Lecture 1

BACK

INDEX

SR NO TOPICS
Lecture 1 Introduction, Difference between Company and Partnership firm, Basic features of a
company : Advantages and Disadvantages, Registrar of companies(ROC), Registratio
company, Removal of company's name from the register
Lecture 2 Kinds of companies and Promoters
Lecture 3 Prospectus and Members meetings
Lecture 4 Memorandum of Association and Articles of Association
Lecture 5 Inquiry and investigation into the affairs of a company; National Company Law Tribu
Appellate Board and Special Courts and Revival and rehabilitation of sick companies
Lecture 6 Dividends; Rule of majority: Foss v. Harbottle and Compromise, arrangements, recon
and amalgamation.
Lecture 7 Winding up of companies
Lecture 8 Shares and Debentures, Members and Shareholders
Lecture 9 Share Capital and Directors

LECTURE ONE

The topics covered under this lecture are :

 Introduction
 Difference between a company and partnership
 Basic features of the company – Advantages and Disadvantages of a
company
 Registration and incorporation of companies
 Removal of a company's name from Register

INTRODUCTION

In ordinary sense, the term "Company" means a voluntary association of persons for
any common object. Such object may be any trade, business, manufacture,
research, and sport etc carries on in accordance with law. In other words,
"Company" means, a group of individuals associates together, for fulfillment or
attainment of any common. The term "Company" represents various kinds of
associations, both, social and economic.
The history of human civilization reveals that in the olden days the creation and
production of material goods, things and articles were confined to skill and labour of
skilled workmen and trading activities were carried on by individuals' traders. Such
trading activities were carried on by forming associations which were in the shape of
partnership without any restrictions also to the number of membership.
Such partnerships were merely associations of persons with a common goal to do
business, make profit and share the same among its members. The losses sustained
in the business used to be suffered by all because the liabilities used to be unlimited.
But, in this stage, insufficient means of communication and transport and also due to
unlimited liability, there was sharp decline in trade, business and ultimately in
commerce. However, in the recent times, due to substantial increase in population,
means of communication and transport, trade and commerce, it was necessary to
evolve certain legislations for new formation of business organizations, in this
context, the concept of company came into existence as one forms of business
organizations.
In lay language, a company is an association of persons who have decided to
register themselves as a company, do business for gains with their collective capital
and borrowed funds, and distribute the fruits of their business amongst themselves.

Definitions

Prof Haney defines company as "an artificial person created by law having a
separate legal entity with a perpetual succession and a common seal."
Lord Justice Lindsay defines company as "an association of persons who contribute
money or money's worth to a common stock employed in some trade or business
and who share the profit and loss arising therefrom."
Definition under Companies Act, 1956:
The term "Company" has been defined under Section 3 (1) (i) of the Companies Act,
1956 as, "A company formed and registered under this Act or an existing company."
Definition under Companies Act, 2013:
The term "Company" has been defined under Section 2(1)(20) of the Companies
Act, 2013 as, "Company " means a company incorporated under this Act or under
any previous company law"

DIFFERENCE BETWEEN A COMPANY AND PARTNERSHIP FIRM

Sr.no COMPANY PARTNERSHIP FIRM

1 It is a separate legal entity. It is an aggregation of all its partners.
2 Members of the company generally enjoy limited Partners are liable personally to an unlimite
liability.
3 Property belongs to the company and not the The firm's property is the property of its par
members of the company.
4 It can sue and be sued in its own name . It can sue and be sues only in the name of it
partners.
5 In public company, shares are freely transferable. A partner cannot transfer his shares in the fi
unless all other partners consent.
6 Death of the person has no effect on the company. Death of the partner dissolves a firm- unless
partnership deed provides otherwise.
7 Insolvency of a member has no effect on the Insolvency of the partner dissolves a firm- u
company. partnership deed provides otherwise.
8 A member can contract with the company of which A partner cannot enter into a contract with h
he is a member.
9 The minimum number of members is two in a Atleast two persons are required to constitu
 private company and seven in a public company.
10 A private cannot have more than 200 members A firm cannot have more than the prescribe
excluding the employees and ex – employees, where of partners.
a public company can have any number of members.
11 Restrictions in the articles of a company bind the Restrictions in a partnership deed do not aff
third parties. parties.
12 A creditor of a company cannot proceed against its A creditor of a firm can proceed against ind
member to recover his debts. partners to recover his debts.
13 Registration of a company is compulsory. Registration of a firm is optional – except in
of Maharashtra.
14 A company's formation involves heavy expenses. The formation of a firm does not involve he
expenses.
15 A company has to observe several formalities like A partnership is free from all such formaliti
compulsory audit, annual meetings, registration of
chargers etc.
16 Winding up and dissolution of a company is an Dissolution of a firm is less expensive and l
expensive and long drawn process. consuming.
17 There is a clear demarcation between ownership Ownership and management are in hands of
(shareholders) and management (directors). substantially the same persons.
18 A company may have a common seal. The law does not prescribe any seal for part
firm.
19 Members may do business which competes with the Partners cannot generally engage in compet
business of the company. business.
20 A company can raise public money by issuing a A partnership firm cannot do so.
prospectus.

Basic features of a company

The main advantages of forming a company which also constitute as its salient
features are :

Advantages of a Company:

1. Separate legal entity:

A company has a separate legal existence. It has separate legal personality or entity
which is distinct and independent from its members who compose the Company and
are known as shareholders. A company exists in the eyes of law, and therefore, it is
described an artificial legal person. A company upon its incorporation is empowered
to acquire, hold and transfer property in its own name and it is also empowered to
sue and can be sued by its own members. Since the company has an independent
existence any of its members can enter into a contact with the company in the same
manner when he enters into a contract with any other individual. Such persons are
not help liable for the acts of the company i.e even if he holds the entire share
capital.
It was for the first time, in the case of Salomon and Salomon & Co. Ltd (1897 AC
22), the principal of separate legal entity or separate legal existence of a company
was recognized by the House of Lords. Salomon & Co. Ltd was practically owned by
Mr. Salomon. In the event of its liquidation, the question arise whether Mr Salomon
has a right to a prior claim, with regard to the debentured held by hi, over the
unsecured creditors of the company. The unsecured creditors claimed that since Mr.
Salomon and the company were one and the same ( as company was owned by Mr.
Salomon), Mr. Salomon should be held personally liable to satisfy their claims. It was
held by the House of Lords that, once the company was incorporated, it becomes a
separate person in the eyes of law. Mr. Salomon was virtually the holder of all the
shares of the company, he was also a creditor secured by debentured and therefore,
Mr. Salomon was entitled to replay in priority to the unsecured creditors of the
company.

2. Limited liability:

A corporate form of business is far superior to and much safe than that of a
partnership firm as far as monetary risk factor is concerned. The shareholder of a
company limited by shared is liable only upto to the unpaid amount on the shares
held by him. For instance, if a shareholder holds one share of face value Rs. 100/-,
on which Rs.80/- has already been paid up, his maximum liability on that share is
Rs.20/- only. After he pays the amount his liability is reduces to nil even if the liability
of the company runs into millions.

3. Easy transferability of shares:

A shareholder can sell his shares in the market and get back his investment. Neither
does he needs any permission of other shareholders not of the company in doing so.
Due to advance technology and the option of "demat shares, a shareholder can sell
or transfer his shares at the tap of a button or a call. S.44 of the Act clearly provides
that shares of a member in a company constitute movable property and can be
transferred in the manner provided by the articles of the company. This benefit
cannot be availed by the members of the private company as it has certain
restrictions on the transfer of its shares as per its definition.

4. Separate property:

A company has separate legal entity and it is an artificial legal person which is
different and distinct from its members. The company is capable of enjoying, owing,
and disposing off the property in its own name because the company is the owner of
its capital and assets. The members of the company commonly the shareholders of
the company are not the owners of the company. (Gramophone & Typewriter Co.
V/s. Starly (1906) 2 KB 856.

5. Capacity to sue in its own name:

Since the company is a distinct entity in the eyes of law, it can sue in its own name
and likewise it also can be sued in its corporate name. just as a person has a right to
his reputation, so also a company has the right to protect its name from being
tarnished and can sue a third person for a defamatory statement made against the
company made by such person.

6. Perpetual succession:
Until a company is wound up or dissolved, a company does not die. For instance, if
all members of a company die in a fatal accident, the company does not die.
Similarly, the insolvency of a member or all members of the company does not bring
the life of the company to an end. The company is a distinct juridical entity,
unaffected by any kinds of mishaps.

7. Professional management:

A company with vast and almost unlimited resources, is capable of attracting best
professional talent at the managerial level. The managers and officers of a company
are generally assured of independent functioning as their "collective employer", the
shareholders, can exercise scant control over them and that too in a remote manner.

8. Democratic set –up:

The corporate setup follows a democratic method of management. A fairly large

body (of shareholder) selects a small body of directors to run and manage the
company. Several such directors are professionals and therefore experts in their own
felids. This adds to the quality of management of the company.

9. Capacity to raise finances:

A company is in a much better position to raise finances that any other form of
business entity. A public company can issue a prospectus inviting members of the
public to purchase its shares and debentures and thus take up huge quantities of
finances to run the business and expand and diversify its activities. Bank and
financial institutions are also less hesitant to advance loans to a company or a
corporate body rather than to an individual or a firm.

Disadvantages of a Company:

As every benefit in the world comes for a price, below are the disadvantages of a
company:

1. Lifting the corporate veil:

Since a company is a separate legal entity, it is clothes with a corporate veil – and is
to be look without touching this veil. The personalities of a company are different
from the personalities of its shareholders and the corporate veil is a legal concept
which exists to distinguish a company as a legal person which separate from its
shareholders. There are times when the courts are often faced with a situation where
it is almost impossible to do justice unless the corporate veil is lifted. The main
instances where the doctrine of lifting of veil is applies are as follows

2. Formalities:

The incorporation of the company requires a host of formalities to be complied with.

Formalities start before the actual incorporation of a company, exists throughout the
life of the company and continues even during its winding up. All these requirements
also have a penalty for non compliance and the Act is replete with all kinds of
corporate offences.

3. Expenses:

Expenses are involved in the incorporation of a company, in its day to day running
and at the time of its winding up. At all three stages, the company has to borne
expense like stamp duty, legal and registration fees, printing expenses, fees payable
to solicitors, auditors, ROC and a heavy expenditure during the winding up or
dissolution of the company.

4. Denial of some fundamental rights:

Fundamental rights guaranteed by the Constitution of India are of two kinds. Some
are Art. 14 which is available to all and some are like Art 19 which are available to
only citizen of India. An interesting question arises here as to a company registered
in India can enforce those fundamental rights which are only available to Indian
citizens.

5. Control possible without majority shareholdings:

To exercise control over the affairs of the company, it is not compulsory to hold
majority of share by the shareholders. A company can manage its affairs without
majority shareholdings.

6. Possibility of fraud:

If the shareholding of a huge public company is spread out amongst thousands of

small shareholders, it affords a good opportunity to the management of the company
to play a financial fraud on the unsuspecting shareholder located in the different
parts of the country. Despite of strict public accounting and auditing provisions, huge
frauds are possible and if not detected in time, it becomes impossible to remedy or
undo the damage.

The Registrar of Companies (Roc)

a. Trading with the enemy.

b. For benefits of revenue.
c. Under statutory provisions.
d. Fraud or improper conduct.
e. Intentional mis description of name.
f. Fraudulent conduct of business.
g. Holding and subsidiary companies.
h. Provisions of tax laws.
i. Group enterprises.
j. Criminal acts.
k. Government companies.

Registration and Incorporation Of A Company

The ROC is the primary regulatory authority of companies registered under the
Companies Act, 2013. He is a full time officer employed by the Central Government
and is responsible for the administration of company law in the state in which he is
appointed.
There is 1 ROC for each state and is assisted by his subordinates. Registrar can
mean Registrar, additional registrar, deputy registrar or an assistant registrar.
All documents shall be registered with the ROC and if any document is found
defective or incomplete, he may call upon the company to rectify the defect or to
complete the document. Power of search and seizure are also conferred on the
ROC.
ROC maintains a register of companies where the names of the companies are
entered in the register in the order in which they were registered. He can also strike
out the name of the companies which have failed to commence its business within 1
year of its incorporation or other operations for a period of 2 immediate preceding
financial years.
1. Seven members in case of a public company and two In case of a private
company can apply for registration of companies.
2. They should prescribe names and submit an application to the ROC of the
State where the registered office of such company is situated. The following
documents shall be submitted along with the application :
1. Memorandum of Association
2. Articles of Association
3. Agreement of the company appointing a person as the managing
director of the company.
4. A declaration signed by an advocate of the Supreme Court or High
Court that all the requirements of the Companies Act are complied with…

Removals of a Company's name from the Register

Ss.248 to 252 of the Act shall empower the ROC to remove the name of a company
from the register of the companies maintained by him. The procedure to be followed
in such a case is set out herein. If the ROC has reasonable cause to believe that:
a. a company has failed to commence its business within one year of its
incorporation;
b. the subscribers to the memorandum have not paid the subscription amount
undertaken to be paid by them within 180 days from the date of incorporation of
the company and a declaration to that effect has not been filed under S11 of the
Act within such period; or
c. a company is not carrying on any business or operation for the two
immediately preceding financial years and has not applied to have itself declared
 as a dormant company under S. 455 of the Act, he shall send a notice to the
company and all its directors informing them his intention to remove the name
from the register of companies maintained by him and calling upon them to make
representation, along with all relevant documents within a period of 30 days.
A notice shall also be published in the Official Gazette for the information of the
general public, and at the expiry of the time mentioned in such notice, unless the
company shows cause to the contrary, the ROC may strike off the company's name
from the register of companies and notify the same in the Official Gazette. In such
case the company stands dissolved from the date of such publication in the Official
Gazette.
Without prejudice to whatever is stated above, a company can itself file an
application to remove its name from the register of companies if it is not a company
registered under S.8 of the Act (non- profit company). However in such case, the
company shall pass a special resolution to that effect or take consent of 75% of its
members in terms of its paid-up share capital.
If, however, it is found that an application made by the company above was made
with the object of evading its liabilities or with the intention of deceiving its creditors
or to defraud any other person, notwithstanding that the company has been notifies
as dissolved, the person in charge of the management of the company becomes
jointly and severally liable for any loss or damage incurred as a result of dissolution
of the company. Such persons are also punishable for fraud as provided in S 477 of
the Act. The persons responsible for filing such an application are also liable to be
prosecuted under the Act on the recommendation of the ROC.
However if any person is aggrieved by the order of the ROC, can appeal to before
the tribunal within 3 years from the date of order of the ROC. If the tribunal is of the
opinion that the removal of the company is not justified, it may order the restoration
of the name of the company in the register of companies based on the hearing and
arguments given by the ROC, company and all concerned persons.

Lecture 2

BACK

The topics covered under this lecture are :

 Kinds of Companies
 Promoters

Kinds of Companies

A. Private and Public Companies

A private company means a company having a minimum paid up share capital of Rs.
1 lakh or such high paid up share capital as may be prescribed. However this
provision was amended by the Companies (Amendment) Act, 2015, and its is now
provided that such companies must have a minimum paid up capital of such amount
as may be prescribe. In other words, the monetary limit imposed earlies in the Act
has been deleted. A private company has a name which ends in 'Private Limited.'
S. 2(68) of the Act, which defines a private company, prescribes that the following
features must be included in the articles of every private company namely:
a. the number of members of a private company cannot, expect in the case of OPC
(One Person Company) exceed 200, not counting employees and ex employees of
the company(who are also a member). Joint shareholders have to be counted as
one member.
b. a private company cannot invite members of the public subscribers for its
securities.
c. there must be some restriction on the transfer of shares of the company. In other
words, the shares of the private company should not be freely transferable. Needless
to say, if the company has no share capital, this requirement is rendered redundant.
The above requirements are cumulative in nature, and even if one of them is
missing, the company is deemed to be a public company. A public company as
defined under S.2(71) of the Act is a company which is not a private company. When
enacted in 2013 the Act provided that a public company must have a minimum paid
up capital of Rs. 5 Lakhs or such higher amounts as may be prescribed. However,
this provision was amended by the Companies(Amendment) Act, 2015 and it is now
provided that such companies must have a minimum paid up capital of such an
amount as may be prescribed in the other words, the monetary limit imposed earlier
in the Act has been deleted.

Difference Between a Private Company and Public Company

Sr.no PRIVATE COMPANY PUBLIC COMPANY

1 It can be incorporated and thereafter continue, with It required atleast 7 members for its incorpo
only two members. An OPC (One Person Company)
which is regarded as a private company has only one
member.
2 There is a restriction on the maximum number of A public company has no upper limit on the
members of a private company i.e 200 members. of its members.
3 As per the Companies (Amendment) Act, 2015, As per the Companies (Amendment) Act, 2
companies must have a minimum paid up capital of companies must have a minimum paid up c
such amount as may be prescribed. such amount as may be prescribed.
4 A private company must have atleast 2 directors. An A public company must have atleast 3 direc
OPC can have only one.
5 Since private company cannot issue prospectus, the The stringent provisions of the Act relating
stringent provisions of the Act relating to the issue of issue of a prospectus shall apply to a public
a prospectus do not apply to it. company.
6 The restrictions contained in the Act as regards the The restrictions contained in the Act as rega
appointment and remuneration of managerial appointment and remuneration of manageria
personnel do not apply to private companies. personnel apply to public companies.
7 The articles of a private company can provide A public company cannot provide additiona
additional disqualifications for appointment of disqualifications for appointment of directo
directors.
8 Under the 2013 Act, a person cannot be a director in He cannot be a director in more than 10 pub
more than 20 companies. companies.
9 In a private company, if 2 members are personally Quorum of 5 members, if the company has
present at a shareholders meeting, there is a 1000 members, 15 if the company has more
sufficient quorum. 1000 members and 30, if the company has m
5000 members.
10 A private company can provide financial assistance A public company cannot do so.
to a person for purchasing shares of the company.
11 If a private company is converted into a public If a public company is converted into a priv
company no statutory approval is necessary. company, prior approval of the tribunal is re
12 Articles of the private company relating to Articles of the public company relating to
entrenchment can be amended only if agreed to by entrenchment can be amended by a special r
all its members. by its shareholders.
13 A private company can accept deposits from any of Public companies having the prescribed net
its members. turn over can accept deposits from persons
members, subject to compliance with certai
conditions.
14 Private companies need not prepare reports on each Listed Public companies are required to pre
annual meeting. reports on each annual meeting.
15 A private company need not appoint independent Listed public companies must have indepen
directors. directors constituting atleast one-third of the
number of directors, and public companies
the prescribed share capital or turnover or h
loans, debentures or deposits exceeding cert
prescribed limits must appoint at least two
independent directors.
16 Contracts of employment of managing or whole time Contracts of employment of managing or w
directors need not be kept at the registered office. directors must be kept at the registered offic
17 A private company can insert a clause in its A public company cannot do so. The provis
memorandum or articles stipulating that the 43 of the Act and S 47 shall apply to all pub
provisions of S 43 of the Act and S 47 shall not companies.
apply. (S 43 deals with kinds of share capital and S
47 deal with voting rights of shareholders)
18 90% of the members of a private company can agree A public company has to adhere to the time
to provide shorter time limits for the shareholders to provided in S.62 of the Act and cannot prov
opt for shares in the case of further issue of shares or shorter period.
for the notice to be sent to shareholders in respect of
such shares.
19 A private company fulfilling the prescribe conditions A public company is subject to restrictions
is not subject to restrictions on purchase by a in S. 67 regarding purchase by a company o
company of its own shares (S 67). shares.
20 A private company may not provide in its articles A public company cannot do so. The provis
that the provisions of S 101 to 107 and S 109 dealing 101 to 107 and S 109 will apply to it.
with notice of meetings, quorum, and proxies and
voting will not apply to it.
21 A privates company is not required to comply with A public company is required to comply wi
certain conditions regarding acceptance of deposits conditions regarding acceptance of deposits
from its members if it fulfils certain conditions. members as prescribed under S.73 of the Ac
22 The provisions of S 160 of the Act, which deals with A person other than retiring directors can st
persons other than retiring directors wishing to stand directorship of a public company, if he fulfi
for directorship of the company, is not applicable to requirements of S160 of the Act.
 a private company.
23 A private company does not have to adhere to the A public company is required to adhere to t
requirements of S 162 of the Act regarding voting on requirements of S 162 of the Act and ensure
the appointment of each director individually. appointment of directors is voted individual
24 A private company is not subject to restrictions on Restrictions on the powers of the board of d
the powers of the board of director, contained in contained in S.180 of the Act , apply to a pu
S.180 of the Act. company.
25 If an interested director of a private company An interested director of a public company
discloses his interest, he can participate in a meeting participate in a meeting of the board of dire
of the board of directors. where a contract or arrangement in which h
interested is discussed.
26 A private company is not restricted to on loans given A public company is subject to restrictions
by a company to its directors if certain conditions are given by a company to its directors.
fulfilled.
27 S. 196(4) and S. 196 (5) which make certain The provisions of S. 196(4) and S. 196 (5) a
provision regarding the appointment of managing public company.
directors, whole time directors and managers, do not
apply to a private company.
NOTE: All points in the distinguish for the private company are also the advantages,
benefits and privileges' of a private company.

