B.A.LL.B.

(H) SEMESTER – VI, EXAMINATION, 2020

Corporate Laws-I
Paper No. II
Duration – 10 days

Max. Marks – 75 marks

Name – MD AL FAHAD ALI

Course – B.A.LL.B (H)

Examination Roll no. – 17BLWS130

Class Roll No.–26

 B.A. LL.B. (H) VIth Semester Online Examination, 2020

Corporate Laws-I

Paper No. II
Time: Three Hours Max. Marks: 75

Note: Answer all questions. All questions carry equal marks.

Unit-I
1. Arshad, Ajay and Hardeep want to start the business of purchasing and selling Electronic
goods. All of them wish to take part in the management of the business, but at the same time they
would like to avoid personal liability for its debts. They would also like to be able to transfer
their respective interests in the business without difficulty. Advise them whether it would be
better for them to form a company limited by shares or a partnership and discuss the advantages
and disadvantages of each of them.

Unit-II

2(a). What do you understand by ‘Memorandum of Association’ of a company? Explain its

clauses.

2(b). Describe the binding force of ‘Memorandum of Association’ and ‘Article of Association’
of a company.

Unit-III

3(a). Share is an interest of shareholder in a company measured a sum of money for the purpose
of liability, in the first place, and of interest in the second……..

Explain the above statement while discussing the nature and concept of share.

3(b). Classify the ‘share’ and ‘share capital’ of a company.

 Unit-IV

4. Discuss the concept and usual feature s of debentures. Also elucidate the circumstances where
a floating charge becomes a fixed one.

Unit-V

5(a). What are the different positions in which a director stands in relation to a company?

5(b). What are the statutory provisions relating to the appointment of directors in a company?

-----------------------------------
 UNIT-I
(1) Arshad, Ajay and Hardeep want to start the business of purchasing and selling
Electronic goods. All of them wish to take part in the management of the business, but
at the same time they would like to avoid personal liability for its debts. They would
also like to be able to transfer their respective interests in the business without
difficulty. Advise them whether it would be better for them to form a company limited
by shares or a partnership and discuss the advantages and disadvantages of each of
them.

Answer:

According to Section 2 (22) of the Companies Act 2013, a company that is limited by shares is
refers to a company that has the liability of the members limited by such an amount that is
unpaid on their respectively held shares. The company can enact this liability while the company
is in existence or as it is ending.

In my opinion, Arshad, Ajay and Hardeep should opt for a company limited by shares because in
this type of companies, the liability of the company members is limited by the amount not paid
on shares they hold. The shareholder has to meet the debits of the company only to the extent
that is unpaid on his shares and no separate property can be used to meet the debt.

Advantages of Limited Company Shares follows-

1. Huge Capital - Public Limited Company can raise a huge amount of capital as there is no
upper limit on the number of owners (shareholders) that a public limited company can have. So
even if every shareholder invests a small amount of money still the company can create a large
capital base.

2. Growth Opportunities - As the company has a large capital base growth opportunities are
also enormous, especially in case of a public limited company. Even after the company has
commenced the business, if a public limited company requires more capital, it can always issue
more shares.
3. Democratic Management - Public Limited Companies have a large number of shareholders.
The company is run by the Board of Directors. And the Board of Directors is appointed by the
shareholders.

4. Limited Liability - The owners of Joint Stock Company have limited liability. In case the
company becomes insolvent/bankrupt and is unable to pay off business liabilities out of business
assets, the personal assets of the owners/shareholders cannot be used to repay the liabilities of the
company.

5. Professional Management - Since Public limited companies have access to large financial
resources, it is possible for a public limited company to appoint professionals who are experts in
different areas. Availability of experts of different areas results in better decision making and
increased efficiency in the operation of business activities

6. Perpetual Existence - Joint Stock Company has a separate legal identity from its owners. It
has a separate legal status, which means in the eyes of the law the joint stock company is
different from its owners. Death, Insolvency or Insanity of any of the owners doesn't result in the
closure of the company.

7. Transferability of Shares - Shares of a public limited company are listed on the stock
exchange and are easily transferable. A shareholder who wants to sell his/her share can do so
through a stock exchange

8. Economies of Large-Scale Operations - Since public limited companies have large-scale

operations, they enjoy economies of the scale (Low cost due to the high volume of business).
They have a better bargaining power than other form of business organizations.

