$RJ0TVVH

CORPORATE LAW
(FOR PRIVATE CIRCULATION ONLY)

2019
PROGRAMME COORDINATOR
Mr. Vishal Ranaware
COURSE DESIGN AND REVIEW COMMITTEE

Mrs. Swatee Yogessh Prof. Dr. Shashikala Gurpur
Mrs. Asawari Abhyankar Prof. Ujjwala Sakhalkar
Carolin Dennis Prof. Medha Kolhatkar
COURSE WRITERS
Mrs. Swatee Yogessh Mrs. Asawari Abhyankar
EDITOR
Ms. Neha Mule
Published by Symbiosis Centre for Distance Learning (SCDL), Pune

July, 2011 (Revision 04, 2019)
Copyright © 2019 Symbiosis Open Education Society

All rights reserved. No part of this book may be reproduced, transmitted or utilised in any form or by any
means, electronic or mechanical, including photocopying, recording or by any information storage or retrieval
system without written permission from the publisher.
Acknowledgement
Every attempt has been made to trace the copyright holders of materials reproduced in this book. Should any
infringement have occurred, SCDL apologises for the same and will be pleased to make necessary corrections
in future editions of this book.
PREFACE
In today’s business world, law plays a major role in the regulation of the business affairs in different
ways. One of the ways is to provide an avenue for different business activities a variety of modality
in forms of various business organizations. Amongst these variety of business entities, Company
and Partnerships are the most important and most common in the Indian Business fraternity. This
SLM provides comprehensive information about Company Law, Partnership and Limited Liability
Partnership laws in India. It aims at aiding the reader’s comprehension by taking them carefully
through each basic and fundamental aspect of the subject. Company law is about the formation of
companies, their continuing regulation during their life and the procedures for dealing with their
assets when they are terminated or wound up. Company law is one of those subjects that students
describe as difficult and challenging, however this difficulty or challenge involved for the student
in understanding company law is to overcome the attitude that law is somehow compartmentalized.
This SLM will provide the reader an easy and legible explanation for self-understanding.
Every unit provides the reader an opportunity to digest and review what you have read by allowing a
pause to think and complete activities. It also introduces the readers with new conceptual challenges
such as corporate personality.
The authors express their gratitude to the various authors, jurists, researchers and academicians whose
writings and opinions have been utilized in compiling of the material.
The authors are also indebted to SCDL for providing them this unique opportunity of compiling
this material. The authors are indeed thankful to their colleagues and family members for their ever
extending help and assistance.
Mrs. Swatee Yogessh

Mrs. Asawari Abhyankar
iii
ABOUT THE AUTHORS
Mrs. Swatee Yogessh is an Assistant Professor in Symbiosis Law School, Pune. She is a B.S.L.LL.M.,
in Corporate Laws with NET qualification. She has been a part of academics for last eight years.
She has been teaching this subject to the Law and Management students. She has taught this subject
in Leibniz University, Hannover, Germany. She has participated in various seminars and conferences
on Company Law.
Mrs. Asawari Abhyankar is an Assistant Professor in Symbiosis Law School, Pune. She is a B.A.
LL.B. LL.M in Corporate Laws and Criminal Law with NET qualification. She has been a part of
academics and has been teaching Law of Contracts and Special Contracts for last six years.
iv
CONTENTS
Unit No. TITLE Page No.

1 Introduction to Company Law 1-26
1.1 Introduction
1.2 Characteristics of a Company-Corporate Personality
1.3 History of Company Law
1.4 Kinds of Company
Summary
Keywords
Self-Assessment Questions
Answers to Check your Progress
Suggested Reading
2 Incorporation of Company 27-46
2.1 Introduction to Company Formation
2.2 Memorandum of Association
2.3 Articles of Association
Summary
Keywords
Suggested Reading
3 Capital 47-62
3.1 Introduction
3.2 Promoters
3.3 Prospectus
3.4 Share Capital
Summary
Keywords
Suggested Reading
4 Membership of Company 63-80
4.1 Introduction to Membership of a Company
4.2 Who can become a Member
4.3 How to become a Member
4.4 Cessation of Membership
4.5 Rights and Liabilities of Members
4.6 Register and Index of Members
Summary
Keywords
Suggested Reading
v
5 Shares and Dividends 81-102
5.1 Introduction to Shares
5.2 Types of Shares
5.3 Allotment of Shares
5.4 Calls on Shares
5.5 Share Certificate
5.6 Transfer of Shares
5.7 Dividends
Summary
Keywords
Suggested Reading
6 Borrowing, Lending and Investments 103-122
6.1 Introduction
6.2 Borrowing Powers
6.3 Mortgages and Charges
6.4 Debenture
6.5 Remedies of Debenture-Holders
6.6 Investment in Other Companies
Summary
Keywords
Suggested Reading
7 Directors and Other Managerial Personnel 123-148
7.1 Introduction
7.2 Position of Directors
7.3 Appointment of Directors
7.4 Removal of Directors
7.5 Duties of Directors
7.6 Register of Directors
7.7 Other Managerial Personnel
Summary
Keywords
Suggested Reading
vi
8 Reconstruction, Amalgamation and Meetings 149-164
8.1 Introduction to Compromises and Arrangements
8.2 Duties and Powers of Tribunal
8.3 Reconstruction, Merger and Amalgamation
8.4 Meetings
8.5 Types of Meetings
8.6 Procedure of Meetings
8.7 Kinds of Resolution
Summary
Keywords
Suggested Reading
9 Winding up 165-188
9.1 Introduction
9.2 Types of Winding up
9.3 Conduct of Winding up
Summary
Keywords
Suggested Reading
10 Minority Protection and Audit & Accounts 189-210
10.1 Introduction
10.2 Rule in Foss vs. Harbottle
10.3 Prevention of Oppression and Mismanagement
10.4 Investigations
10.5 National Company Law Tribunal and Appellate Tribunal
10.6 Accounts
10.7 Audit
10.8 Corporate Social Responsibility (CSR)
Summary
Keywords
Suggested Reading
vii
11 General Features of Partnership 211-228
11.1 Introduction
11.2 Nature of Partnership and its Essentials
11.3 Difference between Partnership and Co-ownership,
Club/Society, Company and Joint Hindu Family
11.4 Kinds of Partnership
11.5 Formation of Partnership
Summary
Keywords
Suggested Reading
12 Relations of Partners 229-244
12.1 Introduction
12.2 Relation of Partners Inter-se
12.3 Relation of Partner to Third Parties
12.4 Liability of Partner to Third Person
12.5 Position of Incoming and Outgoing Partners
Summary
Keywords
Suggested Reading
13 Registration and Dissolution of a Firm 245-260
13.1 Introduction
13.2 Registration of Firms
13.3 Methods of Dissolution
13.4 Consequences of Dissolution
Summary
Keywords
Suggested Reading
14 Limited Liability Partnership 261-280
14.1 Introduction
14.2 Nature of Limited Liability Partnership
14.3 Partners of Limited Liability Partnership
14.4 Incorporation of Limited Liability Partnership
14.5 Rights, Duties and Liabilities of Partners
Summary
Keywords
Suggested Reading
References 281
viii
Introduction to Company Law
UNIT
1
Structure:
1.1 Introduction
1.2 Characteristics of a Company - Corporate Personality
1.3 History of Company Law
1.4 Kinds of Company
Summary
Keywords
Suggested Reading
Introduction to Company Law 1

Notes
Objectives
----------------------
---------------------- After going through this unit, you will be able to:
• Describe and interpret the concept and nature of companies
----------------------
• Discuss the historical background of the companies in India
----------------------
• Compare and contrast different types of companies
---------------------- • Analyse the extent to which the schemes of the Indian Company Law
---------------------- apply
----------------------
1.1 INTRODUCTION
----------------------
---------------------- A company in a practical sense means a company of certain persons

registered under the Companies Act. Two or more persons, who are desirous
---------------------- of carrying on joint business enterprises, have the choice of either forming a
company or a partnership. Partnership is a suitable device for a small scale
---------------------- business which can be financed and managed by a small group of partners who
---------------------- take personal interest and there is mutual trust and confidence among them.
But where the enterprise requires a rather greater mobilization of capital which
---------------------- cannot be fulfilled by the resources from few persons , the formation of a
company is the only choice.
----------------------
The word “Company” has no strict technical or legal meaning. In the
---------------------- terms of the Companies Act a company means a company formed and registered
under the Companies Act. In common law a company is a “legal person” or
---------------------- “legal entity” separate from its members, capable of surviving beyond the lives
---------------------- of its members. It has a capital divisible into parts, known as shares. At the
same time it is an artificial person created by a process of law. It has perpetual
---------------------- succession. It exists only in contemplation of law, i.e. it is regarded by the law
as a person, just as a human being. But is has no physical existence.
----------------------
The present unit aims at explaining the nature and definitional elements
---------------------- of a Company.
----------------------
1.2 CHARACTERISTICS OF A COMPANY - CORPORATE
---------------------- PERSONALITY
---------------------- Separate Legal entity – A company is in law regarded as an entity
separate from its members. In other words it has an independent corporate
----------------------
existence. Any of its members can enter into contracts with it in the same
---------------------- manner as any other individual can and he cannot be held liable for the acts of
the company even if he holds virtually the entire share capital. The Company’s
---------------------- money and property belong to the company and not to the shareholders, though
the shareholders own the company.
----------------------
2 Corporate Law
Thus, for e.g. ABC & Co. ltd. is an entirely different person from ABC Notes
even if he holds practically all the shares in the company. His/Her property is
not the property of ABC. Similarly the company’s debts are the debts of the ----------------------
company and ABC or the share holders cannot be compelled to pay them, this
is subject to the liability of shareholders which is limited to the unpaid value of ----------------------
the shares or the balance amount of guarantee. ABC can make contracts with
----------------------
the company and his personal property cannot be seized for the discharge of the
debts of the company. Again, ABC or any shareholder is not the agent of the ----------------------
company and so he cannot bind the company by his acts.
----------------------
Once a company is incorporated it must be treated like any other
independent person, and the motives of those who promoted it are irrelevant. ----------------------
In England the legal personality or separate entity of an incorporated
----------------------
company was recognized in 1867 in the case of Oakes v. Turquand the
importance of the separate entity of a company was however firmly established ----------------------
in the following case-
----------------------
Salomon v A Salomon & Co Ltd, [1897] – In this case the House of
Lords’ uphold the doctrine of corporate personality and the effect of this was the ----------------------
creditors of an insolvent company could not sue the company’s shareholders to
pay up outstanding debts. ----------------------
Facts: S made leather boots and shoes and his sons wanted to become business ----------------------
partners. Therefore, he transferred his sole proprietorship business to a newly
formed limited company for £39,000. His wife and five elder children became ----------------------
subscribers and the two elder sons became directors. Out of 20,007 shares wife
and five elder children of S took 1 share each and S took 20,001 shares which ----------------------
was payment from S incorporated for his old business (each share was worth £1). ----------------------
The company also gave £10,000 in debentures to S (i.e., S gave the company a
£10,000 loan, secured by a floating charge over the assets of the company). On ----------------------
the security of his debentures, S received an advance of £5,000 from Edmund
Broderip. Soon after S incorporated his business a drop in boot sales, exacerbated ----------------------
by a series of strikes which led the Government, S’s main customer, to split its
----------------------
contracts among more firms to avoid the risk of its few suppliers being crippled
by strikes. Broderip sued to enforce his security. The company was put into ----------------------
liquidation. Broderip was repaid his £5,000. This left £1,055 company assets
remaining, of which S claimed under his retained debentures. This would leave ----------------------
nothing for the unsecured creditors, of which £7,773 was owing. Because of
that, the company’s liquidator opposed to the floating charge, and as per him S ----------------------
should be made personally liable for the company’s debts. And S sued for the ----------------------
company’s debts.
Held: It was held that the company was in the eyes of the law, a separate person ----------------------
independent from ‘S’ and was not his agent. ‘S’, though virtually the holder of ----------------------
all the shares in the company, was also a secured creditor and was entitled to
repayment in priority to the unsecured creditors. In his celebrated passage Lord ----------------------
Macnaghten observed in this case-
----------------------
“The company is at law a different person altogether from the subscribers to
the Memorandum and, though it may be that after incorporation the business ----------------------

Notes is precisely the same as it was before, and the same persons are managers, and
the same hands receive the profits, the company is not in law the agent of the
---------------------- subscribers or trustee for them. Nor are the subscribers liable, in any shape or
form, except to the extent and in the manner provided by the Act.”
----------------------
Limited Liability – The privilege of limited liability for business debts is
---------------------- one of the principal advantages of doing business under the corporate form of
business organization.
----------------------
A company may be a company limited by shares or a company limited by
---------------------- guarantee. In a company limited by shares, the liability of members is limited
to the unpaid value of the shares. For example, if the face value of a share in
---------------------- a company is Rs 10 and a member has already paid Rs. 7 per share, he can
---------------------- be called upon to pay not more than Rs. 3 per share during the lifetime of the
company. In a company limited by guarantee, the liability of members is limited
---------------------- to such amount as the members may undertake to contribute to the assets of the
company, in the event of its being wound up.
----------------------
Perpetual succession – A company is a juristic person with a perpetual
---------------------- succession. Its life does not depend upon the life of its members. It is not
affected by insolvency, mental disorder or retirement of any of its members.
---------------------- It is created by a process of law and can be put to an end only by the process
---------------------- of law. Members may come and go but the company can go on forever until
dissolved. It continues to exist even if all its human members are dead. Even
---------------------- where during the war all the members of a private company, while in general
meeting, were killed by a bomb, the company survived not even a bomb could
---------------------- have destroyed it.
---------------------- Perpetual succession, therefore, means that a company’s existence
persists irrespective of the change in the composition of its membership. Thus
----------------------
its continued existence is not affected by a constant change in its membership
---------------------- “in the like manner as the river Thames is still the same river, though the parts
which compose it are changing even instant.” And as a river is a running stream
---------------------- of water known by a certain name, so is a company a running stream of fiction
composed of a certain number of members which may be constantly changing.
----------------------
The company is like a river which remains unaffected.
---------------------- Common seal – Since a company has no physical existence, it must act
through its agent and all such contracts entered into by its agents may act under
----------------------
the seal (if any, as per Companies Amendment Act, 2015 company seal is not
---------------------- compulsory for the company) of the company. The common seal acts as the
official signature of the company.
----------------------
Transferability of shares – The capital of a company is divided into parts
---------------------- called shares. These shares are, subject to certain conditions, freely transferable,
so that no shareholder is permanently or necessarily wedded to a company.
---------------------- When the joint stock companies were established the great object was that the
shares should be capable of being easily transferred.
----------------------
Separate Property – As a company is a legal person distinct from its
---------------------- members, it is capable of owning, enjoying and disposing of property in its own
4 Corporate Law
name. Although its capital and assets are contributed by its shareholders, they Notes
are not the private and joint owners of its property. The company is the real
person in which all its property is vested and by which it is controlled, managed ----------------------
and disposed of. In Perumal v. John Deavin it was observed that “no member
can claim himself to be owner of the company’s property during its existence ----------------------
or on its winding up.” A shareholder does not have even an insurable interest ----------------------
in the property of the company. Hence “the property of the company is not the
property of the shareholders it is the property of the company” ----------------------
Capacity to sue – A company can sue and be sued in its corporate name. ----------------------
It may also inflict or suffer wrongs. It can in fact do or have done to it most of
the things which may be done by or to a human being. ----------------------
----------------------
Check your Progress 1
----------------------
Fill in the blanks. ----------------------
1. In ___________, a company is a “legal person” or “legal entity”
separate from its members, capable of surviving beyond the lives of ----------------------
its members. ----------------------
2. In England, the legal personality or separate entity of an incorporated
company was recognised in 1867 in the case of ____________. ----------------------
----------------------
1.3 HISTORY OF COMPANY LAW ----------------------
Company law in India – Company legislation in India owes its origin to ----------------------
the English Company Law. The Companies Acts passed from time to time in India
have been following the English Companies Acts with certain modifications to ----------------------
suit Indian conditions. The first legislative enactment for “registration of Joint ----------------------
Stock Companies” was passed in the year 1850. This Act was based on the
English Companies Act, 1844 which recognized the company as a distinct legal ----------------------
entity, but did not grant to it the privilege of limited liability.
----------------------
Act of 1857 – The principle of limited liability was first introduced in
England by the Limited Liability Act of 1855 under which a company was entitled ----------------------
to obtain certificate of registration with limited liability. The English Companies
Act, 1856 (known as the Joint Stock Companies Act of 1856) replaced both the ----------------------
Acts of 1844 and 1955. Under this Act, the company legislation assumed for ----------------------
the first time a form which has been broadly handed down almost to the present
day, subject to various amendments which were made from time to time to suit ----------------------
various exigencies. Under this Act, 7 or more persons could form themselves
into an incorporated company, with or without limited liability, by signing a ----------------------
Memorandum of Association and complying with the requirements of the Act. ----------------------
Following the English Companies Act of 1856, the Joint Stock Companies Act
of 1857 was passed in India. This Act recognized, for the first time in India, the ----------------------
principle of limited liability.
----------------------

Notes The concept of limited liability is not alien to the Indian society. The
Hindu joint family system (which is the oldest and most common form of
---------------------- business activity) possesses many features which are conducive to the conduct
of business by the members of the family as a group. Such a family is treated
---------------------- as distinct from its members and in that capacity can engage in any business
---------------------- activity through its Manager. The liability of the members of the Hindu Joint
family, other than the Manager of the family, in regard to the business of
---------------------- the family, does not extend to their ‘separate’ or ‘self acquired’ property not
employed in such business.
----------------------
Act of 1860 – Both the English Act of 1856 and the Indian Act of 1857
---------------------- did not extend the privilege of limited liability to banking companies. This
disability was removed in England by Joint Stock (Banking) Companies Act
----------------------
of 1857 and the Joint Stock (Banking) Companies Act of 1858 which brought
---------------------- banking companies, both with limited liability and unlimited liability, within
the operation of the Act of 1856. In India, the Joint Stock Companies Act 1860,
---------------------- passed on the lines of the English Act of 1856, enabled banking companies to
register, subject to certain conditions, with limited liability.
----------------------
Then came the Companies Act of 1866 for consolidating and amending
---------------------- “this law related to the incorporation, regulation and winding up of trading
companies and other associations.” This Act was based on the English
----------------------
Companies Act of 1862, which has been called “a masterpiece of legislation”
---------------------- Act of 1882 – The Companies Act 1866 in India was recast in 1882 to
bring the Indian Company law in conformity with the various amendments
----------------------
made to the English Companies Act of 1862. This Act stood the test of time till
---------------------- 1913.
---------------------- Act of 1913 – Following the English Companies (Consolidation) Act,

1908, the Indian Companies Act of 1913 was passed. This Act also like its
---------------------- predecessors was almost verbatim reproduction of the English Act of 1908. It
may be noted that since this Act closely followed the English Company Law
---------------------- were also closely followed by the Indian Courts.
---------------------- The Indian Companies Act of 1913 did not take into account the peculiar
features of the Indian trade and commerce and some peculiar institutions such as
---------------------- managing agency. The Act was, therefore, found to be highly unsatisfactory in the
---------------------- course of its operation. As such, some amendments were made in the Act in the
years 1914, 1915, 1920, 1926, 1930 and 1932. The Act was extensively amended
---------------------- in 1936 on the lines of the English Companies Act of 1929. From 1937 to 1951,
further amendments were made almost every year in the 1913 Act.
----------------------
The Companies Act, 1956 – After the end of World War II, the need for a
---------------------- further revision of the company law was felt. Many changes had taken place in
the organization and management of joint stock companies. The Government of
---------------------- India therefore appointed, on 25th October, 1950, a committee of 12 members
---------------------- representing various interests under the chairmanship of Mr. H.C.Bhabha
The Bhabha Committee submitted a comprehensive report on all aspects
----------------------
of company law in April 1952. The recommendations of the Committees
6 Corporate Law
culminated in the most comprehensive and voluminous law on the subject in Notes
the Companies Act of 1956. This Act largely follows the English Companies
Act of 1948 (subsequently replaced by Companies Acts of 1967, 1976, 1980, ----------------------
1981, 1985, 1989, 2004 and at present Companies Act 2006 which represents
the most significant change to company law for over 20 years.) ----------------------
Object of the Act – The Companies Act of 1956 is a comprehensive piece ----------------------
of legislation covering entire field of company organization and management.
----------------------
All the statutory rules are intended
●● To protect the interest of creditors in view of the limited liability of the ----------------------
members of a company e.g. Rules preventing reduction of capital without
----------------------
proper safeguards , appointments of liquidators where the company is
insolvent ----------------------
●● To protect the interest of the investors e.g. Rules concerning the prospectus
----------------------
and the accounts, holding of statutory and other general meetings
prevention of malpractices by directors and managers, prevention of ----------------------
oppression of minority and mismanagement, and investigations and to
equip the Government with necessary powers to intervene in the affairs of ----------------------
a company in the interest of the shareholders and the public
----------------------
●● To help the growth of companies on healthy business lines. The basic
direction and objectives which throughout have inspired the course of ----------------------
Indian Company legislation were summarized in 1956 by Shri C.D.
----------------------
Deshmukh, the then Finance Minister, while piloting the Companies Bill
in Parliament thus- ----------------------
– Minimum standards of business integrity and conduct in the
promotion and management of companies. ----------------------
– Full and fair disclosure of all reasonable information related to the ----------------------
affairs of the company.
----------------------
– Effective participation and control by shareholders and thus the
protection of their legitimate interests. ----------------------
– Enforcement of proper performance of their duties by company
management. ----------------------
– Powers of intervention and investigation into affairs of a company, ----------------------
where it is being managed in a manner prejudicial to the shareholders
or the public interest. ----------------------
Extent of the Act – The Act extends to the whole of India except that – ----------------------
●● As regards State of Nagaland, it applies, subject to such modifications, if ----------------------
any, as the Central Government may, by notification in the Official Gazette.
●● As regards Goa, Daman, and Diu, such of the provisions of the Act shall ----------------------
not apply or shall apply only with such exceptions and modifications or ----------------------
adaptations to any existing company registered under the Act on or after
26th January, 1963 and for such period or periods with effect from that ----------------------
or any subsequent date as may be specified by the Central Government in
the Official Gazette and ----------------------

Notes ●● As regards Jammu and Kashmir, such of the provisions of the Act as the
Central Government may, by notification in the Official Gazette, direct,
---------------------- shall not apply or shall apply only with such exceptions and modifications
or adaptations to any existing company or any company registered under
---------------------- the Act as may be specified, after the commencement of the Central Laws.
---------------------- Application of the Act – The Act applies to the following companies –
---------------------- ●● Companies formed and registered under the Companies Act 1956
●● Companies formed and registered under previous companies laws , i.e.
---------------------- existing companies
---------------------- ●● Companies registered but not formed under any previous companies
laws to the extent and in the manner declared in Part IX (dealing with
---------------------- Companies authorized to register under the Act)
---------------------- ●● Unlimited companies registered as limited companies in pursuance of any
companies laws.
----------------------
●● Unregistered companies for the purpose of winding up under Part X
---------------------- ●● Foreign Companies
---------------------- ●● Insurance companies, banking companies, electricity companies and
any other company governed by any Special Act for the time being in
---------------------- force, except in so far as the provisions of the Companies Act, 1956, are
inconsistent with the provisions of the Insurance Act, 1938, Banking
----------------------
Regulation Act, 1949, Indian Electricity Act, 1910, or the Electricity
---------------------- Supply Act, 1948, or any Special Act, respectively. The provisions of the
Companies Act, 1956 apply to these special classes of companies to the
---------------------- extent such provisions are not inconsistent with those of the Special Acts
governing them.
----------------------
●● Such body corporate incorporated by any Act for the time being in force
---------------------- as the Central Government may, by notification in the Official Gazette,
specify in this behalf subject to such exceptions, modifications or
----------------------
adaptations as may be specified therein
---------------------- ●● Government Companies
---------------------- ●● Nidhis or Mutual Benefit Societies declared as such by the Central
Government by notification in the Official Gazette
---------------------- ●● Producer Companies
---------------------- This Act does not apply to –
---------------------- ●● Companies established under Special Acts of Parliament, such as Life

Insurance Corporation of India.
---------------------- ●● Partnership firms - These are governed by the Indian Partnership Act,
---------------------- 1932 though the limit on maximum number of partners is prescribed in
the Companies Act, 1956
---------------------- ●● Co-operative societies - These are governed by the separate Acts in
---------------------- various States and Multiple Inter-State Co-operatives Societies Act, 2002
8 Corporate Law
●● Trusts - Trusts are governed by the Indian Trusts Act, 1882 though the Notes
Companies Act, 1956 contains provisions related to the voting rights in
companies by trusts having shareholding therein. ----------------------
●● Societies not engaged in trade or business, which are governed by the ----------------------
Societies Registration Act, 1860. These include clubs and professional
associations and organizations. The Companies Act also makes provisions ----------------------
for the registration of certain associations not trading for profits.
----------------------
Scheme of the Act – The Act provides a basic legal framework for the
regulation of companies in India. IT makes provision for the legal incorporation ----------------------
of companies and lays down rules for their constitution, management and
winding up. The scheme of the Act may be considered broadly under four ----------------------
heads, namely: ----------------------
●● Establishment of a company (Part II to IV of the Act) - The provisions of
the Act related to establishment of a company include: ----------------------
– Incorporation of a company and matters incidental thereto. ----------------------
– Form and contents of the Memorandum and the Articles of ----------------------
Association, their registration and alteration.
– Prospectus ----------------------
– Issue of share capital and debentures ----------------------
●● Management and administration (Part VI of the Act) –Under this head fall ----------------------
provisions related to
– Registered office ----------------------
– Members and debenture-holders ----------------------
– Meetings and proceedings
----------------------
– Managerial remuneration
– Accounts and Audit ----------------------
– Investigation ----------------------
– Directors, their appointment, qualifications, rights, powers, duties, ----------------------
vacation of office and removal.
– Managers ----------------------
– Compromises, arrangements and reconstructions ----------------------
– Prevention of Oppression and mismanagement.
----------------------
●● Winding up – The provisions of the Act related to winding up are discussed
under the heads : ----------------------
– Modes of winding up, ----------------------
– Winding up by the Court, ----------------------
– Voluntary winding up,
----------------------
– Winding up subject to supervision of the court.
----------------------