Conversion of private company into public company

A private company can be converted into a public company if its members pass a
special resolution, amending the articles of the company to include all the
requirements of a private company referred above. However, no such alteration to
the articles has effect unless the same is approved by the Tribunal, which may pass
such orders in the matter as deemed fit. The conversion of a private company into a
public company can take place in the following three ways:
1. Conversion by choice by operation of law
2. Conversion by default
3. Conversion by operation of law (deemed public company) – the concept of
deemed public company was abolished in 2000.

B. Companies limited by guarantee

A company with limited liability may be limited by shares or limited by guarantee. In

the case of a company limited by shares, a shareholder is liable only for the unpaid
amount of face value of the shares held by him. On the other hand, company limited
by guarantee (S .2(21) the memorandum of the company specifies a fixed sum
beyond which a member cannot be called upon to contribute of and when the
company goes into winding up, and that too, only for the payment of the debts and
liabilities of the company.

C. Companies with unlimited liability

Although most companies are incorporated so that its members may enjoy the
blessing of limited liability, it is open to the promoters, under S 2(29) of the Act, to
incorporate a company with unlimited liability. A company with unlimited liability has
no provisions in the memorandum limiting the liability of its members. The liability of
all its members is unlimited, similar to liability of partners in the firm.

D. One person companies

The Companies Act, 2013 has introduced the concept of One person company
which is defined in S 2(62) of the Act as a company which has one person as its
member.

E. Small companies

The Companies Act, 2013 has now introduced the concept of small companies. S .
2(85) of the Act has defined a small company as a company, other than a public
company:
a. where the paid up share capital does not exceed Rs.50 Lacs or such higher
amount as prescribed (not however being more than Rs 5 Crores),
b. where the turnover, as per the last profit and account , doesn't not exceed Rs.2
Crores or such higher amount as may be prescribed (not being more than Rs. 20
Crores).
However the status of a small company is not available to a company which is a
holding or a subsidiary company; a company registered under S.8 of the Act, a
company or body corporate governed by any special Act.

F. Associate companies

A new concept of Associate companies has been introduced under the 2013 Act.
Such a company is defined under S.2(6) of the Act as a company which other
company has a significant influence, but which is not subsidiary of such a company.
The term also includes a joint venture company.

G. Foreign companies

Under S. 2(42) of the Act, the term 'foreign company' is defined to mean any
company or body corporate incorporated outside India:
a. which has a place of business outside India, whether by itself or through an agent,
physically or through any electronic mode;
b. which conducts any business activity in India in any manner. (Also refer to S. 380
of the Act)

H. Government companies

S. 2(45) of the Act defined a 'government company' as a company in which not less
than 51% of the paid up capital is held by ;
a. the Central Government; or
b. the State Government; or
c. partly by the Central Government and partly by one or more the State
Governments.
A subsidiary of a government company is also deemed to be a government
company. All the provisions of the Act apply to government companies. The auditor
of a government company is appointed by the Comptroller and Auditor General of
India. If the Central Government holds shares in such a company, it must prepared
an annual report and place it before the Houses of Parliament and if the State
Government is a shareholder in such a company, an annual report shall be place
before the State Legislature.

I. Non profit companies

S. 8 of the Act deals with a company which is proposed to be registered under the
Act as a limited company and which –
a. has its objects , the promotion of commerce , arts and science, sports, education,
research, religion, charity , social welfare , protection of the environment or any other
object, and
b. intends to apply its profits, if any, or any income in promoting the objects;
c. intends to prohibit the payment of any dividend to its members.

J. Holding and subsidiary company

If company A exercises control over company B in any of the two modes f=given
below, A becomes the holding company and B becomes the subsidiary company of
A.
1. a company becomes a holding company of another company by controlling the
composition of the board of directors of the other.
2. a company can become a holding company of another via the route of
shareholding.

K. Illegal associations

S 464 of the Act therefore provides that no association or partnership consisting of

the prescribed number of persons can be formed for the purpose of carrying on any
business which has for its object, the acquisition of gain by association or
partnership or by the individual members thereof, unless it is registered as a
company under the Companies Act, 2013 or under any other Law. The Act also
specifies that the prescribed number cannot be more than 100 persons. Under the
Companies Rules 2014, the maximum number notified for this purpose is, for the
time being , 50 persons. This provision can be applicable only in 4 conditions;
1. the association has more than the prescribed number of members.
2. the association has been formed for the purpose of carrying on a business.
3. the object of the association is to make profit for itself and for its members and
4. the association is not registered as a company under the Act or any other law in
India.
This provision doesn't apply to :
1. a Hindu undivided family carrying on any business and,
2. an association or partnership, if the same is formed by professionals who are
governed by special Acts.

L. Producer companies

Producer Company is a company registered under the Companies Act, 2013, which
has the objective of production, harvesting, procurement, grading, pooling, handling,
marketing, selling, export of primary produce of the Members or import of goods or
services for their benefit.
Promotors
Although the word promoter is more of a business, rather than a legal term, S. 2(69)
of the Act attempts a definition of the term in the following words:
"Promoter" means a person –
a. who has been named as promoter in a prospectus, or
b. who is identifies by the company as a promoter in its annual returns, or
c. who has control over the affairs of the company, directly or indirectly, whether as a
shareholder, director or otherwise, or
d. in accordance with whose advice, directions or restrictions the Board of Directors
of the company is accustomed to act. (this does not cover a person acting merely in
a professional capacity)
According to Charlesworth and Morse,-
"Before a company can be formed, there must be some persons who have the
intention to form a company and who take the necessary steps to carry the intention
into operation. Such persons are called promoters". Promoters are persons who get
together to form a company. The main question of fact as to whether a person can
be considered as a promoter depends on what is the role played by him in the
incorporation of the company. However as stated herein, a person who is involved in
the formation of a company only in his professional capacity, as for instance, a
solicitor or a chartered accountant, is not a promoter.
A review of case laws indicates that the law imposes a two- fold fiduciary duty to a
promoter namely:
a. a duty not to make a secret profit out of the promotion of the company, and
b. a duty not to disclose any interest which he may have in transaction entered into
by the company.

Liability of promoters under a Prospectus

S.35 of the Act imposes a civil liability on certain persons, including the promoters,
for misstatements in a Prospectus. If a person subscribes for the shares or
debentures of a company on the faith of statement contained in the Prospectus
issues by the company, he can sue the persons mentioned in the said section
including promoters of the company for any loss or damage sustained by him by
reason of any untrue or misleading statement in the Prospectus.

Liability of promoters in respect to allotment of shares

When a company issues Prospectus, all the money which is received by it from
applicants for the shares is to be kept deposited in a Scheduled Bank. If the entire
amount payable on the application for shares in respect of the minimum subscription
as states in the Prospectus has not been received by the company within the
prescribed time, all money received by it from the applicants is to be returned to such
applicants within the stipulated period. If there is any contravention of this provision
by, inter alia, a promoter, he becomes punishable with fine which may extend to Rs.
1 Lac or Rs.1,000 for each day of default, whichever is less. [S. 39]

Liability of promoters at the time of winding up

 If the Tribunal has passed an order for the winding up of a company, and the
liquidator has made a report to the tribunal that, in his opinion, a fraud has been
committed by a person, inter alia, in the promotion of the company, the Tribunal can
order such a person including the promoter to be examined by the Tribunal.[S. 300]

Pre incorporation contracts: liability of promoters

Very often, the promoters enter into contracts with third parties, purporting to act on
behalf of the company which is yet to be formed. Such a contract does not bind the
company, as it was not in existence at the time of the contract. As is well
established, two consenting parties must exist before a contract can be entered into
and since the company has no legal existence before it is incorporated, such
contract cannot bind the company – although the promoter who signed the contract
would be bound by it.

Functions of the Promoters:

The various functions of the promoters are summarized hereunder:

1. to settle the company's name by ascertaining that the same may be accepted by
the Registrar of the Companies.
2. to settle the details of the Memorandum of Association and Articles of Association
of the company.
3. to settle nomination of Directors, solicitors, auditors, bankers, secretary of the
company.
4. to settle the assertion and fixation of registered office of the company.
5. to settle and ascertain the issue of prospectus requiring a public issue, if any.

Lecture 3

BACK

The topics covered under this lecture are :

 Prospectus
 Member's Meetings

Prospectus

S. 23 of the Act deals with how a company can issue securities, that is, shares,
debentures etc. It provides that a public company can issue securities:
a. to the public by the way of prospectus (public offer), or
b. by private placement, by complying with the relevant provisions of the Act, or
c. through the rights issue or a bonus issue in accordance with the provisions of the
Act.
In case a company is a listed company or intends to become one, it mustalso comply
with the provisions of the SEBI Act, 1992 and the rules and regulations made under
the Act.
A private company can issue securities:

a. by making a private statement in accordance with the provisions of the Act; or

b. by the way of rights issue or a bonus issue in accordance with the provisions of
the Act.
The biggest monetary advantage enjoyed by the public company is that it can raise a
huge amount of capital by inviting members of the public to subscribe to its shares or
debentures of the company by issuing a prospectus. When a company is issuing a
prospectus, it doesn't amount to an "offer" in the eyes of law, rather, it is an invitation
to offer. Whereas a private company, however is by definition, prohibited from
inviting members of the public to purchase its shares or debentures, and therefore, a
private company cannot issue a prospectus. However it is not obligatory for a public
company to issue a prospectus and invite members to subscribe for its securities. It
may finance itself by what is known as 'private placement', as for instance, it can
send an offer letter to a selected group of persons.

S. 2 (70) of the Act defines the term 'prospectus' as under:

"Prospectus" means any document described or issued as prospectus and includes

a red herring prospectus as referred in S. 32 or a shelf prospectus referred in S. 31
or any other notice circular, advertisement or other document inviting offer from the
public for subscription or purchase of any securities of a body corporate.

It may be noted that, when shares are offered and application forms are
issued, a prospectus containing all the statutory details is not necessary:

a. when the offer is made in connection with a bona fide invitation to a person to
enter into an underwriting agreement in respect of the shares or debentures.
b. when the shares and/or debentures are not issued to the public.
c. when the company makes an offer only to its existing members or debenture
holders.
d. when the shares or debentures offered are, in all respects, uniform with shares or
debentures already issued and quoted on a recognized stock f exchange.

Under S. 30 of the Act, if an advertisement of a prospectus is published in any

manner, the following matter just be specified therein, namely:

a. the contents of its memorandum as regards its objects, the liability of its members
and the amount of the share capital of the company;
b. the names of the signatories to the memorandum and the number of shares
subscribes from by them, and
c. the capital structure of the company.

Shelf prospectus

Shelf prospectus means a prospectus issued by any public financial institution or

public sector bank for one or more issues of the securities or class of securities
specified in that prospectus. Any public financial institution, public sector bank or
scheduled bank whose main object is financing shall file a shelf prospectus. A
company filing a shelf prospectus with the Registrar shall not be required to file
prospectus afresh at every stage of offer of securities by it within a period of validity
of such shelf prospectus. A company filing a shelf prospectus shall be required to file
an information memorandum on all material facts relating to new charges created,
changes in the financial position as have occurred between the previous offer of
securities and the succeeding offer of securities under the shelf prospectus. An
information memorandum shall be issued to the public along with shelf prospectus
filed at the stage of the first offer of securities and such prospectus shall be valid for
a period of one year from the date of opening of the first issue of securities under
that prospectus.

Red herring prospectus [S. 32]

1. A company proposing to make an offer of securities may issue a red herring

prospectus prior to the issue of a prospectus.
2. A company proposing to issue a red herring prospectus under sub-section (1)
shall file it with the Registrar at least three days prior to the opening of the
subscription list and the offer.
3. A red herring prospectus shall carry the same obligations as are applicable to a
prospectus and any variation between the red herring prospectus and a prospectus
shall be highlighted as variations in the prospectus.
4. Upon the closing of the offer of securities under this section, the prospectus
stating therein the total capital raised, whether by way of debt or share capital, and
the closing price of the securities and any other details as are not included in the red
herring prospectus shall be filed with the Registrar and the Securities and Exchange
Board.
Explanation.—For the purposes of this section, the expression "red herring
prospectus" means a prospectus which does not include complete particulars of the
quantum or price of the securities included therein.

Contents and requirements of a Prospectus

S. 26 of the Act lay down the matter required for a prospectus, which is as
follows:

1. Address of the registered office of the company.

2. Name and address of company secretary, auditors, bankers, underwriters etc.
3. Dates of the opening and closing of the issue.
4. Declaration about the issue of allotment letters and refunds within the prescribed
time.
5. A statement by the board of directors about the separate bank account where all
monies received out of shares issued are to be transferred.
6. Details about underwriting of the issue.
7. Consent of directors, auditors, bankers to the issue, expert's opinion if any.
8. The authority for the issue and the details of the resolution passed therefore.
9. Procedure and time schedule for allotment and issue of securities.
10. Capital structure of the company.
11. Main objects and present business of the company and its location.
12. Main object of public offer and terms of the present issue.
13. Minimum subscription, amount payable by way of premium, issue of shares
otherwise than on cash.
14. Details of directors including their appointment and remuneration.
15. Disclosure about sources of promoter's contribution.
16. Particulars relation to management perception of risk factors specific to the
project, gestation period of the project, extent of progress made in the project and
deadlines for completion of the project.
17. it must also set out a)reports by the auditors of the company with respect to
profits and losses and assets and liabilities and other prescribed matter including the
last preceding five years and assets and liabilities of the business of the company as
on date on which the accounts were made up, being a date not more than 180 days
before the issue of the prospectus , b) reports relating to the profit and losses for
each of the preceding five financial years, including such reports of its subsidiaries
as may be prescribed; c)reports regarding business transactions to which the
proceeds of securities are to be applied directly or indirectly.
18. it must contain all such matters , declaration, reports as may be prescribed.
19. No prospectus can be issued on behalf of the company or an intended company
unless a copy thereof has been delivered to the ROC for registration on or before the
date of its publication. Such a copy shall be signed by every person who is named
herein as a director or proposed director of the company or by his duly authorized
attorney. The ROC shall register the prospectus only if all the above requirements
are fulfilled.

Civil and Criminal liability for false or misleading statements in a

prospectus

The golden rule starts with the presumption that the members of the public are at the
mercy of the promoters. There should, thereof, be a true, full and fair and complete
disclosure of all facts relating to business and affairs of the company which would
influence the judgment of a layperson when deciding whether or not to purchase the
shares or debentures of a company. Nothing stated should be untrue, false or
inaccurate and no facts shall be omitted if that can influence the judgment of the
investor.
In India, in addition to the following the broad framework of the golden rules, the
guidelines issued by SEBI, laying down the disclosure which are mandatory in the
prospectus, have also to be followed. An investor who has purchased shares of a
company replying on the misstatements of the prospectus has several remedies.
The consequences of not making a true and full disclosure in the prospectus as
required by the law can be serious, and may be summed up as under:

1. Damages under the law of torts for deceit

Under the low of torts, deceit or fraud is a tort and damages can be recovered by the
investor, who has suffered the loss or damage as a result of a fraudulent statement
contained in a prospectus. However, before the damages can ve awarded to such a
person, he would have to prove three things:
- There was a fraudulent statement.
- That such a statement related to matter of fact, and
- That, replying of such a statement, he had purchased the shares or debentures
directly from the company and not from the market.
2. Rescission of the contract under the law of contracts

The second remedy of the investor in such cases is to rescind the contract under the
law of contracts; as such a contract is voidable at his option. In order to succeed in
such a suit, he would have to prove:
- that there was a false representation in the prospectus;
- that such a representation was made by or on behalf of the company;
- that such representation was of fact – not of law and;
- that he acted on faith of such a statement and had no means of discovering the
truth with ordinary diligence.

3. Fine payable under S.26 of the Act

The prospectus shall fulfill all requirements as stated in S. 26 of the Act. If the
prospectus being issued is in contravention of the provision of S. 26 of the Act, the
company is liable to pay a fine ranging between Rs. 50,000/- to Rs. 3 Lacs or both.

4. Civil liability for compensation under S.35 of the Act

S .35 of the Act makes five categories of persons liable to pay compensation to an
investor for omission or misleading statements in a prospectus. The payment of
compensation is in addition to any punishment which such a person may incur under
S. 36 (below). The five categories of persons who become liable are:
a. Every person who is a director of the company at the time of the issue of the
prospectus
b. Every person who has authorized himself to be named, and is named in the
prospectus as a director of the company or has agreed to become such a director,
either immediately or after an interval of time.
c. Every promoter of the company.
d. Every person who has authorized the issue of the prospectus.
e. Every person who is an 'expert' referred to in S. 26 of the Act.
5. Criminal liability under S.34 and 36 of the Act.

Criminal liability for mis-statement in Prospectus (section 34):

Under S. 34, when a prospectus, issued, circulated or distributed, includes any

statement which is untrue or misleading in form or context in which it is included; or
where any inclusion or omission of any matter is likely to mislead; every person who
has authorized the issue of such prospectus shall be punishable:
a. with an imprisonment of for a term ranging from six months to ten years, and
b. with fine which cannot be less than the amount involved in such fraud, but which
may extend to three times such an amount.
S.36 also provides for the same punishments as above for any person who
fraudulently induces any person to invest money in a company. A suit can also be
filed or other action can be taken under Ss.34, 35 and 36 of the Act by any person,
group of persons or any association of persons affected by any misleading statement
or the inclusion or omission of any matter in a prospectus.[S.37]

Members Meetings
Financial Year (Section 2(41)): The 2013 Act has introduced a significant difference
in the definition of the term, 'financial year', which has been defined in section 2(41)
of the 2013 Act to mean April to March. All the existing Company, on the
commencement of this Act, shall, within a period of two years from such
commencement, line up its financial year as per this definition of financial year.
Where the company or body corporate has been incorporated on or after the 1st day
of January of a year, the period ending on the 31st day of March of the following
year, in respect whereof financial statement of the company or body corporate is
made up. On an application made by a company or body corporate, which is a
holding company or a subsidiary of a company incorporated outside India and is
required to follow a different financial year for consolidation of its accounts outside
India, the Tribunal may, if it is satisfied, allow any period as its financial year,
whether or not that period is a year.

Annual General Meeting (Section 96):

Every company other than a One Person Company shall in each year hold in
addition to any other meetings, a general meeting as its annual general meeting. The
company shall specify the meeting as such in the notices calling Annual General
Meeting. The 2013 Act states that the first annual general meeting should be held
within nine months from the date of closing of the first financial year of the company
[section 96(1) of 2013 Act], whereas the 1956 Act requires the first annual general
meeting to be held within 18 months from the date of incorporation.
This means, for a company incorporated on 1st day of January 2015, the first
financial year shall be closed on 31st day of March 2016 and Annual General
Meeting should be convened on or before 31st day of December 2016. However for
a company incorporated on 31st day of December 2014, the first financial year shall
be closed on 31st day of March 2015 and Annual General Meeting should be
convened on or before 31st day of December 2015.
One of the changes in the 2013 Act compared to the 1956 Act is that annual general
meeting can now be held on all days including on Sundays and public holidays but
cannot be held on National Holidays as declared by the Government. The
Public/National Holidays are 15th August – Independence Day, 26th January –
Republic Day and 2nd October – Gandhi Jayanti Day. So companies can now hold
annual general meetings on all days of the year except these three days as above.
Section 96(2) Currently, the 1956 Act does not define business hours, which the
2013 Act now defines as between 9 am and 6 pm.