Disadvantages of Limited Company Shares :

1. Difficulty in Formation - Formation of a joint stock company, especially public limited

company involves a lot of legal procedures. It is time-consuming and expensive too.
2. Slow Decision Making - The company is run by the Board of Directors. The decisions are
taken jointly by the Board of Directors. Also in taking certain decisions, they have to seek
shareholders approval by calling a meeting of shareholders. Since there are a lot of people
involved in decision making, the process of decision making takes time

3. Low Motivation - The ownership and management of public limited companies are different.
The company is run by the Board of Directors who are people appointed by the owners
(shareholders). It is the Board of Directors who run the company, but profit belongs to all the
shareholders of the company. Hence there is no direct relationship between efforts and rewards.
There is no incentive for the Board of Directors to work hard.

4. Lack of Secrecy – In case of a public limited company, there is lack of secrecy. The
companies have to publish their financial details/accounts on a regular basis as per law. This
means a lot of information can also be viewed by anyone (including competitors).

5. Excessive Government Control - There are a lot of rules and regulations that have to be
followed while running the business. This also reduces the flexibility in doing the business.

Advantages of Partnership:

1. Easy Formation: Like sole proprietorship, partnership form of organisation can be formed
without legal formalities. No formal documents are required to be prepared as required in the
case of joint stock companies. An agreement which may be oral or written is sufficient to enter
into partnership form of organisation. Even the registration of partnership is not compulsory.

2. Large Resources: The partnership form of organisation enjoys large resources than a sole
proprietorship so that the scale of operation can be enlarged to get the benefit of large-scale
economies.
3. Flexibility: The business is, abundantly mobile, flexible, and elastic being free from legal
restriction on its activities. The partners can introduce any change they consider desirable to
meet the changed circumstances.

4. Combined Skill and Balanced Judgement: The partnership form of organisation enjoys the
benefit of the ability, experience, and talents of the partners. This is the distinctive advantage
partnership enjoys over the sole proprietor because everything is done by mutual consultation.

5. Sharing of Risk: Any loss sustained by the firm will be borne by all the partners equally with
the benefit that the burden borne by each partner will be much less whereas the sole proprietor
has to bear the entire loss of the business.

6. Prompt Decisions: The partners of partnership firm exercise joint responsibility and meet
frequently. This enables them to take decisions promptly, which is conducive to taking
advantage of sudden opportunities.

7. Relationship between Reward and Work: In partnership form of business organisation,

there is an direct relation between reward and work. This enables the partners to put more labour
to earn more and more profits. The more they work, the more will they be benefited.

Disadvantages of Partnership:

The partnership concern suffers from the following disadvantages:

1. Lack of Harmony: There is always likelihood of lack of harmony amongst the partners.
Difference of opinion very often results in disharmony and lack of management, when
differences arise, each partner tries to blame the other partner about his dishonest dealings and
working against the interest of the firm. This is bound to result in disruption and ultimate
dissolution of the firm.
2. Limited Resources: The limit that more than twenty cannot be member of partnership form of
business organisation, limits the amount of capital that can be raised. Actually, in order to secure
harmony amongst the members of the firm, the number has to be kept much smaller than allowed
by the law. This further limits the resources with the result that the large scale business cannot be
run by partnership form of organisation.

3. Lack of Public Faith: As the partnership concern is not subject to any regulation and no legal
formation and functioning, the people have less faith in such organisation coupled with the fact
that every now and then people listen to the dissolution of such partnership concerns. Moreover,
people are not aware of the exact position of the business of the partnership, the reason is that the
accounts of partnership concerns are not published.

4. Restricted Enterprise: As the unlimited liability covers even the private fortune of the
partners, the partners are bound to be over cautious. This restricts enterprise. In fact, the liability
of individual partner may be regarded as excessive for most purposes. Therefore, the partnership
form of business organisation tends to be useful only for small scale business, such as retail
trade, a modern sized mercantile house or a very small manufacturing business.

5. Restriction on Transfer of Interest: In partnership, no partner can transfer his interest to the
third party. If he wants to do so, he will have to seek the consent of all the other partners. This
restricts the liquidity of his investment. In case of a company, any shareholder can transfer his
shares to the third party without the consent of other shareholders.

