registered, he shall be liable to a fine
upto Rs.500.
90. The acquisition of shares under S.395 does not imply dissolution of the transferor company.
91. Where the transferor company is taken over under this provision, its name may be struck off
under S.560.
92. However, till then the two companies shall function as holding and subsidiary companies.
93. A voluntary winding up petition may be filed as well.
94. S.396 states that the Central government where it is of the opinion that two companies should
amalgamate, it may pass an order as regards the same, irrespective of the provisions of Ss.394
and 395. Such order shall be notified in the Official Gazette.

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95. Every creditor or member of the two companies shall have the same rights and interests in the
amalgamated company, as far as possible. Where they do not have such rights, they shall be
paid adequate amount of compensation for the same by the amalgamated company.
96. Where the creditor or member is of the opinion that such assessment is incorrect, he may
appeal to the court which shall look into the matter. Such appeal must be made within 30 days
from the date of publication of the assessment in the Official Gazette.
97. The books and papers of the company which has been amalgamated with or whose shares
have been acquired (as under the entire chapter) shall not be disposed off without the prior
permission of the Central government.

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Unit VI Winding Up

6.1. Modes of winding up

1. A company may be put to an end by 2 ways-

(a) By winding up
(b) By striking the name of the company from the Register by the Registrar where it is a
defunct company under S.560. A defunct company is one which is not in operation or is
not doing business.

2. S.425 provides that winding up may either be done by the court (section mentions
tribunal/NCLT- slides mention tribunal as well) or there may be a voluntary winding up of the
company.
3. Prior to the amendment in 2002, there was a third method by which a company could be
wound up which was under the supervision of the court.
4. A winding up order cannot be rescinded once it becomes final.
5. S.583 provides for the winding up of an unregistered company subject to the provisions
relating to winding up under the Act where it has ceased to carry on its business or where it is
unable to pay its debts or where the tribunal deems it just and equitable to do so.
6. S.584 provides that where a foreign company carrying on business in India ceases to carry on
such business, it may be wound up as an unregistered company irrespective of the fact that the
company has been dissolved under the laws of the country in which it was incorporated.
7. With respect to banking companies, Parts III and IIIA of the Banking Regulation Act will
apply. The Companies Act shall apply only upto the extent it does not conflict with the
provisions of the Banking Regulation Act.
8. S.426 deals with liabilities of past and present members to the assets of the company as
contributories for the purpose of the debts and liabilities of the company as well as the costs
and expenses of the winding up. This shall be subject to the following-
(a) A past member cannot be made liable where he ceases to be a member at least a year
before the winding up
(b) A past member cannot be made liable for debts and liabilities incurred after he ceases to
be a member
(c) A past member can be made liable only where it appears to the court (tribunal as per the
section) that the present members are unable to pay the amount required
(d) Where a company is limited by shares, the past and present members shall be liable to pay
only such amount as remains unpaid by them on any shares
(e) Where a company is limited by guarantee, the past and present members shall be liable to
pay such amounts as were undertaken by them to pay in case the company was wound up
and also such amounts as remain unpaid by them on their shares as if the company was
limited by shares
(f) Where a member is entitled to receive payments from the company in the form of any
dividend, etc., the same shall not be deemed to be a debt owed by the company to the
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 member where a claim has been made in that regard by a creditor of the company, who
does not act in the capacity of a member of the company
(g) Such amount mentioned in (f) and due to the member however shall be taken into account
during the final adjustment of the rights of the contributories

9. Before winding up, liabilities are measured by way of contractual obligation. After winding
up, shareholders become contributories as has been seen under S.426.
10. In Re Laxmi Flour Mills, it was held that only members are regarded as being contributories.
11. Where a person procures allotment of shares in favour of a minor, he shall be made a
contributory himself.
12. In case of a benamidar who holds the share, he will have to contribute initially. However, he
may later recover from the beneficial owner.
13. Liability to pay an interest on the call money may also arise from the date fixed for payment
of such call, once the call has been made by the liquidator.
14. Liability under S.426 is not affected by the status of previous calls. It remains effective even
where previous calls have become time barred.
15. The liquidator gets a fresh period of limitation from the date of his appointment.
16. The liability of a past member under this provision is the same whether he has parted with the
shares by transfer or by forfeiture.
17. S.41 defines a member as including subscribers to the memorandum of the company, any
person who agrees in writing to be a member and such persons holding equity share capital of
the company.
18. Courts are generally reluctant to order rectification of the register of members on the
commencement of winding up.
19. In Lakshmi R Naressa Reddy v. Official Receiver, Shree Films Ltd., the person knew that his
name was written wrongly in the register and stayed silent for 3 years. He took no action till
he received a notice from the Official Liquidator. The case was dismissed on the basis of the
doctrine of holding out.
20. The facts- entered in registered on the basis of insufficiency of funds or membership on
the basis of an allotment which could have been avoided for misrepresentation in
prospectus, etc- no ground (???)
21. S.428 defines a contributory as any person liable to contribute when a company is being
wound up and includes a shareholder who holds fully paid up shares and such person who
may be alleged to be a contributory.
22. S.429 states that the liability of a contributory shall create a debt accruing at the time when
his liability commenced. But, it shall be recoverable/payable as per the time specified in the
calls made on him which enforce the liability.
23. Thus, the liability of a shareholder is a statutory debt.
24. S.430 states that where a person dies before or after he was included in the list of
contributories, his legal representatives shall be liable to pay such debt. However, such
payment shall depend on the property of the deceased coming into the hands of the legal
representative.