Report (Sec 121)

Apart from minutes of AGM, Listed Companies are required to prepare report on
each AGM in a manner prescribed in rule 31 of Companies (Management &
Administration) Rules, 2014 including the confirmation to the effect that the same
was convened, held and conducted as per the provisions of this Act and rules made
there under. The copy of report shall be filed with ROC within 30 days from the date
of conclusion of AGM failure to submit that report attract fine on Company of Rs. 1
lakh minimum which may extend to five lakh and on every defaulting officer of Rs. 25
thousand minimum which may extend to 1 lakh.

Extraordinary General Meeting: (Sec 100)

The clause 42 of Table F (Schedule 1) states that all the meetings other than the
ones which are annual general meetings shall be classified as extraordinary general
meetings. The Board of directors of the company have the power to call an
extraordinary general meeting whenever, in its opinion, it deems fit. The reason for
the existence of an extraordinary general meeting is that the annual general meeting
is conducted within a gap of about 18 months between two consecutive meetings.
This gap is mandatory and shall be maintained, however, if an urgent matter arises
between the two annual general meetings then it can be handled by the way of
extraordinary general meeting. The matters if requires the shareholder's approval,
then an extraordinary meeting may be called.
From the abovementioned, it can be understood that an extraordinary general
meeting may be called if the business which has to be transacted is of urgent nature
and cannot be put on hold till the next annual general meeting. Usually, an EGM may
be called in the following circumstances:
1) By the board ‐ an extraordinary general meeting may be called by the board on its
own motion.
2) By a director ‐ An EGM may be called by a director and if at a time they are called
and are not in India, then the director capable of acting and who are sufficient in
number shall be called to form the quorum.
3) An EGM may be called by the board at the requisition made by the members as
per Section 100.
4) It may be called by the requisitionists themselves
5) Tribunal ‐ An EGM may be called by the Tribunal or the NCLT.

Matters that can be dealt in EGM

It has been provided in the Companies Act, 2013 that any business that is
considered in the extraordinary general meeting shall be considered as special
business. EGM has various functions attached to it. EGM is used to help the Board
to know about certain matters which are important in nature. It also places a duty on
the company to provide to the shareholders more information about the business to
be transacted in the form of an explanatory statement. The explanatory statement
shall have attached to itself a notice to the EGM which shall include the relevant
information such as the nature of concern or interest which may be financial or
otherwise. It shall also include the information and facts that may enable members to
understand the meaning and the implications of the business and the scope of
transactions of business and to take decisions.

Procedure to call for an EGM

The meeting shall be called at any day other than the national holiday and the
procedure for calling an extraordinary general meeting shall be given in the articles
of association of the company.

Initiation of an EGM

By requisition
Section 100(2) of the Companies Act, 2013 makes it clear that an extraordinary
general meeting can be held via requisition which has been made by a member who
at the time of making a requisition holds at least one‐tenth of the share capital. This
can be done only in the companies which have share capital. In the case of
companies, which do not have share capital, the members who have a minimum of a
total of one‐tenth of the total voting power of all the member who have the right to
vote, such members on the date of requisition shall have the power to call an
extraordinary general meeting.
The requisition mentioned above has to set out the matters for which the meeting
has to be held and this matter of considerations shall be signed by the requisitionists
and has to be sent to the registered office of the company. The board has a duty to
call proceed to call the meeting within 21 days from the receipt of the said requisition
and the meeting has to held within 45 days. If the board fails to do so, then the
meeting can be called and held by the requisitionists within 3 months. In the latter
scenario, the meeting which has to be conducted by the requisitionists has to follow
the same manner in which the meetings are conducted by the board.
The expenses which have been incurred by the requisitionists shall be reimbursed to
them from the company and the company can deduct these amounts from the
remuneration of directors, because of whom the default occurred and the meeting
had to be conducted in the said manner.

Amendment to Section 100

There has been an amendment to Section 100 of the Companies Act which states
that unless the company is a wholly owned subsidiary of a company registers
outside India, the extraordinary meeting of all the companies which are remaining
shall be conducted a place in the territory of India.
Another modification which has been made into the Act is that there is a proviso
inserted into the subsection 1 of section 100, which states that in case of Specified
IFSC companies, the board can if the shareholders have given their consent,
conduct their Extraordinary general meeting at any place. This shall include places
within the territory or outside the territory of India.
With respect to the requisitions mentioned above,, it has to be noted that the
requisitions shall set out the matter for considerations and no other business can be
done apart from it. This principle was laid out in the case of Malvika Apparels v.
Union of India in which the notice which was served in response to the requisition
had not included all the items specified by the requisitionists.

The general provision required for the meetings are :

1. Notice

A notice shall be given of not less than 21 days to call any a general meeting, either
in writing or through electronic mode as may be prescribed. A shorter notice is also
possible if consent is obtained from 95% of the members entitled to vote at such a
meeting. Notice shall be given to every member of the company, the legal
representatives of the deceased members; the assignee of an insolvent member; the
auditors of the company and every director of the company.

2. Quorum

It refers to a minimum number of members who must be present in order to

constitute a valid meeting. The Articles of a company provide such quorum fir its
meetings. Unless provided in the articles, the quorum for a meeting of the members
of a company is as follows:
a. in case of a public company:
- 5 members personally present – if the company has not more than 1000 members,
-15 members personally present - if the company has not more than 1000 members
and upto 5000 members,
- 30 members personally present - if the company has more than 5000 members .
b. in case of a private company : two members personally present.
Incase if within half an hour from the time for the meeting, a quorum is not present,
the meeting stands dissolves if it was a meeting called by the requisition of
members. In other cases, the meeting is adjourned to next week at the same time
and place.

3. Chairman

The presence of a chairman is necessary for the proper conduct of a meeting. In the
absence of a chairman, the members shall elect one of themselves as the chairman.
In case of a tie, the chairman can exercise a casting vote. The chairman can also be
appointed by the court.

4. Voting

The votes cast by the shareholders play decisive role in the business proposed in
the meetings of a company. An equity shareholder has the right to vote for every
motion. However, as per the Section 47 of the Companies Act, 2013 preference
shareholder is entitled to vote only for a resolution pertaining to his rights. At the first
instance, the voting is by show of hands, where one member has one vote. A
declaration by the chairman that a resolution has or has not been passed is
conclusive except when a poll demanded. When a poll is taken the number of votes
for and against the resolution is recorded, unlike in the case of voting by show of
hands, a member has as many as votes as he has shares.

5. Proxy

Any member of a company entitled to attend and vote at a meeting of the company
shall be entitled to appoint another person as a proxy to attend and vote at the
meeting on his behalf. A proxy shall not have the right to speak at such meeting and
shall not be entitled to vote except on a poll.A member of a company not having a
share capital shall not be entitled to appoint proxy unless articles provide so. Central
Government may also specify companies whose members shall not be entitle to
appoint a proxy. However, a proxy so appointed doesn't have any right to speak at
the meeting. Section 105 lays down four points:
1.a proxy shall not have the right to speak at such meeting and shall not be entitled
to vote except on a poll.
2. unless the articles of a company otherwise provide, this subsection shall not apply
in the case of a company not having a share capital.
3. the Central Government may prescribe a class or classes of companies whose
members shall not be entitled to appoint another person as a proxy.
4.a person appointed as proxy shall act on behalf of such member or number of
members not exceeding fifty and such number of shares as may be prescribed.
 6. Resolutions

After every meeting, business is transacted at such meetings in the form of

resolutions. Resolutions are of two kids ordinary resolution and special resolution.

7. Minutes

Minutes are concise record of proceedings of meetings of members or Board of

directors or committees which reflect true and fair summary of proceedings at the
meetings. Within 30 days from the meeting the entire proceeding shall be made in
the minute book. The Minute Book is required to be maintained at the registered
office of the company and is to be kept open for inspection by members during the
business hours. Additionally the Tribunal can also direct immediate inspection or
furnishing of the required copies as the case may be .
The provisions referred above regarding meeting, quorum, resolutions, etc cannot
apply to OPC (one person companies). In such case of a company, when the
business is required by the Act to be transacted by an ordinary or special resolution,
it would be sufficient if the resolution is communicated by the member to the
company and is entered in the minute book of the company. Such a resolution
should be signed and dated by the member of the OPC, and such date is deemed to
be the date of the meeting for the purpose of the Act. [S.122]

Lecture 4

BACK

The topics covered under this lecture are :

 Memorandum of Association: its contents and alteration

 Articles of Association

Memorandum of Association

Section 2(56) of the Act defines the word 'memorandum' in the following
words:

"Memorandum means the memorandum of association of a company as originally

framed or altered from time to time in purchase of any previous company law or Act."
Memorandum of Association is a document of prime importance for a company. It
depicts the objectives, extent of authority, competency, liabilities and legal rights of
the company. The memorandum acts as a legal code or constitution for a company
and regulates the relationships between the company and its shareholders,
investors, beneficiaries and other members.
A memorandum of association allows people like the shareholders, creditors,
investors and other members of a company to know the purpose for which a
company has been formed. It allows them to know the range of activities that the
company is permitted to be involved in and authorizes them to learn about the
company's objectives.
The memorandum of association also curbs the company's flexibility by preventing it
from getting involved in any kind of activities other than the ones mentioned in the
memorandum while the company is in its initial stages of formation.
Lord Cairns in the leading case of Ashbury Railway Carriage Co. V. Riche observed
that "The Memorandum of Association of a company is its charter and defines the
limitation of the powers of a company." "The memorandum contains the fundamental
conditions upon which alone the company is allowed to be incorporated."
The importance of memorandum lies in the fact that it contains the six important
clauses that govern the company throughout its existence, namely,-
1. Name clause
2. Registered clause
3. Object clause
4. Liability clause
5. Capital clause
6. Subscription clause
In case of a One Person Company (OPC), the memorandum must also state the
name of the person who, in the event of the death of the subscriber or his capacity to
contract, will become member of the company.
It is also noted that the provisions of the Act have an over- riding effect over the
memorandum and articles of the company. So, if there is any provision in the
memorandum or articles of a company which is repugnant to anything contained in
the Act, such provision would, to that extent, be void.[S.6]

1. Name clause

It is mandatory to mention the name of the company while drafting the Memorandum
of Association. A company may select any name that it prefers but it should not be
identical to an existing company. The chosen name of the company as it appears in
the Memorandum of Association should be exactly the same as the one approved by
the Registrar of Companies. A Public Limited Company should end with the word
"Limited" and likewise, a Private Limited Company should end with the words
"Private Limited". Likewise, the name of the entity shouldn't be similar or closely
identical to any other operating entity. The Central Government may find a name to
be undesirable and misleading, in which case it may prohibit it.
A company should restrain from using words like "King, Queen, Emperor,
Government Bodies and names of World Bodies like U.N.O., W.H.O., World Bank
etc". In order not to mislead the public a company must not use a name which is
prohibited under the Emblems and Names (Prevention of Improper Use) Act of 1950.
A company is restricted from using any name which may connect it to the
government of the state, without obtaining prior permission from the government.
Therefore the name of the company shall be displayed outside every place where
the business of the company is being carried on and on all letter heads, official
publications, orders, receipts, etc of the company along with the registered address
of the company.
In case of change of name, a company can change its name by passing a special
resolution at the meeting of its members and obtaining approval of the Central
Government in writing except in case of change from private to public company.
When the name of the company changes, the ROC enters the new name in the
register and issue a fresh Certificate of Incorporation with the new name of the
company.

2. Registered clause

The Memorandum of Association of a company must contain the name of the state
where the company operates and the jurisdiction of the Registrar of Company must
be specified. It is mandatory for the company to have the registered office within 15
working days. Likewise, the verification of the registered office must be completed in
30 days. This procedure is done to fix the domicile of the company which may or
may not be the place where the company is operating.

3. Object clause

The objective for which the company is formed must be mentioned in the
Memorandum of Association. It is one of the key clauses and should be drafted
carefully mentioning all the types of businesses that the company may possibly
engage in the future. A company is legally prohibited from carrying out any activity
that is not specified in the object clause. The objects are classified as 'Main Objects',
'Ancillary Objects' and 'Other Objects'. The objects must be stated articulately and
must not be ambiguous in nature. The objects must not also be illegal or against the
prohibition of the Act or the public policy of the country. The statement of a
company's objects in its MOA makes way for the following benefits:
It provides protection to subscribers, who are benefited with the required knowledge,
pertaining to the purposes to which their money can be applied.
It provides protection to persons who deal with the company, who can infer from it
the extent of the company's powers.
It restricts the Board of Directors to usage of company's funds for the activities stated
in objects clause.

4. Liability clause

The fourth clause of MOA, the liability clause declares the liability of members of the
company to be either limited or unlimited. The MOA of the company limited by
shares must declare that the liability of the members of the company is limited. The
Memorandum of Association of a company limited by guarantee must state the
amount of contribution, that every member agrees to contribute to the assets of the
company in the event of the company being wound up. However, in case of a limited
company, the liability of directors or managers of a company may be unlimited, if
specified in the memorandum.
The liabilities of the members of the company must be clearly stated in the
Memorandum of Association. They may be limited by shares or by guarantee. In
case of unlimited liability company, the entire clause can be eliminated.
When a company is limited by shares, the liability of its members remains limited to
any unpaid amount on the shares owned by them. When it is limited by guarantee
the members of the company are liable to pay the amount stated in the
memorandum at the time of liquidation of the company. In case of unlimited
companies, the liability of the members is unlimited, involving personal assets.
5. Capital clause

The fifth clause of the MOA, the capital clause, states the company's share capital.
The clause must specify the total number of share capital with which the company
must be registered, the number of shares of each kind and the face value of each
share. Point to be noted, a private or public company not intended to be listed in a
stock exchange may have any face value, but a public company intended to be listed
will have such face value as has been prescribed.
The maximum amount of authorized capital that can be generated by the members
of the company is ought to be specified in the Memorandum of Association. Stamp
duty is applicable on this amount. Although there is no legal limit to the maximum
amount of capital that can be raised by a company, it cannot increase the authorized
share capital once it has been incorporated. The denomination for each such share
has to be either RS 10 or RS 100 in case of equity and preference shares
respectively. A company should make sure that the raised authorized capital is
sufficiently high for further expansion of business in the future. All other rights and
privileges, as agreed upon by shareholder, creditors, and investor and other
members of the company may also be specified in this charter.

6. Subscription clause

The sixth and final clause of the MOA, the subscription clause, should state the
purpose of the subscribers to incorporate the company, agreeing to take the shares
in the company based on the number written in the Memorandum. Another detail to
be specified is the shares agreed to be taken by each subscriber.
The amount of authorized capital and the number of shares owned by each member
of the company should be mentioned in the Memorandum of Association of the
company. The subscribers to the memorandum must own a minimum of one share
each. Each subscriber must write the number of shares owned by him and sign the
memorandum in the presence of at least one witness who is required to attest the
signature.
It is mandatory for every company to print its Memorandum of Association and have
it signed by each of its members. The address, occupation and shares held by each
member of the company must also be mentioned in this charter.
For the formation of a Private Limited Company, a minimum of 2 members are
necessary. For a Public Company, it is 7. In case of a One Person Company, the
nominee has to be stated in the Memorandum of Association as in case of death of
the founding member or his incapacity to perform, the legal rights of the company will
be transferred to him or her.

Alteration, Amendment & Change in Memorandum of Association under

Companies Act 2013

A memorandum of association needs to be amended if any of the following changes

occur in the company:
1. An alteration in the name of the business.
2. A change in the office of registration.
3. An alteration in the object clause of the business.
4. An alteration in the authorized capital of the business.
 5. Any adjustments made in the legal liabilities of the members of the business.

The procedures for making any amendments in the Memorandum of

Association as prescribed under Section 13 of the Companies Act 2013:

 It is advisable to conduct a board meeting to uphold the proposal to the

members of the company for consideration, by passing a special resolution.
 It is recommended to issue a notice of an Extraordinary General Meeting in
which the special resolution will be passed. The notice must mention the location,
date, day and time of the meeting and a statement specifying the objective of the
meeting and the business to the carried out in the meeting.
 As mentioned under Section 102 of the Act, an explanatory statement must
accompany the notice for the meeting.
 As specified under Section 61 of the Act, in the event of an amendment of the
authorized share capital, approval of the members by way of an ordinary resolution
is necessary. However, for amendment of all other clauses, approval of members by
special resolution is mandatory.
 For amendment of a Memorandum of Association with the Registrar of
Companies, a company must file a special resolution which has been passed by its
shareholders. In order to register the special resolution, Form MGT 14 is required to
be filed within 30 days of passing such a motion.
 A validated copy of the special resolution, the notice and the explanatory
statement of the Extraordinary General Meeting must be attached with Form MGT
14, along with the altered memorandum of the company.
 In the event of an alternation in the name of the company or a change in the
registered office, a copy of approval from the Central Government is necessary.
 Any such alterations and amendments made under Section 13 of the Act shall
not be in effect unless registered.

Doctrine of Ultra Vires

Companies have to borrow funds from time to time for various projects in which they
are engaged. Borrowing is an indispensable part of day to day transactions of a
company, and no company can be imagined to run without borrowing from time to
time. Balance sheets are released every year by the companies, and you will hardly
find any balance sheet without borrowings in the liabilities clause of it. However,
there are certain restrictions while making such borrowings. If companies go beyond
their powers to borrow then such borrowings may be deemed as ultra-vires.
Ultra Vires is a Latin term made up of two words "ultra" which means beyond and
"vires" meaning power or authority. So we can say that anything which is beyond the
authority or power is called ultra-vires. In the context of the company, we can say
that anything which is done by the company or its directors which is beyond their
legal authority or which was outside the scope of the object of the company is ultra-
vires.
Memorandum of association is considered to be the constitution of the company. It
sets out the internal and external scope and area of company's operation along with
its objectives, powers, scope. A company is authorized to do only that much which is
within the scope of the powers provided to it by the memorandum. A company can
also do anything which is incidental to the main objects provided by the
memorandum. Anything which is beyond the objects authorized by the memorandum
is an ultra-vires act.
The doctrine of ultra-vires first time originated in the classic case of Ashbury Railway
Carriage and Iron Co. Ltd. v. Riche, (1878) L.R. 7 H.L. 653, which was decided by
the House of Lords. In this case the company and M/s. Riche entered into a contract
where the company agreed to finance construction of a railway line. Later on,
directors repudiated the contract on the ground of its being ultra-vires of the
memorandum of the company. Riche filed a suit demanding damages from the
company. According to Riche, the words "general contracts" in the objects clause of
the company meant any kind of contract. Thus, according to Riche, the company had
all the powers and authority to enter and perform such kind of contracts. Later, the
majority of the shareholders of the company ratified the contract. However, directors
of the company still refused to perform the contract as according to them the act was
ultra-vires and the shareholders of the company cannot ratify any ultra-vires act.
When the matter went to the House of Lords, it was held that the contract was ultra-
vires the memorandum of the company, and, thus, null and void. Term "general
contracts" was interpreted in connection with preceding words mechanical
engineers, and it was held that here this term only meant any such contracts as
related to mechanical engineers and not to include every kind of contract. They also
stated that even if every shareholder of the company would have ratified this act,
then also it had been null and void as it was ultra-vires the memorandum of the
company. Memorandum of the company cannot be amended retrospectively, and
any ultra-vires act cannot be ratified.
This doctrine assures the creditors and the shareholders of the company that the
funds of the company will be utilized only for the purpose specified in the
memorandum of the company. In this manner, investors of the company can get
assured that their money will not be utilized for a purpose which is not specified at
the time of investment. If the assets of the company are wrongfully applied, then it
may result into the insolvency of the company, which in turn means that creditors of
the company will not be paid. This doctrine helps to prevent such kind of situation.
This doctrine draws a clear line beyond which directors of the company are not
authorized to act. It puts a check on the activities of the directors and prevents them
from departing from the objective of the company.