6. Burden of Implied Authority: Each partner is an agent able to bind the others by his acts and
omission in the ordinary and usual course of the business of the partnership. Accordingly, when
there is one partner who is lazy, negligent, has done some blunder, is guilty of corrupt practices
or is playing foul means within the scope of his authority, his partners are equally liable
financially and without limit. This may put heavy burden on the partners which may ruin the
financial position of partners and may lead to the closure of the firm.
7. Liability after Retirement: In partnership form of business organisation, the retiring partner
continues to be liable for all acts done when he was a partner. In the case of a company of
limited liability, the liability of the shareholder ceases immediately on the transfer of shares.
 UNIT-II

2(a). What do you understand by ‘Memorandum of Association’ of a company? Explain its

clauses.

2(b). Describe the binding force of ‘Memorandum of Association’ and ‘Article of

Association’ of a company.

(A) --

Introduction

The memorandum of association of a company is the most important document as it sets out the
constitution of the company. It is in fact the foundation on which the entire structure of the
company is based. It prescribes the name of the company, its registered office, objects and
capital and also defines the extent of its powers. A company can exercise only such powers
which are either expressly stated therein or as may be implied therefrom including matters
incidental to the powers so conferred. Memorandum is therefore a document of great importance
in relation to the proposed company. It is in fact a charter of the company.

Definition According to Section 2(56) of the Companies Act, 2013, 'memorandum' means
memorandum of association of a company as originally formed or altered from time to time in
pursuance of any previous companies law or of this Act. This definition, however, does not give
an idea as to the nature of this document nor is it indicative of its importance.

Purpose of Memorandum

The memorandum of a company serves two main purposes. Firstly, the prospective shareholders
can know the field in which their funds are going to be used by the company and the purpose of
the enterprise so that they can contemplate the risk involved in their investment. Secondly, the
outsiders dealing with the company can know exactly the objects of the company and whether
the contractual relation which they intend to enter into with the company is within the objects of
the company.
Contents of Memorandum

The memorandum of a limited company must contain the following fundamental clauses which
have often been described as the conditions of its incorporation:

(a) Name clause;

(b) Registered office clause;

(c) Objects clause:

(d) Limited liability clause;

(e) Capital clause; and

(f) Association clause.

(A) Name Clause

A company being a legal person must have a name of its own. As pointed by Johnson, J. in
Osborn v. Bank of U.S., "the name of incorporation is the symbol of its personal existence".

Although a company is free to adopt a name of its choice but it cannot be registered with a name
which, in the opinion of the Central Government, is undesirable. It should not contravene the
provisions of the Emblems and Names (Prevention of Improper Use) Act, 1950, nor should it be
suggestive of any Government's patronage or protection to the company. It should not include
the word 'Co-operative' in it. More recently, the non Government Companies or enterprises are
prohibited to include the word 'national within its name.

A company may not adopt a name which is identical, with or too nearly resembles the name by
which a company in existence has been previously registered. If a company adopts such a name,
it may be declared undesirable by the Central Government, and may be restrained from adopting
such an identical name which may be misleading and injurious to an already existing company.

(B) Registered Office Clause

A company is required to state in its memorandum of association the name of the State in which
the registered office of the company is to be situated. However, the company is not required to
mention the exact address of its registered office. This can be filed with the Registrar of
Companies separately in Form No. 18 within thirty days of the incorporation of the company.

Section 12(1) of the Act, 2013 requires that a company must have a registered office within
thirty days of its incorporation or on the day when it commences business, whichever is earlier,
so that all communications and notices may be sent to it. In actual practice, the companies
generally file the notice of the address of the registered office at the time of filing the
memorandum and articles.

(C) Objects Clause

The most important clause of the memorandum of association is the objects clause because it sets
out the purpose for which the company is formed and the kind of activities or business it intends
to carry on. Generally, Companies divide their objects clauses into three distinct parts, namely:

1. Main objects. This sub-clause contains the main objects to be pursued by the company on its
incorporation and objects incidental or ancillary to the attainment of the main objects.

2. Other objects. This sub-clause must include other objects which are not included in the main
objects.

3. States to which objects extend.-The non-trading companies whose objects are not confined to
one State have to state in their object clause, the States to whose territories the objects extend.

However, the Companies Act, 2013 has dispensed with such classification of objects. It only
provides (i) objects for which the company is proposed to be incorporated, and (ii) any matter
considered necessary in furtherance thereof.