Notes ●● Miscellaneous provisions – These include :
– Registration of charges,
----------------------
– Application of the Act to companies formed under previous
---------------------- companies laws
---------------------- – Winding up of unregistered companies

– Foreign Companies
----------------------
– Registration offices and officers and fees
---------------------- – General- The Act is then followed by XV schedules which deal
with various matters discussed in the Act.
----------------------
The Companies Act, 2013 - After a long journey of 57 years, The
---------------------- Companies Act, 1956, finally has been replaced by the new Companies Act,
2013 having passed from Lok Sabha on 18 December 2012 and from Rajya
----------------------
Sabha on 8 August 2013. The President of India gave his assent on 29 August
---------------------- 2013 and thus, the new Act was enforced. THE COMPANIES ACT, 2013 came
into force on 1st April 2014.
---------------------- The Companies (Amendment) Act, 2015
---------------------- The Companies (Amendment) Act, 2015 received the assent from the President
of India on 25 May 2015 after both the houses of the Parliament approved. The
---------------------- Companies (Amendment) Act, 2015 has been published in the Official Gazette
on 26 May 2015.
---------------------- Important changes made by 2015 Amendments are as follows;
---------------------- ●● No Minimum Paid-up Share Capital: The minimum paid-up share
capital requirement of INR 100,000 for a private company and INR
---------------------- 500,000 for a public company under Companies Act, 2013 has been done
away with. Consequently, the definitions of private and public companies
---------------------- stand amended. Accordingly, no minimum paid-up capital requirements
will now apply for incorporating private as well as public companies in
---------------------- India.
---------------------- ●● Common Seal Optional: Companies Act, 2013 required common seal
to be affixed on certain documents (such as bill of exchange, share
---------------------- certificates, etc.) Now, the use of common seal has been made optional.
All such documents which required affixing the common seal may now
---------------------- instead be signed by two directors or one director and a company secretary
of the company. Consequently, several sections of Companies Act, 2013
----------------------
dealing with common seal have been amended to incorporate the above
---------------------- requirement.
●● No declarations for commencement of business, etc.: Companies
---------------------- Act, 2013 required all companies to file following additional declarations
with the Registrar of Companies prior to commencement of business
---------------------- or exercising any borrowing power: (i) declaration by a director that
---------------------- minimum paid-up share capital has been paid; and (ii) company has
filed verification of registered office. The Companies Act, Amendment
---------------------- 2015 has removed the above requirements and deleted Section 11 of
Companies Act, 2013. This reduces the filings to be made by companies
---------------------- in India.
10 Corporate Law
●● Dividend: Section 123 is an enabling provision for companies to declare Notes
divided in a financial year, subject to fulfilment of prescribed conditions.
The Companies Act, Amendment 2015 has introduced a new proviso ----------------------
which states that a company cannot declare dividend for a financial year,
unless the losses and depreciation carried over from past years have been ----------------------
set-off against the profits of the company, in the year it proposes to declare
a dividend. ----------------------
●● Special Courts: Section 435 read with Section 436 provides the Central ----------------------
Government the power to set up special courts to try offences under
Companies Act 2013. By way of the above amendment, special courts ----------------------
may now only try offences punishable under Companies Act 2013,
----------------------
with imprisonment for 2 years or more. All other offences are to be
tried by a Metropolitan Magistrate or a Judicial Magistrate of the First ----------------------
Class.
●● long with the above provisions some changes are also made by
A ----------------------
Companies Amendment Act, 2015 relating to Relaxations vis-a-vis
----------------------
Related Party Transactions, Inspection of Resolutions, etc. filed with
the Registrar, Exemptions to Section 185, Violation of Acceptance of ----------------------
Deposits, etc.
----------------------
The Companies (Amendment) Act 2017:
The Act of Parliament received the assent of the President on the 03rd January, ----------------------
2018. This is the second round of amendments made to the Companies Act,
----------------------
2013, with the first one being made in 2015. The Amendment Act broadly
seeks to strengthen corporate governance standards, initiate strict action against ----------------------
defaulting companies and help improve ease of doing business in the country.
----------------------
Important changes made by 2017 Amendments are as follows;
●● Objects of a Company: The principal Act, i.e. the Companies Act, 2013, ----------------------
requires all companies to mention the objects for which the company is ----------------------
proposed to be incorporated in the Memorandum of Association (MOA).
Under the Companies Amendment Act, 2017, the MOA of a company ----------------------
could state that the company could engage in any lawful act or activity
or business. Hence, small or privately held companies would be able ----------------------
to undertake a range of business activities without making changes to ----------------------
the MOA. However, if the MOA restricts the objects of a company to
certain activities, then the company would be able to abide by the objects ----------------------
specified.
----------------------
●● Harmonisation with SEBI and RBI: Perhaps for the first time, several
provisions have been amended to align the Act with various rules and ----------------------
regulations of the SEBI and the RBI. For instance, Sections 194 and 195
of the Act, which dealt with insider trading and forward dealing, have ----------------------
now been omitted since the SEBI regulations are wide enough to cover all ----------------------
instances of such frauds. Further disclosures to be made in the prospectus
have also been aligned with the SEBI’s power to regulate IPOs. The ----------------------
definition of ‘debenture’ has also been amended to allow RBI to disqualify
certain instruments as debentures. ----------------------

Notes ●● Company Annual Return: All companies are required to file an annual
return with the Ministry of Corporate Affairs each year. The Companies
---------------------- Amendment Act, 2017 has proposed to provide an abridged form of
annual return for One Person Company and small company. The abridged
---------------------- form of annual return will make annual compliance for a company
---------------------- simpler for small businesses. The Companies Amendment Act, 2017 has
also mandated that all companies place a copy of the annual return on the
---------------------- website of the company and provide the web link for the annual report in
the Board’s report.
----------------------
●● Penalty for Late Filing of Annual Return: The penalty for late filing of
---------------------- company annual return is set to significantly increase on the implementation
of the Companies Amendment Act, 2017 during the current financial year.
---------------------- Under the Companies Amendment Act, 2017, the penalty for late filing
---------------------- of Annual Return or financial statements will be a minimum amount
of Rs 100 per day of default. Further, the company would be liable for
---------------------- penal action. If a company defaults on filing the annual return or financial
statements for two or more times, the penalty levied would be doubled.
----------------------
●● Rationalisation of penalties: One of the most applauded amendments
---------------------- made in the Amendment Act – the quantum of penalty will now be levied
taking into consideration the size of company, nature of business, injury
---------------------- to public interest, nature and gravity of default, repetition of default, etc.
---------------------- Two new sections with respect to factors for determining the level of
punishment and for lesser penalties for one person companies and small
---------------------- companies are inserted. Penal provisions for small companies and one
person companies are reduced.
----------------------
●● Private placement process made easier: The private placement process
---------------------- is simplified by doing away with separate offer letter details to be kept
by company and reducing number of filings to Registrar. Further, the
---------------------- company has been restricted from utilising the money raised through
---------------------- private placement unless allotment has been made and return of allotment
has been filed with the Registrar. In order to ensure that investor gets
---------------------- adequate information about the company, the disclosures are made
under Explanatory Statement referred to in Rule 13(2)(d) of Companies
---------------------- (Share Capital and Debenture) Rules, 2014, embodied in the Private
---------------------- Placement Application Form. Change in definition of private placement
is proposed to cover all securities offer and invitations other than rights.
---------------------- The Companies would be allowed to make offer of multiple security
instruments simultaneously.
----------------------
●● Loans to directors: This was done to address the difficulties being faced
---------------------- in genuine transactions due to the complete embargo on providing loans to
subsidiaries with common director. Now the companies are permitted to
---------------------- give loans to entities in which directors are interested after passing special
resolution and adhering to disclosure requirements. This would give big
----------------------
relief to the companies. Section 185 of the 2013 Act, was more restrictive
---------------------- than its parallel provision, Section 295 of the 1956 Act. Not only did it
12 Corporate Law
omit the exemption which was granted to private companies under the Notes
1956 law but also removed the option of obtaining government approval.
However, an exemption for granting loans and providing guarantees and ----------------------
security on behalf of wholly owned subsidiaries was inserted by way
of the Meeting of Boards and its Powers, Rules in 2014. These rules, ----------------------
however, granted exemptions only for “wholly owned subsidiaries”. ----------------------
Later, however, the 2013 Act did add two separate new exemptions:
one for loans granted to a managing or whole-time director (subject ----------------------
to certain conditions) and to “a company which in the ordinary course
of its business provides loans or gives guarantees or securities for the ----------------------
due repayment of any loan.” The Amendment Act further bifurcates the ----------------------
regulatory framework into two categories: the first contemplating certain
transactions which are prohibited and another consisting of transactions ----------------------
which may be permitted, subject to approval of the shareholders by way
of a special resolution passed at a general meeting. ----------------------
●● Disqualification for Independent Director: Section 149 of the Act deals ----------------------
with the qualifications and disqualifications of independent directors.
Sub-Section (6) provides for various disqualifications for becoming an ----------------------
independent director, one of which is, such person having “pecuniary ----------------------
relationship” with “the company, its holding, subsidiary or associate
company, or their promoters, or directors”. The amendment clarifies that ----------------------
this pecuniary relationship excludes the remuneration to such dire
----------------------
Though, the new Act is on the same lines of that of the previous Companies
Act, yet in substance, the new Act has been modified to meet the challenges ----------------------
faced by the companies in the recent past. Because of the frequent amendments
and judicial interpretations, the old law had virtually lost its originality and ----------------------
significance. The new Act has been reorganised and the various provisions of
previous act have either been consolidated or modified. A few new concepts like: ----------------------
One Person Company, Corporate Social Responsibility, provision for creating
----------------------
a category of Independent directors, the creation of Directors’ Nomination and
Remuneration Committee, etc. have been recognised by the new Act. The Act ----------------------
has now been reduced to 470 sections, 29 chapters and 7 schedules, as against
658 sections, 13 parts and 15 schedules in the previous Act. ----------------------
----------------------
----------------------
Match the following
----------------------
i. Joint Stock Companies Act, 1857 a. English Act of 1856
ii. Joint Stock Companies Act, 1860 b. English Companies Act,1856 ----------------------
iii. Indian Companies Act, 1913 c. English Companies ----------------------
Act, 1908 (Consolidation)
iv. Companies Act, 1956 d. English Companies Act, 1948 ----------------------
v. The Companies Act, 1882 e. English Companies Act, 1844 ----------------------
vi. Registration of Joint Stock f. English Companies Act, 1862
----------------------

Notes 1.4 KINDS OF COMPANY
---------------------- Companies may be classified into various as shown in the following flow chart
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
Fig. 1.1 : Kinds of Companies
---------------------- Incorporated Companies – An incorporated company is one which
---------------------- is formed and incorporated under the Companies Act 2013, or some earlier
Companies Acts.
----------------------
The kinds of companies that can be formed under the Companies Act, 2013 are
---------------------- as follows-
1. Public company limited by shares
----------------------
2. Public company limited by guarantee and having share capital
----------------------
3. Public company limited by guarantee and having no share capital
---------------------- 4. Public unlimited company having share capital
---------------------- 5. Public unlimited company not having share capital
6. Private company limited by shares
----------------------
7. Private company limited by guarantee and having share capital
----------------------
8. Private company limited by guarantee and having no share capital
---------------------- 9. Privateunlimited company having share capital
---------------------- 10. Privateunlimited company not having share capital
11. One Person Company limited by shares
----------------------
12. One Person Company limited by guarantee and having share capital
----------------------
13. One Person Company limited by guarantee and having no share capital
---------------------- 14. One Person Company unlimited having share capital
---------------------- 15. One Person Companyunlimited not having share capital
---------------------- In addition to above kinds of companies, the following are also recognized, i.e.
14 Corporate Law
a. Foreign Companies Notes
b. Government Companies
----------------------
c. Producer Company
----------------------
d. Transnational Corporations
Unincorporated Companies – Unincorporated companies are to all ----------------------
intents and purposes large partnerships. These are not regarded as distinct entities ----------------------
separate from the members constituting them. Their shares may be transferable,
but liability of their members is unlimited. These companies continue even after ----------------------
the death or insolvency of a member, and their management is vested in a select
body of directors to the exclusion of members generally. Such companies can ----------------------
no longer be formed under the Companies Act, 2013, if the number of their ----------------------
members exceeds 10 in the case of companies carrying on banking business,
and 20 in the case of any other business. ----------------------
Companies with limited liability – ----------------------
●● Companies limited by shares – Where the liability of the members of the
company is limited to the amount unpaid on the shares, such a company ----------------------
is known as a company limited by shares. The liability can be enforced ----------------------
during the existence of the company and also during the winding up of the
company. If the shares are fully paid, the liability of the members holding ----------------------
such shares is nil.
----------------------
Companies limited by shares are the most common. It is in the light of the
type of company (public company) that the term ‘company’ was defined ----------------------
earlier. A company limited by shares may be a public company or a private
company. ----------------------
●● Companies limited by guarantee – Where the liability of the members ----------------------

of a company is limited to a fixed amount which the members undertake
----------------------
to contribute to the assets of the company in the event of its being wound
up, the company is called a company limited by guarantee. It has a legal ----------------------
personality distinct from its members. The liability of its members is
limited. The Articles of such company must state the number of members ----------------------
with which the company is to be registered.
----------------------
Companies limited by guarantee are not formed for the purpose of profit
but for the promotion of arts, science, culture, charity, sports, commerce or ----------------------
for some similar purpose. They may or may not have a share capital. The
amount guaranteed by each member, is in the nature of reserve capital. It cannot ----------------------
be mortgaged or charged in any way before the liquidation and the general ----------------------
liabilities at the time of liquidation.
----------------------
The form of Memorandum of Association of a company limited by
guarantee shall be in the form in Table B in Schedule I(of the Act), if it has no ----------------------
share capital then it shall be in the form of Table C or in a Form as near thereto
as circumstances admit. The Memorandum shall also state that every member ----------------------
of the company undertakes to contribute to the assets of the company in the
----------------------
event of its being wound up, while he is a member, or within 1 year after he

Notes ceases to be a member. If the company has a share capital, the members are
liable to pay the amount which remains unpaid on their shares together with
---------------------- the amount payable under the guarantee. If a company limited by guarantee is
formed without any share capital, liability of the members of such a company
---------------------- would arise only when the company goes into liquidation.
---------------------- If a company limited by guarantee has a share capital, it is, excepting
certain provisions, governed by the same provisions as a company limited by
----------------------
shares.
---------------------- A company limited by guarantee and having share capital may be public
company or private company.
----------------------
Extent of liability of the members (Sec.285). In the event if a company
---------------------- limited by guarantee being wound up, every member is liable to contribute to
the assets of the company, while he is a member, or within 1 year of his ceasing
----------------------
to be a member, for –
---------------------- (i) payment if the liabilities of the company contracted before he ceases to be
---------------------- a member,
(ii) costs, charges and expenses of winding up, and
----------------------
(iii) for adjustment of rights of the contributories among themselves.
----------------------
The amount payable by a member in such a case should not exceed the
---------------------- specific amount for which he has given guarantee.
●● Unlimited Companies – Sec 2(92) states that an unlimited company
----------------------
means, a company not having any limit on the liability of its members.
---------------------- A company without limited liability is known as an unlimited company.
In case of such a company, every member is liable for the debts of the
---------------------- company, as in an ordinary partnership, in proportion to his interest in the
company.
----------------------
An unlimited company may or may not have a share capital. If it has a
---------------------- share capital, it may be a public company, private company or OPC unlimited
company. It must have its own Articles of Association. The Articles must state
----------------------
the number of members with which the company is to be registered. If the
---------------------- company has a share capital, the Articles must also state the amount of share
capital with which the company is to be registered.
----------------------
Re-registration. Sec.18 permits a company registered as an unlimited
---------------------- company to register itself under the Act as a limited company. A special
resolution to that effect must, however be passed.
----------------------
The resolution must state the manner in which the liability of members
---------------------- is to be limited. It must also state the share capital, if the company is to have
share capital. Further the resolution must provide for the appropriate alterations
---------------------- in and additions to, the Memorandum and Articles of Association. These
---------------------- alterations will be according to whether the company is to be limited by shares
or by guarantee with or without a share capital.
----------------------
16 Corporate Law
The re-registration does not affect any debts, liabilities, obligations or Notes
contracts of the company before or at the time of re-registration.
----------------------
From the point of view of the general public and on the basis of number
of members, a company may be — ----------------------
●● A private company, or
----------------------
●● A public company
----------------------
●● Private Company – A private company is normally what the Americans
call a ‘close corporation’. According to Sec. 2(68) a ‘private company’ ----------------------
means a company which has a minimum paid-up share capital as may be
prescribed, and which by its Articles— ----------------------
– Restricts the right to transfer its shares, if any. This restriction is ----------------------
meant to preserve the private character of the company
----------------------
– Except in one person company, Limits the number if its members to
200 not including its employee-members (present or past) ----------------------
Example. A private company has 300 employee-members,100 former
----------------------
employee-members (i.e., who became members during the course of their
employment and continue to be members even after their employment ceased) ----------------------
and 200 general members. The company fulfils the above condition as employee-
members (present or past) are not to be counted while determining the strength ----------------------
of the members.
----------------------
– Prohibits any invitation to the public to subscribe for any shares in, the
company or debentures of, the company. ----------------------
It may be noted that the number of debentures-holders in a private company ----------------------
may exceed 200 as there is no restriction on their number in the definition. The only
restriction is that a private company cannot issue debentures to the public at large. ----------------------
Joint-holders of shares are treated as a single member. ----------------------

A private company is in the nature of a partnership of persons with mutual ----------------------
confidence in each other and its Articles place positive restrictions on absolute
transfer of shares. However, the Act does not specify in what manner the right ----------------------
to transfer shares is to be restricted. For Example the right may be so restricted
that the shares shall first be offered to existing shareholders. In the case of a ----------------------
private company not limited by shares only the restrictions in Clauses (ii) and ----------------------
(iii) of Sec. 2(68) are necessary.
----------------------
It is sometimes difficult to say whether a company has issued an invitation
to the public or not, but the rest seems to be that the invitation to the public must ----------------------
have been issued—
----------------------
– by the company itself [Burrows v. Metabele Gold Reefs & Estates Co.
Ltd., (1901) 2 Ch. 23]. Thus in Booth v. New Africander Gold Mining ----------------------
Co. Ltd., (1903) 1 Ch. 295, where an offer by the liquidator of an old
company of shares in a new company was made, it was held that it was ----------------------
not an offer to the public and
----------------------

Notes – to any person who chooses to apply for the shares or to a considerable
class of persons selected as being the most likely subscribes [Nash v.
---------------------- Lynd , (1929) A.C. 158].
---------------------- A private company must have its own Articles of Association which
contains the conditions as laid down in Sec. 5.
----------------------
●● Public Company – A public Company means a company which –
---------------------- – is not a private company
– has a minimum paid-up capital as may be prescribed
----------------------
– is a private company which is a subsidiary of a company which is
---------------------- not a private company.
---------------------- A public limited company may be:
– A listed public company, or
----------------------
– An unlisted public company.
----------------------
A listed public company means a public company which has any of its
---------------------- securities listed in any recognized stock exchange.
---------------------- An unlisted public company is one whose securities are not listed in any
recognized stock exchange.
----------------------
Meaning of ‘Public’: ‘Public’ includes any section of the public whether
---------------------- selected as members or debenture-holders of the company or as clients of the
person issuing the prospectus or in any manner. But the offer is not to be treated
---------------------- as made to the pubic where it can in all circumstances be properly regarded as
a domestic concern of the persons making and receiving it.
----------------------
Distinction between a public company and a private company
----------------------
1. Minimum number - The minimum number of persons required to form
---------------------- a public company is 7. It is 2 in case of a private company
---------------------- 2. Maximum number - There is no restriction on maximum number of

members in a public company, whereas the maximum number cannot
---------------------- exceed 200 in a private company except in the case of one person company.
---------------------- 3. Number of directors - A public company must have at least 3 directors

whereas a private company must have at least 2 directors (Sec. 149).
----------------------
4. Restriction on appointment of directors - In the case of public company,
---------------------- the directors must file with the Registrar a consent to act as directors
or sign an undertaking for their qualification shares (Sec. 152(5). The
---------------------- directors of a private company need not do so.
---------------------- 5. Restriction on invitation to subscribe for shares - A public company
invites the general public to subscribe for the shares in, or the debentures
---------------------- of the company. A private company by its Articles prohibits any such
invitation to the public.
----------------------
6. Transferability of shares/debentures - In a public company, the shares
---------------------- and debentures are freely transferable. In a private company the right to
transfer shares and debentures is restricted by the Articles.
18 Corporate Law
7. Special privileges - A private company enjoys some special privileges. A Notes
public company enjoys no such privileges.
----------------------
8. Quorum - If the Articles of a company do not provide for larger quorum,
5 members personally present in the case of public company are quorum ----------------------
for a meeting of the company. It is 2 in the case of a private company
(Sec. 104). ----------------------
9. Managerial remuneration - Total managerial remuneration in a public ----------------------
company cannot exceed 11 per cent of the profits (Sec. 197). No such
restriction applies to a private company. ----------------------
Holding Company – [Sec. 2(46)] ----------------------
“Holding company”, in relation to one or more other companies, means a ----------------------
company of which such companies are subsidiary companies.
Subsidiary Company – [Sec. 2(87)] ----------------------
“Subsidiary Company” or “Subsidiary”, in relation to any other company ----------------------

(that is to say the holding company), means a company in which the holding
company— ----------------------
(i) controls the composition of the Board of Directors; or ----------------------

(ii) exercises or controls more than one-half of the total share capital either at ----------------------
its own or together with one or more of its subsidiary companies:
----------------------
Provided that such class or classes of holding companies as may be
prescribed shall not have layers of subsidiaries beyond such numbers as ----------------------
may be prescribed.
----------------------
A company shall be deemed to be a subsidiary company of the holding
company even if the control referred to in sub-clause (i) or sub-clause (ii) is of ----------------------
another subsidiary company of the holding company.
----------------------
The composition of a company’s Board of Directors shall be deemed to
be controlled by another company if that other company by exercise of some ----------------------
power exercisable by it at its discretion can appoint or remove all or a majority
of the directors. ----------------------
Thus a company which does not have majority voting right is called ----------------------
“Subsidiary Company” or “Subsidiary”.
----------------------
One Person Company
----------------------
The JJ Irani Committee recommended the formation of One Person
Company. It has suggested that such an entity may be provided with a simpler ----------------------
legal regime through exemptions so that the single entrepreneur is not compelled
to fritter away time, energy and resources on procedural matters. ----------------------
OPCs are imperative because they would give entrepreneurial capabilities ----------------------
of people an outlet for participation in economic activity and such economic
activity may take place through the creation of an economic person in the form ----------------------
of a company. ----------------------

Notes According to Sec. 2 (62)“One Person Company” means a company which has
only one person as a member.
----------------------
The following provisions regarding formation of OPCs may be noted:
---------------------- 1. For forming a private company being a one person company, one person
should subscribe his name to the memorandum and comply with the
----------------------
requirements of registration. [Sec. 3(1)(c)]
---------------------- 2. The memorandum should indicate the name of the other person with his
prior written consent in the prescribed form who shall become the member
----------------------
of the company in the event of the subscriber’s death or his incapacity to
---------------------- contract. Such written consent shall be filed with the ROC at the time of
incorporation of the OPC along with its memorandum and articles.
----------------------
3. Such other person may withdraw his consent in such manner as may be
---------------------- prescribed.
---------------------- 4. The member of the OPC may at any time change the name of such other
person in such manner as prescribed.
---------------------- 5. The member of a One Person Company shall intimate the company the
---------------------- change, if any, in the name of the person nominated by him by indicating
in the memorandum or otherwise within such time and in such as may be
---------------------- prescribed. The company shall intimate such change to ROC within such
time and in such manner as may be prescribed.
----------------------
Government Company – A Government company means any company in
---------------------- which not less than 51 percent of the paid-up share capital is held by
●● The Central Government or
----------------------
●● Any state Government or
---------------------- ●● Partly by the Central Government and partly by one or more state
governments.
----------------------
For e.g. State Trading Corporation of Indian Ltd. and Minerals and Metals
---------------------- Trading Corporation of India Ltd. are Government companies.
---------------------- The subsidiary of a Government company is also a Government company.
Foreign Company – Foreign Company is any company incorporated
---------------------- outside India which has an established place of business in India whether by
itself or through an agent, physically or through electronic mode and conducts
----------------------
business in India in any other manner.
---------------------- A company has an established place of business in India if it has a specified
or identifiable place at which it carries on business such as an office, store house,
---------------------- godown or other premises with some visible sign or physical indication that the
---------------------- company has a concrete connection with the particular premises.
Where a minimum of 50 percent of the paid-up share capital of a foreign
---------------------- company is held by one or more citizens of India or/ and by one or more bodies
comply with such provisions as may be prescribed as if it were an Indian company.
----------------------
Producer Company – The Government has made provisions for the
---------------------- setting-up of a producer company which is a fusion of companies in general
and co-operative bodies
20 Corporate Law
Transnational Corporation: The Transnational Corporation (TNC) Notes
is “the most important and most visible innovation of the post-war period in
the economic field”. The TNCs are also known as multinational corporations/ ----------------------
enterprises, global corporations, international Corporations/enterprises/
companies/firms. ----------------------
According to the document prepared by the Organization for Economic ----------------------

Cooperation and Development (OECD), the transnational enterprises usually
----------------------
comprise companies or other entities whose ownership is private, State or
mixed, established in different countries and so linked that one or more of them ----------------------
may be able to exercise a significant influence over the activities of others and
on particular to share knowledge and resources with the others. ----------------------
Transnationals may be defined as large business corporations controlled ----------------------
predominantly by nationals of the country in which their headquarters are
situated, but with operating activities spread across many different countries, ----------------------
employing tens of thousands of people.
----------------------
In the Draft United Nations Code of Conduct of Transnational
Corporations, the term ‘Transnational Corporation’ means enterprise whether ----------------------
of public, private or mixed ownership, comprising entities in two or more
----------------------
countries, regardless of the legal form and fields of activity of these entities,
which operates under a system of decision-making, permitting coherent policies ----------------------
and a common strategy through one or more decision-making centres, in which
the entities are so linked by ownership or otherwise, that one or more of them ----------------------
may be able to exercise a significant influence over the activities of others, and
----------------------
in particular, to share knowledge, resources and responsibilities with the others.
Jacques Maisonrouge, President of IBM World Trade Corporation defines a ----------------------
TNC as a company that meets five criteria: ----------------------
1. It operates in many countries at different levels of economic development;
----------------------
2. Its local subsidiaries are managed by nationals;
----------------------
3. It maintains complete industrial organization including R & D and
manufacturing facilities, in several countries; ----------------------
4. It has a multinational central management;
----------------------
5. It has multinational stock ownership.
----------------------
A transnational company is a multinational in which both ownership and
control are so dispersed internationally. There is no principal domicile and no ----------------------
one central source of power, examples include Royal Dutch-Shell and Unilever.
----------------------
As observed in the guidelines for TNCs issued by the Organisation for
Economic Cooperation and Development (OECD) in June, 1976, TNCs now ----------------------
play an important part in the economics of member countries and in international
economic relations, which is of increasing interest to Governments. Through ----------------------
international direct investment, such enterprise can bring home substantial ----------------------
benefits to have and to host countries by contributing to the efficient utilization
of capital technology and human resources between countries and can, thus, ----------------------

Notes fulfill an important role in the promotion of economic and social welfare. But
the advances made by multinational enterprises on organizing their operations
---------------------- beyond the national framework may lead to abuse of concentration of economic
power and lead to conflicts with national policy objectives.
----------------------
Critics have labeled the TNCs as most atrocious “hydra headed economic
---------------------- monsters that imperil the political sovereignty of nations”. The developing
countries were also deeply concerned about the role of TNCs and their challenge
----------------------
to the sovereignty of developing countries and their work which were often
---------------------- considered contrary to the needs of the economic development of developing
countries.
----------------------
---------------------- Check your Progress 3
---------------------- Multiple Choice Single Response.