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 25. In case there is a default on the part of the legal representatives, the estate of the deceased
may be administered.
26. S.432 provides that where a body corporate which is a contributory is being wound up, such
body corporate shall be represented by the Official Liquidator who shall pay the amount on
the calls already made and future calls from the assets of the body corporate.

6.2. Winding up by the court

Note: The provision mentions ‘tribunal’ and not ‘court’. However, as the tribunal/NCLT is not in
existence, the term court shall be used.

1. Under S.433, a company may be wound up by the court under the following circumstances-
(a) A special resolution is passed by the company in this regard
(b) The company fails to send the statutory report to the registrar or fails to hold a statutory
meeting- this is not applicable to a private company as such company is not required to
file a statutory report
(c) The company does not commence business within a year from the date of incorporation or
suspends business for a period of one year.- A winding up in such cases must be resorted
to only where is a clear indication that there is no intention of carrying on business and
delay or suspension is not accounted for. (Registrar of Companies v. Jaipur Stock
Exchange)
(d) The company is unable to pay its debts
(e) The number of members of a company is reduced below 7 in case of a public company
and below 2 in case of a private company
(f) The company fails to file with the registrar, its balance sheet, profit and loss account and
annual returns for five consecutive years
(g) The court is of the opinion that it is just and equitable that the company be wound up
(h) The court is of the opinion that the company should be wound up as per the provisions of
S.424G which deals with sick industrial companies
(i) The company has acted against the interests of the sovereignty and integrity of India, the
security of the state, friendly relations with foreign nations, public order, morality and
decency.

2. S.433 empowers the court to pass an order for winding up but does not give a right to seek an
order that the company be wound up.
3. However, the right to file a petition as regards the same is a statutory right and shall not be
taken away by way of the articles of the company.
4. A company may present a petition on its own for winding up showing any of the reasons as
specified in S.433.
5. In State of Madras v. Madras Electric Tramways Ltd., it was held that a special resolution
shall be required only in case of clause (a) of S.433.

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6. In Swadeshi Mills of Ahmedbad v. Dye-Chem Corp, it was upheld that a company will not be
wound up merely because it is unable to repay its debts, especially where there is a scheme
for revival.
7. As regards clause (c), discontinuation of any one of many businesses does not mean
suspension. Suspension must thus be of the entire business and not of a part of it.
8. Even where the work is suspended, it shall be open to the court to look into whether it is
possible for the company to continue business.
9. A winding up shall not be ordered where it is seen that the business started abroad and an
intention to continue the same in India was shown.
10. In Re Eastern Telegraph, it was held that where a company ceases to do business but is the
holding company of such subsidiaries as are doing the same business as the company was
doing, it will not be said that it has suspended its business.
11. In Registrar of Companies v. Bihar Wire and Wire Products, the following principles were
laid down-
(a) The mere fact that the business has not been commenced or has been suspended must not
lead to winding up of the company
(b) What needs to be seen is whether there is a sufficient reason not to commence or suspend
the business
(c) The suspension of business is an indicator of the fact that there is no intention to continue
the business
(d) It needs to be seen as to whether the substratum of the company has disappeared
(e) The wish of the majority shareholders must be taken into account

12. In Haven Gold Mining Company, the company was wound up as the mine for which the
company was formed was not found.
13. In German Date Coffee Company, the company was wound up as the patent which the
company was to work was not granted.
14. In Diamond Fuel Company, the company was wound up as the bulk of its property was sold
and its liquidity and capital had been exhausted.
15. In Ramesh G Bhatia v. Gopala Gases Pvt. Ltd., the company was wound up as it could not
carry on business due to a deadlock in the management and there were no prospects for
revival.
16. A default in payment of debts would include a situation where there is a default in payment of
price for goods supplied and a petition filed in this regard shall be fit for admission and shall
not be an abuse of the process.
17. Where a dividend is declared, it is treated as a debt. Thus, a shareholder may file a petition
where it is not paid.
18. In Janbazar Manna Estate Ltd., it was held that a company may be wound up where a debt
became due before incorporation and one of the objects of the company was to repay such
date.
19. In Coimbatore Transport Ltd. v. Governor General in Council, it was held that the
Government may ask for compulsory winding up of a company where a large amount has not
been paid by the company by way of income tax.