Section 12(1) of the Act, 2013 requires that a company must have a registered office within
thirty days of its incorporation or on the day when it commences business, whichever is earlier,
so that all communications and notices may be sent to it. In actual practice, the companies
generally file the notice of the address of the registered office at the time of filing the
memorandum and articles.
(D) Limited Liability Clause

In case of a company whose liability of members is limited by shares or guarantee, the

memorandum must contain a clause stating that 'the liability of the members is limited". Even a
company which is exempted from using the word 'Limited' as a part of its name under Section 8
of the Companies Act, 2013 is also required to state in its memorandum that the liability of
members is limited.

The effect of this clause is that, in a company limited by shares, no member can be called upon
to pay more than the unpaid value of the shares held by him. In case his shares are fully paid, he
shall not be required to pay any more even if the company owes huge debts to its creditors.

(E) Capital Clause

The capital clause in the memorandum states the amount of the nominal or authorised capital
with which the company proposes to be registered, and the value of the shares into which it is
divided. There is no limit to the amount of capital which the company may have, or to the fixed
value of each individual share.

The capital of the company may be divided into two different categories namely, (a) equity share
capital, which may be (i) with voting rights; or (ii) with differential rights as to dividend, voting
or otherwise in accordance with such rules as may be prescribed, and (b) preference share
capital.

Provided that nothing contained in the Companies Act, 2013, shall affect the rights of the
preference share holders who are entitled to participate in the proceeds of winding up before the
commencement of this Act.

(F) Association Clause

This clause is also known as 'subscription clause of the memorandum. The association clause
must state that the persons who are subscribing their signatures to the memorandum and are
desirous of forming themselves into an association in pursuance of the memorandum. Each
subscriber must sign the memorandum in the presence of atleast one witness who shall attest the
signature. Each one of them agrees to take the number of shares stated against their respective
names. The memorandum has to be subscribed by atleast seven persons in case of a public
company and two in the case of a private company.

2(b). Describe the binding force of ‘Memorandum of Association’ and ‘Article of

Association’ of a company.

Binding force of memorandum and articles

Section 36 of Companies Act states that when the memorandum and articles of association are
registered it binds the company and the members the same way as if each member and the
company have respectively signed the documents.

 Binding on members in their relation to company

The provision of the articles of association bound the members to the company. Articles of
association constitute a contract between a company and its every member.

 Binding on company in its relation to members

The company is bound to the members the same way members are bound to the company and if
there is a breach of articles on the part of the company then the member is entitled to an
injunction in order to prevent the breach.

 But no binding in relation to outsiders

In order to give effect to the articles, neither the company nor the member is bound to the
outsiders. No contract can be constituted between the company and the outsider through the
article of associations.

 How far binding between members

The law has not yet finally decided that how far the articles bind one member. It depends on the
articles of association that how far one member will be bound as it only defines the rights and
liabilities of the members.
 UNIT-III

3(a). Share is an interest of shareholder in a company measured a sum of money for the
purpose of liability, in the first place, and of interest in the second……..

Explain the above statement while discussing the nature and concept of share.

Introduction

Share is an interest of shareholder in a company measured a sum of money for the purpose of
liability, in the first place, and of interest in the second……..

A share is a part or interest of a shareholder in a definite allocation of the capital. Shares

calculate rights of a shareholder to receive a certain amount of profit of the company while it is a
going concern, and to contribute to the assets of the company when it is going to be liquidated or
wound up.

A share is, therefore, the interest of a stakeholder in the company measured by a sum of money,
for the purpose of liability in the first place, and of interest in the second, but also consisting of a
series of several mutual covenants entered into by all shareholders of the company.

A share is not a sum of money, but an interest measured by a sum of money and made up of
various rights contained in the contract by all the shareholders.

A person who acquires a share in a company automatically becomes subject to the obligations
imposed by the Company’s Act, the company’s memorandum of association and the company’s
articles of association. He also becomes entitled to the rights similarly.

Sub-section 84 of Section 2 of the Companies Act 2013, defines “Shares” as, “Share” means a
share in the share capital of a company including stocks. Shares are considered as a type of
security. Securities is defined in the Sub-section 80 of Section 2 of the said Act, which refers to
the definition of the securities as defined in clause (h) of section 2 of the Securities Contracts
Act, 1956.
According to Section 44 of the said Act, the shares of any member in a company shall be
movable property. It is considered to be transferable in the manner provided by the articles of the
company.