The doctrine of ultra-vires in Companies Act, 2013

Section 4 (1)(c) of the Companies Act, 2013, states that all the objects for which
incorporation of the company is proposed any other matter which is considered
necessary in its furtherance should be stated in the memorandum of the company.
Whereas Section 245 (1) (b) of the Act provides to the members and depositors a
right to file a application before the tribunal if they have reason to believe that the
conduct of the affairs of the company is conducted in a manner which is prejudicial to
the interest of the company or its members or depositors, to restrain the company
from committing anything which can be considered as a breach of the provisions of
the company's memorandum or articles.

Consequences of an Ultra Vires transaction:

1. Injunction to restrain the company

2. Personal liability of directors
3. Liability of directors for breach of warranty of authority
4. Effect on property acquired under an ultra vires contract
5. Effect of ultra vires contract
6. Effect of ultra vires torts
To conclude, no company can be imagined to run without borrowings. However, at
the same time, it is necessary to protect the interest of the creditors and investors.
Any irregular and irresponsible act may result in insolvency or winding up of the
company. This may cause considerable losses to them. So to protect the interest of
the investors and the creditors, specific provisions are made in the memorandum of
the company which defines the objectives of the company.

Article of Association

Articles of Association is a document which prescribes the rules and bye-laws for the
general management of the company and for the attainment of its object as given in
the memorandum of association of the company. It is a document of paramount
significance in the life of a company as it contains the regulations for the internal
administration of the company's affairs. According to Section 2(5) of the Companies
Act, 2013, 'articles' means the articles of association of a company as originally
framed or as altered from time to time or applied in pursuance of any previous
company law or of this Act.
The articles of association are a subsidiary to the memorandum of association of the
company. They define the rights, duties, powers of the management of a company
as between themselves and the company at large. Further, they also prescribe the
mode and form in which changes in the internal regulation of a company may be
made from time to time. The articles of association of a company must always be in
consonance with the memorandum of that company and being subordinate to the
memorandum; they cannot extend the objects of a company as specified in the
memorandum of the company.
Under sec 36, the memorandum and the articles when registered, shall bind the
company and its members to the same extent as if it had been signed by them and
had contained a covenant on their part that the memorandum and the articles shall
be observed.
With respect to the above section, the importance of articles of association can be
summed up as follows:
1) Binding on members in their relation to the company- the members are bound to
the company by the provisions of the articles just as much as if they had all put their
seals to them.
2) Binding on company in relation to its members- just as members are bound to the
company, the company is bound to the members to observe and follow the articles.
 3) Neither company, nor members bound to outsiders- articles bind the members to
the company and company too the members but neither of them is bound to an
outsider to give effect to the articles.
4) Binding between members inter se- the articles define rights and liabilities of the
members. As between members inter se the articles constitute a contract between
them and are also binding on each member as against the other or others. Such
contract can be enforced only through the medium of the company.

Contents of articles:

 Share capital
 Variation of shareholders
 Calls on members
 Company's lien on shares
 Forfeiture of shares
 Transfer of shares
 Transmission of shares
 Alteration of shares
 General meetings of shareholders and procedure to be followed thereat,
including provisions relating to notice, quorum, voting by show of hands or by poll etc
 Minimum and maximum number of directors
 Qualification of directors
 Board meetings
 Declaration and payment of dividends
 Reserves
 Accounts and audit
 Auditors
 Winding up
 Appoint of liquidators etc.
Section 14 lays down that the articles of a company may be altered by a special
resolution of the members of the company, subject to the provision of the Act and the
conditions contained in the memorandum of the company. When a company alters
its articles, a copy of the same shall be filed with the ROC within 15 days in the
prescribed manner.
Memorandum Articles

It is the charter, the fundamental document of a It is subordinate to the memorandum of a compa

company.

Alteration of the memorandum requires the approval of Alteration of the articles can be amended by a sp
statutory authorities in addition to a special resolution resolution of . No statutory approval of authoriti
of the members. required for altering any part of the articles.
 If an act or transaction falls outside the purview of the An act not allowed by the articles is merely irreg
memorandum, it is ultra vires and void. It cannot e can be ratifies by the shareholders.
ratifies by the shareholders.
In case of any inconsistency between the provisions of the memorandum and
articles, the provisions of the articles will always prevail. In case of any ambiguity the
memorandum shall be used to clear or explain such ambiguity. Articles cannot be
altered in a way which is inconsistent with what is stated in the memorandum.
Thus, the memorandum lays down the scope and powers of the company, and the
articles govern the ways in which the objects of the company are to be carried out
and can be framed and altered by the members. But they must keep within the limits
marked out by the memorandum and the Companies Act.

Doctrine of Constructive Notice

The Memorandum and Articles, on registration, assume the character of public

documents. The office of the Registrar is a public office and documents registered
there are open and accessible to the public at large. Therefore, every outsider
dealing with the company is deemed to have notice of the contents of the
Memorandum and Articles. This is known as Constructive Notice of Memorandum
and Articles.
Under the doctrine of 'constructive notice', every person dealing or proposing to
enter into a contract with the company is deemed to have constructive notice of the
contents of its Memorandum and Articles. Whether he actually reads them or not, it
is presumed that he has read these documents and has ascertained the exact
powers of the company to enter into contract, the extent to which these powers have
been delegated to the directors and the limitations to such powers. He is presumed
not only to have read them, but to have understood them properly. Consequently, if a
person enters into a contract which is ultra vires the Memorandum, or beyond the
authority of the directors conferred by the Articles, then the contract becomes invalid
and he cannot enforce it, not-withstanding the fact that he acted in good faith and
money was applied for the purposes of the company.
Oakbank Oil Co. v. Crum (1882 8 A.C.65)-
It has been held that anyone dealing with the Company is presumed not only to have
read the memorandum and Articles, but understood them properly.Thus,
Memorandum and Articles of a company are presumed to be notice to the public.
Such a notice is called Constructive notice. MOA and AOA become public
documents after registration of a Company. It
Legal effect: If a person's deals with a company in a manner which is inconsistent
with the provisions contained in MOA and AOA – own risk and cost and shall have to
bear the consequences thereof.

Doctrine of Indoor Management

The role of the doctrine of indoor management is opposed to that of the rule of
constructive notice. The latter seeks to protect the company against the outsider; the
former operates to protect outsiders against the company. The rule of constructive
notice is confined to the external position of the company and, therefore, it follows
that there is no notice as to how the company's internal machinery is handled by its
officers. If the contract is consistent with the public documents, the person
 contracting will not be prejudiced by irregularities that may beset the indoor working
of the company.
Royal British Bank v. Turquand-
Turquand, a company, had a clause in its constitution that allowed the company to
borrow money once it had been approved and passed by resolution (decision) of the
shareholders at a general meeting. Turquand entered into a loan with the Royal
British Bank and two of the co-directors signed and attached the company seal to the
loan agreement. Loan had not been approved by the shareholders. Company
defaulted on their payments and the bank sought restitution. Company refused to
repay claiming that the directors had no right to enter into such an arrangement It
was held that – the Turquand was entitled to assume that the resolution was passed.
The Company was therefore bound by the rule. Doctrine is also popularly known as
the Turquand rule'.

Exceptions to the Doctrine of Indoor Management:

No benefit under the doctrine of indoor management can be claimed by a person

under the following circumstances:
1. Where a person dealing with the company has actual or constructive notice of any
irregularity in the internal proceedings of the company.
2. Where a person did not in fact consult the Memorandum and Articles of the
company and consequently did not act on knowledge of these documents.
3. Where a person dealing with the company was negligent and, had he not been
negligent, could have discovered the irregularity by proper enquiries.
4. Where a person dealing with the company relies upon a forged document or the
act done by the company is void.
5. Where a person enters into a contract with an agent or officer of the company and
the act of the agent/officer is beyond the authority granted to him.

Lecture 5

BACK

The topics covered under this lecture are :

 Inquiry and investigation into the affairs of a company

 National Company Law Tribunal, Appellate Board and Special Courts
 Revival and rehabilitation of sick companies

Inquiry and Investigation into the Affairs of a Company

Ss. 206 to 229 of the Act deal with the inspection, inquiry and investigation into the
affairs of a company. As seen earlier, a company is under a statutory obligation to
file several forms and documents with the ROC on a regular basis. Now, if on the
scrutiny of the documents filed by a company or on the basis of information received
by him, the ROC is of the opinion that any further information, explanation or
documents are necessary, he may call upon the company in writing to furnish written
information or explanation or to produce such documents within such reasonable
time may be specified in his notice. It's the duty of the company and its officers to
comply with the requirements. Incase , no compliance is made by the company or its
officers, the ROC may further notice in writing, call upon the company to produce
further books, books of accounts, papers and explanation as he may require. If any
person represent to the ROC that the business of a company is for unlawful
purposes or is fraudulent, not in compliance with the Act and the grievances of the
investors are not addresses, then the ROC shall call upon the company to furnish in
writing any information or explanation on certain matters within the time specified by
the ROC. Additionally, the Central Government can also direct inspection of the
books and papers by an inspector appointed by it, it is satisfied that the
circumstances so warrant. If the company fails to comply with the above terms, the
company and its officers shall be punishable under S.206 of the Act.
Powers of inspectors
As states above, the ROC or any inspector appointed to make an inspection or an
inquiry shall have all the powers of a civil court under the Civil Procedure Code, 1908
in respect of:
a. discovery and inspection of books of accounts and other documents;
b. summoning and enforcing the attendance of persons and examining them on
oath; and
c. inspection of any books, registers and other documents of the company at any
place.
The inspector may with the prior approval of the Central Government require the
company to furnish the books of accounts and papers or any such information before
him as may be considered necessary for the purpose of investigation. The inspector
can also investigate into affairs of its holding and subsidiary company as also any
other companies managed by the managing director or manager of the company
being investigated.
The ROC or the inspector can also apply to the Special Court for an order for the
seizure of the company's books and papers, if he has reasonable ground to believe
that such material may be destroyed, mutilated, altered, falsified or secreted by the
managing director or the manager of the company.
The Central Government or the Tribunal or any other person can contribute to
investigation into the affairs of a company. The Central Government or the Tribunal
can order an investigation into the affairs of the company on receipt of a report of the
ROC or inspector, in public interest, where a court or tribunal passes such order, if
the company passes a special resolution that the affairs of the company ought to be
investigated; or the Tribunal can order such investigation on an application in case of
a company having a share capital, by 200 or more members or members holding not
less than one tenth of the total voting power or in case of company not having a
share capital, by one fifth or more members of the company; or any person can file
such application of he can satisfy the Tribunal that the business of the company is
fraudulent, or the persons concerned in the formation of the company are fraud, or
the members have not been given all intimation as regards to its affairs of the
company.
Establishment of a Serious Fraud Investigation Office: The Act contains provision for
the establishment of an office called the Serious Fraud Investigation Office (SFIO) to
investigate fraud related to companies. It shall be headed by a Director and other
members having expertise in the field of law, corporate affairs, banking, tax, forensic,
capital market, audit etc. The Central Government any assign an investigation into
the affairs of the company on receipt of a report of the ROC or inspector, in public
interest, if the company passes an special resolution or on request from any
governmental departments. A report shall be submitted within the time frame to the
Central Government after completion of the investigation.
Investigation into ownership of a company : S. 216 of the Act empowers the Central
Government to appoint inspectors for the purpose of determining the true persons
who are and have been financially interested in the success or failure of the
company or who are able to control or materially influence the policy of the company.
In such cases, the power of an inspector as regards to production and seizure of
documents etc are the same as those enjoyed by an inspector appointed to
investigate into the affairs of a company.

National Company Law Tribunal, Appellate Board and Special Courts

National Company Law Tribunal (NCLT)

India has had a range of Company Laws starting from 1600, The East India
Company under the Royal Charter, the Joint Stock Company Act, 1857, Companies
Act passed in the year 1866 followed by Indian Companies Act, 1913. The Indian
Companies Act, 1913 was replaced by Indian Companies Act, 1956 and saw various
amendments in the years to come. In the recent year, 2015, the Supreme Court
issued the National Company Law Tribunal (NCLT) and National Company Law
Appellate Tribunal (NCLAT) as valid. This decree thus formed the foundation of the
constitutionalised NCLT & NCLAT, by the Central Government on June 1st, 2016.
The National Company Law Tribunal (NCLT) consolidates the corporate jurisdiction
of the Company Law Board, Board for Industrial and Financial Reconstruction
(BIFR), The Appellate Authority for Industrial and Financial Reconstruction (AAIFR)
and the powers relating to winding up or restructuring and other provisions, vested in
High Courts. Hence, the National Company Law Tribunal will consolidate all powers
to govern the companies registered in India. With the establishment of the NCLT and
NCLAT, the Company Law Board under the Companies Act, 1956 has now been
dissolved.
Constitution of the Tribunal: The Tribunal is to consist of a President and such
other Judicial and technical members as the Central Government may be deem
necessary. The President of the Tribunal is to be appointed after consultation with
the Chief Justice of India and the other members are to be appointed on the
recommendation of a selection committee headed by the Chief Justice of India or by
his nominee. The President of the Tribunal must be a person who is or has been a
Judge of a High Court for at least five years. A person is qualified to be appointed as
a Judicial Member of the Tribunal if-
a. he is or has been a Judge of the High Court, or
b. he is or has been a District Judge for at least five years, or
c. he is an advocate since at least ten years.
A person is qualified to be appointed as a Technical Member as provided under the
Act for instance CA or presiding office in a labor court or a tribunal. The president
and other members of the Tribunal hold office for a term of five years and are liable
for re- appointment for another 5 years until they retire i.e 67 years incase of
President and 65 years in case of other members. The President or any member cab
ne removed by the Central Government after consultation with the Chief Justice of
India, if –
a. he has been adjudged as an insolvent;
 b. he has been convicted of any offence, which in the opinion of the Central
Government, involved moral turpitude;
c. he has become physically or mentally incapable of acting as the President or
Member;
d. if he has acquired such financial or other interests as id likely to prejudicially affect
his functions as a president or Member of the Tribunal;
e. if he has so abused his position that his continuation in office has become
prejudicial to public interest.
Advantages for National Company Law Tribunal
 NCLT is a specialized court only for Corporates, i.e., companies registered in
India.
 This will be no more than a Tribunal for the Corporate Members.
 NCLT will reduce the multiplicity of litigation before different forums and
courts.
 NCLT has multiple branches and is able to provide justice at a close range.
 NCLT consists of both judicial and technical members while deciding on
matters.
 The time taken to windup a company is reduced.
 Speedy disposal of cases will help reduce the number of cases.
 NCLT & NCLAT have exclusive jurisdiction.
Powers of National Company Law Tribunal (NCLT)
The Tribunal and the Appellate Tribunal is bound by the rules laid down in the Code
of Civil Procedure and is guided by the principles of natural justice, subject to the
other provisions of this Act and of any rules that are made by the Central
Government. The Tribunal and the Appellate Tribunal has the power to control its
own procedure.
Further, no civil court has the jurisdiction to consider any suit or proceeding with
reference to any matter which the Tribunal or the Appellate Tribunal is empowered to
decide. National Company Law Tribunal enjoys a wide range of powers. Its powers
include:
 Power to seek assistance of Chief Metropolitan Magistrate.
 De-registration of Companies.
 Declare the liability of members unlimited.
 De-registration of companies in certain circumstances when there is
registration of companies is obtained in an illegal or wrongful manner.
 Remedy of oppression and mismanagement.
 Power to hear grievance of refusal of companies to transfer securities and
rectification of register of members.
 Protection of the interest of various stakeholders, especially non-promoter
shareholders and depositors.
 Power to provide relief to the investors against a large set of wrongful actions
committed by the company management or other consultants and advisors who are
associated with the company.
 Aggrieved depositors have the remedy of class actions for seeking redressal
for the acts/omissions of the company which hurt their rights as depositors.
 Powers to direct the company to reopen its accounts or allow the company to
revise its financial statement but do not permit reopening of accounts. The company
can itself also approach the Tribunal through its director for revision of its financial
statement.
 Power to investigate or for initiating investigation proceedings. An
investigation can be conducted even abroad. Provisions are provided to assist
investigation agencies and courts of other countries with respect to investigation
proceedings.
 Power to investigate into the ownership of the company.
 Power to freeze assets of the company.
 Power to impose restriction on any securities of the company.
 Conversion of public limited company into private limited company.
 If the company cannot or has not held an Annual General Meeting as required
under the Companies Act or a required Extraordinary General Meeting, then the
Tribunal has powers to call for a General Meetings.
 Power to alter the financial year of a company registered in India.
National Company Law Appellate Tribunal (NCLAT)
Appeal from order of Tribunal can be raised to the National Company Law Appellate
Tribunal (NCLAT). Appeals can be made by any person aggrieved by an order or
decision of the NCLT, within a period of 45 days from the date on which a copy of
the order or decision of the Tribunal. On the receipt of an appeal from an aggrieved
person, the Appellate Tribunal would pass such orders, after giving an opportunity of
being heard, as it considers fit, confirming, changing or setting aside the order that is
appealed against. The Appellate Tribunal is required to dispose the appeal within a
period of six months from the date of the receipt of the appeal.
Constitution of the Appellate Tribunal: The National Company Law Appellate
Tribunal consist of one chairperson and not more than 11 other Judicial and
Technical Members. The Chairperson of the Appellate Tribunal should be a person
who is or has been a Judge of the Supreme Court or the Chief Justice of any High
Court. A Judicial Member should be a person who is or has been a judge of a High
Court or a Judicial Member or the Tribunal for 5 years. A Technical Member should
be a person of proven ability and integrity, having special knowledge and experience
of not less than 25 years in specifies felids like law, accountancy, finance, labour
matters etc. All person mentioned herein are appointed after the consultation with
the Chief Justice of India or his nominee. The Chairperson and other Members of the
Appellate Tribunal hold office for a term of five years and are liable for re-
appointment for another 5 years until they retire i.e 70 years incase of Chairperson
and 67 years in case of other members.
Any person aggrieved by an order of the Appellate Tribunal can file an appeal before
the Supreme Court within 60 days from the date of receipt of a copy of the order of
the Appellate Tribunal. The Supreme Court can further extend the period of another
60 days if its satisfied that the appellant couldn't file the appeal in due due to
sufficient cause.
 Special Courts
S. 435 of the Act authorized establishment of special court.
1. The Central Government may, for the purpose of providing speedy trial of offences
under this Act, by notification, establish or designate as many Special Courts as may
be necessary.
2. A Special Court shall consist of a single judge who shall be appointed by the
Central Government with the concurrence of the Chief Justice of the High Court
within whose jurisdiction the judge to be appointed is working.
3. A person shall not be qualified for appointment as a judge of a Special Court
unless he is, immediately before such appointment, holding office of a Sessions
Judge or an Additional Sessions Judge.