---------------------- 1. Property of the company belongs to:
i. Company
----------------------
ii. Share holders
---------------------- iii. Members
---------------------- iv. Promoters
2. The minimum number of members in case of public company is:
---------------------- i. 1
---------------------- ii. 2
iii. 5
----------------------
iv. 7
---------------------- State True or False.
---------------------- 1. TNCs play an important part in international economic relations,
which is of increasing interest to governments.
---------------------- 2. Critics have labeled the TNCs as most atrocious “hydra headed
economic monsters that imperil the political sovereignty of
----------------------
nations”.
----------------------
---------------------- Activity 1
----------------------
1. You and your friend M started a private limited company. You have
---------------------- Rs 50,000 as a paid- up capital with you. How much more capital your
company requires to fulfill the criteria of minimum paid-up capital?
----------------------
2. Go through the annual report of a private limited company and find
---------------------- out their paid-up capital.
---------------------- 3. Locate at least one TNC that exists in your country and analyse its
impact on your country’s economy.
----------------------
22 Corporate Law
Summary Notes
●● A company is nothing but a group of persons who have come together ----------------------
or who have contributed money for some common person and who
have incorporated themselves into a distinct legal entity in the form of ----------------------
a company for that purpose. A company as an entity has several distinct ----------------------
features which together makes it a unique organization. The following
are the defining characteristics of a company like separate legal entity, ----------------------
Perpetual succession, Common seal if any, Transferability of shares,
Separate Property, and Capacity to sue and be sued. ----------------------
●● The Company legislations in India have always been influenced by the ----------------------
English Companies Legislations however the new legislations are now
been altered and amended as per the requirements of Indian business ----------------------
scenario. ----------------------
●● The Companies that could be governed by the Indian Companies Act
are Public Companies limited by shares, Pubic Companies limited by ----------------------
guarantee, Public unlimited companies, Private Companies limited ----------------------
by shares, Private Companies limited by guarantee, Private unlimited
companies, Foreign Companies and Government Companies. ----------------------
Keywords ----------------------
●● Act / legislations - In general sense it means an instrument in writing to ----------------------

verify facts. In a more special sense the word is used to denote the result ----------------------
of a public deliberation, the decision of a sovereign, of a legislative body,
of a council, court of justice, or magistrate. Also a decree, edict, law, ----------------------
judgment, resolve, award, determination. Act in legislation is a statute, or
law made by a legislative body. Act when used in a statute is wide enough ----------------------
to cover a judicial or quasi-judicial act, the passing of an order or decision ----------------------
of revenue officer.
●● Articles of Association - The Articles of Association (AOA) contain the ----------------------
rules and regulations of the internal management of the company. The ----------------------
AOA is nothing but a contract between the company and its members and
also between the members themselves that they shall abide by the rules ----------------------
and regulations of internal management of the company specified in the
AOA. It specifies the rights and duties of the members and directors. ----------------------
●● Memorandum of Association - Is the constitution or charter of the ----------------------
company and contains the powers of the company. No company can be
registered under the Companies Act, 2013 without the memorandum ----------------------
of association. Under Section 2(56) of the Companies Act, 2013 the ----------------------
memorandum means the memorandum of association of the company as
originally framed or as altered from time to time in pursuance with any of ----------------------
the previous companies’ law or the Companies Act, 2013.
----------------------
----------------------

Notes ●● Capital - Capital refers to the amount invested in the company so that it
can carry on its activities. In a company capital refers to “share capital”.
---------------------- The capital clause in Memorandum of Association must state the amount
of capital with which company is registered giving details of number of
---------------------- shares and the type of shares of the company. A company cannot issue
---------------------- share capital in excess of the limit specified in the Capital clause without
altering the capital clause of the Memorandum of Association
---------------------- ●● Company - Means a company formed and registered under the Companies
---------------------- Act or an existing company. It also means an association of a number
of individuals for the purpose of carrying on trade or other legitimate
---------------------- business a number of persons united for the same purpose, or in a joint
concern for profit as a company of merchants’ private partnerships or a
---------------------- corporation.
---------------------- ●● Dividends – A share or portion of any sum or especially profits of a joint
stock company to be divided amongst a number of persons who are the
---------------------- shareholders of the company. In short dividends are the returns paid on
---------------------- shares.
●● Shares – Share is an interest of a shareholder in a company. The Capital
---------------------- of company is divided into certain indivisible units of a fixed amount.
---------------------- These units are called ‘shares’. Hence share means a share in the capital
of company.
----------------------
----------------------
---------------------- 1. Explain the meaning of term “Company”.

2. Enumerate the historical evolution of Indian Company Law.
----------------------
3. What are various types of Companies that could be formed under the
---------------------- Indian Companies Act 2013?
---------------------- 4. Enumerate the distinction between the Public and Private Companies.
---------------------- 5. Explain the characteristics of the Corporate Personality.

6. What is the minimum number of persons required to form a public company?
----------------------
7. When is a company called a Subsidiary Company?
----------------------
8. What is Government Company?
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
24 Corporate Law
Answers to Check your Progress Notes
Check your Progress 1 ----------------------

1. In common law, a company is a “legal person” or “legal entity” separate
----------------------
from its members, capable of surviving beyond the lives of its members.
2. In England, the legal personality or separate entity of an incorporated ----------------------
company was recognised in 1867 in the case of Oakes vs. Turquand.
----------------------
----------------------
Match the following.
i. – b. ----------------------
ii. – a. ----------------------
iii. – c. ----------------------
iv. – d.
----------------------
v. – f.
----------------------
vi. – e.
Multiple Choice Single Response. ----------------------

1. Property of the company belongs to: ----------------------
i. Company
----------------------
2. The minimum number of members in case of public company is:
----------------------
iv. 7
State True or False. ----------------------
1. True ----------------------
2. True ----------------------
----------------------
Suggested Reading
----------------------
1. Kapoor, N.D. 2008. Elements of Company Law. New Delhi: Sultan Chand
& Sons. ----------------------
2. Ramaiya, A. 2004. Guide to the Companies Act. New Delhi: Wadhwa and ----------------------
Co.
----------------------
3. Ravichandran, K.S. 2010. The LLP Law in India. Nagpur: All India
Reporter. ----------------------
4. Singh, Avtar. 2005. Company Law. Eastern Law Publication. ----------------------
5. http://www.mondaq.com/india/x/410320/Corporate+Commercial+Law/
Companies+Amendment+Act+2015+Key+Highlights ----------------------

Notes
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
26 Corporate Law
Incorporation of Company
UNIT
2
Structure:
2.1 Introduction to Company Formation
2.2 Memorandum of Association
2.3 Articles of Association
Summary
Keywords
Suggested Reading
Incorporation of Company 27
Notes
Objectives
----------------------
• Explain and assess the process of formation of companies
----------------------
• Identify the procedural requirements for incorporating a company
----------------------
• Justify the meaning and relevance of memorandum and articles of
---------------------- association
---------------------- • Compare and contrast the interrelation between the memorandum and
articles
----------------------
---------------------- 2.1 INTRODUCTION TO COMPANY FORMATION

---------------------- Companies are artificial entities which are created by law. Hence law lays
---------------------- down the procedure and prerequisites for formation of a company. The present
unit explains this procedure of formation of the companies
----------------------
Company Formation and Procedure of Registration - To obtain the
---------------------- registration of a company an application has to be filed with the Registrar of
Companies the application must be accompanied by the following documents:
----------------------
●● Memorandum of Association.
---------------------- ●● Articles of Association, if necessary.
---------------------- ●● The agreement, if any, which the company proposes to, enter into with
any individual for his appointment as its managing or whole-time director
---------------------- or manager.
---------------------- When the requisite documents are presented for registration, the Registrar
has to see whether they answer the requirements of the Act. He may, however,
---------------------- accept the declaration as sufficient evidence of compliance. He then registers
the company and other documents and places the name of the company in the
----------------------
Register of Companies. A certificate of incorporation is then issued by the
---------------------- Registrar which certifies “under his hand that the company is incorporated and,
in the case of a limited company, that the company is limited”.
----------------------
●● Certificate of incorporation - The certificate of incorporation brings the
---------------------- company into existence as a legal person. Upon its issue the company is
born. For the Act provides that “from the date of incorporation such of the
---------------------- subscribers of the memorandum and other persons, as may from time to
time be the members of the company, shall be a body corporate, … capable
----------------------
forthwith of exercising all the functions of an incorporated company”. The
---------------------- company’s life commences from the date mentioned in the certificate of
incorporation and the date appearing on it conclusive, even if wrong.
----------------------
●● Certificate as Conclusive Evidence
---------------------- Not only does the certificate create the company. It also is “the conclusive
28 Corporate Law
evidence that all the requirements of this Act have been complied with in Notes
respect of registration and matters precedent and incidental thereto and
that the association is a company authorized to be registered and duly ----------------------
registered under this Act”. In other words, the validity of the certificate
cannot be disputed on any grounds whatsoever. ----------------------
●● Pre-incorporation contracts - Sometimes contracts are made on behalf ----------------------

of a company even before it is duly incorporated. Following are few
----------------------
effects of such contracts-
No contract can bind a company before it becomes capable of contracting ----------------------
by incorporation. “The consenting parties are necessary to a contract, whereas
----------------------
the company, before incorporation, is a non-entity”. A company has no status
prior to incorporation. It can have no income before incorporation for tax ----------------------
purposes. Shares cannot form is liable to be rejected where the name of a
proposed company is entered in the column of transferee. Thus, for example, ----------------------
when a solicitor, on the instructions of certain gentlemen, prepared the necessary
----------------------
documents and obtained the registration of a company. He paid the registration
fee and incurred the incidental expenses of registration. But the company was ----------------------
held not bound to pay for those services and expenses, “The Company could
not be sued in law for those expenses, as much as it was not in existence at the ----------------------
time when the expenses were incurred… and ratification was impossible”.
----------------------
“It is not desirable to saddle the corporation with burdens imposed upon
it in advance by overly optimistic promoters.” ----------------------
The company is also not entitled to sue on a pre-incorporation contract. ----------------------
“A company cannot by adoption or ratification obtain the benefit of a contract
purporting to have been made on its behalf before the company came into ----------------------
existence”.
----------------------
If the contract is made on behalf of a company not yet in existence, the
agent might incur personal liability. For, where a contract is made on behalf of ----------------------
a principal known to both the parties to be non-existent the contract is deemed ----------------------
to have been entered into personality by the actual maker. Similarly, “where a
person purports to contract as agent he may nevertheless disclose himself as ----------------------
being in truth a principal, and being an action in his own name”.
----------------------
----------------------
----------------------
1. 1. What brings the company into existence as a legal Person?
----------------------
i. Certificate of commencement of business
ii. Certificate of Incorporation ----------------------
iii. Both
----------------------
iv. None of the above
----------------------
Notes 2.2 MEMORANDUM OF ASSOCIATION
---------------------- An important step in the formation of a company is to prepare a document
---------------------- called the memorandum of association. As observed by Palmer “It is a document
of great importance in relation to the proposed company.” Its importance lies
---------------------- in the fact that it contains the following fundamental clauses which have often
been described as the conditions of the company’s incorporation:
----------------------
●● Name Clauses;
---------------------- ●● Situation Clause;
---------------------- ●● Objects Clauses;
●● Liability Clauses; and
----------------------
●● Capital Clauses.
----------------------
●● Subscription Clause
---------------------- Name Clause
---------------------- The first clause of the memorandum is required to state the name of the
proposed company. A company, being a legal person, must have a name to
---------------------- establish its identity. “The name of a corporation is the symbol of its personal
existence.” Any suitable name may be selected subject, however, to the
----------------------
following restrictions.
---------------------- Legal requirements as to name
---------------------- Section 4 of the Companies Act, 2013 provides that a company shall not
be registered with a name which contains:
----------------------
a) Any word or expression which is likely to give the impression that the
---------------------- company is anyway connected with, or having the patronage of the
Central Govt. or any StateGovt. or any local authority or any statutory
---------------------- corporation or body.
---------------------- b) Such word or expression as may be prescribed.
---------------------- Further Section 4 incorporates the procedural aspects of application for
availability of name of proposed company or proposed new name for
---------------------- existing company and where after the reservation of name , it is found that
the name was applied for by furnishing wrong or incorrect information,
----------------------
then,-
---------------------- (a) if the company has not been incorporated, the reserved name shall be
cancelled and the person making the application for reservation of name
----------------------
shall be liable to a penalty not exceeding one lakh rupees; and
---------------------- (b) if the company has been incorporated, the Registrar may, after giving the
company an opportunity of being heard—
----------------------
(i) either direct the company to change its name within a period of
---------------------- three months, after passing an ordinary resolution;
----------------------
30 Corporate Law
(ii) take action for striking off the name of the company from the Notes
register of companies; or
----------------------
(iii) make a petition for winding up of the company.
“Under the Companies Act, company by registering its name gains a monopoly ----------------------
of the use of that name since no other company can be registered under a name
----------------------
identical with it or so nearly resembling it as to be calculated to deceive”. The
name of a company is a part of its business reputation and that would definitely ----------------------
be injured of a new company could adopt an allied name.
----------------------
The resemblance between the two names must be such as to be “calculated
to deceive”. ----------------------
Whatever be the name of the company, if the liability of the members ----------------------
is limited, the last word of the name must be “Limited”, and in the case of a
private company “Private Limited”. This is to ensure that all persons dealing ----------------------
with the company shall have clear notice that the liability of the members is
limited. And for the same reason it is further required that such name of the ----------------------
company must be painted on the outside of every place where the business of the ----------------------
company carried on. Such name, including the address of the registered office,
must also be mentioned on all business letters and other official publications, on ----------------------
all negotiable instruments issued or endorsed by the company and on all other
orders, receipts, etc. Any default in this respect might involve the officers of the ----------------------
company in mist of serious consequences. For example, if a bill of exchange is ----------------------
issued by a company on which its name is not properly mentioned or if the word
“limited” has been omitted, and if the company fails to pay the bill, the officer ----------------------
who issued or authorized the issue of such a bill would be personally liable
under it and will also be punishable with a fine. ----------------------
Situation Clause ----------------------

The second clause of the memorandum must specify the State in which ----------------------
the registered office of the company is to be situated.
----------------------
Within thirty days of incorporation the exact place where the registered
office is to be located must be decided and notice of the situation given to the ----------------------
Registrar who is to record the same. All communications to the company must
be addressed to its registered office. ----------------------
Objects And Powers Clause ----------------------
According to Section 4(1)(c) of the Companies Act, 2013 the Memorandum ----------------------
of Association of a company shall state the objects for which the company is
proposed to be incorporated any matter considered necessary for furtherance ----------------------
thereof.
----------------------
In view of Section 13(8) of the Companies Act, 2013, a company, which
has raised money from public through prospectus and still has any unutilised ----------------------
amount out of the money so raised shall not change the objects for which it
raised the money through prospectus unless a special resolution is passed by the ----------------------
company, and- ----------------------
Notes (i) the details as may be prescribed, in respect of such resolution shall also
be published in the newspapers (one in English and one in vernacular
---------------------- language) which is in circulation at the place where the registered office
of the company is situated and shall also be placed on the website of the
---------------------- company, if any, indicating therein the justification for such change;
---------------------- (ii) the dissenting shareholders shall be given an opportunity to the exit by the
promoters and shareholders having control in accordance with regulations
----------------------
to be specified by the Securities and Exchange Board.
---------------------- The 2013 Act does not require the objects clause in the memorandum to be
classified as the following:
----------------------
(i) The main object of the company
----------------------
(ii) Objects incidental or ancillary to the attainment of the main object
---------------------- (iii) Other objects of the company
---------------------- Why objects?
---------------------- The ownership of the corporate capital is vested in the company itself. But
in reality that capital has been contributed by the shareholders and is held by the
---------------------- company as though in trust for them. Such a fund must obviously be dedicated
to some defined objects so that the contributors may know the purposes to
----------------------
which it can be lawfully applied. The statement of objects, therefore, gives a
---------------------- very important protection to the shareholders by ensuring that the funds raised
for one undertaking are not going to be risked in another.
----------------------
The objects clause, affords a certain degree of protection to the creditors
---------------------- also. The creditors of a company, trust the corporation and not the shareholders
and they have to seek their repayment only out of the company’s assets. The
---------------------- fact that the corporate capital cannot be spent on any project not directly within
the terms of the company’s objects gives the creditors a feeling of security.
----------------------
Pubic financial institutions providing loans to companies have to go object-wise
---------------------- because they have their own list of priorities. The objects clause is their only
guidance in this respect.
----------------------
By confining the corporate activities within a defined field, the statement of
---------------------- objects serves the public interest also. It prevents diversification of a company’s
activities in directions not closely connected with the business for which the
---------------------- company may have been initially established. It also prevents concentration
---------------------- of economic power. Any change of objects would require approval of the
Company Law Board thus giving the Board an opportunity to examine whether
---------------------- the proposed plan of diversification would not be against public interest.
---------------------- Doctrine of ultra vires

Those then are the reasons which explain the necessity of an objects
---------------------- clause. The same reason require that the company should devote itself only
---------------------- to the objects set out in the memorandum and to no others. It is the function
of the memorandum “to delimit and identify the objects in such plain and
---------------------- unambiguous manner as that the reader can identify the field of industry within
32 Corporate Law
which the corporate activities are to be confined”. And it is the function of the Notes
courts to see that the company does not move in a direction away from that
field. That is where the doctrine of ultra vires comes into play in relation to ----------------------
joint stock companies. “Ultra” means beyond, “vires” means powers. An action
outside the memorandum is ultra vires the company. ----------------------
Following are the Consequences of ultra vires transactions ----------------------

When a company gets involved in an ultra vires transaction the question ----------------------
arises as to what are its effects.
----------------------
1. Injunction - In the first place, that members are entitled to hold a
registered company to its registered objects has been recognized long ----------------------
since. Hence whenever an ultra vires act has been or is about to be
undertaken, any member of the company can get an injunction to restrain ----------------------
it from proceeding with it.
----------------------
2. Personal liability of directors - It is one of the duties of directors to
see that the corporate capital is used only for the legitimate business of ----------------------
the company. If any part of it has been diverted to purposes foreign to ----------------------
the company’s memorandum, the directors will be personally liable to
replace it. Thus, for example, the Bombay High Court in Jehangir R. ----------------------
Modi v Shamji Ladha held that - A shareholder can maintain an action
against the directors to compel them to restore to the company the funds ----------------------
of the company that have by them been employed in transactions that they ----------------------
have no authority to enter into, without making the company a party to the
suit. ----------------------
3. Breach of warranty of authority - It is the duty of an agent to act within ----------------------
the scope of his authority. For if he goes beyond he will be personally
liable to the third party for breach of warranty of authority. The directors ----------------------
of a company are its agents. As such it is their duty to keep within the
limits of the company’s powers. If they induce, however innocently, an ----------------------
outsider to contract with the company in a matter in which the company ----------------------
does not have the power to act, they will be personally liable to him for
his loss. ----------------------
4. Ultra vires acquired property - If a company’s money has been spent ----------------------
ultra vires in purchasing some property, the company’s right over that
property must be secure. For, that asset, through wrongly acquired, ----------------------
represents the corporate capital.
----------------------
5. Ultra vires contracts - “A contract of a corporation”, observed Justice
GRAY, “which is ultra vires, that is to say, outside the objects as defined ----------------------
by its memorandum is wholly void and of no legal effect.” The objection
----------------------
to an ultra vires contract is, not merely that the corporation ought not
to have made it, but that it could not make it. The question is not as to ----------------------
the legality of the contract: the question is as to the competency and
power of the company to make it. “An ultra vires contract, being void ----------------------
ab initio, cannot become intra vires by reason of estoppels, lapse of time,
----------------------
ratification, acquiescence or delay.” “No performance on either side can
Notes give the unlawful contract any validity or to be the foundation of any right
of action upon it.” This incapacity of a company occasionally results in
---------------------- manifest injustice.
---------------------- 6. Ultra vires torts - The rule of constructive notice of memorandum and
articles explains why a company is not liable for an ultra vires contract,
---------------------- but that does not solve the problem of injustice involved. Moreover,
---------------------- the rule altogether fails to hold ground when a company is sought to
be made liable for a tort committed by a servant of the company while
---------------------- acting beyond the company’s powers. Any one dealing with a company
may, at the pain of losing the bargain, be required to acquaint himself
----------------------
with the company’s memorandum. But that can hardly be expected of
---------------------- a person who has been the victim of an ultra vires tort. For example, a
company is operating omnibuses—a venture entirely alien to its objects
---------------------- as described in the memorandum. The driver of one such bus negligently
---------------------- injures the plaintiff who sues the company for the tort. It can, no doubt, be
contended against him that the driver was not a servant of the company.
---------------------- The company, having no existence outside its corporate sphere, could not
have appointed him. But can it be said that the plaintiff ought to have
----------------------
known that fact. Doubtless the plaintiff deserves to be compensated. But
---------------------- the law has not yet clearly declared the justice of his demand. As the law
seems to stand at present, to make a company liable for any tort it must be
---------------------- shown that—
---------------------- – That the activity in the course of which it has been committed falls
within the scope of the memorandum, and
----------------------
– That the servant committed the tort within the course of his
---------------------- employment.
---------------------- Liability Clause
---------------------- The fourth clause has to state the nature of liability that the members incur.
If the company is to be incorporated with limited liability, the clause must state
---------------------- that “the liability of the members shall be limited by shares”. This means that no
member can be called upon to pay anything more than the nominal value of the
----------------------
shares held by him, or so much thereof as remains unpaid; and if his shares be
---------------------- fully paid up his liability is nil. If it is proposed to register the company limited
by guarantee, this clause will state the amount which every member undertakes to
---------------------- contribute to the assets of the company in the event of its winding up. The clause
---------------------- will, for example, run like this: “Every member of the company undertakes to
contribute to the assets of the company in the event of its being wound up such
---------------------- amounts as may be required, not exceeding one thousand rupees.”
---------------------- Capital Clause
---------------------- The last clause states the amount of the nominal capital of the company
and the number and value of the shares into which it is divided.
----------------------
34 Corporate Law
Subscription Clause Notes
The memorandum concludes with the subscribers’ declaration. The
----------------------
subscribers declare: “We, the several persons whose names and addresses are
subscribed, are desirous of being formed into a company, in pursuance of this ----------------------
memorandum of association, and we respectively agree to take the number
of shares in the capital of the company set opposite our respective names.” ----------------------
The memorandum has to be subscribed by at least seven persons in the case ----------------------
of a public company and by at least two in the case of a private company.
Each subscriber must sign the document and must write opposite his name the ----------------------
number of shares he takes. But no subscriber shall take less than one share.
----------------------
After incorporation no subscriber can withdraw his name on any ground
whatsoever. “The subscriber to the memorandum cannot have rescission on the ----------------------
ground that he was induced to become a subscriber by the misrepresentation of ----------------------
an agent of the company”
----------------------
1. The doctrine of indoor management is a ______to the doctrine of ----------------------

constructive notice.
----------------------
i. Exception
----------------------
ii. Extension
iii. Alternative ----------------------
iv. None of the above ----------------------