According to Section 45 of the said Act, it mandates on all companies having a share capital to
ensure that the shares of the company shall be distinguished by a distinctive number. This
requirement does not apply where a share is held by a person whose name is entered as holder of
beneficial interest in the records of depository.

Principles of Allotment of Shares

1. Allotment of shares by proper authority

Allotment is generally made by a resolution that consists of the Board of directors. But where the
articles so provided, an allotment made by secretaries and treasures was held to be regular.

2. Within the reasonable time

Allotment is basically made within a reasonable or specified period of time otherwise the
application shall lapse. The specified time frame of six months between application and
allotment is held to be not reasonable.

3. Shall be communicated

It is primary that there must be communication of the allotment to the applicant. Posting of a
properly addressed and stamped letter of allotment is considered as a sufficient communication
even if the letter were to be delayed or lost.

4. Absolute and unconditional

As per the terms and conditions of the applicant the allotment must be absolute and
unconditional. Thus where a person applied for 400 shares on the condition that he would be
appointed cashier of a new branch of the company, the Bombay High Court held that he was not
bound by any allotment unless he was so appointed.
3 (b). Classify the ‘Share’ and ‘Share Capital’ of a Company.

Section 2(46) of Companies Act, 1956 defines Share as follows:

Share is defined in Section 2(46) of the Companies Act, 1956 as, “‘share’ means share in the
share capital of a company, and includes stock except where a distinction between stock and
shares is expressed or implied.” Shares are considered as goods under S 2(7) of the Sale of
Goods Act, 1930, and are moveable property, but are transferable only in the manner provided
by the Articles of Association of the Company, as per Section 82 of the Companies Act, 1956.

A landmark case in which the meaning of share has been clearly postulated is CIT v. Standard
Vacuum Oil Co. where the Supreme Court of India said that “by a share in a company is meant
not any sum of money but an interest measured by a sum of money and made up of diverse rights
conferred on its holders by the articles of the Company which constitute a contract between him
and the company.”

In another case, Bucha F. Guzdar v. Commissioner of Income Tax, Bombay, the Supreme

Court defined share as “the right to participate in the profits made by a company while it is a
going concern and declares a dividend, and in the assets of the company when it is wound up.”
Therefore, a share, or share capital, is not a sum of money, and not just the interest of the
shareholder in a company, but also represents a set of rights and liabilities.

Prior to the enactment of the Companies Act, 1956, there were three kinds of shares.

1. Ordinary Shares- An ordinary share basically represents the equity ownership of a

company, which would, simply put, entitle the shareholder to a certain portion of the
company’s profits. Other privileges include receiving quarterly accounts and annual reports,
and participating at Annual General Meetings, but such shareholders are at a more
disadvantageous position in case there is liquidation of the company or the company is
wound up, because they have the last call on the assets of the company, after all the other
liabilities of the company have been met.
2. Preference Shares- “A preference share is a share which entitles a holder to an annual
dividend, of a fixed amount per share (usually expressed as a percentage of the nominal value
of the share), paid in priority to any dividend payments to other members.”
3. Deferred Shares- These shares generally came with a condition that no dividends can be
paid to the shareholder for a period of time, generally one financial year, unless the ordinary
shareholders have been paid a certain amount in that year; and these are generally issued to
founders of the company and thus also called ‘founders’ shares.’

But with the enactment of the Companies Act, 1956, under Section 86 of the Act, only two kinds
of shares are now recognized and can be issued by a company limited by shares.

Section 86 states:

The share capital of a company limited by shares shall be of two kinds only, namely:-

(a) Equity Share -

(i) With voting rights; or

(ii) with differential rights as to dividend, voting or otherwise in accordance with such rules and
subject to such conditions as may be prescribed;

(b) Preference Share -

With regard to issuing shares with differential voting rights, certain rules and regulations which
have been specified by the Department of Company Affairs have to be followed while issuing
such shares. These Rules, among other things, provide that only 25 percent of the total issued
share capital, including non-voting shares, can be shares with differential voting rights
(hereinafter DVR unless otherwise specified), and it can only be issued by a company which has
distributable profits in the last three years immediate to such issuance. Neither Equity shares
with regular voting rights will be allowed to be converted to DVR nor will the latter be allowed
to be converted to the former, and a shareholders’ resolution by the general body will have to
approve the issue of such shares.