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20. In Amalgamated Commercial Traders Pvt. Ltd. v. Krishnaswami, and UCO Bank v. Jagatia
Paper Mills Pvt. Ltd., it was held that winding up cannot be used for realisation of debts from
a company.
21. In Trilokchand Jain v. Swastika Strips Pvt. Ltd., it was held that the incapacity to pay debts by
the company should be proved by the creditor.
22. The failure on the part of the company to pay the creditor or secure or compound his claim
would result in the presumption of insolvency against the company.
23. In Arvind Investment Consultant v. Presto Finance, it was held that the company must be
wound up as not only had it not paid its debts, but it also did not have the capacity to do so.
All cheques had bounced due to insufficiency of funds. Further, the stock exchange had taken
steps against the company and had warned the public against the company.
24. Where a debt is bonafidely disputed by the company and the court is satisfied by the
company’s defence, it shall not order a winding up.
25. Further, the court does not wind up a potentially growing company.
26. In case of debts, notice demanding payment should have been made and should have been
submitted at the registered office of the company.
27. Advertisement of winding up is required as it enables the creditors to attend the court
proceedings and bring to the notice of the court, any material facts which shall help in
determining whether or not the order should be passed.
28. It also warns the public as regards a petition being presented.
29. In Pawan Kumar Kullar v. Kaushal Leather Board Ltd., it was held that where the salary of an
employee has not been paid, it shall not be taken to mean a debt. Salary is considered to be
remuneration.
30. However, the contrary was held by the Andhra Pradesh High Court in Captain BS Damagary
v. VIF Airways Ltd., where it was held that even salary is recoverable as debt. This was also
upheld in French Times Industries Ltd.
31. Where the liabilities of a company exceed its assets, it shall not be deemed to be unable to pay
its debts.
32. In G Claridge and Co. Ltd. v. Nav Bharat Investments Ltd., it was held that a company shall
be wound up where it admits to its liability but refuses to pay, irrespective of its solvency.
33. Where the court wishes to wind up a company for just and equitable reasons, it must ensure
that not only is such winding up equitable but also that there is no other alternative remedy.
34. This measure should be rarely resorted to as generally the company should be left to itself and
a decision should be taken by a majority.
35. Under S.439, the following persons may file a petition for winding up before the court-
(a) The company
(b) The creditor(s), which includes the prospective and contingent creditors
(c) The contributory or contributories
(d) Collectively by persons mentioned in (a),(b) and (c)
(e) The Registrar
(f) By any person authorized by the Central Government in this regard where the company
has to be wound up because of oppression or mismanagement

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 (g) Where the company has to be wound up as its acts are against the sovereignty and
integrity of India, security of the state, friendly relations with foreign states, morality,
decency and public order, by the Central Government or State Government

36. The leave of the court shall be taken where a winding up petition is to be filed by a
prospective or contingent creditor (Slides: where petition is to be filed by any person) and
the same shall not be granted unless the court is of the opinion that a prima facie case has
been made and until such security for the costs has been furnished as required by the court.
37. It is necessary for preserving the limited assets of the company in the best way. ???
38. Under S.439A, a company is required to file alongwith the petition for winding up, a
statement of its affairs with the court. Such statement shall be filed even where the company
opposes a petition for its winding up.
39. The statement shall contain the following details-
(a) Last known addresses of all directors and the CS
(b) Details of all creditors and debtors and their addresses
(c) Location and value of the assets of the company
(d) Details of workmen and employees and any payment outstanding to them
(e) Any other detail as may be required by the court