2. A company can change its name at its own discretion by passing ----------------------
_________.
----------------------
i. Ordinary resolution
ii. Special resolution ----------------------
iii. Boards resolution ----------------------
3. Any change in the address of the registered office must be
communicated to the Registrar within: ----------------------
i. 15 days ----------------------
ii. 30 days ----------------------
iii. 1 month
----------------------
iv. 12 months
----------------------
----------------------
Notes 2.3 ARTICLES OF ASSOCIATION
---------------------- An article of association is the second document which has, in the case
of some companies, to be registered along with the memorandum. Companies
----------------------
which must have articles of association are:
---------------------- 1. Unlimited companies;
---------------------- 2. Companies limited by guarantee
---------------------- 3. Private companies limited by shares

This document contains rules, regulations and bye-laws for the general
----------------------
administration of the company. Schedule I of the Companies Act, 2013, contains
---------------------- various model forms of memoranda and articles. The Schedule is divided into
several Tables. Each Table serves as a model for one kind of company. The
---------------------- contents and description of the Articles of Association shall be in accordance
with the table – F,G, H, I and J of Schedule –I of the Companies Act, 2013. The
----------------------
chief advantage of adopting the appropriate Table is that its provisions are legal
---------------------- beyond all doubt.
Public companies are free to have or not to have articles. But they cannot
----------------------
survive without articles of association because without any rules or regulations
---------------------- they may not be able to hold in harmony the diversity of relations under which
they have to function.
----------------------
●● Contents of Articles
---------------------- Articles of Association may prescribe such regulations for the company
as the subscribers to the memorandum deem expedient. The Act gives the
----------------------
subscribers a free hand. Any stipulation as to the relations between the company
---------------------- and its members, and between members inter se may be inserted in the articles.
But everything stated therein is subject to the Companies Act.
----------------------
The document must not conflict with the provisions of the Act. Any clause
---------------------- which is contrary to the provisions of the Act or of any other law for the time
being in force, is simply inoperative and void. Section 272 of the Companies
---------------------- Act, for example, confers the right on a shareholder to petition for winding
up of the company in certain circumstances. This right cannot be excluded or
----------------------
limited by the articles. Similarly, the articles cannot sanction something which
---------------------- is forbidden by the Act. The articles may contain provisions for entrenchment
to the effect that specified provisions of the articles may be altered only if
---------------------- conditions or procedures as that are more restrictive than those applicable in
the case of a special resolution, are met or complied with. The provisions for
----------------------
entrenchment shall only be made either on formation of a company, or by an
---------------------- amendment in the articles agreed to by all the members of the company in the
case of a private company and by a special resolution in the case of a public
---------------------- company.
---------------------- ●● Articles in relation to memorandum
---------------------- Articles have always been held to be subordinate to the memorandum. If,
therefore, the memorandum and articles are inconsistent, the articles must give
36 Corporate Law
way. In other words, articles must not contain anything the effect of which is Notes
to alter a condition contained in the memorandum or which is contrary to its
provisions. “This is so because the object of the memorandum is to state the ----------------------
purposes for which the company has been established, while the articles provide
the manner in which the company is to be carried on and its proceedings disposed ----------------------
of.” This constitutes the principal difference between the two documents. In the ----------------------
words of Lord CAIRNS, the difference is:
----------------------
The memorandum is, as it were, the area beyond which the action of the
company cannot go inside that area the shareholders may make such regulations ----------------------
for their own government as they think fit.
----------------------
“Though the articles cannot alter or control the memorandum, yet, if there
is an ambiguity in the memorandum, the articles registered at the same time ----------------------
may be used to explain it, but not so as to extend the objects”. But this rule,
as is shown in the above work itself, will not apply to the interpretation “of ----------------------
those portions of the Memorandum of Association which the Act of Parliament
----------------------
requires to be stated in the memorandum”.
Binding Force of Memorandum And Articles [S.10] ----------------------
Section 10 declares: ----------------------
Subject to the provisions of this Act, the memorandum and articles shall, ----------------------
when registered, bind the company and the members thereof to the same extent
as if they respectively had been signed by the company and by each member, ----------------------
and contained covenants on its and his part to observe all the provisions of the
memorandum and of the articles. ----------------------
The section aims to impart contractual force to the memorandum and ----------------------
articles. It is only the exact limits of that effect and the persons it is intended
to cover that are somewhat uncertain. The law may be stated in terms of the ----------------------
following propositions: ----------------------
1. Binding on members in their relation to company
----------------------
The members are bound to the company by the provisions of the articles
“just as much as if they had put their seals to them”, and had thus ----------------------
contracted to conform to them. In the words of Lord HERSCHELL: “It is
----------------------
quite true that the articles constitute a contract between each member and
the company.” In Borland’s Trustee v Steel Bros & Co Ltd: ----------------------
The articles of association of the defendant company contained clauses ----------------------
to the effect that on the bankruptcy of a member his shares would be sold
to a person and at a price fixed by the directors. B, a shareholder, was ----------------------
adjudicated bankrupt. His trustee in bankruptcy claimed that he was not
bound by these provisions and should be at liberty to sell the shares at ----------------------
their true value. But it was held that “a contract contained in the articles ----------------------
of association is one of the original incidents of the shares. Shares having
been purchased on those terms and conditions, it is impossible to say that ----------------------
those terms and conditions are not to be observed”.
----------------------
Notes 2. Binding on company in its relation to members
Members are bound to the company and the company is bound to the
----------------------
members to observe and follow the articles. “Each member is entitled
---------------------- to say that there shall be no breach of the articles and he is entitled to
an injunction to prevent the breach.” This is clear from the section itself
---------------------- which says that “the memorandum and articles shall bind the company”.
In Wood v Odessa Waterworks Co:
----------------------
The articles of the Waterworks Co, provided that ‘the directors may, with
---------------------- the sanction of the company at general meeting, declare a dividend to
be paid to the members’. Instead of paying the dividend in cash to the
----------------------
shareholders a resolution was passed to give them debentures bonds.
---------------------- In an action by a member to restrain the directors from acting on the
resolution, STIRLING J held: “The question is whether that which is
---------------------- proposed to be done in the present case is in accordance with the directors
may, with the sanction of a general meeting, declare a dividend to be paid
----------------------
to shareholders. Prima facie that means to be paid in cash. The debenture
---------------------- bonds proposed to be issued are not a payment in cash.” Accordingly the
directors were restrained from acting on the resolution.
----------------------
3. But not binding in relation to outsiders
---------------------- Thus, the articles bind the members to the company and the company to
---------------------- the members. But neither of them is bound to an outsider to give effect
to the articles. “No article can constitute a contract between the company
---------------------- and a third person.” For example, in Browne v La Trinidad:
---------------------- The articles of association of a company contained a clause to the effect

that B, should be a director and should not be removable till after 1888.
---------------------- He was, however, removed earlier and had brought an action to restrain
the company from excluding him. It was held that there was no contract
---------------------- between B and the company. No outsider can enforce articles against the
---------------------- company even if they purport to give him certain rights.
4. How far binding between members
----------------------
Lastly, how far do the articles bind one member to another? Unfortunately,
---------------------- on this point the law has yet to take a final shape. The Companies Act does
not purport to settle the rights of members inter se. It leaves these to be
----------------------
determined by the articles. Hence articles define the rights and liabilities
---------------------- of members. But whether those rights and liabilities can be enforced by
one member against another is the moot point. Lord HERSCHELL said in
---------------------- Welton v Saffery. “It is quite true that articles constitute a contract between
each member and the company, and that there is no contract in terms
----------------------
between individual members of the company; but the articles do not any
---------------------- the less regulate their rights inter se. Such rights can only be enforced by
or against a member through the company.” “Memorandum and articles
---------------------- did not constitute a contract between the members inter se, although they
regulated their rights which could be enforced through the company and
----------------------
that they only regulated the rights of the members qua members for the
38 Corporate Law
purposes of the company law.” Thus in a case before the Calcutta High Notes
Court, a member of a company who had a commercial dispute of private
nature with another member could not be compelled to refer the dispute ----------------------
to arbitration in terms of the company’s articles. The Court said: “Articles
do not affect or regulate the rights arising out of a commercial contract ----------------------
with which the members have no concern, rights completely outside the ----------------------
company relationship.”
It follows that the extent to which the articles seek to regulate the rights ----------------------
of shareholders as shareholders they can be directly enforced by one member ----------------------
against another without joining the company as a party.
Alteration of Articles [S. 14] ----------------------
Every company has a clear power to alter its articles of association by a ----------------------
special resolution. It is a statutory power given by Section 14, and, therefore, it
cannot be negative by contract. If, for example, there is a clause in the articles ----------------------
providing that the company would not introduce any change in its original ----------------------
articles, it will be invalid on the ground that it is contrary to the statute. Similarly,
a company cannot deprive itself of the power of alteration by a contract with ----------------------
anyone.
----------------------
The altered articles will bind the members just in the same way as did
the original articles. But that will not give the alteration a retrospective effect. ----------------------
A transfer of shares when first presented was permissible within the company’s
articles, but it was rejected because the stamps were not cancelled. Before ----------------------
it could be presented again, the company changed articles excluding such
----------------------
transfers. The alteration was held to be effective against the transfer.
The power of alteration of articles as conferred by Section 14 is almost ----------------------
absolute. It is subject only to two restrictions.
----------------------
●● The alteration must not be in contravention of the provisions of the Act. It
should not be an attempt to do something which the Act forbids. ----------------------
●● The power of alteration of articles is subject to the conditions contained ----------------------
in the memorandum of association. The provision to sub-section (1) says
that an alteration which has the effect of converting a public company ----------------------
into a private company would not have any effect unless it is approved by
the Tribunal. ----------------------
Alteration in breach of contract ----------------------
Sometimes an alteration of articles may operate as a breach of contract ----------------------
with an outsider. To take, for instance, a Madras case. A clause in the articles
of a company provided Rs 250 a month as the remuneration of the company’s ----------------------
secretary. The plaintiff accepted the post upon those terms. Subsequently, the
company modified the article and reduced the secretary’s pay to Rs 25 a month. ----------------------
Could this be done? The answer depends upon the nature of the contract. If the
----------------------
contract is wholly dependent upon the provisions of the articles, as it was in
this case, the alteration would naturally be operative. Articles are subject to the ----------------------
statutory power of alteration. Anyone accepting an appointment purely on the
terms of the articles takes the risk of those terms being altered. ----------------------
Notes Increasing liability of members
An alteration cannot require a member to purchase more shares or
----------------------
increase his liability in any way except with his consent in writing. A person
---------------------- who becomes a member under the protection of limited liability cannot be
converted into a member with unlimited liability except with his consent in
---------------------- writing.
---------------------- Fraud on minority shareholders
Lastly, the alteration must not constitute a “fraud on the minority”.
----------------------
●● Constructive Notice of Memorandum and Articles of Association
----------------------
The memorandum and articles of association of every company are
---------------------- registered with the Registrar in a public office and consequently the memorandum
and articles become public documents. They are open and accessible to all. It
---------------------- is, therefore, the duty of every person dealing with a company to inspect its
public documents and make sure that his contract is in conformity with their
----------------------
provisions. But whether a person actually reads them or not, “he is to be in the
---------------------- same position as if he had read them”. He will be presumed to know the contents
of those documents. This kind of presumed notice is called constructive notice.
----------------------
●● Doctrine of ‘indoor management’
---------------------- Scope of operation
---------------------- 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. The rule had its genesis in Royal
---------------------- British Bank v Turquand.
The directors of a company borrowed a sum of money from the plaintiff.
---------------------- The company’s articles provided that the directors might borrow on bonds
---------------------- such sums as may from time to time be authorized by a resolution passed at a
general meeting of the company. The shareholders claimed that there had been
---------------------- no such resolution authorizing the loan and, therefore, it was taken without their
authority. The company was, however, held bound by the loan. Once it was
---------------------- found that the directors could borrow subject to a resolution, the plaintiff had
---------------------- the right to infer that the necessary resolution must have been passed.
In a subsequent case the rule is thus stated: “If the directors have power
----------------------
and authority to bind the company, but certain preliminaries are required to
---------------------- be gone through on the part of the company before that power can be duly
exercised then the person contracting with the directors is not bound to see that
---------------------- all these preliminaries have been observed. He is entitled to presume that the
directors are acting lawfully in what they do.”
----------------------
40 Corporate Law
The rule is based upon obvious reasons of convenience in business Notes
relations. Firstly, the memorandum and articles of association are public
documents, open to public inspection. But the details of internal procedure are ----------------------
not thus open to public inspection. Hence an outsider “is presumed to know the
constitution of a company but not what may or may not have taken place within ----------------------
the doors that are closed to him”. The wheels of commerce would not go round ----------------------
smoothly if persons dealing with companies were compelled to investigate
thoroughly “the internal machinery of a company to see if something is not ----------------------
wrong”. People in business would be very shy in dealing with such companies.
----------------------
Yet another reason is explained by Gower in these words: “The creditors
of a limited company are not happy and they would be unhappy still, if the ----------------------
company could escape liability by denying the authority of the officials to act
----------------------
on its behalf.”
The rule is of great practical utility. It has been applied in a great variety ----------------------
of cases involving rights and liabilities. It has been used to cover acts done
----------------------
on behalf of company by de facto directors who have never been appointed,
or whose appointment is defective, or who, having been regularly appointed, ----------------------
have exercised an authority which could have been delegated to them under the
company’s articles, but never has been so delegated, or who have exercised an ----------------------
authority without proper quorum. Thus, where the directors of a company having
----------------------
the power to allot shares only with the consent of the general meeting, allotted
them without any such consent; where the managing director of a company ----------------------
granted a lease of the company’s properties, something which he could do only
with the approval of the board; where the managing agents having the power to ----------------------
borrow with the approval of directors borrowed without any such approval, the
----------------------
company was held bound.
Exceptions ----------------------
The rule is now more than a century old. In view of the fact that companies ----------------------
having come to occupy the central position in the social and economic life of
modern communities, it was expected that its scope would be widened. But the ----------------------
course of decisions has made it subject to the following exceptions: ----------------------
1. Knowledge of irregularity
----------------------
The first and the most obvious restrictions is that the rule has no application
where the party affected by an irregularity had actual notice of it. “Thus ----------------------
where a transfer of shares was approved by two directors, one of whom
within the knowledge of the transferor was disqualified by reason of ----------------------
being the transferee himself and the other was never validly appointed, ----------------------
the transfer was held to be ineffective”.
----------------------
2. Suspicion of irregularity
The protection of “the Turquand rule” is also not available where the ----------------------
circumstances surrounding the contract are suspicious and, therefore,
----------------------
invite inquiry. Suspicion should arise, for example, from the fact that
an officer is purporting to act in a manner which is apparently outsider ----------------------
Notes the scope of his authority. Where, for example, the plaintiff accepted a
transfer of a company’s property from its accountant, the transfer was
---------------------- held void. The plaintiff could not have supposed, in the absence of a
power of attorney, that the accountant had authority to effect transfer
---------------------- of the company’s property. Where a person holding directorship in two
---------------------- companies agreed to apply the money of one company in payment of the
debt of the other, the court said that it was something so unusual “that the
---------------------- plaintiffs were put upon inquiry to ascertain whether the persons making
the contract had any authority in fact to make it”. Any other rule would
---------------------- “place limited companies without any sufficient reasons for so doing, at
---------------------- the mercy of any servant or agent who should purport to contract on their
behalf”.
----------------------
3. Forgery
---------------------- Forgery may in circumstances exclude the Turquand rule. The only clear
illustration is Ruben v Great Fingall Consolidated.
----------------------
The plaintiff was the transferee of share certificates issued under the seal
---------------------- of the defendant company. The certificate was issued by the company’s
secretary, who had affixed the seal of the company and forged the
----------------------
signatures of two directors.
---------------------- The plaintiff contended that whether the signatures were genuine of forged
---------------------- was a part of the internal management and, therefore, the company should
be stopped from denying genuineness of the document. But it was held
---------------------- that the rule has never been extended to cover such a complete forgery.
Lord Loreburn said: “It is quite true that persons dealing with limited
---------------------- liability companies are not bound to inquire into their indoor management
---------------------- and will not be affected by irregularities of which they have no notice.
But this doctrine, which is well established, applies to irregularities which
---------------------- otherwise might affect a genuine transaction. It cannot apply to a forgery.”
---------------------- This statement has been regarded as a dictum, as the case was decided
on the principle that secretary did not have actual or implied authority to
---------------------- represent that a forged document was genuine and, therefore, there was
no estoppels against the company. Hence, a general statement that “the
---------------------- Turquand rule” does not apply to forgeries is not exactly warranted by the
---------------------- present authorities. Thus, for example, Andrews R. Thompson, writing
in an extensive article on the subject, says: “A company may represent
---------------------- that a forged instrument is genuine. In such a case, it will be stopped
from denying that a forged instrument is genuine against an outsider who
---------------------- has relied to his detriment upon the representation. Also, a company may
---------------------- represent that the forger has authority to execute the forged instrument. In
that event it will be bound by the forged instrument as against an outsider
---------------------- who has relied on the apparent authority to execute the instrument.”
---------------------- 4. Representation through Articles
This exception deals with the most controversial and highly confusing
----------------------
aspect of the “the Turquand rule”. Articles of association generally contain
42 Corporate Law
what is called the “power lf delegation”. Lakshmi Ratan Cotton Mills Notes
v J.K. Jute Mills Co explains the meaning and effect of a “delegation
clause”. ----------------------
One G was a director of a company. The company had managing agents ----------------------
of which also G was a director. Articles authorized directors to borrow
money and also empowered them to delegate this power to any or more ----------------------
of them. G borrowed a sum of money from the plaintiffs. The company
----------------------
refused to be bound by the loan on the ground that there was no resolution
of the board delegating the power to borrow to G. Yet the company ----------------------
was held bound by the loan. “Even supposing that there was no actual
resolution authorizing G to enter into the transaction, the plaintiff could ----------------------
assume that a power which could have been delegated under the articles
----------------------
must have been actually conferred. The actual delegation being a matter
of internal management, the plaintiff was not bound to enter into that.” ----------------------
5. Acts outside apparent authority
----------------------
If the act of an officer of a company is one which would ordinarily be
beyond the powers of such an officer, the plaintiff cannot claim the ----------------------
protection of “the Turquand rule” simply because under the articles power
----------------------
to do the act could have been delegated to him. In such a case the plaintiff
cannot sue the company unless the power has, in fact, been delegated to ----------------------
the officer with whom he dealt. A clear illustration is Anand Behari Lal v
Dinshaw & Co. ----------------------
The plaintiff accepted a transfer a company’s property from its accountant. ----------------------
Since such transaction is apparently beyond the scope of an accountant’s
authority, it was void. Not even ‘delegation clause’ in the articles could have ----------------------
validated it, unless he was, in fact, authorized. ----------------------
----------------------
----------------------
Multiple Choice Single Response.
----------------------
1. The doctrine of _________ does not apply to acts void ab initio.
----------------------
i. Ultra virus
ii. Intra virus ----------------------
iii. Constructive notice ----------------------
iv. Indoor management ----------------------
----------------------
Activity 1 ----------------------
Find out from the Internet the differences between the Memorandum of ----------------------
Association and Articles of Association.
----------------------
Notes Summary
---------------------- ●● The Company could be registered when an application is filed with
the Registrar of Companies accompanied with the Memorandum of
----------------------
Association, Articles of Association, if necessary, and the agreement, if
---------------------- any, which the company proposes to, enter into with any individual for his
appointment as its managing or whole-time director or manager.
----------------------
●● The Memorandum of Association is the fundamental document in the
---------------------- application for registration of a Company as it is the Constitution of the
Company which contains important information of the Company which
---------------------- includes, Name Clauses; Situation Clause; Objects Clauses; Liability Clauses;
and Capital Clauses.
----------------------
●● An article of association is the second document which contains rules,
---------------------- regulations and bye-laws for the general administration of the company.
---------------------- ●● The Company then is born on the issue of the certificate of incorporation
issued by the Registrar of the Companies upon his satisfaction of the
---------------------- prerequisites. A company can commence business immediately once it
receives the certificate of incorporation.
----------------------
----------------------
Keywords
----------------------
●● Registrar of Companies: An official recorder or keeper of records. He/
---------------------- She is an officer whose duty is to make a registration. An officer in courts
---------------------- entrusted with executive duties and some judicial functions.
●● Plaintiff: A person who files a plaint (suit) in the court of law
----------------------
●● Defendant: A person against whom a plaint has been filed
----------------------
●● Retrospective: Looking backward, having reference to a state of things
---------------------- before the Act in question, applying back dated
----------------------
----------------------
1. What is Corporate Personality? Explain the nature of a Company.
---------------------- 2. What is the procedure for incorporation of a Company?
---------------------- 3. Explain what are the contents of Memorandum of Association?
---------------------- 4. What is Articles of Association, do all companies need to file Articles?
5. Explain the doctrine of Indoor Management and what are the exceptions
----------------------
to it?
---------------------- 6. Write a note on Constructive Notice.
----------------------
----------------------
44 Corporate Law

1. What brings the company into existence as a legal Person? ----------------------
ii. Certificate of Incorporation ----------------------
----------------------
----------------------
1. The doctrine of indoor management is a ______to the doctrine of ----------------------
constructive notice. ----------------------
Exception
----------------------
2. A company can change its name at its own discretion by passing
_________. ----------------------
ii. Special resolution ----------------------
3. Any change in the address of the registered office must be communicated
----------------------
to the Registrar within:
ii. 30 days ----------------------
----------------------
----------------------
1. The doctrine of _________ does not apply to acts void ab initio.
----------------------
i. Ultra virus
----------------------
----------------------
Suggested Reading
----------------------
----------------------
& Sons.
Co.
----------------------
Reporter. ----------------------

5. Singh, Avtar. 2005. Partnership Act. Lucknow: Eastern Book Company. ----------------------
----------------------
----------------------
Notes
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
46 Corporate Law
Capital
UNIT
3
Structure:
3.1 Introduction
3.2 Promoters
3.3 Prospectus
3.4 Share Capital
Summary
Keywords
Suggested Reading
Capital 47
Notes
Objectives
----------------------
• Paraphrase and draw a diagram as to how the company raised capital
----------------------
for company formation
---------------------- • Appraise the role of promoters in raising the capital of a company
---------------------- • Classify share capital
----------------------
----------------------
3.1 INTRODUCTION
---------------------- The Capital for a Company is the foundation of the incorporation of a

company. The Company specifies various options of the mode and procedure
---------------------- for raising the Capital. The Promoters are instrumental in deciding the mode
which is suitable for their business. The promoters inform the world about their
---------------------- intention to start a particular business, through the prospectus they set out the
---------------------- future plans of the company and the purpose for which the capital is required.
This helps the prospective investors to form their opinion and take decisions as
---------------------- to the worth and prospects of the company. This unit discusses the role of the
Promoter in the formation of a Company and thereafter explains the concept of
---------------------- “Prospectus” its contents and its implications. Lastly it explains the meaning of
---------------------- “Capital” and its sub classifications.
---------------------- 3.2 PROMOTERS