Revial and Rehabilitation of Sick Companies

The coverage of Sick Industrial Companies Act, 1985 (SICA) is limited to only
industrial companies, while Ss. 253 to 268 of the 2013 Act covers the revival and
rehabilitation of all companies, irrespective of their sector.
The determination of whether a company is sick, would no longer be based on a
situation where accumulated losses exceed the net worth. Rather it would be
determined on the basis whether the company is able to pay its debts. In other
words, the determining factor of a sick company has now been shifted to the secured
creditors or banks and financial institutions with regard to the assessment of a
company as a sick company.
The 2013 Act does not recognize the role of all stakeholders in the revival and
rehabilitation of a sick company, and provisions predominantly revolve around
secured creditors. The fact that the 2013 Act recognizes the presence of unsecured
creditors, is felt only at the time of the approval of the scheme of revival and
rehabilitation. In accordance with the requirement of section 253 of the 2013
Act, a company is assessed to be sick on a demand by the secured creditors of a
company representing 50% or more of its outstanding amount of debt under the
following circumstances:
 The company has failed to pay the debt within a period of 30 days of the
service of the notice of demand
 The company has failed to secure or compound the debt to the reasonable
satisfaction of the creditors
To speed up the revival and rehabilitation process, the 2013 Act provides a one year
time period for the finalization of the rehabilitation plan.
Overview of the process
In response to the application made by either the secured creditor or by the company
itself, if the Tribunal is satisfied that a company has become a sick company, it shall
give time to the company to settle its outstanding debts if Tribunal believes that it is
practical for the company to make the repayment of its debts within a reasonable
period of time.
Once a company is assessed to be a sick company , an application could be made
to the Tribunal under section 254 of the 2013 Act for the determination of the
measures that may be adopted with respect to the revival and rehabilitation of the
identified sick company either by a secured creditor of that company or by the
company itself. The application thus made must be accompanied by audited financial
statements of the company relating to the immediately preceding financial year, a
 draft scheme of revival and rehabilitation of the company, and with such other
document as may be prescribed.
Subsequent to the receipt of the application, for the purpose of revival and
rehabilitation, the Tribunal, not later than seven would be required to fix a date for
hearing and would be appointing an interim administrator under Section 256 of 2013
Act to conduct a meeting of creditors of the company in accordance with the
provisions of section 257 of the 2013 Act. In certain circumstances, the Tribunal may
appoint an interim administrator as the company administrator to perform such
functions as the Tribunal may direct.
The administrator thus appointed would be required to prepare a report specifying
the measures for revival and rehabilitation of the identified sick industry. The
measures that have been identified under the section 261 of the 2013 Act for the
purpose of revival and rehabilitation of a sick company provides for the following
options:
 Financial reconstruction
 Change in or takeover of the management
 Amalgamation of the sick company with any other company, or another
company's amalgamation with the sick company
The scheme thus prepared, will need to be approved by the secured and unsecured
creditors representing three-fourth and one-fourth of the total representation in
amounts outstanding respectively, before submission to the Tribunal for sanctioning
the scheme pursuant to the requirement of section 262 of the 2013 Act. The
Tribunal, after examining the scheme will give its approval with or without any
modification. The scheme, thus approved will be communicated to the sick company
and the company administrator, and in the case of amalgamation, also to any other
company concerned.
The sanction accorded by the Tribunal will be construed as conclusive evidence that
all the requirements of the scheme relating to the reconstruction or amalgamation or
any other measure specified therein have been complied with. A copy of the
sanctioned scheme will be filed with the ROC by the sick company within a period of
30 days from the date of its receipt.
However, if the scheme is not approved by the creditors, the company administrator
shall submit a report to the Tribunal within 15 days, and the Tribunal shall order for
the winding up of the sick company. On passing of an order, the Tribunal shall
conduct the proceedings for winding up of the sick company in accordance with the
provisions of the Act.

Lecture 6

BACK

The topics covered under this lecture are :

 Dividends
 Rule of majority : Foss v. Harbottle
 Compromise, arrangements, reconstruction and amalgamation
Dividends

The word "Dividend" has origin from the Latin word "Dividendum". It means a thing to
be divided. The term 'dividend' has been defined under Section 2(35) of the
Companies Act, 2013. The term "Dividend" includes any interim dividend. It is an
inclusive and not an exhaustive definition. According to the generally accepted
definition, "dividend" means the profit of a company, which is not retained in the
business and is distributed among the shareholders in proportion to the amount paid-
up on the shares held by them. Dividends are usually payable for a financial year
after the final accounts are ready and the amount of distributable profits is available.
Dividend for a financial year of the company (which is called 'final dividend') are
payable only if it is declared by the company at its annual general meeting on the
recommendation of the Board of directors. Sometimes dividends are also paid by the
Board of directors between two annual general meetings without declaring them at
an annual general meeting (which is called 'interim dividend'). The companies having
license under Section 8 of the Act are prohibited by their constitution from paying any
dividend to its members. They apply the profits in promoting the objects of the
company. Interim dividend can only be declared by board of Directors and generally
paid in the middle of the year if Board of directors fined that profitability of the
Company. The Board of Directors can declare dividend out of surplus in profit and
loss account at the beginning of the year or profit during the year. If the company has
incurred loss during the current financial year upto the end of the quarter
immediately preceding the date of declaration of interim dividend, such interim
dividend shall not be declared at a rate higher than the average dividends by the
company during the immediately preceding three financial year- Section 123(3).
S. 123 lays down that dividend can be declared and paid by a company only out of
the profits of the company. In other words, dividend cannot be paid out of capital.
Under this Act, there are only three sources out of which dividends can be paid,
namely:
1. profits of the company for the year for which dividends are to be paid,
2. Undistributed profits of the company of the previous financial years,
3. Money provided by the Central or State Government for the payment of dividends
in pursuance of a guarantee given by such Government.
Once the dividend is declared, it becomes a statutory debt owned by the company to
the shareholders and such dividend must be paid within 30 days from such
declaration. The company must send the dividend warrant to the registered holder of
the shares or to his order or to his bank within 30 days. If the declared dividend is not
paid within the said periods, every director of the company who is knowingly in
default is exposed to a penalty by the way of imprisonment which may extend to 2
years and a fine of Rs. 1,000 for every day of default. Additionally, the company
becomes liable to pay interest at 18% p.a. during the period of default.
However S.127 of the Act clarifies that no offence shall be deemed to have been
committed in the following five cases namely:
1. where the dividend cannot be paid by reason of the operation of law;
2. where the shareholder has given directions to the company regarding the payment
of the dividend and such directions cannot be complied with and the same has been
communicated to him;
3. where there is a dispute regarding the right to receive the dividend;
4. where the dividend has been lawfully adjusted by the company against any sum
due to it from the shareholders, or
5. where, for any other reason, the failure to pay the dividend or to post the dividend
warrant within the said period is not due to any default on the part of the company.
Capitalization of dividends:
Although S.123 of the Act provides that dividend is to be paid in cash or by cheque
pr by warrant or in any electronic mode, of authorized by the articles, a company can
give, in general meeting, resolve to capitalized its profits and convert its accumulated
undivided profits into bonus sares to be allotted to its shareholders.

Rule of Majority: Foss V. Harbottle

A company is a juristic person which is conferred with a legal personality distinct

from the members who form it. Decisions of the company represent the animus
component of its personality and are taken by the Member Shareholders and the
Board Members on behalf of the Company. The company also takes decisions
regarding pursuing litigation.
Courts do not in general interfere in the management of the company on the
insistence of shareholders in matters of internal administration as long as the
directors are acting within the powers conferred to them under the Articles. Judges
have for long been reluctant to interfere in the internal affairs of companies. For
redressal of wrongs done to a company, it is believed that the action should prima
facie be brought by the company which was laid down in Foss v. Harbottle. This rule
is the foundation of common law jurisprudence regarding who may bring an action
on behalf of the company. The rule in Foss v Harbottle is prudent since it is
unnecessary to give recourse to the courts in regard to a matter which a company
can settle on its own, or an irregularity which it can ratify or condone through its own
internal procedure. Without this rule, there would be such a large amount of frivolous
litigation that the normal functioning of companies would be threatened.
However, a balance must be struck between the effective control of the company
and the interests of the individual shareholders. In certain circumstances therefore,
an individual member is also allowed to bring an action on behalf of the company to
compel the company to comply with its constitution and seek for remedy even when
no wrong has been done to him personally and the majority of members do not wish
for the action. There may also be collective litigation by a group of shareholders.
Foss v. Harbottle
The basic rule of "majority prevails" was laid down back in 1843 in the famous case,
Foss v. Harbottle [(1843) 67 ER 189]. In this case, two shareholders filed a suit
against the directors of a company, alleging various illegal and fraudulent
transactions on their part whereby the company's property was misapplied and
wasted, and seeking an order from the court that the director make good this loss to
the company. The suit was dismissed on the grounds that, if at all such allegation
were true, it is the company and not the individual shareholders who could sue. The
court was of the view that it is not open to individual members of the company to
assume to themselves this right of suing an alleged loss, as such loss, if at all, was
being caused to the company and not them. It was observed that this is not the
function of the court to interfere in the matter which the majority of shareholders had
the power to confirm, as long as the management acts within the scope of its power
to as per the memorandum and articles of the company. Thus , the rule of the
majority in the corporate world was firmly established in the shape of the "Rule in
Foss V. Harbottle."
Exception in the Rule of Foss V. Harbottle
The rule of majority cannot, however be applied in all possible situations. There are
certain circumstances in which it would be unfair to do so, there are certain
managerial sins which no majority can approve, confirm pr condone. These
constitute the exception to this rude. The court has laid down, in certain
circumstances; even a single shareholder can sue the company by filing a 'derivative
action'. The six exceptions to this rule are as follows:
1. Ultra vires acts
If the act which is challenged is ultra vires the company, no majority of shareholders
can approve or ratify it, and even one shareholder can bring an appropriate action
against the company. This exception was impliedly recognized in Foss v. Harbottle
itself and it is evident that the rule of majority applies only when the majority is acting
intra vires, that is, within the scope of its powers.
2. Fraud on the minority
If the conduct of majority of the shareholders amounts to fraud on the minority
shareholders, it would not be fair to apply this rule. What constitutes fraud will of
course depend on the facts and circumstances of every individual case.
3. Acts requiring a special majority
There are many decisions which shareholders of a company cannot take by a simple
majority, namely, by passing an ordinary resolution. For many important matters, the
Act has prescribed a special resolution, which requires the votes of three-fourth of
the members present and voting, as for instance, for alteration of the MOA or AOA of
the company. In such cases, a sheer majority will not suffice and a majority of 3/4th
of the members present and voting is necessary.
4. Control in the hands of the wrongdoers
If a legal wrong has been committed against the company, but for some reason,
those in control of the company do not permit any action to be taken against the
wrongdoer, any member or members may approach the court to safeguard the
interest of its company. This exception was recognized in this case itself and has
been followed in other cases too.
5. Individual rights of shareholders
Every member of the company has certain rights as a member, such rights are
conferred upon him by law, and sometimes also by the articles of the company and
no majority can deprive him of such rights. The rule is Foss v. Harbottle cannot be
applied to take away such "individual member rights", as they are sometimes
referred to. As observed by the Madras High Court, "A shareholder is entitled to
enforce his individual rights against the company, such as his right to vote, his right
to have his vote recorded or his right to stand as a director of the company".
(Nagappa Chettiar v. Madras Race Club)
6. Oppression and mismanagement
Ss. 241 to 246 of the Act contains provisions for grant of relief against the
oppression and mismanagement and this constitutes the six exception to the rule of
Foss v. Harbottle.

Compromise, Arrangements, Reconstruction and Amalgamation

Compromise and Arrangements

Compromise means resolving and settling a dispute or differences between the
partied amicably and by mutual consent of the parties. Thus, there can be no
compromise unless there is some dispute, as for instance, the enforcement of
certain words. Such a dispute can be resolved baby drawing up a scheme of
compromise.
An Arrangement includes a wider class of agreements than compromise. It includes
agreement which alter rights with respect to which there are no disputes. As clarified
in S. 230 of the Act, the term "arrangement" includes the reorganization of the share
capital of the company by consolidation of shares of different classes or by the
division of shares into shares of different classes or by both these methods.
A company has an implied power to compromise its disputes with its members or
outsiders. Likewise, it also has the implied power to enter into arrangements.
Usually, both the powers are inserted in the Objects Clause of the company's
memorandum of a company; it can nevertheless enter into such schemes as the
provisions of the Act empower it to do so.
Statutory provisions relating to compromise or arrangement:
A company may make a compromise or an arrangement with its creditors or any
class of them or with its members or any class of its members. When a compromise
or an arrangement is proposed, the Tribunal may, on the application of the company,
or any creditor or the liquidator (where the company is being wound up), order that a
meeting of the creditors or members (or class of creditors or members) be called and
held in the manner directed by the Tribunal.
If at the meeting, a majority of three-fourths of the creditors or members (or class of
creditors or members, as the case may be) present in person or by proxy agree to
the compromise or arrangement, and if such compromise or arrangement is
sanctioned by the Tribunal, then the same becomes binding on:
a. all the creditors or any class of them or all the members or any class of them; and
b. the company, or if the company is being wound up, on the liquidator and
contributories of the company.
However, the Tribunal cannot make any order sanctioning any compromise or
arrangement unless the Tribunal is satisfied that the company or any person by
whom an application has been made above, has disclosed to the Tribunal, by
affidavit or otherwise, all material facts relating to the company, such as the latest
financial position of the company, the latest auditor's report, the pendency of any
investigation against the company and other specified matters. Moreover, no such
scheme can be sanctioned by the Tribunal unless the company files a certificate to
its auditors to the effect that the accounting treatment, if any, proposed in the
scheme is in conformity with th accounting standards prescribed under S.133 of the
Act.
The order of the Tribunal is also to be filed by the company with the ROC within a
period of 30 days from the receipt of the other. The Tribunal is also empowered to
dispense with the calling of the meeting, if the creditors or class of creditors of the
value of 90% agree, by affidavit, to the scheme of compromise or arrangement. The
Tribunal may sanction a scheme if the following have been complied with:
a. all the statutory provisions have been complied with;
b.the class of creditors or members, as the case may be, has been fairly represented
at the meeting;
c. the proposed scheme is fair and reasonable;
d. where the company is under liquidation, the scheme should be bona fide to save
the company from liquidation.
Powers of the Tribunal: The Tribunal has very vide powers to sanction or reject a
scheme of compromise or arrangement. After such a scheme is sanctioned, the
tribunal also has the power to supervise the implementation thereof. If, however, the
Tribunal is satisfied that the sanctioned compromise or arrangement cannot ne
implemented and the company is unable to pay its debts as per the scheme, it can
pass an order for winding up of the company.
Reconstruction and Amalgamation
The term "reconstruction" indicates a process which involves the transfer of an
undertaking of an existing company to another company, which is usually
incorporated for this purpose. Thus, it is a situation where substantially the same
business is carried on by substantially the same persons. Usually, the shareholders
of the old company are allotted shares in the new company on a proportionate basis.
A reconstruction of a company is often undertaken to extend the operations of the
company or for the purposes of reorganization.
Amalgamation can be defined as a process whereby two or more companies are
merged into one undertaking and the shareholders of each company become
substantially the shareholders of the resulting company. Thus, A Ltd. may be merged
into B Ltd., with the result that A Ltd. loses its separate existence. Similarly A Ltd and
B Ltd may be merged together to form a new company, C Ltd., in which both A Ltd
and B Ltd both lose their separate existence.
Statutory provisions relating to reconstruction and amalgamation:
A Reconstruction or Amalgamation may take place by:
1. sale of the undertaking;
2. sale of shares of the undertaking;
3. sale and dissolution;
4. by scheme of arrangement.
If an application is made to the Tribunal and it is shown to the Tribunal that the
compromise or arrangement has been proposed for the purpose of a scheme of
reconstruction of any company or amalgamation of two or more companies and that
under the scheme the whole or any part of the undertaking, property or liabilities of
any company (the transferor company) is to be transferred to another company (the
transferee company), the Tribunal may call a meeting of the creditors or a class of
creditors or members or a class of members to be called in such manner as be
directed by the Tribunal.
If the Tribunal is satisfied that all the requirements of the law have been satisfies, it
may sanction the scheme. The Tribunal may also make provision; inter alia, for the
following matters, namely –
a. the transfer to the transferee company of the whole or any part of the undertaking,
property or liabilities of any transferor company;
b. the allotment or appropriation by the transferee company of any shares,
debentures, policies, or other like interests in that company which under the
compromises or arrangements are to be allotted or appropriated by that company to
or for any person;
c. the continuation by pr against the transferee company of any legal proceedings
pending by or against any transferor company on the date of the transfer;
d. the dissolution without winding up of any transferor company;
e. the provision to be made for any person who within such time and in such manner
as the Tribunal directs, dissents from the compromise or arrangement; and
f. such incidental, consequential and supplemental matters as are necessary to
secure that the reconstruction or amalgamation is fully and effectively carried out.
No such scheme can be sanctioned by the Tribunal unless the company files a
certificate of its auditors to the effect that the accounting treatment, if any, proposed
in the scheme is in conformity with the accounting standards prescribed under S.
 133 of the Act. A certified copy of the order of the Tribunal sanctioning the scheme of
amalgamation is to be filed by the company with the ROC within 30 days of the
order. When the Tribunal sanctions a scheme, it must –
i. ensure that the scheme is reasonable and just;
ii. ascertain the wishes of the members;
iii. ensure that the scheme is aimed to overcome difficulties and reestablish the
business.
Special procedures are also prescribed by the Act for the merger or amalgamation (i)
of two or more small companies, and (ii) between a holding company and its wholly
owned subsidiary company [S.233]. The Act also makes new provisions for schemes
of merger and amalgamation between companies registered under the Act and
companies incorporated outside India in notified jurisdiction.[S 234]. A "squeeze out"
provision is also made in S.236 of the Act, enabling a person or group of persons
holding 90& or more of the issued share capital of the company as a result of the
amalgamation, to purchase the minority shares following the prescribed procedure
and rules.
Power of Central Government to order amalgamation in public interest:
S.237 of the Act provides that if the Central Government is satisfied that it is
essential in the public interest that two or more companies should be amalgamated,
it may, by an order notified in the Official Gazette, provide for an amalgamation of
such companies into a single company with such constitution, property rights,
powers, authorities, interests, privileges, liabilities, duties and obligations as me be
specified in the order.
However, no such order can be passed unless a copy of the draft of the proposed
order has been sent to each of the concerned companies and their suggestions and
objections have been considered and incorporated, if so thought fit, in the draft
order. Such an order may provide for the constitution, by or against the company, of
any legal proceedings pending by or against the transferor company, and may also
contain such consequential, incidental and supplemental provisions as me be
necessary, in the option of the Central Government , to give effect to such an
amalgamation. Copies of the order made under S.237 are also to be laid, as soon as
,ay be, before both the Houses of the Parliament.
Preservation of books and papers: The books and papers of a company which is
amalgamated or whose shares have been acquires by another company cannot be
disposed of without the prior permission of the Central Government. Before granting
such permission, the Central Government may appoint a person to examine such
books and papers to ascertain whether there is any evidence of the commitment of
an offence in connection with the promotion or formation of the company or the
management of its affairs. [S.239]

Lecture 7

BACK

The topic covered under this lecture is :