40. In case of rehabilitation or revival or protection of assets of a sick industrial company, a cess
of not less than 0.005% and not more than 0.1% shall be levied on every company on the
value of the annual turnover or the gross annual receipts, whichever is higher and as decided
by the Central Government. (S.441A)
41. Such amount shall be payable to the Central Government within 3 months of the close of the
financial year.
42. This amount forms part of the Consolidated Fund of India. (S.441B)
43. Where the court passes an order for winding up, an Official Liquidator must be appointed
from a panel of professional firms of CA, advocates, CS, ICWA or a firm having a
combination of such persons which shall be constituted by the Central Government.
44. The Official Liquidator shall be a part time or whole time officer who has been approved by
the central government.
45. The Official Liquidator shall conduct the winding up and perform such other functions as may
be imposed by the court.
46. The court may also appoint a provisional liquidator before the winding up order is passed and
before the company makes its representations.
47. The proceedings must be conducted in camera to protect the reputation of the company.
48. A statement of the affairs of the company shall be submitted to the Official Liquidator within
21 days from the date of the order or where the official liquidator has been appointed as the
provisional liquidator from the date of such appointment. However, such time period cannot
be extended to beyond three months from the date where the Official Liquidator or the court
may allow under special circumstances.
49. The statement of affairs must state the following-

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 (a) The assets of the company including the cash in hand, in banks or cash held by way of any
negotiable instrument
(b) Debts and liabilities of the company
(c) Names, residences and occupations of the creditors and any securities with respect to
secured debts
(d) Names, residences and occupations of debtors and the debts owed by them
(e) Any other information as may be required by the Official Liquidator

50. The statement shall be verified by a director or manager or secretary or other chief officer of
the company or by such other person as the Official Liquidator may require for verifying the
statement as per the directions of the tribunal.
51. Where a winding up order has been passed, the Official Liquidator shall make a report as
soon as possible to the court. Such report must be made within a maximum period of 6
months from the date of the order or within such extended period as may be specified by the
court.
52. The report shall consist of the following particulars-
(a) The amount of issued, subscribed and paid up capital of the company and the amount of
assets and liabilities of the company
(b) Where the company has failed, the causes for such failure
(c) Whether any further enquiry is required into the promotion or formation or failure of the
company or into the conduct of its business

53. The Official Liquidator may also make further reports as regards the formation or promotion
of the company or as regards any fraud committed in relation to its formation or promotion or
by any officer of the company after its formation.
54. Where a winding up order is made, the Official Liquidator or the provisional liquidator shall
take into his custody and under his control, the property, effects and any actionable claims to
which the company is entitled or appears to be entitled.
55. The court shall have the following powers on hearing the winding up petition-
(a) Dismiss it with or without costs
(b) Adjourn the hearing conditionally or unconditionally
(c) Make any interim order as it deems fit
(d) Make an order for winding up of the company, with or without costs
(e) Make any other order as it deems fit

56. The consequences of a winding up order are as follows-

(a) Intimation of the order is sent to the Official Liquidator
(b) A copy of the order must be sent by the petitioner and the company within 30 days from
the date of the order to the Registrar. Where there is any default in complying with the
same, a penalty of Rs.1000 shall be levied.
(c) The Registrar shall make a minute of the order in his books relating to the company and
issue a notification in the Official Gazette that such an order has been passed.

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 (d) The order shall lead to discharge of all officers and employees of the company except
where the business of the company is carried on for beneficial winding up.
(e) The order shall lead to stay of all actions and suits against the company except where an
appeal has been made to the Supreme Court or the High Court. However, the court may
grant leave to continue or commence proceedings.

57. A suit or proceeding pending in any other court shall be transferred to the court where the
winding up of the company is proceeding. (S.466)
58. In Official Liquidator v. Dharti Dhan, it was held that a stay order is not mandatory and may
not be granted if the object of the same is to delay adjudication and due to which justice is
defeated.
59. The order for winding up operates in the interests of all creditors and contributories no matter
who asked for it. (S.447)
60. On commencement of winding up, the limitation remains suspended in favour of the company
till one year after the winding up order is made.
61. Any disposition of property or attachment or sale made during this period without the leave of
the court shall be void.
62. S.464 provides for the appointment of a committee of inspection who shall assist the
liquidator in the winding up.
63. Where the court makes an order in this regard, the liquidator shall within 2 months from the
date of the order convene a meeting of creditors to decide the members of the committee.
64. Within 14 days of such meeting, the liquidator shall convene a meeting of contributories to
confirm the appointments made in the creditors’ meeting.
65. Except where the meeting of contributories accepts the composition of the committee as
proposed by the creditors’ meeting, the liquidator shall seek directions from the court as
regards the composition of the committee.
66. The total number of members of the committee shall not exceed 12 and shall consist of
creditors and contributories or attorneys of such persons, in such proportion as may have been
decided by the creditors’ and the contributories’ meetings.
67. The quorum of the meeting shall be fixed at 1/3rd members or 2, whichever is higher.
68. The committee shall have the right to inspect the accounts of the liquidator at all reasonable
times.
69. They shall act by way of a majority but not without the required quorum.
70. A vacancy may be created in the committee in the following manner-
(a) By resignation of a member by giving a notice in writing to the liquidator
(b) If a member is adjudged an insolvent or compounds or arranges with his creditors
(c) If a member fails to attend five consecutive meetings without the leave of the members
(d) Where a member is removed by a meeting of creditors or contributories, as the case may
be, by giving a notice of 7 days

71. Where a vacancy is created, the liquidator shall again call for a meeting of creditors or
contributories, as the case may be for filling up such vacancy.