---------------------- In many company matters, the term “Promoter” is of frequent occurrence.
---------------------- The Companies Act itself uses the word at some places for the purpose of
imposing liability upon promoters. Yet “it has never been clearly defined either
---------------------- judicially or legislatively”. “The difficulties in defining the term led the judges
to state that the term ‘promoter’ is not a term of art, nor a term of law, but of
---------------------- business.”
---------------------- Most of the definitions are in terms of categories of work that promoters
usually perform. “A promoter is a person who brings about the incorporation
---------------------- and organization of a corporation. He brings together the persons who become
---------------------- interested in the enterprise, aids in procuring subscriptions, and sets in motion
the machinery which leads to the formation itself.” “A promoter is one who
---------------------- undertakes to form a company with reference to a given project and to set it
going, and who takes the necessary steps to accomplish that purpose.”
----------------------
●● Duties and Liabilities of the Promoters
---------------------- Fiduciary position
---------------------- The promoters stand, in a fiduciary position. They have in their hands the
creation and moulding of the company. They have the power of defining how
----------------------
48 Corporate Law
and when, in what shape and under what supervision the company shall start Notes
into existence and begin to act as a trading corporation.
----------------------
The business of promotion thus gives a very advantageous position to
the promoter in relation to the proposed company. The courts have, therefore, ----------------------
fixed him with the responsibility of a fiduciary agent. “The promoter is in the
situation akin to that of a trustee of the company, and his dealings with it must ----------------------
be open and fair.” Thus the first and the foremost duty of a promoter is that if
----------------------
he starts a company for the purpose of buying his property and wants to draw
his payment from the money obtained from shareholders, he must faithfully ----------------------
disclose all facts related to the property. If he conceals any fact in relation to the
character or value of the property, or his personal interest in the proposed sale, ----------------------
the company will be entitled to set aside the transaction or recover compensation
----------------------
for its loss. He is guilty of breach of trust if he sells property to the company
without informing the company that the property belongs to him or he may ----------------------
commit a breach of trust by accepting a bonus or commission from a person
who sells property to the company. In short, the chief duty of the promoter as ----------------------
a fiduciary agent is to disclose to the company his position, his profit and his
----------------------
interest in the property which is the subject of purchase or sale by the company.
The only difficult question is to whom the disclosure is to be made. It was ----------------------
suggested by the House of Lords in Erlanger v New Sombrero Phosphate Co
----------------------
that it should be made to an independent and competent board of directors. The
facts of the case were as follows: ----------------------
A group of persons headed by E purchased an island containing phosphate ----------------------
mines for £55,000. A company was then incorporated to take over the island and
to work in the mines. E named five persons as directors. Two were abroad. Of the ----------------------
three others, two were persons entirely under E’s control. These three directors
purchased the island for the company at a price of £1,10,000. A prospectus was ----------------------
then issued. Many persons took shares. The purchase of the island was adopted ----------------------
by the shareholders at their first meeting; but the real circumstances were not
disclosed to them. The company failed and the liquidator sued the promoter for ----------------------
refund of the profit.
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
Capital 49
Notes
----------------------

1. ______ conceives the idea of the business.
----------------------
i. Promoters
---------------------- ii. Directors
---------------------- iii. Auditors
----------------------
2. _______stands in the fiduciary position of the company.
---------------------- i. Directors
ii. Promoters
----------------------
iii. Auditors
---------------------- iv. None of the above
---------------------- 3. ______ are contracts entered into by promoters on behalf of a
prospective company.
---------------------- i. Provisional contracts
---------------------- ii. Pre-Incorporation contracts
iii. Preliminary contracts
----------------------
iv. Both i. and ii.
----------------------
---------------------- Activity 1
----------------------
Interview a promoter of a company and appraise the functions he is performing
---------------------- in the company.
----------------------
----------------------
3.3 PROSPECTUS
Prospectus is defined by Section 2(70) as follows:
----------------------
‘Prospectus’means any document described or issued as a prospectus and
---------------------- includes a red herring prospectus referred to in Section 32 or Shelf prospectus
referred to in Section 31 or any notice, circular, advertisement or other document
---------------------- inviting offers from public for subscription or purchase of any securities of a
body corporate.
----------------------
In order to finance its activities, the company needs capital which is raised
---------------------- by a public company by the issue of the prospectus inviting deposits or offers
for shares and debentures from the public. A private company is prohibited from
---------------------- making any invitations to the public subscribers for any shares in, or debentures
---------------------- of the company. Hence it need not issue a prospectus.
The central theme of a prospectus, from the money raising point of view,
---------------------- is that it sets out the prospects of the company and the purpose for which
50 Corporate Law
the capital is required. The prospectus is the basis on which the prospective Notes
investors form their opinion and take decisions as to the worth and prospects of
the company. ----------------------
●● Prospectus to be in writing - A prospectus must be in writing. An oral ----------------------
invitation to subscribe for shares in, or debentures of, a company, or
deposits is not a prospectus. Similarly an advertisement in television or a ----------------------
film is not treated to be a prospectus.
----------------------
●● Subscription- The word ‘subscription’ in the definition of prospectus
means ‘taking’ or ‘agreeing to take’ shares for cash. It imports that the ----------------------
person agreeing to take the shares puts himself under a liability to pay the
nominal amount thereof in cash. ----------------------
●● Invitation to public- A document is not a prospectus unless it is an ----------------------

invitation to the public to subscribe for shares in or debentures of, a
company. But if the document satisfies the condition of invitation to the ----------------------
public, it is a prospectus even though it is issued to a defined class of the ----------------------
public. Thus an advertisement which stated that “some shares are still
available for sale according to the terms of the company which may be ----------------------
obtained on application” was held to be a prospectus as it invited the
public to purchase shares. ----------------------
●● Date of Prospectus - A prospectus issued by or in relation to an intended ----------------------
company must be dated and that date is, unless the contrary is proved,
taken as the date of publication of the prospectus. ----------------------
●● Signing of prospectus - In case the prospectus is issued by an intended ----------------------
company, it has to be signed by the proposed directors of the company
or by their agents authorized in writing. In case of existing companies, ----------------------
the prospectus has to be signed by every person who is named therein as ----------------------
director of the company or by his agent authorised in writing.
●● Registration of prospectus - A prospectus can be issued by or on behalf ----------------------
of a company only when a copy thereof has been delivered to the Registrar
----------------------
for registration. The registration must be made on or before the date of
publication. The copy must be signed by every person who is named ----------------------
therein as director or proposed director of the company, or by his agent
authorized in writing. Further, such a prospectus must state on the face of ----------------------
it that a copy of it has been delivered to the Registrar for registration on
----------------------
or before the date of publication.
●● Contents of prospectus - Prospectus is the window through which an ----------------------
investor can look into the soundness of a company’s venture. The investor
must, therefore, be given a complete picture of the company’s intended ----------------------
activities and its position. This is done through prospectus which must ----------------------
secure the fullest disclosure of all material and essential particulars and
lay the same in full view of all intending purchases of shares. ----------------------
The important contents of prospectus are as follows: The Companies
----------------------
Act contains a comprehensive set of regulations intended to protect the
investing public from victimization. The intention of the legislature in making ----------------------
Capital 51
Notes these regulations is “to secure the fullest disclosure of material and essential
particulars and lay the same in full view of all the intending purchasers of
---------------------- shares”. The relevant rules and regulations may be briefly stated as –
---------------------- ●● Every prospectus must be dated.
●● A copy of prospectus must be registered with the Registrar and this fact
---------------------- must be stated on the face of the prospectus. The prospectus must be
---------------------- issued within 90 days of its registration.
●● If the prospectus includes a statement purporting to be made by an expert,
---------------------- consent in writing of that expert must be obtained and this fact must
be stated in the prospectus. The expert should be unconnected with the
----------------------
formation or management of the company.
---------------------- ●● Every prospectus should disclose the matters specified in Section 26 of
the Act. The information required to be disclosed refers to the objects
---------------------- of the company, details as to shares, managerial personnel, minimum
---------------------- subscription, underwriting, preliminary expenses, material contracts etc.
●● Lastly, the “golden rule” as to the statements in prospectus must be
---------------------- observed. “The public is at the mercy of company promoters. Everything
must, therefore, be stated with strict and scrupulous accuracy”
----------------------
●● Procedure For Changing Terms Of Prospectus – The terms of a
---------------------- prospectus can be changed only with the approval or authority of the
company in general meeting by way of special resolution. Thus a change in
----------------------
the deployment of issue proceeds without the consent of the shareholders
---------------------- in general meeting would be fraud on the shareholders.

----------------------
----------------------
1.
Definition of prospectus is given under Section _______.
---------------------- i. 2 (70)
ii. 2 (32)
----------------------
iii. 2 (34)
---------------------- iv. 2 (36)
2.
_______ years of imprisonment will be imposed in case of issue of
----------------------
prospectus with untrue statements
---------------------- i. One
ii. Two
----------------------
iii. Three
---------------------- iv. Four
----------------------
Activity 2
----------------------
---------------------- Study and compare the prospectus of all types of companies.
52 Corporate Law
3.4 SHARE CAPITAL Notes
Share capital means the capital raised by a company by the issue of shares. ----------------------
The word ‘capital’ in connection with a company is used in several senses: it
----------------------
may mean authorized, issued and subscribed, or paid up or reserve capital of
company. ----------------------
●● Authorized or nominal capital - This is the nominal value of the ----------------------
shares which a company is authorized to issue by its Memorandum of
Association. In the case of a limited company, the Memorandum shall ----------------------
state the amount of capital with which the company is proposed to be
registered and the division thereof into shares of the fixed amount. This ----------------------
is the maximum capital which the company will have during its lifetime ----------------------
unless it is increased.
●● Issued and subscribed capital – Issued capital is the nominal value of ----------------------
the shares which are offered to the public for subscription. A company
----------------------
does not normally issue all its capital at once, so that issued capital in
such case is less than the authorized capital. The issued capital can never ----------------------
exceed the authorized capital; it can at the most be equal to the authorized
capital which is the case when all the shares have been issued to the public. ----------------------
Sometimes, all the shares which are offered to the public for subscription
----------------------
may not be taken up. In such a case, that part of the issued capital which
is taken up by the public is called the subscribed capital. ----------------------
●● Called-up capital – This is that part of the issued capital which has been
----------------------
called up on the shares.
●● Paid-up capital - This is that part of the issued capital which has been ----------------------
paid up by the shareholders or which is credited as paid-up in the shares.
----------------------
●● Uncalled capital – This is the remainder of the issued capital which has
not been called. The company may call this amount any time but this is ----------------------
subject to the terms of issue of shares and the provisions of the Articles.
----------------------
Example. A company is registered with a capital of Rs.1,00,000 divided
into 10,000 shares of Rs. 10 each. The authorized capital of the company in ----------------------
such a case is Rs. 1,00,000. The company offers 8,000 shares to the public
which takes them up. The issued capital of the company is Rs.80,000. The ----------------------
company calls up only Rs. 6 per share. In such a case, the called up capital ----------------------
is Rs. 48,000 and the uncalled capital is Rs. 32,000,
----------------------
●● Reserve capital – This is that part of the uncalled capital of a company
which can be called only in the event of its winding up. A limited company ----------------------
may, by a special resolution, determine that a portion of its uncalled capital
shall not be called up, expecting in the event and for the purposes of the ----------------------
company being wound up (Sec. 99); and such capital is known as ‘reserve
----------------------
capital’. Reserve capital cannot be turned into uncalled capital without
the leave of the Court. It is available only for the creditors on the winding ----------------------
up of the company. The company can neither charge reserve capital nor
cancel it in a reduction of capital. ----------------------
Capital 53
Notes Reserve capital must be distinguished from ‘reserve’ or ‘reserve fund’.
The expressions ‘reserve’ and ‘reserve fund’ are applied to undistributed
---------------------- profits which the company keeps in hand to provide for emergencies.
---------------------- ●● Publication of capital (Sec. 60) - Where any notice, advertisement, or
other official publication, or any business letter, bill-head or letter paper,
---------------------- of a company contains statement of the amount of the authorized capital
of the company, such document shall also contain a statement of the
----------------------
subscribed and the paid-up capital. This statement shall be in an equally
---------------------- prominent position and in equally conspicuous characters.
●● Penalty - If default is made in complying with the above requirement
---------------------- the company shall be liable to pay an amount of ten thousand rupees and
---------------------- every officer of the company who is in default shall be liable to pay a
penalty of five thousand rupees, for each default.
---------------------- ●● Kinds of Share Capital – Capital must be divided into shares of a fixed
---------------------- amount. The Companies Act now permits only two kinds of shares to be
issued, namely
---------------------- – Equity share capital that is ordinary shares.
---------------------- – Preference share capital that is preference shares.
---------------------- Equity or ordinary share capital is defined in the Act as meaning all
share capital which is not preference share capital.
----------------------
Preference share capital means that part of the share capital of a
---------------------- company which fulfils both the following requirements:
– During the continuance of the company it must be assured of
----------------------
a preferential dividend.
---------------------- – On the winding up of the company it must carry a preferential
---------------------- right to be paid back.
●● Alteration of Capital (Sec. 61) – A company can alter its capital in any
---------------------- of the following ways, provided the authority is there in the articles:
---------------------- – increase its capital by issuing new shares;
---------------------- – Consolidate and divide the whole or any part of its share capital into
shares of a larger amount;
----------------------
– convert shares into stock or vice versa;
---------------------- – sub-divide the whole or any part of its share capital into shares of a
smaller amount;
----------------------
– cancel those shares which have not been taken up and reduce its
---------------------- capital accordingly.
---------------------- Any of the above things can be done by passing a special resolution
of share-holders and does not require to be confirmed by the National
---------------------- Company Law Tribunal. Within thirty days of alteration the Registrar
---------------------- should be informed.
54 Corporate Law
●● Reduction of Capital (Sec. 66) – “Conservation of capital is one of the Notes
main principles of company law.” Share capital being the fund out of
which the creditors are paid, every reduction is going to reduce their ----------------------
security. But sometimes there may be a genuine necessity for reduction.
Hence Section 66 permits capital to be reduced only with the sanction of ----------------------
the Tribunal. Under this section, a company may reduce its capital in any ----------------------
of the following ways:
– extinguish or reduce the liability on any of its shares in respect of ----------------------
the share capital not paid-up; ----------------------
– cancel any paid-up share capital which is lost or is unrepresented by
any available assets; ----------------------
– pay-off any paid-up share capital which is in excess of the wants of ----------------------
the company.
Authority to reduce capital must be present in the articles. A special ----------------------
resolution should authorize the contemplated reduction. The next stage is to ----------------------
apply to the Tribunal for an order confirming the reduction.
The main duty of the Tribunal is to look after the interests of creditors and ----------------------
different classes of shareholders. Creditors are likely to be affected only when ----------------------
the reduction diminishes the liability of members to pay the uncalled capital or
involves refund of capital to shareholders. In other cases, the creditors are not ----------------------
entitled to object. If any creditor raises an objection, the Tribunal may either
have his interest secured or dispense with his consent. ----------------------
The second duty is the protection of the interests of shareholders. The ----------------------
proposed scheme must be reasonable and fair to all the classes of shareholders.
If there is only one class of shareholders and all of them are to bear the reduction ----------------------
proportionately the scheme is obviously fair and must be confirmed. Thus where ----------------------
shares of the value of Rs. 100 were reduced to Rs. 50, the balance being struck
off as lost capital, the scheme was confirmed because every shareholders and all ----------------------
the members of a class are given the same treatment, the scheme is fair.
----------------------
●● Further Issue of Capital – If the directors could offer new shares to
any person at their discretion, they would add to their own majority. ----------------------
Section 62, therefore, lays down that such shares must be offered to the
----------------------
existing equity shareholders of the company in proportion, as nearly
as the circumstances admit, of the shares held by them. The restriction ----------------------
applies only when it is proposed to increase the subscribed capital of the
company by issue of further shares. ----------------------
Such shares are called “rights shares” and the right to receive them as the ----------------------
“pre-emptive right”. The offer is made by giving each member a notice
of the shares offered to him. The notice must fix a time which is not ----------------------
less than 15 days and not exceeding 30 days from the date of the offer
within which the offer must be accepted. The notice must also inform the ----------------------
shareholders that if the offer is not accepted within, the specified time, it ----------------------
shall be deemed to have been declined. Again, the notice has to inform the
shareholders that they have the right to renounce all or any of the shares ----------------------
offered to them in favour of their nominees.
Capital 55
Notes The notice can be dispatched through registered post or speed post or
through electronic mode at least 3 days before opening of the issue.
---------------------- If the shareholder has neither nominated anyone nor accepted himself, the
---------------------- Board of Directors will get the discretion to dispose of the shares declined
in such manner as they think most beneficial to the company.
---------------------- Similarly, if after carrying out proportional allotment as nearly as
---------------------- circumstances admit, some shares are left, they may be disposed of by the
directors in such manner as they think most beneficial to the company.
---------------------- Such shares can also be offered to the employees under a scheme of
---------------------- employees’ stock option. It can be done under the authority of a special
resolution and also subject to such conditions as may be prescribed. They
---------------------- can also be offered to any persons, if so authorised by a special resolution
even if they are not within the two categories mentioned above. Such
---------------------- offer can be made for cash or for consideration other than cash. This
---------------------- would require the price of the non-cash consideration to be determined
by valuation report of a registered valuer subject to such conditions as
---------------------- may be prescribed.
Section 62 applies to public companies and private companies.
----------------------
Power to convert loans into capital – Where a company has taken
---------------------- any loan from the Central Government by issuing any debentures or
otherwise, the Government may convert the loan into shares. The power
----------------------
is to be exercised only if such conversion appears to be necessary in the
---------------------- public interest. The terms and conditions of the conversion should appear
reasonable to the Central Government, but if they are not acceptable to
---------------------- the company, it may prefer an appeal to the Tribunal within 60 days and
the decision of the Tribunal shall be final. A copy of every order proposed
----------------------
to be issued is to be laid in draft before each house of parliament for a
---------------------- total period of 30 days.
●● Purchase by company of its own shares – It is not open to a limited
----------------------
liability company to purchase its own shares. Section 67 expressly
---------------------- provides that “no company limited by shares, and no company limited
by guarantee and having a share capital, shall have power to buy its
---------------------- own shares, unless the consequent reduction of capital is affected and
sanctioned in pursuance of the provisions of the Act. Buying its own
----------------------
shares by a company involves permanent reduction of capital without
---------------------- sanction of the Tribunal which is “illegitimate” and “in violation of the
statute law”.
----------------------
To make the restrictions more effective in reference to public companies it
---------------------- is provided that no public company and its subsidiary private company shall
in any way provide loan, guarantee or security or otherwise any financial
---------------------- assistance to any person to enable him to buy shares in the company or in
its holding company. However, the following transactions are allowed:
----------------------
– The lending of money by a banking company in the course of
---------------------- business.
56 Corporate Law
– The provision of money for the purchase of fully paid shares in the Notes
company by trustees for and on behalf of the company’s employees.
– The lending of money by a company to its employees to enable ----------------------
them to buy fully paid shares in the company. The amount of loan
----------------------
cannot exceed the employee’s salary for a period of six months. The
word ‘employee’ for this purpose does not include directors or key ----------------------
managerial personnel.
----------------------
Where the directors provide the company’s money for the purchase of its
own shares outside the scope of the above exceptions, it is a breach of ----------------------
trust for which they are liable.
----------------------
The first exception is for protection of banks. They have to make loans
in the ordinary course of their business and they can hardly supervise the ----------------------
purpose for which the borrower uses the loan money. A company’s fully
paid shares may be transferred to a nominee or trustee or the company for ----------------------
its benefit .There is nothing wrong where the company does not become
----------------------
its own member, or does not have to pay for its own shares or does not
reduce its capital. Where shares were allotted to partners of a firm for ----------------------
taking over their business and the allotment happened to exceed the value
of assets acquired; allottees returned the extra shares to the company ----------------------
which were taken in the name of a trustee for the benefit of the company,
----------------------
the court could find nothing wrong with it.
●●Reorganization of Capital ----------------------
The reorganization of share capital of a company may take place – ----------------------
(1) by the consolidation of shares of different classes, or
----------------------
(2) by the division of shares of one class into shares of different classes, or
(3) by both these methods ----------------------
(4) The reorganization of the share capital of a company may be
----------------------
proposed –
– between a company and its creditors or any class of them or ----------------------
– between a company and its members or any class of them. ----------------------
In such a case, the NCLT (National Company Law Tribunal) may, on the
application of the company or of any creditor or member of the company, ----------------------
order a meeting of the creditors, or of the members, as the case may be. ----------------------
The meeting is to be called, held and conducted in such manner as the
NCLT directs. A majority of 3/4ths in value of the creditors of members ----------------------
present and voting either in person or by proxy at the meeting should
agree to the reorganization of share capital. The reorganization should ----------------------
also be sanctioned by the NCLT. If these conditions are satisfied, the ----------------------
reorganization is binding on all the creditors or all the members, and also
in the company or, in the case of a company which is being wound up, on ----------------------
the Liquidator and contributories of the company.
----------------------
The order of the NCLT has no effect until a certified copy of the order has
been filed with the Registrar (Sec. 230). ----------------------
Capital 57
Notes Equity shareholders’ rights [Sec. 47 (1)] –
An equity shareholder of a company limited by shares has a right to
----------------------
vote on every resolution placed before it. His voting right on a poll is in
---------------------- proportion to his share of the paid-up equity capital of the company. The
right of vote is an individual right in respect of which a member has the
---------------------- right to say:
---------------------- “Whether I vote with the majority or with the minority, you shall record my
vote: that is, a right of property belonging to my interest in the company,
---------------------- and if you will not, I shall institute legal proceedings to compel you.”
---------------------- Preference shareholders’ rights [Sec. 47 (2)] –
---------------------- A preference shareholder has a right to vote on those resolutions which

directly affect his rights and any resolution, for winding up the company
---------------------- or for the repayment or reduction of its shareholders. Where the dividend
in respect of a class of preference shares has not been paid for a period of
---------------------- two years or more, such class of preference shareholders shall have a right
---------------------- to vote on all the resolutions placed before the company. The voting right
of the preference shareholders on a poll shall be in the same proportion
---------------------- which the capital paid up in respect of the preference shares bears to the
paid-up equity capital of the company.
----------------------
The above rules do not apply to a private company which is not a subsidiary
---------------------- of a public company.
---------------------- Fetters on voting rights. The Articles of a company cannot impose any
fetter on the voting rights of the shareholders expect that a member shall
---------------------- not exercise voting right in respect of shares on which a call, or any other
sum due to the company, has not been paid.
----------------------
Variation of shareholders’ rights (Sec. 48) –
----------------------
Where the rights attached to a particular class of shareholders are to be
---------------------- varied, the procedure prescribed by Section 48 has to be followed. Firstly,
there should be provision in the memorandum or articles empowering
---------------------- the company to vary such rights, at any rate there should be nothing in
the terms of the issue prohibiting such variation. Secondly, the holders
----------------------
of three–fourths of the issued shares of that class must have given their
---------------------- consent in writing or a special resolution sanctioning the variation must
have been passed at a separate meeting of that class of shareholders.
---------------------- Thirdly, the holder of at least 10 percent of the shares of that class who did
not consent to or vote in favour of the resolution may apply to the Tribunal
----------------------
and variation shall not take effect unless it is confirmed by the Tribunal.
---------------------- An application should be made within 21 days from the date of consent or
resolution. The Tribunal grants a hearing to the company and any person
---------------------- interested in the matter. If the Tribunal feels that the variation is unfair it
would be disallowed, otherwise confirmed. New issue if preference share
----------------------
pari passu with the existing shares does not amount to variation so as to
---------------------- require the consent of preference shareholders.
58 Corporate Law
The shares in a company may be equity shares and/or preference shares. Notes
Usually, the rights attached to different classes of shares are different.
These rights may be set out in: ----------------------
●● Articles of Association - It is advisable that shareholders’ rights should ----------------------
be contained in the Articles and not in the Memorandum. For in such a
case, the alteration can be effected by passing a special resolution, subject ----------------------
only to certain statutory safeguards for minority protection. The variation
----------------------
can however be made –
– With the consent in writing of the holders of 3/4ths of the issued ----------------------
shares of that class,
----------------------
– With the sanction of a special resolution passed at the separate
meeting of the holders of the shares of that class. The necessary ----------------------
quorum at such meeting is 2 persons at least holding or representing
----------------------
by proxy 1/3rd of the issued shares of the class in question.
●● Memorandum of Association - Class rights of shareholders are ----------------------
sometimes contained in the Memorandum. If the provision for their
----------------------
alteration is made in the Memorandum, these may contain the power of
alteration but the method of alteration may be given in the Articles. In ----------------------
such a case, the procedure contained in the Articles must be complied
with ----------------------
In the absence of any provision in the Memorandum for alteration of class ----------------------
rights, if the variation of prohibited by the terms of issue of shares of that
class, they cannot be altered by passing a special resolution. Likewise, ----------------------
these rights cannot be altered if these are set out unconditionally in these
----------------------
rights van be altered – for a scheme of arrangement under Sec. 230, or
by the NCLT under Sections 241 and 242 for the protection of minority ----------------------
rights.
----------------------
Conditions to be fulfilled for variation of rights - The rights of shareholders
may be varied subject to the fulfilment of the following conditions: ----------------------
(1) The holders of not less than 3/4ths of the issued shares of the class ----------------------
whose rights are to be varied, shall give their consent in writing
or a special resolution shall be passed at a separate meeting of the ----------------------
holders of the issued shares of that class.
----------------------
(2) The Memorandum or the Articles of the company shall contain a
provision with respect to such variation. ----------------------
(3) In the absence of any such provision in the Memorandum or the ----------------------
Articles, such variation shall not be prohibited by the terms of issue
of the shares of that class. ----------------------
Variation may be challenged (Sec. 48) ----------------------
The holders of not less than 10 per cent of the issued shares of a class,
----------------------
who did not consent to or vote in favour of the resolution for the variation,
may apply to the Tribunal to have the variation cancelled. Where any such ----------------------
Capital 59
Notes application is made, the variation shall not have effect unless and until it is
confirmed by the Tribunal. Application to the Tribunal shall be made within 21
---------------------- days after the date on which the consent was given by the other shareholders
or the resolution was passed. On any such application, the Tribunal shall grant
---------------------- a hearing to the applicant and any other persons who apply to the Tribunal to
---------------------- be heard and appear to the Tribunal to be interested in the application. If the
Tribunal feels that the variation would unfairly prejudice the shareholders of the
---------------------- class represented by the applicant, it may confirm the variation. The decision of
the Tribunal on any such application shall be final.
----------------------
The company shall within 30 days after the service on the company of any
---------------------- order made on any application referred to above, forward a copy of the order
to the Registrar. Where any default is made in complying with the provisions
----------------------
of section 48, the company shall be punishable with fine which shall not be
---------------------- less than twenty-five thousand rupees but which may extend to five lakh rupees
and every officer of the company who is in default shall be punishable with
---------------------- imprisonment for a term which may extend to six months or with fine which
shall not be less than twenty-five thousand rupees but which may extend to five
----------------------
lakh rupees, or with both.
----------------------
----------------------