 Winding up of Companies
 What is Winding up: Modes of Winding up

Winding up is the most common way in which the existence of a company is brought
to an eng. Once winding up commences, the Board of Directors go out of the picture
and a liquidator takes charge. It is he who recovers the money and other assets
belonging to the company, pays the debts and liabilities of the company and
distributes the surplus assets, if any amongst the members of the company in
accordance with their rights. The life of the company does not, however, come to an
end when winding up begin, because winding up is merely a process, and it is only
at the end of the process that the company is dissolved, that is, it loses its corporate
status and existence. Winding up is often a long drawn-out process which ends in
the dissolution of the company.
Although it is true that several companies are wound up because they have
insufficient assets and are unable to pay their debts, financial incapacity is not a
necessary requirement for the winding up a company. A company which is quite
solvent can also be wound up under the Act, as there are several grounds for
winding up a company other than its insolvency.
Winding up assumes three forms:
 Compulsory winding up i.e. winding up by the Tribunal.
 Voluntary winding up.
 Winding up subject to the supervision of the court (under the Companies Act,
1956).
Contributories
The word "contributory", as used in corporate law, has two different connotations. In
the first sense, it refers to a person who is liable "to contribute" to the assets of a
company at the time of its winding up (upto the unpaid amount on the shares held by
him). In this sense, all the members of the company who have not paid the full
amount on their shares become "contributories". In the second sense, however, the
term used to cover all members of the company, including the holders of full paid-up
shares. In this sense, a contributory is a person who would be entitled to a share in
the surplus assets, if any, of the company at the time of winding up.
The act uses the term "contributory" in both the connotations. Whilst S. 2(26) lays
down that a contributory is a person who is liable to contribute towards the assets of
the company in winding up, it also clarifies that eeven the holder of fully paid up
shares is also considered to be a contributory, but the would have no liabilities of a
contributory.
Under S. 285 of the Act, every past and present member is liable to contribute to the
assets of the company for payment of the debts and liabilities and for the costs,
charges and expenses of winding up. This liability is, however, subject to the
following five qualifications:
Past members are liable to contribute only if the present members are unable to
contribute to the assets of the company for the aforesaid purposes.
If a person had ceased to be a member of the company one year or more before the
commencement of the winding up of the company, he is not liable as a contributory.
A past member is not liable as a contributory in respect of any debt or liability of the
company incurred after he ceased to a member of the company.
In the case of a company limited by shares, any past or present member cannot be
made to contribute any amount exceeding the amount if any, unpaid of his shares.
In the case of a company limited by guarantee, no past or present member can be
made to contribute any amount exceeding the amount undertaken to be contributed
by him at the time of winding up of the company.
Keeping the above in mind, the liquidator prepares two lists of contributories: List A
and List B. The names of all the members of the company appearing on the register
of members all the commencement of the winding up are placed on List A, whereas
List B contains the names of all persons who were members of the company during
a period of one year before the commencement of winding up.
The liability of the contributories in List A is primary liability and of those in List B,
secondary liability. Contributories in List B can be called upon to contribute only if the
contributories in List A are unable to make their contributions.
Likewise, in the case of a company limited by guarantee, the contributory's liability
cannot exceed the amount mentioned in the memorandum of the company, being
the amount undertaken to be contributed by every member at the time of winding up
of the company.
If a contributory dies, his legal representative will be treated as a contributory. If the
legal representative dies, his legal representative will, in turn, become the
contributory. If a contributory becomes insolvent, his assignees in insolvency can be
treated as contributories. If a contributory is itself a company which has been
ordered to be wound up, the liquidator of that company can be treated as a
contributory.
It is to be noted that the liability of a contributory is a new liability which arises ex
lege (that is, operation of law) at the time of winding up. It is not the same liability
that was undertaken by him earlier or contract. In other words, such liability does not
arise by virtue of his contract to take and pay for the shares of the company. It is a
new statutory liability which arises when his name is included in the list of
contributories.
It is, therefore, not open to a contributory to contend that a call had been made on
him by the company several years ago (that is, long before the winding up of the
company) and that although he had not paid this amount, the company could not
have recovered the amount after this lapse of time because the claim would have
been time-barred. This is so because, as stated above, a new statutory liability is
imposed on him when the company goes into winding up.
Winding up by the Tribunal (Compulsory Winding up)
Under the Companies Act, 1956, the power to wind up a company was vested in the
High Court. Under an amendment of that Act in 2002, this power was sought to be
transferred to the Tribunal. However, since no steps had been taken to constitute
such a Tribunal, those provisions (of the amendment) were brought into force. Now,
the Companies Act, 2013, vests the power of compulsory winding up in the Tribunal.
However, in cases decided under the 1956 Act, the reference would naturally be to
the court and not to the Tribunal.
Winding up by the Tribunal or "compulsory winding up" (as it is sometimes called) is
discussed below under the following three heads:
1. Grounds of compulsory winding up
2. Persons who can file a winding up petition
3. Powers of the Tribunal
4. The Official Liquidator and summary procedure for winding up
Grounds Rounds of Compulsory Winding up
Under S. 271 of the Act, a company may be wound up by the Tribunal in the
following seven cases, namely, -
1. If the company passes a special resolution, resolving that the company be
wound up by the Tribunal.
2. If the company is unable to pay its debts.
3. If the company has acted against the interests of the sovereignty and integrity
of India, the security of the state, friendly relations with foreign states, public
order, decency or morality.
4. If the tribunal has ordered the winding up of 'sick' company.
5. If the tribunal is of the opinion that the affairs of the company have been
conducted in a fraudulent manner or that the company was formed for a
fraudulent or unlawful purpose.
6. If the company has defaulted in filing its financial statements or anuual returns
with the ROC for the last five consecutive financial years.
7. If the Tribunal is of the opinion that is just and equitable that the company be
wound up.
Passing of a special resolution by the members
The Tribunal may wind up a company if the members of the company have passed a
special resolution resolving that the company be wound up by the Tribunal. This is,
however, not a very common ground on which a petition is filed for the winding up of
a company. Most companies would rather pass a resolution to go into voluntary
winding up rather than be wound up by the Tribunal.
It may be noted that the Tribunal may refuse to wind up a company even if a special
resolution as above has been passed. The use of the word "may" in S. 271(above) is
significant, and the Tribunal has ample discretion in the matter.
Inability to pay debts
A company may also be wound up on the ground that it is unable to pay its debts.
This is perhaps the ground which is most often resorted to, and the courts have, in
several cases, drawn attention to the world "unable" used by the legislature. Just
because a company has not actually paid its debts, it does not necessarily mean that
it is unable to do so.
S. 271 of the Act lays down three cases in which a company shall be deemed to be
unable to pay its debts, namely, -
1. Statutory notice;
2. Execution against the company return unsatisfied; and
3. Commercial insolvency
Statutory notice
If a creditor to whom the company owes Rs. 1 Lakh or more has served a notice to
the company at its registered office (by registered post or otherwise), demanding
payment of such sum, and if the company has, for a period of three weeks
thereafter, failed to pay the amount or to secure or compound for it to the reasonable
satisfaction of the creditor, it can be said that the company is unable to pay its debts.
Execution against the company return unsatisfied
If execution or any other process issued on a decree or order of any court or tribunal
in favour of a creditor of the company is return unsatisfied- in whole or in part – it can
 be said that the company is unable to pay its debts. Under this clause, there is no
requirement that the debt of the company should be of any minimum amount ( as
under the earlier clause)
Commercial Insolvency.
Lastly, a company can be wound up if it is proved to the satisfaction of the Tribunal
that the company is unable to pay its debts. In determining this question, the Tribunal
must take into account the contingent and prospective liabilities of the company. This
is sometimes referred to as "commercial insolvency" because what has to be
ascertained in such a case is not whether the company would be able to meet all its
liabilities if its assets were to be converted into cash, but whether the company is
insolvent in the commercial sense.
Company acting against the interest of sovereignty and integrity of India, etc.
Under a new ground introduced by the Act, the Tribunal is empowered to wind up a
company if it has acted against:
 The interests of the sovereignty integrity of India; or
 The security of the states; or
 Friendly relations with foreign states; or
 Public order, decency or morality.
 In such cases, the petition for winding up can be filed only by the Central
Government or a State Government.
Winding up on the ground that the company is a sick company
Under S. 258 of the Act, if the Tribunal is satisfied that the creditors representing
three-fourths of the amount outstanding against a sick company have resolved that it
is not possible to revive and rehabilitate such a company, the tribunal can pass an
order that winding up proceedings against the company be initiated.
So also, if a scheme of revival and rehabilitation of a sick company is not passed by
the creditors in the manner prescribed by S.262(2) of the Act, the company
administrator must file a report with the Tribunal, which can then order the winding
up of the sick company. (S. 265)
Winding up on the ground of fraudulent conduct
A company can also be wound up, if on an application filed by the ROC or any other
person authorized by the Central Government, the Tribunal is of the opinion that:
The affairs of the company have been conducted in a fraudulent manner; or
The company was formed for a fraudulent or unlawful purpose; or
The persons concerned in the formation or management of the affairs of the
company have been guilty of fraud, misfeasance or misconduct in connection
therewith; and that it is proper that the company be wound up by the Tribunal.
Default in filing financial statements
If a company defaults in filing (with the ROC) its financial statements or annual
returns for the last five consecutive financial years, it can be wound up by the
Tribunal.
Just and equitable ground
A company can also be wound upon the ground that the Tribunal is of the opinion
that it is just and equitable to wind up the company. This is an omnibus clause which
gives ample discretion to the Tribunal to wind up a company in a fit case where the
other criteria for winding up do not exist, since this ground is not ejusdem generis
with the other ground of compulsory winding up. However, there must be a really
strong ground to wind up the company and an order will not be granted if it is seen
that the petitioner has not pursued other effective remedies and seeks unreasonably
to bring the company into liquidation.
Although, as stated above, the Tribunal has a very wide discretion in the mater,
courts have observed that such discretion should be exercised after giving due
weight to all relevant factors. The interests of not only the creditors, but also its
employees, it should be taken into account before passing any order.
It is neither possible nor even desirable, to lay down a complete list of all the
circumstances in which winding up of a company is justified on the just and equitable
ground. However, the following are some common instances in which the courts
have held that it would be justified to wind up a company on the just and equitable
ground.
Loss of substratum
If a company's main object has failed that is, its substratum is lost, it would be just
and equitable to wind it up.
No possibility of doing business except at a loss
Every company expects to achieve its object of trading at a profit. If, therefore, it is
clear that a company cannot continue to do business save at a loss, it would be just
and equitable to wind it up. However, just because some losses have been incurred
in the past or just because some shareholders apprehend that the assets of the
company are being frittered away and that therefore, huge losses are imminent, it
does not necessarily mean that the company deserves to be wound up on the just
and equitable ground.
Deadlock in management
If there is a deadlock in the management of a company and there seems to be no
possibility of resolving such a deadlock, the company may be wound up on the just
and equitable ground.
Oppression
If the principal shareholders of a company adopt an aggressive and oppressive
policy towards the minority shareholders in an attempt to "squeeze" them out by
purchasing their shares at an under-value, it amounts to oppression.
Partnership analogy
Several small companies are incorporated under the Companies Act but are, in
essence, just like partnership firms. Such companies cannot be compared to giant
corporations which are also companies.
Public interest
Some judicial decisions suggest that a company may be wound up under the just
and equitable clause if it is in the public interest to do so, that is, if its conduct comes
into conflict with public interest.
Persons who can file a Winding up Petition
Under S. 272 of the Act, a petition for winding up can be filed by the following
persons:
1. The company
2. Creditors
3. Contributories
1. All or any of the persons specified above, together
b. The ROC
c. Any person authorized by the Central Government in that behalf
 d. The Central Government or a State Government – in cases where a company
is sought to be wound up on the ground that it has acted against the interests of
the sovereignty and integrity of India, etc.
Powers of Tribunal
The following is a summary of Tribunal's powers when winding up a company:
When a petition for winding up is filed before the Tribunal, it may pass any of the
following order:-
1. Dismiss the petition
2. Pass any interim orders
3. May appoint a provisional liquidator for the company till the winding up order
is passed by it.
4. May pass an order for the winding up of the company, with or without costs.
5. May pass any other order as it thinks fit.
6. An order as above must be passed within 90 days from the presentation of
the petition.
7. Before appointing a provisional liquidator, the company must be given a
notice to appear and make the representations- unless the Tribunal thinks it fit to
dispense with such notice for special reasons recorded by it in writing.
8. Cannot refuse to pass a winding up only on the ground that the assets of the
company have been mortgaged for an amount which is equal to, or in excess of,
those assets or on the ground that the company has no assets.
9. When the petition is filed on the just and equitable ground, the Tribunal may
refuse to pass an order if it is of the opinion that:
Some other remedy is available to the petitioners. The petitioner is acting
unreasonably in seeking winding up of the company, rather than pursuing such other
remedy.
When a petition is filed by an person other than the company, if the Tribunal is
satisfied that a prima facie case is made out for winding up the company. It must
direct the company to file its objections, along with a statement of its affairs within
thirty days, which period can be extended by a further period of thirty days. If a
company fails to file its statement of affairs, it forfeits its right to oppose the petition,
and the directors and other officers of the company responsible for such non-
compliance are liable to be punished as provided in S.274 of the Act.
The Tribunal also has the power to direct the petitioner to deposit such security for
costs as it may consider reasonable, as a pre-condition to issuing any directions to
the company.
After the winding up order is passed, the Tribunal can, at any time, stay the winding
up proceedings for maximum period of 189 days, if it is satisfied that is just and fair
that an opportunity be given to revive and rehabilitate the company. Such an
application for stay can be filed by any promoter or shareholder or the company or
by any other interested person.
Notwithstanding anything contained in any other law, the Tribunal also has the power
to entertain and dispose of:
 Any suit or proceedings by or against the company;
 Any claim made by or against the company;
 Any application made for compromise or arrangement with the company's
creditors or members;
 Any scheme submitted for the revival or rehabilitation of the company;
 Any question of priorities- or any question whatsoever, whether of law or fact,
in any matter arising out of or relating to, the winding up of the company.
May appoint an advisory committee of 12 members to advise the Company
Liquidator and report to the Tribunal.
On an application by the Company Liquidator, review any order passed by it and
make any such necessary modifications.
After passing the winding up order, the Tribunal can make calls on any or all of the
contributories and pass orders for the payment of such calls
After passing a winding up order, the Tribunal can order any contributory to pay any
money due to him or from the estate of the person whom he represents, exclusive of
any money payable by way of a call.
The Tribunal is also empowered to adjust the rights of contributories inter se, and to
distribute the surplus assets of the company (if any) amongst the persons entitled
thereto.
of winding up in such order of priority as it thinks just and proper.
If the Tribunal is satisfied that a contributory or any person having property, accounts
or papers of the company in his possession, is about to abscond or leave India, the
Tribunal can cause such a person to be detained, and the books, papers and other
immovable property be seized, until such time as the Tribunal may order.
Powers and Duties of the Company Liquidator
Subject to the directions, if any, which may be given by the Tribunal, the Company
Liquidator has the following powers:
 Can carry business of the company, so far as may be necessary for the
winding up of the company.
 Can sell the whole undertaking of the company as a going concern.
 Can raise money required on the security of the assets of the company.
 Can sell the movable and immovable property of the company by public
auction or private contract.
 Can institute or defend any suit or other legal proceedings in the name and on
behalf of the company.
 Can inspect all the records and returns of the company on the files of the
ROC or any other authority
 Can invite and settle claims of the creditors, employees or any other claimants
and distribute the sale proceeds in accordance with the provisions of the Act.
 Can prove, rank and claim in the insolvency of any contributory for any
balance against his estate.
 Can draw, accept, make and endorse negotiable instruments in the name and
on behalf of the company.
 Can take out, in his official name, letters of administration in respect of any
deceased contributory
 Can apply to tribunal for any directions or orders as and when necessary.
The Official Liquidator and Summary Proccedure for Winding up
Section 359 authorizes the Central Government appointment of Official
Liquidator. For the purposes of this Act, so far as it relates to the winding up of
companies by the Tribunal, the Central Government may appoint as many Official
Liquidators, Joint, Deputy or Assistant Official Liquidators as it may consider
necessary to discharge the functions of the Official Liquidator. The liquidators
appointed shall be whole-time officers of the Central Government. The salary and
other allowances of the Official Liquidator, Joint Official Liquidator, Deputy Official
Liquidator and Assistant Official Liquidator shall be paid by the Central Government.
The Official Liquidator shall exercise such powers and perform such duties as the
Central Government may prescribe. The Official Liquidator may—
 exercise all or any of the powers as may be exercised by a Company
Liquidator under the provisions of this Act; and
 conduct inquiries or investigations, if directed by the Tribunal or the Central
Government, in respect of matters arising out of winding up proceedings.
Where the company to be wound up under this Chapter, —
has assets of book value not exceeding one crore rupees; and belongs to such class
or classes of companies as may be prescribed, the Central Government may order it
to be wound up by summary procedure provided under this Part. Where an order is
made, the Central Government shall appoint the Official Liquidator as the liquidator
of the company.
The Official Liquidator shall forthwith take into his custody or control all assets,
effects and actionable claims to which the company is or appears to be entitled. The
Official Liquidator shall, within thirty days of his appointment, submit a report to the
Central Government in such manner and form, as may be prescribed, including a
report whether in his opinion, any fraud has been committed in promotion, formation
or management of the affairs of the company or not.
On receipt of the report u, if the Central Government is satisfied that any fraud has
been committed by the promoters, directors or any other officer of the company, it
may direct further investigation into the affairs of the company and that a report shall
be submitted within such time as may be specified. After considering the
investigation report, the Central Government may order that winding up may be
preceded under Part I of this Chapter or under the provision of this Part.
Sale of Assets and Recovery of Debts due to Company (Section 362)
The Official Liquidator shall expeditiously dispose of all the assets whether movable
or immovable within sixty days of his appointment. The Official Liquidator shall serve
a notice within thirty days of his appointment calling upon the debtors of the
company or the contributories, as the case may be, to deposit within thirty days with
him the amount payable to the company. Where any debtor does not deposit the
amount, the Central Government may, on an application made to it by the Official
Liquidator, pass such orders as it thinks fit. The amount recovered under this section
by the Official Liquidator shall be deposited in accordance with the provisions of
section 349.
Settlement of Claims of Creditors by Official Liquodator (Section 363)
 The Official Liquidator within thirty days of his appointment shall call upon the
creditors of the company to prove their claims within thirty days of the receipt of such
call. The Official Liquidator shall prepare a list of claims of creditors and each
creditor shall be communicated of the claims accepted or rejected along with
reasons to be recorded in writing.
Appeal by Creditors (Section 364)
Any creditor aggrieved by the decision of the Official Liquidator under section 363
may file an appeal before the Central Government within thirty days of such decision.
The Central Government may after calling the report from the Official Liquidator
either dismiss the appeal or modify the decision of the Official Liquidator. The Official
Liquidator shall make payment to the creditors whose claims have been accepted.
The Central Government may, at any stage during settlement of claims, if considers
necessary, refer the matter to the Tribunal for necessary orders.
Order of Dissolution of Company (Section 365)
The Official Liquidator shall, if he is satisfied that the company is finally wound up,
submit a final report to— (i) Central Government, in case no reference was made to
the Tribunal under sub-section (4) of section 364; and (ii) in any other case, the
Central Government and the Tribunal. The Central Government, or as the case may
be, the Tribunal on receipt of such report shall order that the company be dissolved.
Where an order is made, the Registrar shall strike off the name of the company from
the register of companies and publish a notification to this effect.
Provisions applicable to both modes of Winding up
These are provisions applicable to all the modes of winding up. They can be
summarized as follows:-
In every winding up (subject, in the case of insolvent companies, to the application in
accordance with the provisions of this Act or of the law of insolvency), all debts
payable on a contingency, and all claims against the company, present or future,
certain or contingent, ascertained or sounding only in damages, shall be admissible
to proof against the company, a just estimate being made, so far as possible, of the
value of such debts or claims as may be subject to any contingency, or may sound
only in damages, or for some other reason may not bear a certain value.
Two types of payments to be overriding preferential payments,that are to priority
over others are as follows:
 workmen's dues; and
 debts due to secured creditors to the extent such debts rank under clause (iii)
of the proviso to sub-section (1) of section 325 pari passu with such dues, shall be
paid in priority to all other debts
In a winding up, subject to the provisions of section 326, there shall be paid in priority
to all other debts,—
 all revenues, taxes, cesses and rates due from the company to the Central
Government or a State Government or to a local authority at the relevant date, and
having become due and payable within the twelve months immediately before that
date;
 all wages or salary including wages payable for time or piece work and salary
earned wholly or in part by way of commission of any employee in respect of
services rendered to the company and due for a period not exceeding four months
 within the twelve months immediately before the relevant date, subject to the
condition that the amount payable under this clause to any workman shall not
exceed such amount as may be notified;
 all accrued holiday remuneration becoming payable to any employee, or in
the case of his death, to any other person claiming under him, on the termination of
his employment before, or by the winding up order, or, as the case may be, the
dissolution of the company;
 unless the company is being wound up voluntarily merely for the purposes of
reconstruction or amalgamation with another company, all amount due in respect of
contributions payable during the period of twelve months immediately before the
relevant date by the company as the employer of persons under the Employees'
State Insurance Act, 1948 or any other law for the time being in force;
 unless the company has, at the commencement of winding up, under such a
contract with any insurer as is mentioned in section 14 of the Workmen's
Compensation Act, 1923, rights capable of being transferred to and vested in the
workmen, all amount due in respect of any compensation or liability for
compensation under the said Act in respect of the death or disablement of any
employee of the company
Power is conferred on the Tribunal to set aside any act of the company which
amounts to a fraudulent preference.
All transfers not made in good faith as well as any transfer or assignment made by
the company of all its properties and assets to trustees for the benefit of all its
creditors are declared to be void.
The company liquidator is authorized to make a disclaimer of onerous property.
All transfers of shares or alterations in the status of members, made by the company
after the commencement of voluntary winding up are declared to be void – unless
made with the sanction of the Company Liquidator
Likewise, any such transfer or alteration or any disposition of the property of the
company made by a company being wound up by the Tribunal are void – unless
otherwise ordered by the Tribunal.
Detailed provisions are also made for offences committed by officers of the company
in liquidation, subjecting them to imprisonment for a term ranging between 3 years
and 5 years and fine ranging between 1 Lakh and 3 Lakhs.
Provisions are also made for punishment for any fraud committed by officers of the
company for not keeping proper accounts and for fraudulent conduct of business.
S. 340 empowers the Tribunal to assess damages against the delinquent officers of
the company and order them to repay money with interest or to contribute any sum
to the assets of the company by way of compensation, as the Tribunal considers just
and proper.
Provisions are also made for the prosecution of delinquent offices and members of
the company in liquidation.
S. 343 of the Act provides that certain powers can be exercised by the Company
Liquidator:
a. only with the sanction of the Tribunal – if the company is being wound up by
the Tribunal; and
b. With the sanction of a special resolution of the company and the prior
approval of the Tribunal – if the company is being wound up voluntarily.
When a company is being wound up in any form, every invoice, order for goods or
business letter on which the name of the company appears, must contain a
statement that the company is being wound up.
Winding up subject to the supervision of the court
The Companies Act, 1956 provided for a third kind of winding up, namely subject to
the supervision of the Court, it was provided that after a company had passed a
resolution for voluntary winding up, the court could, in specified circumstances pass
an order that the voluntary winding up was to continue under the supervision of the
court, with liberty given to the creditors, contributories and other persons to apply to
the court for appropriate directions. In such cases, the Court was also empowered to
appoint additional liquidators or to appoint the Official Liquidator as the liquidator of
such a company.
The concept of a winding up subject to the supervision of the Court does not find a
place in the Companies Act, 2013.
Winding up of unregistered companies 375. Winding up of unregistered
companies.
Subject to the provisions of this Part, any unregistered company may be wound up
under this Act, in such manner as may be prescribed, and all the provisions of this
Act, with respect to winding up shall apply to an unregistered company, with the
exceptions and additions mentioned in sub-sections (2) to (4).
No unregistered company shall be wound up under this Act voluntarily.
An unregistered company may be wound up under the following circumstances,
namely:—
if the company is dissolved, or has ceased to carry on business, or is carrying on
business only for the purpose of winding up its affairs;
if the company is unable to pay its debts;
if the Tribunal is of opinion that it is just and equitable that the company should be
wound up.
An unregistered company shall, for the purposes of this Act, be deemed to be unable
to pay its debts—
if a creditor, by assignment or otherwise, to whom the company is indebted in a sum
exceeding one lakh rupees then due, has served on the company, by leaving at its
principal place of business, or by delivering to the secretary, or some director,
manager or principal officer of the company, or by otherwise serving in such manner
as the Tribunal may approve or direct, a demand under his hand requiring the
company to pay the sum so due, and the company has, for three weeks after the
service of the demand, neglected to pay the sum or to secure or compound for it to
the satisfaction of the creditor;
if any suit or other legal proceeding has been instituted against any member for any
debt or demand due, or claimed to be due, from the company, or from him in his
character as a member, and notice in writing of the institution of the suit or other
legal proceeding having been served on the company by leaving the same at its
principal place of business or by delivering it to the secretary, or some director,
manager or principal officer of the company or by otherwise serving the same in
 such manner as the Tribunal may approve or direct, the company has not, within ten
days after service of the notice,—
1. paid, secured or compounded for the debt or demand;
2. procured the suit or other legal proceeding to be stayed; or
3. indemnified the defendant to his satisfaction against the suit or other legal
proceeding, and against all costs, damages and expenses to be incurred by him
by reason of the same;
4. if execution or other process issued on a decree or order of any Court or
Tribunal in favour of a creditor against the company, or any member thereof as
such, or any person authorized to be sued as nominal defendant on behalf of the
company, is returned unsatisfied in whole or in part;
5. if it is otherwise proved to the satisfaction of the Tribunal that the company is
unable to pay its debts.
Explanation.—For the purposes of this Part, the expression "unregistered
company"— shall not include—
i. railway company incorporated under any Act of Parliament or other Indian law
or any Act of Parliament of the United Kingdom;
ii. a company registered under this Act; or
a company registered under any previous companies law and not being a company
the registered office whereof was in Burma, Aden, Pakistan immediately before the
separation of that country from India; and
b. save as aforesaid, shall include any partnership firm, limited liability partnership or
society or co-operative society, association or company consisting of more than
seven members at the time when the petition for winding up the partnership firm,
limited liability partnership or society or co-operative society, association or
company, as the case may be, is presented before the Tribunal.
Consequences of winding up
The corporate existence comes to an end only after the proceedings ends and the
unit is dissolved
The company must cease to carry on business – except sorry far as may be
necessary for the winding up of the company.
The liquidator or the provisional liquidator, if any, must take into his custody or
control, the property, effects and actionable claims to which the company is, or
appears to be, entitled.
When a winding up order is passed by Tribunal, the Official Liquidator can exercise
all the powers and must discharge all his duties in relation of the winding up.
The wind up order operates in favour of all the creditors and all the contributories of
the company as if it had been made on a join petition of a creditor and a contributory.
The directors and all other officers of the company must ensure that books of
account of the company are competed and audited up to the date of the winding up
order and submitted to the Tribunal at the cost of the company
When the tribunal passes an order for the winding up of a company, it must within
seven days of such an order send intimation thereto to ROC
When the ROC receives intimation as above, he must make an endorsement to that
effect in his records and also notify the same in the Official Gazette. In case of a
 listed company, the must also send the necessary intimation to the stock exchanges
where the securities of the company are listed
The winding up order operates as a notice of discharge to all the employees of the
company – except when the business of the company is continued for a beneficial
winding up.
Dissolution
"Winding up" and "Dissolution" of a company are two different things. Compulsory
winding up commences when a petition for winding up is filed against the company
and voluntary winding up is deemed to commence when a resolution is passed to
wind up the company. The winding up process then begins, and can continue for
years on end. All this while, the company does lose its corporate existence. It
continues to be a separate legal entity in the eyes of law and can exercise its
corporate powers, subject to the various provisions and restrictions contained in the
law. When winding up comes to and end, the company is ordered to be dissolved,
and it is then that the life of the company comes to an end. The order of dissolution
is like the Death Certificate of the company.