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 72. The liquidator may even recommend to the court that the vacancy need not be filled. In such a
situation, the court may make an order that such vacancy need not be filled or that it may be
filled in such circumstances as are specified in the order.
73. The continuing members, where they are not less than 2 may act even when there is a
vacancy.
74. Does the board become defunctus officio when the company is ordered to be wound up?

General Powers of the Court:

1. S.466 provides that the court may stay a winding up where after it passes an order for winding
up, an application for stay is made by the Official Liquidator or creditor or contributory. It
must also be proved to the satisfaction of the court that all the proceedings must be stayed.
2. Where an application is made under this provision to the court, it may require the Official
Liquidator to furnish a report of the facts and matters as it feels are relevant to the application.
3. A copy of the order made shall be submitted to the Registrar who shall make a minute of the
same in his books.
4. In VB Purohit v. Gadag and Janbukeshwara and Official Liquidator, it was held that the court
may exercise such powers even where there is a voluntary winding up.
5. In the case of National Transport and General Co. Pvt. Ltd., it was held that generally the
court orders a stay so that the company may come up with a scheme of reconstruction or
amalgamation or arrangement.
6. In KD Maheshwari v. Titagarh Plc, it was held that the winding up of a company may be
stayed on showing the credit worthiness of the company.
7. However, staying of the proceedings will not affect other pending suits. (Central Bank of
India v. Atlas Works Pvt. Ltd.)
8. Under S.467, the court shall have the power to settle the list of contributories that shall be
liable to contribute. The court may even rectify the register of members where necessary.
9. While settling such list, the court shall distinguish between contributories in their own right
and contributories on behalf of others or those who are liable for the debts of others.
10. The court may under S.468 require any contributory or trustee or receiver or banker or agent
or officer or other agent of the company to deliver any property, money, books, papers in his
custody to the Official Liquidator to which the company is prima facie entitled.
11. This is so that there is quick allocation of the company’s assets without any expensive and
dilatory litigation.
12. Under S.479, where the court either before or after making an order for winding up is of the
opinion that a contributory is likely to leave India or to abscond or conceal his property to
evade any calls that may be made later on him, the court may order that such person be
arrested and kept safely till such time as it may order. The court may even order that the
books, papers and movable property of such person be kept safely.
13. S.469 provides for the right of set off to be allowed by the court in the following cases-
(a) In case of an unlimited company, a contributory may set off his debt against any money
due to him from the company on any independent dealing or contract with the company.

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 But, this is not allowed as regards money due to him by way of any dividend or other
profit payable.
(b) In case of a limited company, a director with unlimited liability shall have the same right
as mentioned in (a).
(c) Where there is a limited or unlimited company in which all the creditors have been paid in
full, any money due to any contributory may be payable by way of set off against any
subsequent call.

1. The court also has the power to institute any proceedings against a contributory or debtor of
the company.
2. It also has the power to make calls.
3. It has the power to publicly examine any promoters or directors.
4. It has the power to order the money to be deposited with the RBI rather than the Official
Liquidator.
5. It has the power to adjust the claims of the contributories.

6.3. Voluntary winding up

1. Voluntary winding up is where a company is wound up by agreement between the members

and the creditors, without interference of the court. However, the directions of the court may
be taken when necessary.
2. A voluntary winding up may be carried out under S.484 by passing an ordinary resolution
where the time for which the company was created, the same being mentioned in the articles
has expired or where the event which is mentioned in the article as one on whose occurrence
the company shall be wound up has occurred.
3. A special resolution may also help in voluntary winding up of the company. No special
reasons need to be given for the same.
4. The special resolution is a statutory requirement and cannot be invalidated by way of the
articles.
5. The winding up shall be deemed to have commenced when the resolution is passed.
6. Once such a resolution is passed, within 14 days from the date of passing, the company shall
notify the same in the Official Gazette and shall cause an advertisement to be published in a
newspaper circulated in the district where the registered office of the company is located.
7. Where there is a default in complying with the abovementioned provision, a fine of Rs.500
shall be levied for every day the default continues.
8. Where a company is voluntarily wound up, it shall cease to carry on all business except where
the same is required to secure a beneficial winding up although the corporate status and
corporate powers of the company shall continue till dissolution.
9. Most of the powers of the Board and the MD shall cease when a liquidator is appointed.
10. All transfers and alterations in the status of members after commencement of a voluntary
winding up shall be deemed to be void.
11. In Dharmesh Chandrakant Patel v. Official Liquidator, Suraj Co. Ltd., it was held that where
an agreement to sell land of the company has been entered into before winding up and the