---------------------- 1. Called-up capital is the nominal value of the shares, which are offered
to the public for subscription.
---------------------- 2. Reserve capital is not synonymous to “reserve” or “reserve fund”.
---------------------- 3. Company can convert its loan into capital.
----------------------
----------------------
Activity 3
---------------------- Examine the share certificates you and your friends have and review the
various components.
----------------------
---------------------- Summary
----------------------
●● A promoter is a person who conceives the idea of starting a company,
---------------------- he brings about the incorporation and organization of a corporation. He
brings together the persons who become interested in the enterprise, aids
---------------------- in procuring subscriptions, and sets in motion the machinery which leads
to the formation itself. The promoters stand, in a fiduciary position. They
----------------------
have in their hands the creation and moulding of the company.
---------------------- ●● In order to finance its activities, the company needs capital which is raised
by a public company by the issue of the prospectus inviting deposits or
----------------------
offers for shares and debentures from the public.
60 Corporate Law
●● The Company has to raise initial investment which is called as Share Notes
Capital. Share capital means the capital raised by a company by the issue
of shares. The capital could be authorized, issued and subscribed, or paid ----------------------
up or reserve capital of company.
----------------------
Keywords
----------------------
●● Prospectus: Prospectus is “any document described or issued as a
prospectus and includes any notice, circular, advertisement or other ----------------------
document inviting deposits from the public or inviting offers from the ----------------------
public for the subscription or purchase of any shares in, or debentures of,
a corporate”. In simple terms, any document inviting deposits. ----------------------
●● Capital: The common stock or fund of a Company. The sum raised by ----------------------
subscription of stockholders divided into shares. It is the investment
raised for the working of a company. ----------------------
●● A person holding a character of a trustee, or a character analogous to that
----------------------
of a trustee. It is a relation of utmost good faith.
----------------------
----------------------
1. What are the duties and liabilities of a Promoter?
2. Enumerate what are the contents of a Prospectus? ----------------------
3. When is statement in – lieu of prospectus issued? ----------------------
4. What is meaning of share capital? What is the further classification of
share capital? ----------------------
5. What are the conditions for reorganization of capital? ----------------------
6. Can the Share capital be altered? What are the prerequisites for it?
----------------------
7. What is the object behind issuing the prospectus?
8. When and with whom the prospectus must be filed? ----------------------
9. What is statement – in - lieu of prospectus?
----------------------
10. What is subscription?
11. What is the consequence of not filing a prospectus? ----------------------
Answers to Check your Progress ----------------------

1. ______ conceives the idea of the business ----------------------
i. Promoters
----------------------
2. _______stands in the fiduciary position of the company
ii. Promoters ----------------------
3. ______ is the contracts entered into by promoters on behalf of a prospectus
----------------------
company.
iv. Both i. and ii. ----------------------
Capital 61
Notes Check your Progress 2
----------------------
1. Definition of prospectus is given under Section __________.
----------------------
i. 2 (70)
---------------------- 2. _______ years of imprisonment will be imposed in case of issue of
---------------------- prospectus with untrue statements.
ii. Two
----------------------
----------------------
---------------------- 1. True
---------------------- 2. True
3. True
----------------------
----------------------
---------------------- Suggested Reading

---------------------- 1. Kapoor, N.D. 2008. Elements of Company Law. New Delhi: Sultan Chand
& Sons.
----------------------
2. Ramaiya, A. 2004. Guide to the Companies Act. New Delhi: Wadhwa and
---------------------- Co.
---------------------- 3. Ravichandran, K.S. 2010. The LLP Law in India. Nagpur: All India
Reporter.
----------------------
4. Singh, Avtar. 2005. Company Law. Eastern Law Publication.
---------------------- 5. Singh, Avtar. 2005. Partnership Act. Lucknow: Eastern Book Company.
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
62 Corporate Law
Membership of Company
UNIT
4
Structure:
4.1 Introduction to Membership of a Company
4.2 Who can become a Member
4.3 How to become A Member
4.4 Cessation of Membership
4.5 Rights and Liabilities of Members
4.6 Register and Index of Members
Summary
Keywords
Suggested Reading
Membership of Company 63
Notes
Objectives
----------------------
• To understand the procedure and capacity to become member of a
----------------------
company.
----------------------
• Rights, Liabilities & Register of member.
---------------------- • To know the difference between member & shareholder.
----------------------
---------------------- 4.1 INTRODUCTION TO MEMBERSHIP OF A COMPANY

---------------------- The ‘Members’ or ‘Shareholders’ of a company are the persons who
collectively constitute the company as a corporate entity. The terms ‘member’
----------------------
and ‘shareholder’ and ‘holder of a share’ are used interchangeably. They are
---------------------- synonymous in the case of a company limited by shares, a company limited
by guarantee and having a share capital and an unlimited company whose
---------------------- capital is held in definite shares. But in the case of an unlimited company or a
company limited by guarantee, a member may not be a shareholder, for such
----------------------
a company may not have a share capital. The present unit would discuss the
---------------------- difference between a member and a shareholder, who may become a member
of a company, the procedure and modes of becoming member, the registration
---------------------- of members and the rights and liabilities of members.
---------------------- Distinction between a shareholder and a member
---------------------- 1. A registered shareholder is a member but a registered member may not be

a shareholder because the company may not have a share capital.
----------------------
2. A person who owns a bearer share warrant is a shareholder but he is not a
---------------------- member as his name is struck off the register of members. This means that
a person can be a holder of shares without being a member. A ‘member’
---------------------- may be a shareholder but a ‘shareholder’ may not be a ‘member’. A
shareholder whose name appears in the registrar of members may have
----------------------
sold his shares and from the moment the property on the shares passes to
---------------------- the purchaser he ceases to be a holder of those shares, but he continues to
be a member till his name is removed from the register of members.
----------------------
----------------------
4.2 WHO CAN BE A MEMBER
---------------------- Any person who is competent to contract may become a member of a

company. This is subject to the provisions of the Memorandum and the Articles
---------------------- of the company. The Articles may provide that certain persons cannot become
members of the company.
----------------------
Minor - A minor is not competent to become the member of a company
---------------------- because an agreement with a minor is absolutely void
64 Corporate Law
An application for shares in a company was made by a father on behalf Notes
of his minor daughter. The company registered the shares in the name of the
daughter described as minor. Subsequently it went into liquidation. Held, the ----------------------
agreement with minor was void and the father, who signed the application,
could not be deemed to have contracted for the shares, and thus could not be ----------------------
placed on the list of contributories. ----------------------
If the directors, in ignorance of the fact of minority, allot shares to a minor
----------------------
and enter his name in the register of members, the company can repudiate the
allotment. The minor may also repudiate the allotment any time during his ----------------------
minority. In earlier case, the company must return the money received in the
shares to the minor. If the allotment is not repudiated by either party and the ----------------------
minor’s name appears on the register of members, he is not liable to pay any
----------------------
call during his minority. On attaining majority, if he does not want to continue
as a member, he must repudiate his liability on the shares. If he does not do so, ----------------------
he will become liable as a member on the ground of estoppels.
----------------------
For example, a person was a minor at the date when shares in a company
were allotted to him. After attaining majority, he received dividends for 3 ----------------------
years and thereafter raised an objection to his being included on the register
of members. His objection was overruled and he was estopped by his conduct ----------------------
from denying that he was not a shareholder.
----------------------
However, an agreement in writing for a minor to become a member may
be signed on behalf of the minor by his lawful guardian and the registration of ----------------------
a transfer of shares in the name of minor, acting through his or her guardian, ----------------------
specially where the shares are fully paid-up, cannot be refused on the ground
of the transferee being a minor, further there is no bar to a minor acquiring or ----------------------
holding shares when they are fully paid-up and are subject to no obligation.
----------------------
Insolvent - An insolvent may be a member of a company. So long as his
name appears in the register of members, he is a member and is entitled to vote ----------------------
even though his shares vest in the Official Assignee or Receiver
----------------------
Partnership firm - A partnership firm may hold shares in a company in
the individual names of partners as joint shareholders. As an unincorporated ----------------------
association, a firm is not a person and as such it cannot be entered as a member
in the register of members. ----------------------
Foreigner - A foreigner may become a member of a company, but if at ----------------------

any time he becomes an alien enemy, his rights as a member of the company are
----------------------
suspended.
Company ----------------------
●● A company may, if so authorized by its articles, become a member of ----------------------
another company.
----------------------
●● A company cannot become a member of itself, i.e., it cannot purchase
its own shares. Purchase by a company of its own shares is illegal ----------------------
because it involves return of capital to the shareholders, which amounts
----------------------
Notes to reduction of the company’s capital without the consent of the Tribunal.
The following example will explain the point clearly.
---------------------- ●● A company was authorized by its Articles to purchase its own shares.
---------------------- W sold his shares to the company. Before the full price of the shares
was paid, the company went into liquidation. W claimed to prove in the
---------------------- liquidation for the balance of the price of the shares. Held, the transaction
was ultra vires the company as company had no power to purchase its
---------------------- own shares, and hence the claim of W failed.
---------------------- ●● A company cannot lend money to anyone for the purpose of purchasing
its own shares. Further, it is not lawful for a company to give, whether
---------------------- by means of a loan or provision of a security or otherwise, any financial
---------------------- assistance in connection with purchase of, or subscription for, shares in
the company or in its holding company.
---------------------- ●● A subsidiary company cannot be a member of its holding company and
---------------------- any allotment or transfer of shares in a company to its subsidiary is void
(Sec. 19). Sec. 19 does not apply where –
---------------------- (a) the subsidiary company holds such shares as the legal representative
of a deceased member of the holding company; or
----------------------
(b) the subsidiary company holds such shares as a trustee; or
----------------------
(c) the subsidiary company is a shareholder even before it became a
---------------------- subsidiary company of the holding company
----------------------
----------------------
----------------------
1. When the shares are transferred to X from Y, Y will be a __________
---------------------- of the company.
---------------------- i. Member
---------------------- ii. Owner

iii. Partner
----------------------
iv. None of these
----------------------
----------------------
Activity 1
----------------------
---------------------- A, B, C, D are four friends who all are minors. They have started a company.
Advice them taking into consideration all the criteria of membership of a
----------------------
company.
----------------------
----------------------
66 Corporate Law
4.3 HOW TO BECOME A MEMBER Notes
A person may become a member of a company in the following ways: ----------------------

Membership by subscription ----------------------
The subscribers to the Memorandum of Association of a company are ----------------------
deemed to have agreed to become its members [Sec. 2(55)(i)]. When the
company is registered, their names are entered as members in the register ----------------------
of members. Neither application nor allotment of shares is necessary. Even
in absence of entry in the register of members cannot deprive them of their ----------------------
status. The object underlying this provision is that the public might rely with ----------------------
confidence on the subscribers to become the members of the company.
----------------------
For example, S subscribed to a company’s Memorandum for 200 shares,
but actually he took only 20 shares. Held, he was liable in the winding up of ----------------------
the company for all the 200 shares as he became a member by the very fact of
subscription. ----------------------
A subscriber to the Memorandum cannot rescind the contract to take ----------------------
shares on the ground of misrepresentation made by a promoter because -
----------------------
●● By his own act he brought the company into existence;
●● The company could not appoint an agent before it came into existence ----------------------
and it is, therefore, not liable for the promoter’s act; and
----------------------
●● By signing the Memorandum he became bound on the registration of the
company, not as between himself and the company, but also as between ----------------------
himself and the other persons who became members.
----------------------
A person who subscribes to the Memorandum for a certain number of
shares is bound to take that number of shares from the company and pay for ----------------------
them. The gift of fully paid shares of a subscriber by a third party does not
----------------------
satisfy his obligation in this respect.
Membership by application and registration – ----------------------
Apart from the subscribers of Memorandum, every other person, who ----------------------
agrees in writing to become a member and whose name is entered in the register
of members, is a member of the company [Sec. 2(55)(ii)]. A written application ----------------------
for allotment of shares is, therefore, necessary before a person can be entered as
----------------------
a member in the register of members.
Registration of the name of a person as member of a company may result ----------------------
from any one of the following ways: ----------------------
●● by application and allotment -An application for shares is an offer to
take shares. Allotment is acceptance of that offer by the company which ----------------------
creates a binding contract between the applicant and the company. The ----------------------
application may be absolute or conditional. If it is absolute, an allotment
and its notice is a sufficient acceptance. If it is conditional, the allotment ----------------------
must be according to the terms of the application, otherwise there will be
no contract. ----------------------
Notes For example, S, a builder, wrote to a Hotel Company offering to take up
300 shares on the condition that a contract for alterations to the Hotel
---------------------- would be given to him. His offer was accepted and 300 shares were
---------------------- allotted to him. Such a contract was never made and the company went
into liquidation. Held, S was not liable as a contributory for the amount
---------------------- unpaid on the 300 shares because his agreement to take the shares was
---------------------- conditional on the contract for alterations being given to him.
●● by transfer - A person may purchase shares in the open market. He
----------------------
becomes a member when the transfer of shares is affected and his name
---------------------- is entered in the register of members. The transfer of shares is affected by
lodging with the company an instrument of transfer signed by both the
----------------------
transferor and the transferee along with the share certificate. When the
---------------------- company entered the name of the transferee in the register of members,
the transferee becomes its member.
----------------------
●● by Succession - A deceased member continues to be a member of the
---------------------- company so long as his name appears in the register of members. His
---------------------- legal representative who acquires a legal right to shares is entitled to
have his name entered in the register of members. The company also
---------------------- has the power to register any person as a shareholder to whom the right
---------------------- to any shares (also debentures) in the company has been transmitted by
operation of law (Sec. 108), and in such a case an instrument of transfer
---------------------- is not necessary. Provisions related to transmission of shares are generally
---------------------- found in the Articles of a company.
---------------------- If a company refuses to accept a transmission without any valid reason,

the same remedies are available to the legal representative as in the case of
---------------------- refusal by the company to register a transfer. Further, Sec. 109 entitles the legal
---------------------- representative to effect transfer of the shares or other interest in the company of
the deceased member, although he himself is not a member.
----------------------
The official Receiver or Assignee is also entitled to be a member in place
---------------------- of the shareholder who has been adjudicated insolvent.
---------------------- ●● Agreement to be in writing - An agreement for becoming a member has

to be in Writing. As such a person cannot be deemed to have become a
---------------------- member by means of acquiescence or estoppels simply because his name
---------------------- is entered in the register of members.
●● Membership by beneficial ownership – Every person holding shares
----------------------
of the company and whose name is entered as beneficial owner in the
---------------------- records of the depository shall be deemed to be a member of the concerned
company [Sec. 2(55)(iii)].
----------------------
----------------------
68 Corporate Law
Notes
----------------------
1. When the transfer of shares is affected by lodging with the company
----------------------
an instrument of transfer?
i. after signed by both the transferor and the transferee. ----------------------
ii. after signed by transferor only.
----------------------
iii. after signed by transferee only.
iv. none of the above. ----------------------
----------------------
4.4 CESSATION OF MEMBERSHIP ----------------------
A person may cease to be the member of a company by - ----------------------
1. Act of the parties, or ----------------------
2. Operation of law.
----------------------
1. Act of the parties –
----------------------
A person may cease to be the member of a company –
●● If he transfer his shares to another person. ----------------------
●● If his shares are forfeited. ----------------------
●● If the company sells his shares under some provision in its Articles
----------------------
(e.g., to enforce a lien.)
●● If he rescinds the contract to take shares on the ground of mis- ----------------------
representation in the prospectus or on the ground of irregular
----------------------
allotment.
●● If redeemable preference shares are redeemed. ----------------------
●● If he surrenders his shares, where surrender is permitted. ----------------------
●● If share warrants are issued to him in exchange of fully paid shares.
----------------------
2. Operation of law –
This covers the following cases: ----------------------
●● Insolvency – The shares of an insolvent vest in the Official Receiver or ----------------------

Assignee. When the Official Receiver or Assignee transfers his shares to
----------------------
another person, the insolvent ceases to be a member on the registration of
the transferee as a member. But the insolvent remains a member as long ----------------------
as his name is not removed from the register of the company.
●● Death - The deceased member’s estate, however, remains liable until the ----------------------
shares are registered in the name of his legal representative. ----------------------
●● Sale of shares in execution of a decree of a Court.
----------------------
Notes ●● Winding up of the company. However, during the winding up of a
company a member continues to be liable as a contributory and is also
---------------------- entitled to share in the surplus assets, if any.
----------------------
4.5 RIGHTS AND LIABILITIES OF MEMBERS
----------------------
Rights of members
---------------------- The rights of the members of a company may be grouped under the
---------------------- following three heads:
1. Statutory rights -
----------------------
These are the rights which are conferred in the members by the Companies
---------------------- Act. These rights cannot be taken away or modified by any provision
in the Memorandum or the Articles. Some of the statutory rights of a
---------------------- member are as follows:
---------------------- ●● Right to obtain copies if the Memorandum and the Articles on request and
on payment of the prescribed fees (Sec.17).
----------------------
●● Right of priority to have shares offered in case of increase of capital
---------------------- (Sec. 62).
---------------------- ●● Right to transfer shares (Sec. 44).
●● Right to vote on resolutions at meetings of the company (Sec. 47).
----------------------
●● Right to apply to the Tribunal (National Company Law Tribunal) to have
---------------------- any variation of his rights set aside by the Tribunal (Sec. 48).
---------------------- ●● Right to have share certificate in respect of his shares delivered to him
(Sec.56).
---------------------- ●● Right to inspect the register of members, register of debenture-holders
and copies of annual returns (Sec. 94).
----------------------
●● Right to apply to the Tribunal for calling an annual general meeting when
---------------------- the company fails to call such a meeting (Sec. 97).
---------------------- ●● Right to receive notice of meetings, attend and vote at meeting (Sec. 101).
●● Right to appoint proxy and inspect proxy register (Sec. 105).
----------------------
●● Right to demand a poll or join in demand for a poll (Sec. 109).
---------------------- ●● Right to apply to the Tribunal for calling an extraordinary meeting of the
---------------------- company where it is impracticable to call such a meeting (Sec. 98).
●● Right of a body corporate, as a member of a company, to appoint a
---------------------- representative to attend and vote at general meetings on its behalf
---------------------- (Sec. 113).
●● Right to require the company to circulate resolutions (Sec. 111).
----------------------
●● Right to have on request minute of proceedings of a general meeting
---------------------- (Sec. 119).
●● Right to receive dividend when declared (Sec. 123).
----------------------
70 Corporate Law
●● Right to receive copies of annual accounts of the company with the Notes
auditor’s report (Secs. 129 and 136).
●● Right to participate in appointment of directors and auditors in the ----------------------
annual general meeting (Secs. 139 and 140). ----------------------
●● Right to participate in appointment of directors in annual general meeting
(Sec. 152). ----------------------
●● Right to make an application to the NCLT (Tribunal) for ordering an ----------------------
investigation into the affairs of the company (Sec. 210).
●● Right to present a petition to the NCLT for relief in cases of oppression ----------------------
and mismanagement (Sec. 241 and 242). ----------------------
●● Right to petition to the NCLT of the wind up of the company (Sec. 272).
----------------------
●● Right to share in surplus on winding up (Sec. 320).
Documentary rights ----------------------
These are the rights given to the members by the Memorandum and the ----------------------
Articles of Association.
----------------------
Legal rights
These are the rights which are given to the members by the general ----------------------
law, e.g., in case of any misstatement or concealment of a material fact on a ----------------------
prospectus, a person who has applied for shares on the faith of such prospectus
and has been allotted shares can avoid the contract and claim damages under the ----------------------
general law.
----------------------
Right of shareholders to share in assets of a company
An incorporated company’s assets are the property of the company and ----------------------
not that of its shareholders for the time being. No shareholder, therefore, has ----------------------
any right to any item of property owned by the company for he has no legal
or equitable interest therein. He is entitled to a share in the profits while the ----------------------
company continues to carry on business and a share in the distribution of the
surplus assets when the company is wound up. Note the observation made in ----------------------
the following case: Bacha F. Guzdar v. commr. Of income-tax, A.I.R. (1955) ----------------------
S.C. 74.
----------------------
“That a shareholder acquires a right to participate in the profits of the
company may be readily conceded but it is not possible to accept the contention ----------------------
that the shareholder acquires any interest in the assets of the company. A
shareholder has not got a right in the property of the company. There is nothing ----------------------
in the Indian Law to warrant the assumption that a shareholder who buys shares
----------------------
buys any interest in the property of the company which is a juristic person
entirely distinct from the shareholders. The true position of a shareholder in ----------------------
a company is that on buying shares he becomes entitled to participate in the
profits of the company in which he held the shares of and when the company ----------------------
declares, subject to the Articles of Association, that the profits or any portion
----------------------
thereof should be distributed by way of dividend among the shareholders. He
has undoubtedly a further right to participate in the assets of the company which ----------------------
Notes would be left over after winding up but not in the assets as a whole. Further than
this, he acquires no interest in the assets of the company. “
----------------------
Liability of members
---------------------- The liability of the members of a company depends on the nature of the company.
---------------------- Company with unlimited liability –
---------------------- Each member is liable to pay the full nominal value of the shares held by
him. If he already paid a part of the amount on the shares, his liability is limited
---------------------- to the unpaid amount on the shares in respect of which he is a member.
---------------------- The liability of a registered shareholder to pay for the shares standing on
his name arises from the operation of Sec. 10 which provides that all moneys
---------------------- payable by any member to the company under the Memorandum or the Articles
are a debt due from him to the company. Further, it is the registered holder of
---------------------- shares, whether he is beneficial owner or a mere trustee, who is liable to pay the
---------------------- amounts due on shares.
Where a shareholder dies, his estate is liable in respect of his partly
---------------------- paid shares, and when these shares are registered in the name of his legal
---------------------- representatives, they become liable on those shares. Where he is adjudicated
insolvent, the Official Receiver or Assignee may either sell the partly paid
---------------------- shares in which case the buyer would become liable in respect thereof or he
may disclaim them as onerous property.
----------------------
Company limited by guarantee –
----------------------
Each member is liable to contribute the amount guaranteed by him to be
---------------------- paid in the event of the winding up of the company.
----------------------
----------------------
----------------------
1. Which of the following is a right of the members of a company?
----------------------
i. Right to have share
---------------------- ii. Right to appoint an auditor
---------------------- iii. Right to appoint the director
---------------------- iv. All of the above

1. Once a person becomes a member of a company, he cannot cease to
----------------------
be a member.
---------------------- 2. Statutory rights, which are conferred in the members by the
Companies Act can not be taken away or modified by provisions in
----------------------
the Memorandum or the Articles.
----------------------
72 Corporate Law
4.6 REGISTER AND INDEX OF MEMBERS Notes
Register of members, etc. [Sec. 88] ----------------------

Every company shall keep and maintain the following registers in such ----------------------
form 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; ----------------------
(b) register of debenture-holders; and ----------------------
(c) register of any other security holders.
----------------------
The contents of such registers, their form and manner are prescribed
under the rules. ----------------------
The register may be in the form of a bound book or computer record. ----------------------
Required particulars should be recorded and adequate precautions should be
taken against tampering. ----------------------
Index of members ----------------------