Lecture 8

BACK

The topic covered under this lecture is :

 Shares and Debentures

 Members and shareholders

Shares

A "share" is defined to mean a share in the share capital of a company and it

includes stock. [S.2(84)] All shares of a company must have a distinctive number.
This requirement does not, however, apply to shares held by a person whose name
is entered as a holder of beneficial interest in such share in the records of a
depository ,that is demat shares. [S. 45]
Under S.44 of the Act, shares are to be regarded as movable property of
transferable in the manner provided by the articles of the company. Thus share is a
right to a specified amount of the share capital of a company, carrying with it certain
rights and liabilities, both when the company is a going concern and also when it is
wound up. It represents the interest of the holder measured for purposes of liability
and dividend by a sum of money. (Borland's Trustee v. Steel Brother's Co.Ltd.,
(1901) 1 Ch, D, 279)
Black's Law Dictionary defines a share as 'the unit into which the proprietary
interests in a corporation are divided.' A share can also be defined as 'a proportional
part of certain rights in a company during its existence and in its assets upon its
dissolutions.'
Shares are also regarded as are movable property by S.2 of the Sale and Goods Act
of 1030. Shares can therefore be also considered as "goods". Thus, rules relating to
passing to ownership of goods would be applicable in cases of transfer of shares.
Shares can also be pledged like other goods. A provate company must, however
some restrictions have in its articles on the right to transfer its shares. [S. 2 (68)].
Shares and stock
Accordingly to Halsbury, "stock" is the aggregate of fully paid up shares, legally
consolidated, and portions whereof may be transferred and split into fractions of any
amount without regards to the original amount of shares. The holder of stock is
called a stockholder and is given a stock certificate. Shares have distinctive
numbers, stock does not have.
Shares may or may not be fully paid. However, the stock always represents fully paid
up shares of the company. It is also to be noted that a company cannot directly issue
stock; it must first issue shares and then convert them into stock.
SHARE STOCK

A share is a share in the share capital of a company. Stock is an aggregation of fully paid up shares.

In case of shares, a share certificate is issues. In case of stock, a stock certificate is issues.

Shares may or may not be fully paid up. Stock is always fully paid up.

Shares have distinctive numbers. Stock need not be numbered.

Shares are divided into equal parts. Stock need not be divided into equal parts.

Shares are converted into stock. Stock cannot be formed till shares are issued.
Rights and liabilities of shareholders:
1. To elect directors, thus participating in the management of the company
through them.
2. To vote on a resolution at meetings of the company.
3. To receive dividends.
4. To seek relief from the appropriate authorities in case of oppression or
mismanagement.
5. To vote at a meeting.
6. To requisition an extraordinary general meeting of the company'
7. To receive the notice of general meetings of the company.
8. To appoint a proxy and inspect proxy registers.
9. To appointment representative to attend the company's general meeting on
behalf of body corporate, in the event of a body corporate being a member.
10. To require the company to circulate a resolution proposed to be passed at a
forthcoming meeting of the company.
11. To apply to the Tribunal for winding up of the company.
12. To share the surplus assets at the time of winding up of the company.
Allotment of shares
When an applicant applies for shares of a company, he is making an offer to
purchase such shares. Acceptance of this offer by the company is called allotment.
Thus allotment is an appropriation out of the previously inappropriate capital of the
company. To be valid, an allotment must satisfy:

A. Statutory requirements of the Act

1. Minimum Subscription [S.39] :

This section provides the unless the amount stated in the prospectus as the
minimum subscription amount has been subscribed and the sum payable on
application has been paid to and received by the company, no allotment of share can
be made by the company. Minimum subscription amount is that amount which in the
opinion of the directors must be raised to provide for the p[purchase price of
property, preliminary expenses and working capital. If the minimum subscription
amount has not been subscribed and the sum payable on application has not been
received, within a period of 30 days from the issue of the prospectus, the amount
received by the company has to be returned to the subscribers within such time and
in such manner as may be prescribed. When shares are allotted, a return has to be
filed with the ROC in the prescribed manner. Any default in compliance with the
above makes the company and every offices of the company in default punishable
with a penalty of Rs.1000 each day or default of Rs.1 Lac whichever s less.
2. Permission of the stock exchange [S.40]
Every company which makes a public offer must, before making such an offer, apply
to one or more recognized stock exchanges and obtain permission for its securities
to be dealt with on such exchange. If a prospectus states that such an application
has been made, it must also, mention the name of such stock exchanges. When
money is received by the company for subscription to its securities, the company
must deposit such money in a separate bank account with a scheduled bank. This
money can be used by the company for the following two purposes;
1. for adjusting the amount against the allotment of ts securities when the stock
exchange has permitted securities to be dealt with; or
2. for repayment of the money to the subscribers within such time as meant be
specified by SEBI when the company is, for any other reason, not able to allot the
securities.
Any default in complying with the above provisions make the company punishable
with a fine ranging between Rs. 5-50 Lakhs. Additionally every officer is also
punishable with imprisonment unto one year or a fine between Rs. 50,000 and Rs. 3
Lakhs, or both,

B. The general principles of the law of contracts :

1. Allotment by proper authority

An acceptance is only valid if made with proper authority, which in the case of an
acceptance of an offer to purchase shares is the board of director of the company.
Therefore, any allotment made by any other authority is an invalid allotment, unless it
has been delegated powers by the board by the articles of the company. This, an
allotment made by the general manager of the company under an improper
delegation is not valid.
2. Allotment to be made within reasonable time
It is a settled principle of law of contracts that acceptance shall be communicated
within a reasonable time. So also, the shares must be allotted within a reasonable
time. For instance, if an application is received by the company in December and the
shares are allotted in August of the following year, acceptance cannot be said to
have been made in reasonable time.
3. Communication of allotment
It is necessary to communicate the allotment of shares to the applicant. A person
cannot be treated as a shareholder, unless notice of allotment has been sent to him.
4. Conditional allotment not allowed
An acceptance must be absolute and unqualified and the same rule applies to the
allotment of shares. It must be in accordance with the term and conditions of the
application, if any. Therefore, no shares can be allotted with any conditions put
forward by the company.
Share Certificate
A share certificates in an instrument issues under the common seal(if any) of the
company and which specifies the number of shares held by a member and is a prima
facie evidence of the title of such a member to those shares. S. 56 of the Act lays
down specific time limits within which share certificates are to be delivered – whether
at the time of allotment or transfer or transmission – as under:
-In case of delivery to a subscriber to the memorandum – within two months from the
date of incorporation of the company.
-In case of allotment – within two months from the date of allotment.
-When there is a transfer or transmission of shares – within one month from the date
of receipt by the company of the instrument of transfer or the intimation or
transmission.
-In case of allotment of debentures – within six months from the date of allotment.
-In case of demat securities – immediately on allotment.
If there is any default in complying with the above time limits the company becomes
punishable with a fine ranging between Rs. 25,000 to Rs. 5 lakhs and every officer in
deafly becomes liable ti pay a fine ranging between Rs.10,000 to Rs. 1 lakh.
Effects of share certificate: a share certificate has dual effect. It acts as an estoppel
as to title and an estoppel as to payment. Section 46 of the Act contains that a
certificate, issued under the common seal of the company, specifying the shares
held by any person, shall be prima facie evidence of the title of the person to such
shares. Further, where a share is held in depository form, the record of the
depository is the prima facie evidence of the interest of the beneficial owner.
Duplicate Share Certificate: it is the duty of the shareholder to keep his share
certificate in a safe and secure place. However, there are possibilities that the
certificate may be torn, or mutilated or defaced, accidently or otherwise. It may also
be lost, stolen, misplaced. In such circumstances the issues of duplicate certificate
arises. The AOA of the companies usually governs the this issue,. Therefore,
shareholder shall prove an affidavit stating the loss of the original certificate to the
company and also execute an indemnity bond in favor of the company in case of any
misuse of the original certificate. In case of the certificate is torn or mutilated or
defaced, the certificate shall be handed over to the company so that minuses of the
same is ruled out.
Transfer and transmission of shares
S . 44 of the Act expressly provide that shares of a company shall be movable
property capable of being transferred in the manner provided by the articles of the
company. So as long as the transfer complies with the requirement of the articles of
the company, it is a valid transfer and even in absence of any such mention in the
articles of the company, a transfer of share shall be held valid .
Procedure for transfer
The procedure for effecting a valid transfer of shares can be briefly set out as
follows;
1. A share transfer form must be executed by the transferor and the transferee.
The same should comply with the articles of the company and must specify the
full name, address and occupation of the transferee. It must also contain other
important details like the name of the company, the number of shares and so on.
2. The instrument of transfer, that is the share transfer form must be duly
stamped and must also bear a date stamp on it.
3. The said instrument must be lodged with the company along with the original
share certificate within a period of sixty days from the date of its execution. If the
share certificate has not been received by the transferor, the Letter of Allotment is
to be substituted in its place.
4. If the board of directors approves the transfer, the name of the transferee is
entered in the register of members of company and the share certificate is
returned to the transferee with is name endorsed thereon.
Transfer of share by the private company and public company
The private company has some restrictions on the transfer of its shares. The reason
behind that is although from the legal angle, such companies are separate legal
corporate entity and from the business angle, most of them resemble incorporated
partnerships more than they resemble public corporations. Accordingly, it is
expected that the directors of such companies be given a higher degree of control
over the transfer of shares by its members. Some instances of restrictions in the
articles of a private company which have been held valid are :
1. a clause in the articles stating that an the insolvency of a member his shares
will be transferred at a fir value to a nominee of the directors of the company.
2. a clause in the articles laying down that, on the death of a member, his shares
shall be offered to other members of the company.
3. a clause in the articles providing that a member must first offer his shares to
the existing members before he can sell them to an outsider that is a pre-emotion
clause in respect of transfer of shares.
Therefore, the directors must exercise their discretion bona fide in what they
consider and not what the court may consider and which is in the interest of the
company.
On the other hand, S. 58 of the Act declares that the shares and other securities of a
public company are freely transferable. It is however, clarified that if there is any
contract or arrangement between the two or more persons in respect of such
transfer, it will be enforceable as a contract. The persons can file an appeal within
sixty days before the Tribunal, if the company refuses to such transfer within 30 days
from the date of the transfer of the instruments with all documents duly filed.
Transmission of shares: whereas transfer of shares taken place by an act inter vivos
i.e between two living persons, transmission of shares takes place by operation of
law, as for instance, when the sole shareholder dies and his shares devolve on his
heir. The heir can, in such cases, gets his name entered in the company's register of
members by virtue of transmission. The formalities relating to transfer would
naturally be inapplicable to transmission of shares. This implies that in case of
transmission of shares, an instrument of transfer, along with other formalities are not
necessary. The manner in which the transmission takes place is generally provided
for in the articles of the company.
Nomination of shares
Section 72 of the Act provides the facility of nomination to shareholders and
depositors. A shareholder can file a nomination in the prescribed form at any time,
specifying the person in whom his shares are to vest in the event of his death. Even
joint shareholders may so nominate a person, who will be entitled to the shares in
the case of the death of all such joint holders. A nominee can be changed anytime.
The nomination supersedes the law of succession or will or any testamentary
deposition made by the shareholder. In case if the nominee is a minor, the
shareholder can appoint any person as the person who will be entitled to the shares
in case of the death of the nominee during his minority. In OPC, the member must
nominate another person (with such person's written consent) who will become the
member of the company on the death or incapacity of the original member
Issue of shares at a premium
Issue of shares at premium means issue of shares at a value above the normal
value, for instance, when a share of the face value of Rs.100 is issued for Rs. 120.
The difference between the price at which the shares are actually offered and the
face value of the shares is called the premium which may be received by the
company in cash or kind. Though the companies are free to issue shares at
premium, S.52 of the Act regulates the manner in which the amount collected as
premium can be utilized by the company. Moreover, SEBI Guidelines have also to be
followed in this regards, as these Guidelines lay down when a company must issue
shares at a par and when it may issue shares at a premium. S.52 of the Act
regulates also lays down that a sum equal to the aggregate amount of the premium
must be transferred to an account called the Securities Premium Account. This
account shall be applied by the company:
a. to issue fully paid up bonus shares to existing shareholders;
b. to write off preliminary expenses of the company;
c. to write off expenses, commission paid or discount allowed on issue of shares
or debentures of the company;
d. to pay premuin on redemption of redeemable preferences shares or any
debentures of the company; or
e. to buy back its own shares.
Issue of shares at a discount
Issue of shares at a discount is discouraged by the company's law. Shares are said
to be issues at a discount if they are issued at a price lower than their face value, as
for instance, when a share of the face value Rs. 100 is offered for a total price of Rs.
80. The difference between the face value of the shares and the price at which it is
offered is called as the "discount".
Company's lien on shares
A lien is the right to retain possession of a thing until a claim is satisfied. In the case
of a company lien on a share means that the member would not be permitted to
transfer his shares unless he pays his debt to the company. The articles generally
provide that the company shall have a first lien on the shares of each member for his
debts and liabilities to the company. The right of lien is not inherent but must be
clearly provided for in the articles. The articles may give the right of lien over share
either for unpaid calls or for any other debt due by the member of the company. The
company may have lien on fully paid-up shares. The lien also extends to the
dividends payable on the shares.
Forfeiture and surrender of shares
When shares are allotted by the company to an applicant, an obligation is cast on
the shareholder to pay the allotment money and the call amount as and when the
company calls upon him to make such payment. If a member fails to pay such
amount when called upon to do so, the company may take its shares back, if an
express provision in that regard is contained in its articles. This provision of the
company is called forfeiture of shares. Such action of the company shall be done in a
bona fide manner for the purpose which is conferred by law. As it virtually amounts
to an expulsion of the shareholder, the court will carefully scrutinize suc act to ensure
that it meets the following requirements:
1. The forfeiture shall be in accordance with the articles of the company. The
articles of the company must allow the company to forfeit the shares. To be valid,
the forfeiture must be made in accordance with the provisions relating to forfeiture
laid down in the company's articles.
2. A proper notice should be sent to the shareholder, calling upon him to pay the
amount due. The defaulting shareholder must be given at least fourteen days
notice, requiring him to pay the amount due on or before a day specified in the
notice. The notice which must be issued under the authority of the board of
directors, must state the exact amount due and the consequences of nonpayment
that is forfeiture of shares.
3. The shareholder should default in paying the amount within the time specified
in the notice. It must be shown that the shareholder did not pay the call amount
within the time specified in the notice. If such payment has been made, the
question of forfeiture cannot arise.
4. The director must pass a resolution declaring that his shares have been
forfeited. If the shareholder defaults in making the payment, the director must
pass a resolution to the effect that the shares have been forfeited by the
company.
5. The right of forfeiture should have been exercised in good faith. Lastly, the
company must exercise its powers of forfeiture in good faith and in the interest of
the company. Thus the company cannot forfeit the shares at the request of the
shareholder to relieve him from his future liabilities.
Surrender of shares means the return of shares by the shareholder to the company
for cancellation. Holder in this case voluntarily abandons all his shares in favour of
the company. A mere refusal to take up newly issued shares, to which a shareholder
is entitled to, is not a surrender of shares. The power to accept surrender of shares
cannot be exercised by a company unless expressly given by the Articles of
Association. Surrender is not valid if the purpose is to relieve the shareholder from
his liability to pay calls on the shares held by him.