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 same has not been enforced for a very long time, the buyer does not have any preference
when actually sale starts as part of liquidation.
12. A resolution for voluntary winding up operates as a discharge to all employees except when
the liquidation is only to bring about a reconstruction or where the business is continued by
the liquidator for the beneficial winding up of the company.
13. Voluntary winding up may be carried on by the members or creditors.
14. S.488 provides that where a resolution for voluntary winding up is to be passed, the directors
shall within 5 weeks before the date of the resolution make a declaration on affidavit that they
have formed an opinion as regards the affairs of the company and that the company has no
debts or that such debts, if any shall be paid within a period of 3 years from the
commencement of winding up.
15. The declaration shall be delivered to the Registrar for registration before the date of the
resolution.
16. It shall be accompanied by the auditor’s report on the profit and loss accounts of the company
for the period between the last time such accounts were made and the present period.
17. A director who makes a declaration without any reasonable grounds that the company shall
pay its debts within the time period specified shall be punishable with imprisonment upto 6
months or a fine of Rs.50, 000 or both. (Slides: directors shall be personally liable to pay
debts)
18. As per S.490, the company in a general meeting shall fix the liquidators for the company and
also specify the remuneration payable to them. Such remuneration fixed cannot be increased
at any time without the sanction of the court.
19. S.491 provides that where a liquidator is appointed, the powers of the directors, MD, any
whole-time directors and manager shall cease except as regards giving notice of such
appointment to the Registrar.
20. Another exception to this rule is where continuance of the office of such persons is consented
to in a general meeting or by the liquidator.
21. Under S.494, where in the course of being wound up, the business or property of the company
is being transferred to another, the liquidator after being sanctioned by the general meeting in
this regard shall receive any compensation payable in this regard.
22. In case of insolvency, it is the duty of the liquidator to call for a creditors’ meeting. He shall
lay before such meeting, a statement of assets and liabilities of the company. (S.495)
23. The liquidator also has the duty to inform the income tax officer.
24. Under S.496, where the winding up of the company extends beyond a year, the liquidator
shall be required to call a general meeting of the company every year.
25. Once a company has been wound up, the liquidator shall prepare accounts of such winding up
and present the same before a final meeting of the company. (S.497)
26. On dissolution, the liquidator also becomes functus officio.
27. Liquidation means determination of liabilities and apportionment of assets towards
discharging indebtedness.
28. Winding up means to settle the accounts and liquidate the assets of partnership or corporation
for the purpose of making distribution and dissolving the corporation.
29. Creditor’s voluntary winding up is carried out when the company is insolvent.

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30. A meeting of the creditors needs to be called, the notice for which must be advertised in the
Official Gazette and two newspapers circulated in the district where the company has its
registered office or principal place of business.
31. The appointment of liquidator shall be made by the company and the creditors at their
respective meeting. Where they have different choices, the official liquidator shall be such
person as is chosen by the creditor.
32. There is a distinction between voluntary shareholders’ winding up and creditor’s
winding up. ???
33. S.529A and S.530 provide for the priority which shall be followed while satisfying claims
under a winding up as follows-
(a) All revenues, taxes, etc due to any government or local authority
(b) Workmen’s dues
(c) All holiday remuneration payable to an employee by virtue of the termination of his office
before or on winding up
(d) All amounts payable as contributions under the ESI Act during 12 months before winding
up
(e) All amounts payable as compensation under the Workmen’s Compensation Act for death
or disability of a workman
(f) Any provident fund amounts
(g) Expenses for investigations held in pursuance of S.235 or S.237
(h) Secured creditors
(i) Unsecured creditors
(j) Claims of shareholders

34. S.541 provides that where proper books of account of a company are not kept for 2 years
preceding the winding up or for the period between the incorporation of the company and its
winding up, whichever is shorter, every officer in default, unless he shows that he acted
honestly shall be punishable with imprisonment which may extend to one year.
35. S.542 provides that where in the course of winding up, it is discovered that the business of
any company is being carried on with the intent to defraud creditors or any other person or for
fraudulent purposes, the court on the application of the liquidator or Official liquidator or a
creditor or contributory may declare that the person who was knowingly party to such acts
shall be liable to pay all or any debts or liabilities of the company.
36. S.543 provides that where in the course of winding up, it is discovered that any person
responsible for the formation or promotion of the company or any director, liquidator,
manager or officer of the company is liable for any money or property of the company or
where such person is guilty of misfeasance or breach of trust, the court may on the application
of the liquidator or Official liquidator or creditor or contributory order that such person repay
or restore the money or property with interest.