Companies are required to maintain an index of members. The register itself ----------------------
may be kept in the form of an index or a separate card index may be used for the
purpose. This is to enable entries relating to a particular member to be readily ----------------------
found.
----------------------
Register and Index of beneficial owners [Sec. 88(3)]
----------------------
The register and index of beneficial owners maintained by a depository
under section 11 of the Depositories Act, 1996, shall be deemed to be the ----------------------
corresponding register and index for the purposes of this Act.
----------------------
Foreign Register of members [Sec. 88(4)]
A company may, if so authorised by its Articles of Association, keep ----------------------
in any country outside India, a part of the register called “Foreign Register” ----------------------
containing the names and particulars of the members; debentures holders, other
security holders or beneficial owners residing outside India. ----------------------
The foreign register is to be a part of the company’s home register which ----------------------
shall, in contrast to that, be called the principal register. In respect of closure,
copies, extracts, inspection, etc., the foreign register is bound by the same ----------------------
provisions as apply to the principal register.
----------------------
Penalty [Sec. 88(5)]
----------------------
If a company does not maintain a register of members or debenture-
holders or other security holders or fails to maintain them in accordance with ----------------------
the provisions of section 88 the company and every officer of the company
who is in default shall be punishable with fine which shall not be less than ----------------------
fifty thousand rupees but which may extend to three lakh rupees and where
----------------------
the failure is a continuing one, with a further fine which may extend to one
thousand rupees for every day, after the first during which the failure continues. ----------------------
Notes Place of keeping, inspection and returns [Sec. 94]
Place of keeping
----------------------
The registers required to be kept and maintained by a company under
---------------------- section 88 and copies of the annual return filed under section 92 shall be kept at
the registered office of the company.
----------------------
Such registers or copies of return may also be kept at any other place in
---------------------- India in which more than one-tenth of the total number of members entered in
the register of members reside, if approved by a special resolution passed at a
----------------------
general meeting of the company and the Registrar has been given a copy of the
---------------------- proposed special resolution in advance.
---------------------- The period for which the registers, returns and records are required to be
kept shall be such as may be prescribed.
---------------------- Inspection of Register
---------------------- Any member, debenture-holder, other security holder or beneficial owner
or any other person may take extracts from any register, or index or return
---------------------- without payment of any fee; or require a copy of any such register or entries
---------------------- therein or return on payment of such fees as may be prescribed.
This is to enable the persons dealing with the company to ascertain for
----------------------
themselves the membership of the company. The company may, however,
---------------------- impose reasonable restrictions on the right of inspection, but the register must
remain open during business hours each day.
----------------------
Penalty
---------------------- If any inspection or the making of any extract or copy required under
section 94 is refused, the company and every officer of the company who is in
----------------------
default shall be liable, for each such default, to a penalty of one thousand rupees
---------------------- for every day subject to a maximum of one lakh rupees during which the refusal
or default continues.
----------------------
Power to close Register [Sec. 91]
---------------------- A company may close the register of members or the register of debenture
---------------------- holders or the register of other security holders for any period or periods not
exceeding in the aggregate forty-five days in each year, but not exceeding thirty
---------------------- days at any one time.
---------------------- Notice
A previous notice of at least seven days or such lesser period as may
----------------------
be specified by Securities and Exchange Board for listed companies or the
---------------------- companies must be given, in such manner as may be prescribed.
Penalty
----------------------
If the register of members or of debenture-holders or of other security
---------------------- holders is closed without giving the notice, or after giving shorter notice than
---------------------- that so provided, or for a continuous or an aggregate period in excess of the
limits specified, the company and every officer of the company who is in default
74 Corporate Law
shall be liable to a penalty of five thousand rupees for every day subject to a Notes
maximum of one lakh rupees during which the register is kept closed.
----------------------
Registers, etc., to be prima facie evidence [Sec. 95]
The registers, their indices and copies of annual returns maintained under ----------------------
sections 88 and 94 shall be prima facie evidence of any matter directed or
----------------------
authorised to be inserted therein by or under the Companies Act.
M.F.R.D. Cruz, Re, A.I.R. (1939) Mad. 803. Four thousand shares of a ----------------------
company were transferred to the plaintiff who had not applied for them. He did
----------------------
not insist for removal of his name from the register of members, although he
knew that his name appeared in the register. Held, he was liable as a contributory. ----------------------
The Court observed in this case:
----------------------
“When a person knows that his name is included in the register of
shareholders and stands by and allows his name to remain, he is holding out ----------------------
to the public that he is a shareholder and thereby he loses his right to have his
name removed.” ----------------------
The register of member is a valuable document not only from the ----------------------
viewpoint of the company and of the shareholders but also of creditors. An
entry in the register of members determines the right of a person to participate ----------------------
in the affairs of the company. At the same time, he incurs the liability of a ----------------------
shareholder. Creditors can also act upon an entry in the register of members by
treating that person to be the shareholder. ----------------------
Rectification of register of members ----------------------
Rectification is a term which by itself implies the prior existence of some
----------------------
error, mistake or defect, which after rectification is made right and corrected by
removal of flaws. The register kept by a company has to be shown to be wrong ----------------------
or defective, if it is to be rectified.
----------------------
Rectification of register of members [Sec.59]
It is, the duty of the company to keep the register up to date so as to give ----------------------
at all times the accurate and correct position as to particulars of shareholding. If ----------------------
the company does not do so, an order can be sought from the Tribunal in respect
of all matters falling within Section 59. ----------------------
An aggrieved person or any member or the company itself can apply for ----------------------
rectification:
a) If the name of any person is, without sufficient cause, entered in the ----------------------
register ofmembers of a company, ----------------------
b) If the name of any person after having been entered in the register, is,
----------------------
without sufficient cause, omitted therefrom.
c) If a default is made, or unnecessary delay takes place in enteringin the ----------------------
register, the fact of any person having become or ceased to be a member.
----------------------
----------------------
Notes Benami Holders of Shares (Sec. 89)
Sometimes a person, known as benamidar, may hold some shares for the
----------------------
benefit of another person known as the beneficial owner. Although the latter has
---------------------- the beneficial interest in the shares, the former stands registered as shareholder
in the books of the company. Sec. 89 makes it obligatory for both the benamidar
---------------------- as well as the beneficial owner of the shares to make a declaration to that effect.
The provisions of Sec. 89 are summarized below:
----------------------
●● Declaration by benamidar – Every benamidar (i.e., a shareholder who
---------------------- does not have the beneficial interest in the shares registered in his name)
shall make a declaration to the company specifying the name and other
----------------------
particulars of the person who holds the beneficial interest in such shares.
---------------------- Such declaration has to be submitted within such time and in such a
manner as may be prescribed.
----------------------
●● Declaration by beneficial owner – Similarly the person who holds a
---------------------- beneficial interest in the shares shall make a declaration within 30 days
after becoming the beneficial owner, specifying the nature of his interest,
---------------------- particulars of the person in whose name the shares stand registered in the
books of the company and such other particulars as may be prescribed.
----------------------
●● Declaration of change in beneficial interest – The beneficial owner is also
---------------------- required to submit a declaration whenever there is a change in the beneficial
interest in such shares, within 30 days from the date of such change.
----------------------
●● Penalty on benamidar or beneficial owner – If the benamidar or
---------------------- beneficial owner fails to make a declaration, without any reasonable
excuse, he shall be punishable with fine which may extend to Rs. 1,000
---------------------- for every day during which the failure continues.
---------------------- ●● Note of declaration by the company in register of members and return
to Registrar – The Company shall make a note of the declaration made
---------------------- by the beneficial owner in its register of member. It shall also file, within
---------------------- 30 days with the Registrar with regard to such declaration.
●● Beneficial owner debarred from certain remedies – If any of the
---------------------- declarations required to be made under the provisions of Sec. 89 is
---------------------- not made, the beneficial owner will not be able to enforce any charge,
promissory note or any other collateral agreement, created, executed or
---------------------- entered into in relation to any share, by the benamidar thereof.
---------------------- ●● Dividend – The obligation of the company to pay dividend (in accordance
with the provisions of Sec. 123) shall not be affected by Sec. 89.
---------------------- ●● Penalty on company – If a company fails to comply with the provisions
of Sec. 89, the company, and every officer of the company who is in
----------------------
default, shall be punishable with fine which may extend to Rs. 100 for
---------------------- every day during which the default continues.
●● The Central Government may appoint Inspectors to investigate and report
----------------------
as to whether the provisions of Sec. 89 have been complied with by a
---------------------- company (Sec. 90).
76 Corporate Law
Notes
----------------------
1.
A shareholder who does not have the beneficial interest in the shares
----------------------
registered in his name is a ___________.
i. Owner ----------------------
ii. Partner
----------------------
iii. Creditor
iv. Benamidar ----------------------
----------------------
Summary ----------------------
●● The ‘Members’ or ‘Shareholders’ of a company are the persons who ----------------------

collectively constitute the company as a corporate entity. These terms are
used interchangeably. They are synonymous in the case of a company ----------------------
limited by shares, a company limited by guarantee and having a share ----------------------
capital and an unlimited company whose capital is held in definite
shares. But in the case of an unlimited company or a company limited by ----------------------
guarantee, a member may not be a shareholder, for such a company may
not have a share capital. ----------------------
●● Any person who is competent to contract may become a member of a ----------------------

company. A person may become a member of a company in the following
ways, Membership by subscription, Membership by application and ----------------------
registration, Membership by qualification shares. ----------------------
●● The members enjoy certain rights and are subject to certain liabilities.
The rights of the members of a company may be grouped under the three ----------------------
heads, statutory rights, Documentary rights, Legal rights. ----------------------
●● Every company shall keep a register of its members and enter therein the
following particulars, The name and address, and the occupation of each ----------------------
member, In the case of a company having a share capital, the shares held ----------------------
by each member distinguishing each share by its number except where
such shares are held with a depository and the amount paid, or agreed ----------------------
to be paid, on those shares, The date at which each person was entered
in the register as a member, The date at which any person ceased to be a ----------------------
member. ----------------------
----------------------
----------------------
----------------------
----------------------
Notes Keywords
----------------------
●● Competent to contract: The use of the expression in Section 11 of
---------------------- the Indian Contract Act, requiring that all contracting parties should be
“competent to contract”, has the effect of rendering the contracts entered
---------------------- into by incompetent person not voidable but void.
---------------------- ●● A competent person is a person who is a practical and reasonable man,
who knows what to look for and knows how to recognize it when he sees
---------------------- it.
---------------------- ●● Benami/ Benamidar: – Nameless, fictitious, fraudulent as a purchase
under false name, or land held in another name than that of the real
---------------------- proprietor sale or purchase made in the name of someone other than the
actual vendor.
----------------------
●● Benamidar: is one whose name appears in a benami transaction but who
---------------------- is not the real proprietor of the right indicated. A benamidar may be either
a stranger whose name is used in order to conceal the real owner, or he
---------------------- may be a relative for the sake of whose reputation a nominal assignment
---------------------- of property is made.
●● Decree of court: – Decree means the formal expression of an adjudication
---------------------- which so far as regards the court expressing it, conclusively determines the
---------------------- rights of the parties with regard to all or any of the matters in controversy
in the suit and may be either preliminary or final.
---------------------- ●● Succession: – The process by which one person succeeds another in the
occupation or possession of any estate or the like. The act or right of legal
----------------------
or official investment with a predecessor’s officer, dignity, possessions, or
---------------------- functions, a series of persons following one another in lineage; an order
of descendants.
----------------------
---------------------- Self-Assessment Questions

---------------------- 1. What is the difference between the shareholders and members?
---------------------- 2. Who can become a member of a company?
3. What is the procedure for becoming a member of a company?
----------------------
4. What are the rights of a member?
----------------------
5. What are the liabilities of a member?
---------------------- 6. Where is the record of shareholders maintained?
---------------------- 7. Write a note on foreign register?
---------------------- 8. When can a Company become a member?
9. Can a partnership firm become a shareholder?
----------------------
10. Subsidiary Company cannot become whose member?
----------------------
11. Can a company become its own member?
78 Corporate Law
1. Which of the given below members are not shareholders
----------------------
i. Death of members
----------------------
2. When the shares are transferred to X from Y, Y will be a __________ of
the company. ----------------------
i. Member
----------------------
----------------------
1. When the transfer of shares is affected by lodging with the company an ----------------------
instrument of transfer?
----------------------
i. after signed by both the transferor and the transferee.
----------------------

1. Which of the following is a right of the members of a company? ----------------------
iv. All the above
----------------------
----------------------
State True or False.
1. False ----------------------
2. True ----------------------
----------------------
----------------------
----------------------
1. A shareholder who does not have the beneficial interest in the shares
registered in his name is a ____________. ----------------------
iv. Benamidar ----------------------
----------------------
----------------------
----------------------
----------------------
Notes
Suggested Reading
----------------------
---------------------- & Sons.
----------------------
Co.
---------------------- Reporter.
----------------------
5. Companies Act, 2013.
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
80 Corporate Law
Shares and Dividends
UNIT
5
Structure:
5.1 Introduction to Shares
5.2 Types of Shares
5.3 Allotment of Shares
5.4 Calls on Shares
5.5 Share Certificate
5.6 Transfer of Shares
5.7 Dividends
Summary
Keywords
Suggested Reading
Shares and Dividends 81

Notes
Objectives
----------------------
• Classify shares
----------------------
• Compare and contrast the types of shares
----------------------
• Discuss the modes of allotment of shares
---------------------- • Distinguish between shares and dividends
----------------------
----------------------
5.1 INTRODUCTION TO SHARES
----------------------
A share is the interest of a shareholder in a company. The capital of a
---------------------- company is divided into certain indivisible units of a fixed amount. These units
---------------------- are called shares. ‘Share’ means share in the share capital of a company and
includes stock [Sec. 2 (84)]. A share has also been defined as “an interest having
---------------------- a money value and made up of diverse rights specified under the Articles of
Association”.
----------------------
A share is evidenced by a share certificate [Sec.46]-
---------------------- A certificate, is issued under the common seal if any and with the
---------------------- signature of authorized signatory of the company. It specifies the shares held by
any person, and shall be prima facie evidence of the title of the person to such
---------------------- shares.
---------------------- Where a share is held in depository form, the record of the depository is
the primafacie evidence of the interest of the beneficial owner.
----------------------
Each share is be distinguished by its distinctive number [Sec.45]-
---------------------- Every share in a company having a share capital shall be distinguished by
---------------------- its distinctive number.
Section 45 shall not apply to a share held by a person whose name is entered
---------------------- as holder of beneficial interest in such share in the records of a depository.
---------------------- Further the Memorandum of a company having share capital shall state
the amount of share capital with which the company is to be registered and the
---------------------- division thereof into shares of a fixed amount.
---------------------- Stock and Shares
---------------------- Stock is the aggregate of fully paid-up shares, consolidated and divided,
for the purpose of convenient holding into different parts. It may be transferred
---------------------- or split into fractions of any amount, without regard to the original face value of
the share. It also denotes –
----------------------
(1) that a company has recognized the fact of complete payment of the shares,
---------------------- and
82 Corporate Law
(2) that they can be assigned in fragments which could not be done before. Notes
Stock can validly be issued only when the shares are fully paid-up. The
----------------------
issue of partly paid-up stock is a nullity. This, in other words, means that only
fully paid-up shares can be converted into stock. ----------------------
A company limited by shares may, of authorized by its Articles, by
----------------------
ordinary resolution passed in general meeting, convert its fully paid-up shares
into stock. When shares are converted into stock, notice shall be given to the ----------------------
Registrar within 30 days of the conversion. The register of members shall then
show the amount of stock held by each of the members concerned instead of the ----------------------
amount of shares.
----------------------
5.2 TYPES OF SHARES ----------------------
Under the Companies Act, 2013, a company can issue two types of shares, viz., ----------------------
(1) Preference shares
----------------------
(2) Equity shares
----------------------
1. Preference Shares [Sec. 43] – Preference shares, with reference to any
company limited by shares, are those which have 2 characteristics: ----------------------
●● They have a preferential right to be paid dividend during the lifetime ----------------------
of the company.
●● They have a preferential right to the return of capital when the ----------------------
company goes into liquidation. ----------------------
2. Equity Shares [Sec. 43] – Equity shares, with preference to any company
limited by shares, are those which are not preference shares. ----------------------
Sweat equity shares- [Sec. 2(88)]. The expression “sweat equity shares” ----------------------
means equity shares issued at a discount or for consideration other than cash
for providing know-how or making available rights in the nature of intellectual ----------------------
property rights or value additions, by whatever name called. ----------------------
All limitations, restrictions and provisions related to equity shares shall
be applicable to sweat equity shares also. ----------------------
Kinds of preference shares ----------------------

Preference shares are of the following kinds, viz. ----------------------
1. Cumulative preference shares -
----------------------
These are the shares on which dividend goes on accumulating till it is
fully paid off. The arrears of any year’s dividend are carried forward as a ----------------------
charge upon the subsequent years’ profits. The company is bound to pay ----------------------
dividend only if it has sufficient profits available for distribution. If it
goes into liquidation, arrears of dividends are payable – ----------------------
●● If the Articles contain express provision to this effect, or
----------------------
●● The Articles, upon their true construction, give the preference
shareholders a clear right to the dividend. ----------------------

Notes 2. Non-cumulative preference shares –
These are the shares on which the dividend does not go on accumulating.
----------------------
If there are no profits or there are inadequate profits in any year, these
---------------------- shares get no dividend or get a partial dividend. They cannot claim arrears
of dividends of any year/years out of the profits of the subsequent years.
----------------------
Whether preference shares are cumulative or non-cumulative depends
---------------------- upon the terms of issue and provisions in the Articles of the company
issuing them. In the absence of any specific provision to the contrary,
---------------------- preference shares are presumed to be cumulative. An ambiguous language
in the Articles does not make them non-cumulative.
----------------------
3. Participating preference shares –
----------------------
These shares are not only entitled to a fixed rate of dividend but also at
---------------------- a share in the surplus profits which remain after the claims of the equity
shareholders (up to a limit, say, 15 per cent) have been met. The surplus
---------------------- profits are distributed in a certain agreed ratio between the holders of the
---------------------- participating preference shares and the holders of equity shares.
If the Articles and Memorandum are silent and there is no clear provision
---------------------- in the terms of issue of preference shares, all preference shares are deemed
---------------------- to be non-participating preference shares. Further, if there is no special
provision in the Articles, the preference shareholders have no further
---------------------- right to share in the surplus assets in a winding up remaining after they
and equity shareholders have been paid in full.
----------------------
4. Non-participating preference shares –
----------------------
These shares are entitled to only a fixed rate of dividend. The holders
---------------------- of these shares do not share in the surplus profits which go to the equity
shareholders.
----------------------
5. Convertible preference shares –
---------------------- These are the shares which entitle their holder to convert them into equity
shares within a certain period.
----------------------
6. Non-convertible preference shares –
----------------------
Non-convertible preference shares does not have the option to convert
---------------------- them into equity shares but it has all other normal characteristics of a
preference share.
----------------------
7. Redeemable preference shares (Sec. 55). A company limited by shares
---------------------- may, if so authorized by its Articles, issue preference shares which are
to be redeemed. Sec. 55 authorizes only the fresh issue of redeemable
----------------------
preference shares. A company cannot convert the existing preference
---------------------- shares into redeemable preference shares. If it wants to do so the proper
course would be to first effect a reduction of capital and then to increase
---------------------- the capital by issue of redeemable preference shares.
----------------------
84 Corporate Law
Redemption of redeemable preference shares – Notes
Redeemable preference shares can be redeemed subject to the following
----------------------
conditions:
●● The shares to be redeemed must be fully paid-up. ----------------------
●● Such shares can be redeemed only out of the – ----------------------
●● Profits of the company which would otherwise be available for dividend,
or ----------------------
●● The proceeds of a fresh issue of shares made for the purpose of redemption. ----------------------
●● Any premium payable on redemption must have been provided for out of ----------------------
the profits or out of the company’s security premium account, before the
shares are redeemed. ----------------------
●● Where redemption is made out of profits, a sum equivalent to the nominal ----------------------
value of the shares redeemed must be transferred to the ‘capital redemption
reserve account’. This is treated as equivalent to share capital of the ----------------------
company and can be reduced only of the provisions related to reduction
of share capital are observed. But it may be applied by the company to ----------------------
pay up unissued shares to be issued as fully paid bonus shares. ----------------------
●● Redemption of preference shares by a company is not taken as reducing
the amount of its authorized share capital, and as such provisions of the ----------------------
Act with regard to reduction of capital are not required to be complied ----------------------
with.
●● No company limited by shares shall, after the commencement of ----------------------
the Companies Act, 2013 issue any preference share which is
----------------------
irredeemable or is redeemable, after the expiry of a period of 20 years
from the date of its issue. ----------------------
However, a company may issue preference shares for a period exceeding
----------------------
twentyyears for infrastructure projects, subject to the redemption of such
percentage of shares asmay be prescribed on an annual basis at the option of ----------------------
such preferential shareholders.
----------------------
Notice to Registrar [Sec. 64(1)(c)]- Any redemption of redeemable preference
shares must be notified to the Registrar within 30 days of the date of redemption. ----------------------
Penalty ----------------------
If a company and any officer of the company who is in default contravenes
the provisions of sub-section (1) of Section 64, it or he shall be punishable with ----------------------
fine which may extend to one thousand rupees for each day during which such ----------------------
default continues, or five lakh rupees, whichever is less.
----------------------
----------------------
----------------------
----------------------

Notes
----------------------

1. Within how many days any redemption of redeemable preference
----------------------
shares need to be notified to Registrar from the date of redemption?
---------------------- i. 30 days.
ii. 60 days.
---------------------- iii. 90 days.
iv. 45 days.
----------------------
----------------------
Activity 1
----------------------
---------------------- Find out whether there is any difference between share and stock. If yes, then
what it is?
----------------------
---------------------- 5.3 ALLOTMENT OF SHARES

---------------------- An application for shares is an offer by a prospective shareholder of a
company to take shares. ‘Allotment’ is the acceptance by the company of that
----------------------
offer. Allotment results in a binding contract between the company and the
---------------------- applicant.
---------------------- The term ‘allotment’ is not defined in the Act. Broadly speaking, allotment
is the appropriation to an applicant by a resolution of the Board of Directors of
---------------------- a company of a certain number of shares on the company in response to an
application.
----------------------
The general principles as to offer and acceptance in the law of contract
---------------------- apply to a contract involving an application for and allotment of shares in a
company. These principles are as follows:
----------------------
1. Proper authority – An allotment must be made by a resolution of the
---------------------- Board of directors of the company. This duty cannot be delegated by the
directors except in accordance with the provisions of the Articles.
----------------------
2. Reasonable time – Time allotment must be made within a reasonable
---------------------- time otherwise the applicant is not bound to accept it. But if in spite of
an unreasonable delay, shares are accepted by the applicant (or are not
----------------------
repudiated by him), he cannot plead that his offer had lapsed because of
---------------------- the delay.
3. Communication – The allotment must be communicated to the person
----------------------
making the application so that it is legally complete. Where the post is
---------------------- used as a means of communication between the parties (as is generally
the case), Secs. 4 and 5 of the Indian Contract Act, 1872 apply. Thus
----------------------
86 Corporate Law
allotment is complete as soon as the company posts the letter of acceptance, Notes
sufficiently stamped and correctly addressed. If the letter of acceptance
is lost in postal transit, the allottee is liable as the contract is complete ----------------------
against him as soon as the letter of acceptance is posted.
----------------------
4. Absolute and unconditional – The allotment must be absolute and
unconditional. If an application for shares is conditional and the condition ----------------------
is not fulfilled, the applicant is not bound to take shares.
----------------------
5. Revocation – An offer to take shares (i.e., application) may be withdrawn
any time before communication of its acceptance (i.e., allotment) is ----------------------
complete as against the applicant (i.e., before the letter of allotment is
----------------------
posted). That is, an applicant for shares can withdraw his offer any time
before his offer has been accepted. ----------------------
Likewise, allotment may be withdrawn by the company any time before
----------------------
its communication is complete as against the company (i.e., before the letter of
allotment is received by the applicant). ----------------------
Special Provision Related To Application and Allotment ----------------------
Public Offer and Private Placement
----------------------
Public Offer
----------------------
A public company may issue securities—
(a) to public through prospectus (herein referred to as “public offer”) by ----------------------
complying with the provisions of Part I of Chapter III; or
----------------------
(b) through private placement by complying with the provisions of Part II of
Chapter III; or ----------------------
(c) through a rights issue or a bonus issue in accordance with the provisions of ----------------------
this Act and in case of a listed company or a company which intends to get
its securities listed also with the provisions of the Securities and Exchange ----------------------
Board of India Act, 1992 and the rules and regulations made thereunder. ----------------------
A private company may issue securities—
----------------------
(a) by way of rights issue or bonus issue in accordance with the provisions of
this Act; or ----------------------
(b) through private placement by complying with the provisions of Part II of ----------------------
Chapter III.
----------------------
“Public offer” includes initial public offer or further public offer of
securities to the public by a company, or an offer for sale of securities to the ----------------------
public by an existing shareholder, through issue of a prospectus.
----------------------
Private Placement
“Private placement” means any offer of securities or invitation to ----------------------
subscribe securities to a select group of persons by a company (other than by ----------------------
way of public offer) through issue of a private placement offer letter and which
satisfies the conditions specified in section 42. ----------------------

Notes Without prejudice to the provisions of section 26, a company may, subject
to the provisions of section 42, make private placement through issue of a
---------------------- private placement offer letter.
---------------------- Subject to sub-section (1) section 42, the offer of securities or invitation to
subscribe securities, shall be made to such number of persons not exceeding fifty
---------------------- or such higher number as may be prescribed, [excluding qualified institutional
buyers and employees of the company being offered securities under a scheme
----------------------
of employees stock option as per provisions of clause (b) of sub-section (1) of
---------------------- section 62], in a financial year and on such conditions (including the form and
manner of private placement) as may be prescribed.
----------------------
If a company, listed or unlisted, makes an offer to allot or invites
---------------------- subscription, or allots, or enters into an agreement to allot, securities to more
than the prescribed number of persons, whether the payment for the securities
---------------------- has been received or not or whether the company intends to list its securities
or not on any recognised stock exchange in or outside India, the same shall be
----------------------
deemed to be an offer to the public and shall accordingly be governed by the
---------------------- provisions of Part I of Chapter III.
Registration of prospectus [Sec. 26].
----------------------
A copy of the prospectus signed by every person who is named therein
---------------------- as a director or proposed director of the company or by his agent authorized in
---------------------- writing shall be duly filed with the Registrar for registration on or before the
date of its publication.
---------------------- Initial offer of securities to be in dematerialized form in certain cases.
---------------------- Notwithstanding anything contained in any other provisions of the Act,
every listed public company, making initial public offer of any security for a
---------------------- sum of rupees 10 crores or more, shall issue the same only in dematerialized
---------------------- form by complying with the requisite provisions of the Depositories Act, 1996
and regulations made there under.
----------------------
Minimum subscription [Sec. 39(1)]
---------------------- No allotment shall be made of any share capital of a company offered to
the public for subscription unless –
----------------------
– The amount stated in the prospectus as the minimum amount has been
---------------------- subscribed, and
---------------------- – The sum payable on application for such amount has been paid to and
received by the company.
----------------------
Application money [Sec.39(2) & (3)]
----------------------
The amount payable on application on every security shall not be less than
---------------------- five per cent of the nominal amount of the security or such other percentage or
amount, as may be specified by the Securities and Exchange Board by making
---------------------- regulations in this behalf.
----------------------
88 Corporate Law
If the stated minimum amount has not been subscribed and the sum Notes
payable on application is not received within a period of thirty days from the
date of issue of the prospectus, or such other period as may be specified by the ----------------------
Securities and Exchange Board, the amount received shall be returned within
such time and manner as may be prescribed. ----------------------
Return of allotment [Sec. 39(4)] ----------------------