Preference Share has been defined and explained elaborately in Section 85 of the Companies
Act, which states that preferential share capital is that capital which fulfils the two conditions,
first, there has to be guaranteed dividend during the life of the company, which may or may not
be a fixed amount, or a fixed rate, to be paid to preferential shareholders before anything is paid
to equity shareholders, and secondly, if the company is wound up, the preferential dividends
must be paid to the preferential shareholders before paying to the equity shareholders.

Nature and Concept of Share Capital

Capital can be broadly categorized into fixed capital and working capital. Capital which is
required for procuring assets of fixed and permanent nature is called fixed capital and capital
required for running the operation of the business such as purchase of raw materials, payment to
workers, meeting various other' current expenses, allowing credit to customers etc are called
working capital. Estimation of working capital depends on a number of variable factors such as
potential market of the product; credit to be allowed to customers to push up the product in the
market, the time for which raw materials to be kept in stock, period of production process,
availability of credit from the suppliers etc. The promoters have to work out and decide how
much and in what proportion the fixed and working capital will be required

The share capital of company may be of the following types:

1. Registered, Authorized or Nominal Capital:

The Memorandum of Association of every company has to specifically mention the amount of
capital with which it wants to be registered. The capital so stated is called Registered, Authorized
or Nominal Capital. The Registered Capital is the maximum amount of share capital which a
company can raise through public subscription.

2. Issued Capital:

The company may not issue the whole authorized capital at once. It goes on raising the capital as
and when the need for additional fund is felt. So, issued capital is that part of
Authorized/Registered or Nominal Capital which is offered to the public for subscription in the
form of shares.

3. Subscribed Capital:

It is that part of “issued capital” for which applications are received from the public. The
subscribed capital is allotted to the respective subscribers as per resolution and rules passed by
the directors of the company.
4. Unissued Capital:

The balance of nominal capital which is left to be issued is called Unissued Capital.

5. Called up Capital:

It is that part of subscribed capital which has been called up by the company itself. A company
does not call at once the full amount on each of the shares it has allotted and therefore, calls up
only such amount as it needs.

6. Uncalled up Capital:

It is the uncalled portion of the allotted capital and represents contingent liability of the
stakeholders on the shares.

7. Paid up Capital:

It is that part of called up capital against which payment has been received from the members on
their respective shares in response to the calls made by the company.

8. Reserve Capital or Reserve Liability:

By Reserve Capital we mean that amount which is not callable by the company except in the
event of the company being wound up. The company cannot demand the payment of money on
the shares to that extent during its life time. Reserve capital may be created by means of a special
resolution passed by the company in its General Meeting by three-fourths majority of those
voting on it.

9. Fixed Capital:

The fixed capital of a company is what the company retains in the shape of fixed assets such as
land and buildings, plant and machinery, furniture, etc.

10. Circulating Capital:

The circulating capital is a part of subscribed capital which is circulated in business in the form
of using goods or other assets such as book debts, bill receivables, cash, bank balance, etc.
 UNIT-- IV

4. Discuss the concept and usual features of debentures. Also elucidate the circumstances
where a floating charge becomes a fixed one.

Introduction

Companies usually have to borrow large sums of money. The loan requirements of the company
might not be met by a single tender, therefore a loan, in certain situations can be split into several
units. One of the most convenient methods of doing so is by borrowing the issue of
debentures. A debenture is an important tool for raising loan capital for a company, whereby the
company borrows money and then agrees to repay the debt where there might be a charge on the
company’s assets for ensuring the repayment of the company’s debt.

Although the money raised by a debenture becomes a part of the capital structure of the company
but it doesn’t become a part of the share capital. It is in the form of a loan certificate which
serves as evidence that the company is liable to pay a specified amount with interest. 

Debentures have been defined under the Companies Act, 2013. As per section 2(30)
“Debentures” includes debenture stocks, bonds and other instruments of a company regarding
debts whether they constitute a charge over the company’s assets or not.

Section 179 (3) of the Companies Act, 2013, gives the power to the board of directors to issue
debentures on behalf of the company, while section 71 of the Companies Act, 2013, deals with
the issuance of debentures along with the penalties for non-compliance of the same. 