6.4. Liquidator’s role in winding up

1. The liquidator shall conduct the proceedings of winding up.

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2. The remuneration payable to a liquidator shall be fixed by the Central Government where he
is a whole-time or part-time officer appointed by the Government. In all other cases, his
remuneration shall be fixed by the court. (Slides: Remuneration shall be fixed by the
Central Government)
3. The acts of the liquidator shall be valid notwithstanding any defect that may be later
discovered in his appointment or qualification.
4. The liquidator shall perform the following functions with the sanction of the court, except
where the court specifies that it need not get the sanction of the court or that the court will not
interfere as regards such matters-
(a) To defend or prosecute any suit, proceeding, etc. on behalf of the company
(b) To carry on the business of the company in case of a beneficial winding up
(c) To sell the movable or immovable property or actionable claims of the company by way
of public auction or private contract to any person, either in part or in whole
(d) To sell the undertaking of the company, either in part or in whole
(e) To raise money or securities from the company’s assets
(f) To appoint any lawyer to assist him as regards performance of his duties before the court
(g) To compromise calls, debts or other present or pecuniary liabilities with contributories or
debtors
(h) To make payment to any class of creditors in full
(i) To do such other acts as may be required for the winding up

5. He may perform the following functions without the sanction of the court-
(a) To do all acts and execute in the name and on behalf of the company all deeds, receipts
and other documents and use the seal of the company where necessary
(b) To inspect the records and returns of the company in the files of the Registrar without
payment of any fee
(c) To prove, rank and claim in the insolvency of any contributory for any balance against the
estate and to receive dividends in the insolvency
(d) To draw, accept or endorse any promissory note or bill of exchange or hundi in the name
of the company or in its behalf
(e) To take out, in his official capacity, letters of administration to any deceased contributory
and do any act in his official name to obtain any payment due from a contributory in his
estate which cannot be done in the name of the company
(f) To appoint any agent to do such business as he is unable to do himself
(g) To appoint security guards to protect the property of the company
(h) To appoint a valuer or CA or Chartered surveyor to assess the value of the company’s
assets within 15 days after taking into custody, the assets of the company, its property, etc
(i) To give advertisements for bids for sale of its assets

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Unit VII Indian Capital Market and SEBI

7.1. Growth of Securities market in India

7.2. Need for regulation
7.3. SEBI Act, 1992
7.4. Insider Trading Regulation

1. A capital market is a market for securities, debt or equity where business enterprises and
governments can raise long term funds. It is a market in which money is provided for more
than a year.
2. The capital market includes the stock market for equity securities and the bond market for
debt securities.
3. The money market is a component of the financial markets in which there may be short term
lending and borrowing of assets with original maturity of one year or for a shorter time
period.
4. Trading in the money market includes treasury bills, banker’s acceptances, short lived
mortgages, asset backed securities, federal funds, commercial papers and certificates of
deposit.
5. The regulatory authorities in various countries ensure that there is investor protection in the
securities market and there is no fraud. Some of such regulators include the SEBI in India, the
Securities Exchange Commission in the United States and the Financial Services Authority in
the UK.
6. Capital markets may either be primary markets or secondary markets.
7. Primary markets involve selling of new stock or bond to investors while the secondary
markets involve the selling and buying of existing securities among investors, traders, etc.
which are usually on a securities exchange and are over the counter.
8. Before the SEBI, the Controller of Capital Issues used to be the designated regulatory
authority which derived authority from the Capital Issues (Control) Act, 1947.
9. In those days, many factors restricted the expansion of equity trading.
10. Issue of fresh capital was controlled by the Capital Issues (Control) Act and there was no
transparency in trading. There were several issues of insider trading.
11. The SEBI was originally established in 1988. However, it gained statutory status as an apex
regulatory authority after the passing of the SEBI Act in 1992.
12. The SEBI has to respond to the needs of the issuers of securities, the investors and the market
intermediaries in a securities market.
13. The SEBI makes regulations and thus works in a quasi-legislative capacity. It also passes
ruling and orders and thus acts in a quasi-judicial capacity. Further, it conducts investigation
and carries out enforcement action and thus has quasi-executive functions.
14. Securities has been defined under the Securities Contracts (Regulation) Act under S.2 as
including the following-
(a) Shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of
an incorporated company or body corporate
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 (b) Derivative
(c) Any unit or instrument under a collective investment scheme issued to an investor in such
scheme
(d) Any unit or instrument issued to an investor under a mutual funds scheme
(e) Any security receipt under the SARFAESI Act
(f) Government securities
(g) Such other instrument as may be declared by the Central Government as being a security
(h) Any interests and rights in such securities