Debentures

Debenture includes debenture stock, bonds and any other instrument of company
evidencing a debt, whether constituting a charge on the assets of the company or
not. Debenture is a document issued by a company, indication that it owes a
particular amount of money lent to it by the debenture holder. This loans taken by the
company may be secured or may be unsecured. The following points are relating to
debentures:
1. A debenture is an acknowledgement of the indebtedness of the company.
Thus if the debenture is of the face value of Rs. 100, it signifies that the company
owes Rs.100 to the debenture holder.
2. It is in form of a certificate issued by the company generally under its common
seal.
3. It specifies the rate if interest payable to the debenture holder, the intervals at
which the same is payable and the other terms and conditions on which the
debenture is issued.
4. It mentions the date of redemption of the debenture that is the date of which
the holder will get back the amount mentioned in the debenture.
5. If it is a secured debenture, it creates a charge on the assets or on part of the
assets of the company.
6. A register of debenture holders is to be maintained by the company containing
all the particulars of the persons whom the debentures have been allotted.
7. A company shall create a Debenture Redemption Reserve Account, to which
adequate amounts of money are to be credited from out of the profits of the
company every year until debentures are redeemed.
8. A company shall appoint a debenture trustees incase it makes an offer or
invitation to the public or more than 500 of its members, for the subscription of its
debentures.
9. A contract with a company to purchase its debentures can be enforced by a
decree of specific performances.
10. A company must pay the interest on the debentures and if it fails to do so the
debenture holder can approach the Tribunal.
Types of debentures:
Redeemable debentures: They are issued for a fixed period and the principle amount
is paid off only at the expiry of that period or at the maturity.
Irredeemable debentures: They are matured only after the liquidation or closing
down or winding up of the company.
 Secured debentures: These are secured by a charge on the assets of a company.
The principle amount and the unpaid interest could be recovered by the holder out of
the assets mortgaged by the company.
Unsecured debentures: They do not get any security in reference to principal amount
or unpaid interest. They are simple debentures.
Debentures in favour of registered holders: these debentures are registered with the
company and the amount is payable only to those debentures holders whose names
are registered with the company.
Debentures payable to bearer: these debentures are not registered with the
company, these are transferable merely by delivery and the debenture holder will get
the interest.
Convertible debentures: These can be converted to shares after the expiry of the
period i.e; on their maturity.
Non- convertible debentures: These cannot be converted to shares on their maturity.
SHARES DEBENTURES

Share capital forms a part of the total capital of the Debentures are defined as a debt of the company
company and shareholders are treated as owners of the debenture holders are creditors to the company.
company

The dividend rate on shares fully depends upon the The interest rate on debentures is fixed at the be
profits that are obtained by the company. of the issue of the debentures.

Shareholders are paid after the debenture holders are Debenture holders are paid the interest before th
paid interest. shareholders are paid.

Shareholders are given right to attend and vote at the Debenture holders do not have any right to vote
meetings of the shareholders conducted by the company's meetings.
company.

A shareholder is a member of the company. A debenture is a creditor of the company.

Members and Shareholders

S. 2(55) of the Act defines the term "member" as :

i. the subscriber to the memorandum of the company who shall be deemed to
have agreed to become member of the company, and on its registration, shall
be entered as member in its register of members;
ii. every other person who agrees in writing to become a member of the
company and whose name is entered in the register of members of the company;
iii. every person holding shares of the company and whose name is entered as a
beneficial owner in the records of a depository.
Membership of a company implies to a contract with the company. Therefore, every
person who is competent to contract can be a member of a company. Minors and
persons of unsound mind are not competent to contract under the Indian Contract
Act and therefore cannot become members. In India however, a minor cannot incur
any personal liability under a contract. A company may become a member of
another company as it is a separate legal entity in the eyes of law. A partnership firm
does not have a separate legal existence in the eyes of law and therefore it cannot
become be a member or shareholder of a company. However, a firm may hold
shares of the company as its assets provided such shares are held in the individual
names of one or more partners of the firm.
Modes of becoming a member of a company :
1. By subscribing to the memorandum of the company
All persons who put the signatures on the memorandum of the company are deemed
to have become members of that company and when the company is registered,
their names are to be entered on the register of the members of that company. Thus,
a subscriber to the memorandum becomes a member of the company by the mere
fact of his subscription. He continues to be a member of the company even if for
some reason, his name is not entered into the register of the members.
2. By transfer of shares
This is one of the commonest methods of becoming a shareholder of a company.
When a person buys the shares from the "market", it is nothing but a simple transfer
of shares. The name of the earlier holder, the transferor of the shares is removed
and replaced by the name of the transferee in the register.
3. By transmission of shares
Whereas transfer of shares taken place by an act inter vivos i.e between two living
persons, transmission of shares takes place by operation of law, as for instance,
when the sole shareholder dies and his shares devolve on his heir. Such person can
apply to the company for transmission of shares.
4. By allotment of shares
When a company makes a public offer of its shares by issuing a prospectus,
members of the public are invited to apply for such shares. Pursuant to such an
application, of the person is allotted shares of the company, he becomes a member
of that company.
5. By amalgamation of companies
Amalgamation can be defined as a process whereby two or more companies are
merged into one undertaking and the shareholders of each company become
substantially the shareholders of the resulting company and therefore a member of
the company.
6. By estoppels or holding out
If a person holds himself out as a member or knowingly allows his name to continue
being on the register of members of a company though he as in fact parted his
shares, he can be made liable as a contributory at the time of winding up. In such
cases, the proper course of corrective action is that he should apply for a ratification
of the register of the company.
A person can also cease to be a member of a company by transfer of shares, by
death of the member, by forfeiture of shares, by surrender of shares, by winding up
of the company or by amalgamation of the companies.
Register of members:
Section 88 of the Companies Act 2013 deal with the register of members and
provides that - Every company shall keep and maintain the following registers in
such for and in such manner as may be prescribed, namely:—
 a. register of members indicating separately for each class of equity and
preference shares held by each member residing in or outside India, along
with an index;
b. register of debenture-holders, along with an index; and
c. register of any other security holders, along with an index.

Lecture 9

BACK

The topics covered under this lecture are :

 Share Capital
 Directors

Share Capital

A layman views capital as the money, which a company has raised by issue of its
shares. It uses this money to meet its requirements by way of acquiring business
premises and stock-in-trade, which are called the fixed capital and the circulating
capital respectively. The phrase "loan or borrowed capital" is sometimes used to
mean money borrowed by the company and secured by issuing debentures and
other securities. This, however, is not the proper use of the word 'capital'. In relation
to a company limited by shares, the word 'capital' means the share capital i.e., the
capital in terms of rupees divided into specified number of shares of a fixed amount
each. For example share capital of a company is `1,00,000 which can be divided into
10,000 shares of `10 each or 1,000 shares of `100 each, whichever is feasible to the
company.
1. Authorized Share Capital : it is authorized, nominal or registered by the
memorandum of a company to be the maximum amount of share capital of the
company.
2. Issued Share Capital: It is that part of the authorized share capital which is
issued by the company.
3. Subscribed Share Capital: It is that portion of the issued capital which has
been actually subscribed by the company. It is clear that the entire issued capital
may or may not be subscribed.
4. Called-up Share Capital: It is that portion of the subscribed capital which has
been called up or demanded on the shares by the company. The balance is
known as the uncalled capital of the company.
5. Paid-up Share Capital: it is a part of the called up share capital which is
actually paid up by the shareholders. The balance is known as the unpaid capital
of the company.
 6. Preference and Equity share capital Section 43 of the Act allows a
company to issue only two kinds of shares :
1. ''Equity share'', with reference to any company limited by shares,
means all share capital which is not preference share capital;
2. ''Preference share", with reference to any company limited by shares,
means that part of the issued share capital of the company which carries or
would carry a preferential right with respect to— a) payment of dividend, either
as a fixed amount or an amount calculated at a fixed rate, which may either be
free of or subject to income-tax; and b) repayment, in the case of a winding up
or repayment of capital, of the amount of the share capital paid-up or deemed
to have been paid-up, whether or not, there is a preferential right to the
payment of any fixed premium or premium on any fixed scale, specified in the
memorandum or articles of the company;
A Preference share, which receive dividends before ordinary shares but which have
no voting rights, it must satisfy the following conditions:
 As regards dividends, it must carry a preferential right to fixed amount or
amount calculated at a fixed rate and
 As regards the capital, in the event of a winding up or other arrangement to
repayment of capital, there must be a preferential right to be repaid the amount of
the capital paid up on such share. A Preference share capital may or may not carry
such other rights as specified.
All share capital, not falling within the above description of preference capital, is
equity share capital, which has no guaranteed amount of dividend but carries voting
rights. Some illustrative rights attached to the equity shareholding are as under:
 Right to vote
 Right to receive dividends
 Right to transfer freely without any restriction.
The Equity share capital is sub-divided into shares with equal voting rights and
shares with differential voting rights as to dividend, voting or otherwise. Equity capital
is also known as "Common Stock" or common share capital that represents
ownership in a company. Common share capital is generally divided into units known
shares. These unit holders are called equity shareholders. They are the real owners
of the company and policy makers of the company. However, they do not have
access to the day to day affairs of the company. They appoint their representatives
called board of directors to look after the affairs of the company. Equity shareholders
are entitled to vote on resolutions of the company, get a return by way of dividend if
declared and take part in surplus in assets of the company at time of winding-up.
Also, tenure of Preference Shares continued as 20 years except for "Infrastructural
Projects" Companies having "infrastructural projects" can issue Preference Shares
for more 20 years but upto 30 years subject to minimum 10% redemption of such
preference shares from 21st year onward or earlier.
 a. Cumulative preference Shares: As the word indicates, all dividends are
carried forward until specified, and paid out only at the end of the specified
period.
b. Non Cumulative preference Shares: it's the opposite of cumulative shares,
where Dividends are paid out of profits for every year. There are no arrears
carried over a time period to be paid at the end of the term.
c. Participating preference Shares: Besides a fixed rate of dividend, the
holders of these shares are also entitled to participate with the equity
shareholders in the surplus profits which remain after paying dividend to equity
shareholders up to a certain limit. They may also be entitled to get a share in the
surplus assets of the company on its winding up.
d. Non Participating preference Shares: The holders of these shares are
entitled only to a fixed rate of dividend and do not share in the surplus profits. The
whole of the surplus profits will, thus, go to the equity shareholders.
e. Redeemable preference Shares: Shares which can be redeemed after a
fixed period or after giving a certain notice at any time at the will of the company
out of the profits of the company or sale proceeds of the new shares are called
redeemable shares.
f. Non Redeemable preference Shares: Such shares cannot be redeemed
during the lifetime of the company, but can only be obtained at the time of
winding up (liquidation) of assets.
g. Sweat equity shares: According to Sweat Equity Shares under Companies
Act, 2013 it means that such equity shares as are issued by a company to its
directors or employees at a discount or for consideration, other than cash for
providing them know how or making available rights in the nature of intellectual
property rights or values addition, by whatever name called.
h. Bonus Shares: Bonus shares are additional shares given to the current
shareholders without any additional cost, based upon the number of shares that a
shareholder owns. These are company's accumulated earnings which are not
given out in the form of dividends, but are converted into free shares.
Reduction of share capital: S. 66 of the Act allows the company to reduce its share
capital and consequently alter its memorandum by reducing the amount of its share
capital and its shares, inter alia, by-
a. extinguishing or reducing the liability on any of its shares in respect of share
capital not paid up.
b. cancelling any paid up share capital which is lost or unrepresented by
available assets; and
c. paying off any paid up share capital which is in excess of the wants of the
company.
The following requirements shall be complied with by a company before it can
reduce its share capital, incidentally also involves an alteration to the memorandum
of the company:
a. a special resolution for reduction of share capital must be passed by the
shareholders of the company.
b. a petition should be filed before the Tribunal for an order confirming the
reduction of the share capital of the company.
c. no reduction of share capital can be made if the company is in arrears in the
repayment of any deposits accepted by it or any interest payable therein.
d. the accounting treatment proposed by the company for such reduction should
be inconformity with the accounting standards prescribed under S. 133 of the Act,
and a certificate to that effect issued by the company's auditor should be filed with
the Tribunal. Once it is filed with the Tribunal, all the decision made by the
Tribunal shall be final and the company shall also comply with other requirements
as required by the Tribunal.
Buy Back of shares: Section 68 of the Companies Act, 2013 permits a company,
both private and public, to buy back its shares or other specified securities in
accordance with the conditions prescribed under Section 68 and the Companies
(Share Capital and Debentures) Rules, 2014. Further, listed companies are
permitted to buy back its securities in accordance with the conditions prescribed by
the Securities and Exchange Board of India (SEBI) (Buy-back of Securities)
Regulations, 1998 and the relevant sections of the Companies Act. The conditions
for buy back of Securities include:
Quantum of buy back: the buy back should be 25% or less of the aggregate of paid
up capital and free reserves of the company;
Authorization: a buy back of more than 10% of the total paid-up equity capital and
free reserves of the company can be carried out if the buy back is authorized by the
articles of association of the company and a special resolution is passed by the
members of the company authorizing the buy back. These conditions are not
applicable to buy back of 10% or less of the total paid-up equity capital and free
reserves of the company and the same can be carried out pursuant to a resolution of
the board of directors of the company;
Time limit: the buy back is to be completed within a period of 12 months from the
date of passing the special resolution, or the board resolution, as the case may be;
Minimum interval: An offer of buy back shall not be made earlier than the expiry of 1
year from the date of closure of the preceding offer of buy back, if any.

Directors

The directors play a very important role in the day to day functioning of the company.
It is the board, who is responsible for the company's overall performance. Only
individuals can be appointed as directors of a company. The subscribers to the
memorandum who are individuals are deemed to be the first directors of the
company. Thereafter the shareholders or in many cases the board of directors
appoint the directors. The Act has brought in many new provisions such as
appointment of women director, resident director, independent director by certain
class of companies.
Section 2(34) of the Act :"director" means a director appointed to the Board of a
company. The director has certain legal positions. Courts have described directors
as agents, organs, trustee or even managing partner under different circumstances.
Director as agent: As a company is not a human person, it can act only through its
directors, who in fact act as its agents. It's an ordinary case of principal and agent.
Director as trustee: A trustee is a person who is vested with the legal ownership of
certain property, which he has to administer for the benefit of others. Similarly, the
directors are the trustees of the company.
Director as organs: The development of the organic theory of corporations led to
the description of company directors as the "brain" and "nerve centre" of a company
Director as managing partners: Sometimes, a company is considered as a large
partnership and its directors are entrusted with the function and responsibilities of
damaging its affairs.
Director as servants: The directors are elected representatives by the
shareholders, engaged in directing the affairs of the company on their behalf.
Therefore they act as the agents and not as an employee or servants of the
company.
Composition / Appointment : As per Chapter XI, Section 149 of the Companies
Act 2013, it is mandatory for every company to have a Board of Directors, the
composition should be as follows:
Public Company: Minimum 3 and maximum 15 nos. of Directors; at least 1/3 rd
number of Independent Directors
Private Company: Minimum 2 and maximum 15 nos. of Directors
One person Company: minimum 1 director
At least 1 woman director
At least 1 Director who has stayed in India for minimum 182 days in the previous
calendar year.
The Companies Act 2013 gives recognition to the idea of Independent Director,
which was earlier part of the listing agreement only. It means a director other than a
whole time director or the Managing Director or a nominee director who fulfills the
criteria's mentioned in Section 149.
An additional director is appointed by the Board of Directors through the Boards
vested power to hold office till next general meeting. An alternate director may be
appointed by the Board of Directors to act as a Director in absence for a period of
not less than 3 months and not more than the allotted period for the director for
whom the replacement is. The Board may appoint any person as a director
nominated by any institution in pursuance of the provisions of any law for the time
being in force or any government regulation or shareholdings, such directors are
known as Nominated Directors.
As per Principle of Proportional representation the articles of a company may provide
for the appointment of not less than two-thirds of the total number of the directors of
a company, and such appointments may be made once in every three years and
casual vacancies of such directors shall be filled as provided in the Act.
Qualification and Disqualification: There are no specific qualifications for
becoming a director of a company. The Articles may lay down the qualification for
being appointed as director. People of unsound mind, undischarged insolvent,
convicted by a court of any offence and either / or imprisoned for a period of 7 years
or more, convicted of the offence dealing with related party transactions under
section 188, charged with the offences of moral turpitude, disqualified by Tribunal or
courts due to fraud in relation to the company, not paid his call for 6 months, not filed
financial statement for three consecutive years, no Din number.
Powers: S.179 of the Act deals with the powers of the Board of Directors. It lays
down the broad rule that, subject to the provision of the Act, the board of directors of
a company is entitled to exercise all such powers and to do all such acts and things
as the company is authorized to exercise and do. A director can also make certain
political contributions and other contributions to any purpose for any political purpose
expect government companies and companies in existence for less than three years.
Duties:
The duties of directors as contained in section 166 of the Companies Act, 2013 are
described as follows
1. Duty to act as per the articles of the company: The director of a company shall
act in accordance with the articles of the company.
2. Duty to act in good faith: A director of a company shall act in good faith in
order to promote the objects of the company for the benefit of its members as a
whole, and in the best interests of the company, its employees, the shareholders,
the community and for the protection of environment.
3. Duty to exercise due care: A director of a company shall exercise his duties
with due and reasonable care, skill and diligence and shall exercise independent
judgment.
4. Duty to avoid conflict of interest : A director of a company shall not involve in a
situation in which he may have a direct or indirect interest that conflicts, or
possibly may conflict, with the interest of the company.
5. Duty not to make any undue gain : A director of a company shall not achieve
or attempt to achieve any undue gain or advantage either to himself or to his
relatives, partners, or associates and if such director is found guilty of making any
undue gain, he shall be liable to pay an amount equal to that gain to the
company.
6. Duty not to assign his office; A director of a company shall not assign his
office and any assignment so made shall be void.
7. Confidentiality of sensitive proprietary information, commercial secrets,
technologies, unpublished price to be maintained and should not be disclosed
unless approved by the board or required by law.
Removal of Directors: The director can be removed by the shareholders or by a
Tribunal.