Some of the salient features of debentures are as follow:

 It is an acknowledgement of the debt;

 Debentures can be both secured or unsecured;
 The rate of interest and the date of payment is pre-determined;
 Debentures issued are freely transferrable by debenture holders;
 Debenture holders do not get any voting right in the company;
Debentures are further classified into the following categories:

(i) Convertible and Non-convertible debentures:

Convertible debentures refer to those debentures in which the debenture-holders are given an
option to exchange their debentures for equity shares in the company. Certain conditions and
limitations are imposed on the period during which this option may be exercised.

Non-convertible debentures refer to those debentures in which the debentures cannot be

exchanged for equity shares in the company.

(ii) Secured debentures and Unsecured debentures:

Secured debentures refer to those debentures which are secured as there is a charge on the fixed
assets of the company. The purpose of this instrument is to secure the debenture-holder in case of
default made by the issuer for the payment of either the principal or interest amount. He can sell
the assets of the issuer to recover the amount. Section 71(3) of the Act provides that a company
has the right to issue such an instrument subjected to the conditions of the government of India.

Unsecured or naked debentures refer to those debentures which are unsecured in case there is a
default in the payment of the principal or interest amount. The debenture-holder cannot sell any
assets for repayment.     

(iii) Redeemable
debentures and irredeemable debentures:

Redeemable debentures refer to those debentures which are issued with an option of redemption
on demand or by a system of periodical drawing or by serving notice at a fixed date.

Perpetual or irredeemable debenture refers to those debentures in which there is no fixed time for
the issuer to repay the amount. The debenture-holder cannot demand the payment of principal
amount provided the company does not default in making payment of the interest regularly. 

(iv)Registered debentures and unregistered debentures:

Registered debentures refer to those debentures which are made in the name of an individual
who is registered in the register of debenture-holder and his/her name appears on the debenture
certificate. Section 56 of the Act provides that these debentures can be transferred in a similar
way as shares are transferred with necessary formalities.

Section 71 of the act provides for a document to be created by the company, where trustees are
appointed to protect the interest of debenture-holders before they can be offered for public
subscription.  This document is known as “debenture trust deed”. The trust deed has to be in such
form and executed within such time as may be prescribed. The Central Government may
prescribe and regulate the above-mentioned things. Section 71(5) of the Companies Act provides
for the appointment of debenture trustees who must be appointed before making the debenture
issue.

Also, for the purpose if issuing the debentures, the concerned company has to create a
Debenture Redemption Reserve. Till the time debentures are redeemed, adequate amounts have
to be transferred to the fund from the profits every year. The amount so credited cannot be used
for any other purpose.

Thus, it can be concluded that the issuance of debentures is one of the ways of raising debt
finance for a company. The advantage of being of being a debenture holder is that, in case of
winding-up/bankruptcy the debenture holders are considered to be the creditors and they are the
ones who would be re-payed first.

A floating charge security can be converted into fixed charge. The floating charge becomes a
fixed charge under the following circumstances:

1. The company is about to wind up.

2. Non-payment of debts, that is, the debtor is unable to pay the debts.

3. The business cannot be carried on if the creditor takes an action against the debtor for
non-payment of debts and other circumstances mentioned under the provisions of the
Companies Act, 2013.

Once the property is crystallised, the creditor (lender) obtains the right to possession of the
crystallised security. The debtor (borrower) cannot dispose of crystallised security.
 UNIT--V

5(a). What are the different positions in which a director stands in relation to a company?

5(b). What are the statutory provisions relating to the appointment of directors in a
company?

Introduction

“A corporation is an artificial being, invisible, intangible and existing only in contemplation of

law.” “It has neither a mind nor a body of its own.”  “A living person has a mind which can have
knowledge or intention and he has hands to carry out his intention. A corporation has none of
these; it must act through living persons.” This makes it necessary that the company’s business
should be entrusted to some human agents. Hence, the necessity of directors. Section 252 of the
Act, therefore, requires that “every public company shall have at least three directors and every
private company shall have at least two directors”. 

Section 2(13) of the Companies Act, 1956 defines a ‘director’ as including “any person
occupying the  position of a director by whatever name called “. Thus, it is not the name by
which a person is called but the position he occupies and the functions and duties which he
discharges that determine whether in fact He is a director or not.

In Re, Forest of Dean Coal Mining Co. it was stated that function is everything; name matters 
nothing. So long as a person is duly appointed by the company to control the company’s business
and authorised by the articles to contract in the company’s name and on its behalf , he functions
as a director. A company is Indeed a person but  juridical person and the directors as a body
endow the juridical person with human face that can act and react.