15. The SEBI is a body corporate with common seal and having perpetual succession. It may hold
or dispose off property as per the provisions of the Act and may sue and be sued in its name.
16. Its head office is in Mumbai.
17. The SEBI shall constitute of the following persons, who are to be appointed by the Central
Government-
(a) A chairman
(b) Two members from amongst officials of the Central Government dealing with finance or
administration of the Companies Act
(c) One member from amongst officials of the RBI
(d) Five other members, at least three of whom shall be whole-time members

18. The general superintendence and management of the affairs of the board rests with the Board
members who have the powers to do all acts that may be done by the Board. Such power rests
with the chairman as well, provided the same is not restricted by any regulation.
19. The Central Government may remove a member on the following grounds-
(a) He is or at any time has been adjudged an insolvent
(b) He is found to be of unsound mind by a competent court
(c) He is convicted of an offence which according to the Central Government involves moral
turpitude
(d) He has abused his office in a manner that his continuation in such office shall be
detrimental to public interest

20. Further, where any member of the Board is a director of a company and has a direct or
indirect pecuniary interest in any matter that has come before the board, he shall disclose the
same before the board.
21. Such disclosure shall be recorded in the proceedings of the board and the member shall not be
permitted to participate in any deliberation or decision of the board in such matters.
22. The SEBI has the primary function of developing and regulating the securities market and
protecting investors, for which it may take up the following measures (S.11)-
(a) Regulating the business in stock exchanges and other securities market
(b) Registering and regulating intermediaries like stock brokers, brokers, merchant bankers,
portfolio managers, bankers to an issue, underwriters, etc.
(c) Registering and regulating intermediaries such as depositories, custodians of securities,
Foreign Institutional Investors (FIIs), etc.

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 (d) Registering and regulating the working of venture capital funds and other collective
investment schemes such as mutual fund schemes
(e) Promoting and regulating the working of self regulatory organisations
(f) Prohibiting fraud and unfair trade practices in the securities market
(g) Prohibition of insider trading
(h) Regulating the substantial acquisition of shares and takeover of companies
(i) Promoting investor education and training of intermediaries
(j) Calling for information from, conducting enquiries into the affairs of, conducting audits
for, etc. for intermediaries and self regulatory organisations
(k) Calling for information and records from any bank or any other authority established
under any State or Provincial Act as regards a securities transaction
(l) Performing any other function under the Securities Contracts (Regulation) Act
(m)Levying fees or other charges for carrying out such functions

23. The SEBI also has the power to inspect any book or register or other document or a record of
any listed public company or any other public company, which wishes to be listed on any
recognised stock exchange, not being an intermediary, where it has reason to believe that such
company has been indulging in practices of fraud or insider trading or unfair trade practices.
24. The SEBI may also pass an order after recording reasons, on the following matters in the
interests of the investors and the securities market where either an investigation in a matter is
pending or on completion of such investigation-
(a) That trading of a particular security in the market be suspended
(b) Prohibition on certain persons to access the securities market and restraining certain
persons from buying or selling or dealing with securities
(c) Removal of an office bearer of any stock exchange or self regulatory organisation
(d) Impounding and retaining the proceeds of any securities transaction which is under
investigation
(e) Attaching any bank account or account, the proceeds of which have been involved in a
transaction under investigation for a period not exceeding one month where an order has
been passed to that effect and an application has been made to the Judicial Magistrate
First Class for his approval
(f) Direct any intermediary or any other person not to dispose off any asset which is involved
in a transaction under investigation

25. The SEBI has successfully and aggressively introduced reforms in the securities market. It
has increased the number of disclosures required to be made by corporates.
26. As a result of the meltdown, it has liberalised the takeover code. In one such move it has
increased the application limit for retail investors to Rs.2 lakh from Rs.1 lakh.
27. Some of the Committees of the SEBI include Technical Market Advisory Committee,
Takeover Regulations Advisory Committee, Primary Market Advisory Committee, Secondary
Market Advisory Committee, Mutual Fund Advisory Committee, etc.

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