Section 303(1) of the Companies Act ( through for the limited purpose of maintenance of
Register of directors, etc.) provides that any person with whose directions or instructions the
Board of Directors is accustomed to act is also deemed to be a director.
Position of Director standing in relation to the Company

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

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

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

Director as Agents

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

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

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

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

The directors of a company are trustees for the company, and for reference to their power of
applying funds of the company and for misuse of the power they could be rendered liable as
trustees and on their death, cause of action survives against their legal representatives 11.
Directors are those persons selected to manage the affairs of the company for the benefit of
shareholders. It is an office of trust, which if they undertake, it is their duty to perform fully and
entirely. This peculiar nature of their office is one of the reason why the directors been described
as trustees.

Director as Organs of Corporate Body

The organic theory of corporate life "treats certain officials as organs of the company, for whose
action the company is held liable just as a natural person is for the action of his limbs 17. Thus
the modern directors are more than mere agents or trustees. The Board is also correctly
recognised to be a primary organ of the company. Directors and managers represent the directing
mind or will of the company and control what it does.

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

5(b). What are the statutory provisions relating to the appointment of directors in a
company?

Appointment of Directors
The success of the company depends, to a very large extent, upon the competence and integrity
of its directors. It is, therefore, necessary that management of companies should be in proper
hands. The appointment of directors is accordingly strictly regulated by the act. There are now
special provisions for preventing management by undesirable persons.

Appointment of first directors –

The first directors are usually appointed by name in the articles or in the manner provided
therein. Where the articles do not  provide for the appointment of first directors, the subscribers
to the memorandum, who are individuals, shall be deemed to be the first directors of the
company subject to the regulations of the company’s articles. The first directors can hold office
until the directors are duly appointed in accordance with the provisions of section 235) (Section
254). It may, however, be noted that in case of a public company, a list of persons who are   to be
the first directors of a company along with their consent in writing must be delivered to the
Registrar of Companies.

Appointment of directors at general meeting –

According to section 255, the director must  be appointed  by the company in general meeting. In
the case of a public company or of a private company which is a subsidiary of a public company,
unless the articles provide for the retirement of all directors at every annual general meeting, at
least two-third of total number of directors must be persons whose period of office is liable to
determination by rotation. In other words, only one third  of the total number of directors can be
non-rotational directors.

Section 256 provides that one-third of the directors subject to retirement by rotation must retire
at an annual general meeting. It follows that all such directors must retire in the course of three
years, one-third of them retiring in each year. The directors to retire by rotation at every annual
general meeting shall be those who have been longest in office since their last appointment. As
between persons appointed on the same day, retirement is to be determined by mutual consent
and in case of default, by lots [Section 256(2)].

If the directors do not hold a general meeting in time, can they continue till the meeting is held?
The Delhi High Court in B.R. Kundra V. Motion Picture Association, held that directors cannot
prolong their tenure by not holding a meeting in time . The directors due to retire by rotation
must vacate office at the latest on the last day on which an annual general meeting ought to have
been held. Retiring directors are, however, eligible for re-election.

Deemed re-appointment of a retiring director [Sec. 256]- The vacancy caused by the retirement
of a director by rotation should be filled up at the same meeting or at an adjourned meeting. If it
is not so done, the retiring director shall be deemed to have been appointed at such adjourned
meeting except in the following cases:

1. At any previous meeting, a resolution for his re-appointment was put to vote, but was
lost; or

2. the retiring director has, in writing, expressed his unwillingness to continue, or

3. he is not qualified or is disqualified for appointment; or

4. a special or ordinary resolution is necessary for his appointment or reappointment by

virtue of any provisions of the Companies Act; or

5. it is resolved not to fill the vacancy; or

6. it is resolved to fill two or more vacancies by a single resolution (Sec. 263).

Appointment of a director other than a retiring director [Sec. 257]-

Section 257 provides for the procedure of appointment of a person other than retiring director. If
any person other than the retiring director wishes to stand for directorship or any  member
proposes a person for directorship, he must signify his intention to do so by giving 14 days’
notice to the company before the general meeting and the company must inform the members not
later than seven days before the general meeting either by individual notices or by advertisement
of this fact in at least two newspapers circulating in the place where its registered office is
located of which one must be in English and the other in the regional language of that place.