Where a company having a share capital makes any allotment of securities, ----------------------
it shall file with the Registrar a return of allotment in such manner as may be
prescribed. ----------------------
Penalty for default [Sec.39(5)] ----------------------
In case of any default under sub-section (3) or sub-section (4) of section ----------------------
39, the company and its officer who is in default shall be liable to a penalty, for
each default, of one thousand rupees for each day during which such default ----------------------
continues or one lakh rupees, whichever is less.
----------------------
Any condition requiring or binding any applicant for shares to waive
compliance with any requirement of Sec. 39 shall be void. ----------------------
Shares and debentures to be listed in on a stock exchange (Sec. 40) ----------------------
The Companies Act, provides for compulsory listing of all public issues
----------------------
with recognized stock exchanges. According to it, every company, intending
to offer shares or debentures to the public for subscription by the issue of a ----------------------
prospectus, shall, before such issue, make an application to one or more
recognized stock exchanges for permission for the listing of its shares or ----------------------
debentures. This provision has been made to lend liquidity and marketability to
----------------------
the shares or debentures issued to the public.
The name of the stock exchange or, as the case may be, of each of the ----------------------
stock exchanges is to be stated in the prospectus. Any allotment made under
----------------------
the prospectus shall be void if the permission for listing of shares has not been
granted by the stock exchange or each of such stock exchanges. ----------------------
It is a condition precedent for listing permission that the application money ----------------------
is deposited in a separate bank account and is to be used only for the adjustment
against allotment of securities if the securities have been permitted to be dealt ----------------------
with in the exchange or exchanges specified in the prospectus. Otherwise the
money has to be used for repayment to applicants within the time specified by ----------------------
SEBI, if the company is for any other reason unable to allot securities. [Sec. ----------------------
40(3)]
If a default is made in complying with the provisions of the section, the ----------------------
company is to be punishable with a fine which is not less than which is not less ----------------------
than Rs 5,00,000 but may extend to Rs 50,00,000. Every officer in default is
punishable with imprisonment for a term extending to one year or fine not less ----------------------
than Rs 50,000 extending up to Rs. 3,00,000 or with [Sec. 40(5)].
----------------------
----------------------

Notes Debentures
Broadly speaking when a company takes a loan and issues a loan certificate
----------------------
that is a debenture. According to Section 2(30) “debenture” includes debenture
---------------------- stock, bonds or any other instrument of a company evidencing a debt, whether
constituting a charge on the assets of the company or not. Thus, debenture is
---------------------- a document which either creates a debt or acknowledges it, and any document
which fulfils either of these conditions is a debenture.
----------------------
To determine whether a particular document issued by a company is
---------------------- a debenture or not, the court looks at the substance of the transaction. Thus,
where a company issued certain documents for money, the documents bore
----------------------
serial numbers, acknowledged debt and provided for payment of interest by
---------------------- determining lucky numbers, the court held on to them to be debentures.
Thus usual features of a debenture are that it is a certificate issued under
----------------------
the seal of the company, it generally acknowledges a debt, it usually provides
---------------------- for the payment of principal at specified time with interest in the meantime; it
is usually one of a series; it generally creates a charge on the company’s assets.
---------------------- These are the usual but not compulsory features.
---------------------- Issue of Debentures
---------------------- A company may issue debentures either with an option to convert such
debentures into shares wholly or partly at the time of redemption. The issue of
---------------------- such debentures shall be approved by a special resolution passed at a general
meeting.
----------------------
Secured debentures may be issued by the company subject to such terms
---------------------- and conditions as may be prescribed.
---------------------- Compulsory appointment of debenture trustees
Appointment of debenture trustees is compulsory only when prospectus
----------------------
is issued to more than 500 persons for subscription of debentures. This ensures
---------------------- than when not more than 500 people are targeted for raising debentures money,
the company is not saddled with the cost of appointing debenture trustees.
----------------------

---------------------- 1. Allotment results in a binding contract between the company and the
applicant.
----------------------
---------------------- 5.4 CALLS ON SHARES

---------------------- A call is a demand by a company on its shareholders to pay the whole or
part of the balance remaining unpaid on each share. It is made in pursuance of
---------------------- a resolution of the Board of directors and terms of the Articles. It may be made
---------------------- any time during the lifetime of the company or during its winding up.
90 Corporate Law
The amounts paid on application and allotments are not calls unless the Notes
Articles explicitly recognize them as calls. But subsequent installments, as and
when demanded, are calls. The word ‘call’ is used to denote both demand for ----------------------
money and also the sum demanded.
----------------------
Legal provisions related to calls
----------------------
1. Resolution of the Board [Sec. 179] – A call must be made under a
resolution of the Board of directors passed at a meeting of the Board. In ----------------------
making a call, care must be taken –
(1) That the directors making it are duly appointed and duly qualified, ----------------------
(2) The meeting of directors has been duly convened, ----------------------
(3) That the proper quorum is present, and
----------------------
(4) That the resolution making the call is duly passed.
As regards minor discrepancies, the Articles usually provide that the act ----------------------
of the directors would be valid even if it is afterwards discovered that there was ----------------------
some defect in the appointment for qualifications of such directors.
2. Bona fide and for the benefit of the company – The power to make calls ----------------------
is in the nature of trust and must be exercised bona fide for the benefit of ----------------------
the company. A call should be made by the company only when it is in
bona fide need of capital. For Example, good faith is lacking where the ----------------------
directors call upon the shareholders to pay without clearing their own
dues on their shares, or where the directors make a call only to enable ----------------------
them to draw their salary. ----------------------
3. Uniform basis (Sec. 49) – The calls must be made on a uniform basis
----------------------
on all shares falling under the same class. Shares of the nominal value
on which different amounts have been paid up under the same class. If a ----------------------
call is made on some shareholders but not on others or a call of a greater
amount is made on some shareholders than on others, the call is invalid. ----------------------
4. Calls in advance (Sec. 50) – A company may, if so authorized by its ----------------------
Articles, accept from any member the whole or part of the amount
remaining unpaid on any shares held by him in advance. The payment of ----------------------
calls in advance does not give voting rights to the member in respect of
----------------------
that amount until that amount becomes presently payable.
5. In accordance with the Articles, amount, place and time of payment - ----------------------
The call must be made strictly in accordance with the provisions of the ----------------------
Articles. It must specify the amount of the call and the time and the place
of payment. If this is not done, the call will be invalid. ----------------------
5.5 SHARE CERTIFICATE ----------------------
Every person whose name is entered as a member in the register of ----------------------

members of a company has a right to receive a certificate of his shares. A ----------------------
share certificate shall be under the seal if any and with signature of authorized
signatory of the company, and shall specify – ----------------------

Notes (1) The shares to which it relates,
(2) The amount paid up thereon, and
----------------------
(3) The name of the holder of the shares. The share certificate shall be signed
---------------------- by at least 2 directors and the secretary.
---------------------- Limitation of time for issue of share certificates (Sec. 56)
---------------------- The company shall deliver share certificates –

(a) within a period of two months from the date of incorporation, in the case
---------------------- of subscribers to the memorandum;
---------------------- (b) within a period of two months from the date of allotment, in the case of
any allotment of any of its shares;
----------------------
(c) within a period of one month from the date of receipt by the company of
---------------------- the instrument of transfer under sub-section (1) of section 56 or, as the
case may be, of the intimation of transmission under sub-section (2) of
----------------------
section 56, in the case of a transfer or transmission of securities;
---------------------- (d) within a period of six months from the date of allotment in the case of any
allotment of debenture.
----------------------
Issue of share certificate is however subject to any provision of law or of
---------------------- any order of any Court, tribunal or the authority.
---------------------- The expression ‘transfer’ means a transfer duly stamped and otherwise
valid, and does not include any transfer which the company is for any reason
---------------------- entitled to refuse to register and does not register.
---------------------- The share certificate issued to promoters, directors, friends, relatives and
associates, etc. Should carry the inscription “not transferable” for the period
---------------------- as may be applicable from the date of commencement of production or date of
---------------------- allotment whichever is later.
Objects of share certificate – A share certificate under the seal if any and
----------------------
with signature of authorized signatory of company is prima facie evidence of
---------------------- the title of the member to the shares specified in the certificate.
“The power of granting certificates is to give the shareholders the
----------------------
opportunity to deal easily with their shares in the market, and make facilities
---------------------- affordable to them for selling their shares by at once showing a marketable title,
and the effect of this facility is to make the shares of greater value.”
----------------------
Estoppel - A share certificate of a company creates two kinds of estoppel
---------------------- against the company, namely:
---------------------- 1. Estoppel as to title – If a company authorises the issue of a share certificate

stating that the person named therein is the registered holder of certain
---------------------- shares, it cannot afterwards allege that that person is not entitled to those
shares.
----------------------
2. Estoppel as to payment - If the share certificate states that the shares are
---------------------- fully paid, the company is estopped as against a bona fide purchaser from
92 Corporate Law
alleging that the amount stated in the share certificate as being paid on Notes
shares has not been paid.
----------------------

1. The company must deliver share certificate within ___________ of ----------------------
share allocation by the company.
i. Two months ----------------------
ii. Three months ----------------------
iii. Four months
----------------------
----------------------
5.6 TRANSFER OF SHARES ----------------------
The shares of a member in a company are movable property, transferable ----------------------

in the manner prescribed in the Act and the Articles of the company (Sec. 44). ----------------------
“The right of a shareholder to transfer his shares in a company is absolute as
it is inherent in the ownership of the shares, but it can be restricted by contract ----------------------
which has to be found in the Articles of Association of the Company.”
----------------------
Secs. 44 and 58 permit the Board of directors to assume powers under
the Articles of Association to refuse registration of transfer of shares without ----------------------
assigning any reason. However, a provision has been provided for an appeal
against such a refusal to the Tribunal. ----------------------
Lien on Shares ----------------------

‘Lien’ means a right to retain possession of some property of another until ----------------------
some claim attached to it is settled. The right of lien on shares is not conferred
on a company by the Statute. It must be clearly provided for in the Articles. ----------------------
A company has first and paramount lien on all shares (not being fully paid
----------------------
shares) for amounts payable on the shares or for any amounts due from any
shareholder or his estate to the company (Article 9 of Table F). The company’s ----------------------
lien on shares operates even for debts due by a shareholder to the company
in his capacity as a customer of the company. It also extends to all dividends ----------------------
payable thereon and the assets receivable by the shareholders upon winding up.
----------------------
It continues even after the death of a shareholder. It is safer for a company to
adopt such a regulation in the Articles of Association. ----------------------
Loss of lien – A company loses lien if –
----------------------
●● It registers a transfer of shares subject to the lien of the transferee.
----------------------
●● A member pledges his shares to a third party as security for a loan and the
company has notice thereof, and then incurs a liability to the company. In ----------------------
such a case, the pledgee has priority over the lien of the company.
----------------------

Notes Surrender of Shares - When a shareholder of a company voluntarily
give up his shares in favour of the company, he is said to have surrendered them
---------------------- to the company. The Companies Act does not contain any provision related to
the surrender of shares and Table F gives no power to the company to accept
---------------------- surrender. If it accepts the surrender of shares, it possibly amounts to a purchase
---------------------- by the company of its own shares. This is prohibited by Sec. 67. The Articles,
however, sometimes give power to the directors to accept a surrender of shares.
----------------------
The surrender of shares by a member to the company is valid in the
---------------------- following case :
In case of partly paid shares where forfeiture is called for – Where the
----------------------
Articles give power to the directors to accept surrender of shares and it is
---------------------- accepted in case of partly paid shares to save the company from going through
the formalities of forfeiture, the surrender is valid. Any provision in the Articles
---------------------- for the acceptance of surrender in other circumstances is invalid. Surrender has
practically the same effect as forfeiture.
----------------------
The ultimate effect of surrender and forfeiture of shares is the termination
---------------------- of the membership of a shareholder. But surrender of shares is voluntary whereas
forfeiture is at the instance of the company.
----------------------
Forfeiture of Shares
----------------------
If a shareholder, having been called upon to pay any call on his shares,
---------------------- fails to pay the call, the company has two remedies against the shareholder, viz.,
---------------------- ●● It may sue him for the amount due.
●● It may forfeit his shares.
----------------------
Forfeiture means depriving a person of his property as a penalty for some act
---------------------- or omission.
---------------------- The company may forfeit the shares of a shareholder for non-payment of some
call/calls if the following conditions are satisfied:
----------------------
1. In accordance with Articles – A forfeiture must be authorized by the
---------------------- Articles of the company. Forfeiture is in the nature of penal proceedings.
It is valid only if the provisions of the Articles are strictly complied with.
----------------------
2. Notice prior to forfeiture – Before shares can be forfeited, the company
---------------------- must serve a notice on the defaulter shareholders who are required to pay
of the unpaid call together with any interest which may have accrued
---------------------- (Article 29 of Table F). The notice must –
---------------------- ●● Give not less than 14 days’ time from the date of service of notice
for the payment of the amount due ;
----------------------
●● State that in the event of non-payment of the amount due within the
---------------------- period mentioned in the notice, the shares in respect of which the
call was made will be liable to be forfeited (Article 30 of Table F).
----------------------
●● The notice of forfeiture must also specify the exact amount due
---------------------- from the shareholder. If the notice is defective in any respect, e.g.,
94 Corporate Law
where it does not specify the amount claimed by the company, or Notes
where it claims a wrong amount, the forfeiture will be invalid. The
defect in the notice, even though slight, invalidates the notice and is ----------------------
fatal to the forfeiture.
----------------------
3. Resolution of the Board – If the defaulting shareholder does not pay the
amount within the specified time as required by the notice, the directors ----------------------
must pass a resolution forfeiting the shares (Article 30 of Table F). If this
resolution is not passed, the forfeiture is invalid. If, however, the notice ----------------------
threatening the forfeiture incorporates the resolution of forfeiture as well, ----------------------
e.g., when it states that in the event of default the shares shall be deemed
to have been forfeited, no further resolution is necessary. ----------------------
4. Good faith – The power to forfeit shares must be exercised by the ----------------------
directors in good faith and for the benefit of the company.
----------------------
Distinction between transfer and transmission of shares
Transfer of shares ----------------------
●● It is affected by a voluntary act of the parties. ----------------------
●● It takes place for consideration.
----------------------
●● The transferor has to execute a valid instrument of transfer.
----------------------
●● As soon as the transfer is complete, the liability of the transferor ceases.
Transmission of shares ----------------------
●● It takes place by operation of law, e.g., due to death, insolvency or lunacy ----------------------
of a member.
----------------------
●● No consideration is involved.
●● There is no prescribed instrument of transfer. ----------------------
●● Shares continue to be the subject to the original liabilities. ----------------------
Issue of Sweat Equity Shares (Sec. 54)
----------------------
Meaning of sweat equity shares – For the purpose of Sec. 54, the
expression ‘sweat equity shares’ issued at a discount or for consideration other ----------------------
than cash for providing know-how or making available rights in the nature of
intellectual property rights or value additions by whatever name called. ----------------------
Issue of sweat equity shares – Notwithstanding anything contained in ----------------------

Sec. 53 (which deals with the power of a company to issue shares at a discount),
----------------------
a company may issue sweat equity shares of a class of shares already issued if
the following conditions are fulfilled, namely – ----------------------
●● The issue of sweat equity shares is authorized by a special resolution
----------------------
passed by the company in the general meeting.
●● The resolution specifies the number of shares, current market price, the ----------------------
consideration, if any, and the class or classes of directors or employees to
----------------------
whom such equity shares are to be issued.
----------------------

Notes ●● Not less than one year has at the date of the issue elapsed since the date
on which the company was entitled to commence business.
---------------------- ●● The sweat equity shares of a company, whose equity shares are listed
---------------------- on a recognized stock exchange, are issued in accordance with the
regulations made by the Securities and Exchanges Board of India in this
---------------------- behalf. But in the case of a company whose equity shares are not listed
on any recognized stock exchange, the sweat equity shares are issued in
---------------------- accordance with the guidelines as may be prescribed.
---------------------- Application of provisions related to equity shares – All the limitations,
restrictions and provisions related to equity shall be applicable to sweat equity
---------------------- shares also [Sec. 54(2)].
----------------------
5.7 DIVIDENDS
----------------------
One of the main objects of commercial enterprises is to earn profits which
---------------------- are distributed among shareholders by way of ‘dividend’. The Companies Act
however does not define the term ‘dividend’. Sec. 2 (35) only says that dividend
----------------------
includes interim dividend.
---------------------- The term ‘dividend’ means, receipt of part of profits of a trading company
---------------------- by the members in proportion to their respective shares. Subject to certain
statutory requirements and the provisions of the Articles, the amount to be
---------------------- distributed as dividend is a matter of internal management and depends on
the discretion of the directors and shareholders in this regard. But there is one
---------------------- fundamental constraint, i.e., dividend shall not be paid out of capital. This, in
---------------------- other words, means that dividend can only be paid out of the profits.
Dividends
----------------------
A company which fails to comply with sections 73 and 74, shall not, so
---------------------- long as such failure continues, declare any dividend on its equity shares.
---------------------- Third proviso to section 123(1) provides that no dividend shall be declared
or paid by a company from its reserves other than free reserves.
----------------------
Unpaid Dividend Account
---------------------- Section 124(6) provides that all shares in respect of which unpaid
---------------------- or unclaimed dividend has been transferred to the Investor Education and
Protection Fund shall also be transferred by the company in the name of Investor
---------------------- Education and Protection Fund along with a statement containing such details
as may be prescribed.
----------------------
Any claimant of shares transferred above shall be entitled to claim the
---------------------- transfer of shares from Investor Education and Protection Fund in accordance
with such procedure and on submission of such documents as may be prescribed.
----------------------
Interim dividend
----------------------
The Articles of a company may empower the directors to declare interim
---------------------- dividends, i.e., dividends in between its two annual general meetings. The Board
96 Corporate Law
may from time to time pay to the members such interim dividends as appear Notes
to it to be justified by the profits of the company (Article 86 of Table A). But
before declaring an interim dividend, the directors must satisfy themselves that ----------------------
the financial position of the company warrants the payment of such dividend
out of profits available for distribution. ----------------------
An interim dividend, which may be declared by a company, if authorized ----------------------

by the Articles, is not a debt. it is settled law that in case of an interim dividend
----------------------
which the directors have resolved to pay, they have an option at any time before
payment to review their decision and resolve not to pay. ----------------------
The interim dividend is not a debt and, therefore, not an enforceable
----------------------
obligation. “Therefore, a declaration of final dividend by a company on general
meeting gives rise to an enforceable obligation, but a resolution of the Board ----------------------
of directors resolving to pay interim dividend or even resolving to declare
interim dividend pursuant to the authority conferred upon them by the Articles ----------------------
of Association gives rise to no enforceable obligation against the company,
----------------------
because the resolution is always capable of being rescinded.”
Bonus Shares and GDRs ----------------------
Specific provisions have been introduced under the Companies Act, 2013 ----------------------
for bonus shares [Section 63] and GDRs [Section 41].
----------------------
Bonus Shares or Capitalisation of Profits
A company may be following a conservative policy of not distributing all ----------------------
the profits every year. It accumulate large reserves over time. If the Articles so ----------------------
permit, it may convert a part of these reserves into share capital by issuing fully
paid bonus shares to the existing shareholders. This is called capitalisation of ----------------------
profits.
----------------------
‘Bonus’ is “something given in addition to what is usually or strictly due.”
(Webster Dictionary). It comes to shareholders in addition to what they get in ----------------------
the form of dividend. It may also be paid
----------------------
●● • in case the company has surplus cash and has no use for it, or
----------------------
●● • by making partly paid shares as fully paid. Normally bonus is paid to the
shareholders in the form of fully paid shares free of cost. This augments ----------------------
the resources and earning capacity of the company.
----------------------
Issue of bonus shares.
Section 63 provides for conditions and manner of issue of fully paid up ----------------------
bonus shares to its members.
----------------------
A company may issue fully paid-up bonus shares to its members, in any
mannerwhatsoever, out of— ----------------------
(i) its free reserves; ----------------------
(ii) the securities premium account; or ----------------------
(iii) the capital redemption reserve account.
----------------------

Notes Provided that no issue of bonus shares shall be made by capitalising
reserves created by the revaluation of assets.
----------------------
Issue of bonus shares-When can be made?
---------------------- No company shall capitalise its profits or reserves for the purpose of issuing
fully paid-up bonus shares unless—
----------------------
(a) it is authorised by its articles;
---------------------- (b) it has, on the recommendation of the Board, been authorised in the general
---------------------- meeting of the company;
(c) it has not defaulted in payment of interest or principal in respect of fixed
---------------------- deposits or debt securities issued by it;
---------------------- (d) it has not defaulted in respect of the payment of statutory dues of the
employees, such as, contribution to provident fund, gratuity and bonus;
---------------------- (e) the partly paid-up shares, if any outstanding on the date of allotment, are
made fully paid-up;
----------------------
(f) it complies with such conditions as may be prescribed.
---------------------- The bonus shares shall not be issued in lieu of dividend.
---------------------- Issue of bonus shares results in capitalisation of profits and reserves of the
company.
----------------------
(1) A company in general meeting may, upon the recommendation of the
---------------------- Board, resolve –
---------------------- (a) That it is desirable to capitalize any part of the amount for the
time being standing to the credit of any of the company’s reserve
---------------------- accounts or to the credit of the profit and loss account, or otherwise
available for distribution ; and
----------------------
(b) That such sum be accordingly set free for distribution amongst the
---------------------- members who would have been entitled thereto, if distributed by
way of dividend and in the same proportions.
----------------------
(2) The sum set free for distribution shall not be paid in cash but shall be
---------------------- applied either in or towards –
(i) paying up any amounts for the time being unpaid on any shares held
----------------------
by the members respectively.
---------------------- (ii) paying up in full unissued shares of the company to be allotted and
distributed, credited as fully paid up, to and amongst the members;
---------------------- make separate point -
---------------------- (iii) Partly in the way specified in sub-clause (i) and partly in that
specified in sub-clause (ii)
----------------------
(3) A share premium account and a capital redemption reserve account may
---------------------- be applied in the paying up of unissued shares to be issued to members of
the company as fully paid bonus shares.
----------------------
(4) The Board shall give effect to the resolution passed by the company in
---------------------- pursuance of this regulation.
98 Corporate Law
Section 40 Notes
(1) Whenever such a resolution as aforesaid (section 39) shall have been
passed, the Board shall - ----------------------
(a) Make all appropriations and applications of the undivided profits ----------------------
resolved to be capitalized thereby, and all allotments and issues of
fully paid shares, if any and ----------------------
(b) Generally do all acts and things required to give effect thereto. ----------------------
(2) The Board shall have full power to make such provision, by the issue of
fractional certificates or by payment in cash or otherwise as it thinks fit, ----------------------
for the case of shares or debentures becoming distributable in fractions.
----------------------
Global Depository Receipt[Section 41]
A company may, after passing a special resolution in its general meeting, ----------------------
issue depository receipts in any foreign country in such manner, and subject to
----------------------
such conditions, as may be prescribed.
----------------------
----------------------

1. The _____________may empower the directors to declare interim
----------------------
dividends, i.e., dividends in between its two annual general meetings.
1. ________ is issued in acknowledgement of any indebtedness ----------------------
i. Debenture certificate
ii. Share certificate ----------------------
iii. Share warrant ----------------------
2. Own funds are called _______. ----------------------
i. Debenture capital ----------------------
ii. Share capital
iii. Loan capital ----------------------
3. Debenture forms part of _________.
i. Capital ----------------------
ii. Loan ----------------------
iii. Fund
----------------------
4. Shareholders are _________. ----------------------
i. Owners
----------------------
ii. Creditors
iii. Debtors ----------------------
----------------------

Notes Summary
---------------------- ●● The payment of interest out of capital shall not operate as reduction of the
amount paid up on the shares in respect of which it is paid.
----------------------
●● Under the Companies Act, 2013, a company can issue two types of shares,
---------------------- viz. Preference shares and equity shares.
---------------------- ●● Preference shares, which have a preferential right to be paid dividend
during the lifetime of the company and they also have a preferential right
---------------------- to the return of capital when the company goes into liquidation. Preference
shares could be classified further as Cumulative preference shares, Non-
---------------------- cumulative preference shares, Participating preference shares, Non-
---------------------- participating preference shares, Convertible preference shares, Non-
convertible preference shares, Redeemable preference shares.
---------------------- ●● Equity shares are the shares which are not preference shares.
---------------------- ●● An application for shares is an offer by a prospective shareholder of a
company to take shares. ‘Allotment’ is the acceptance by the company of
---------------------- that offer. Allotment results in a binding contract between the company
and the applicant.
----------------------
●● A share certificate is a document which is a prima facie evidence of shares
---------------------- held by a shareholder whereas a share warrant is document issued by a
public company stating that its bearer is entitled to the shares specified
----------------------
therein. It is transferable by mere delivery and is a substitute for the share
---------------------- certificate. All companies, whether public or private, are required to issue
share certificates. The shares of a member in a company are movable
---------------------- property, transferable in the manner prescribed in the Act and the Articles
of the company.
----------------------
●● A company should issue dividends which are the returns on the shares.
---------------------- The term ‘dividend’ means, receipt of part of profits of a trading company
by the members in proportion to their respective shares.
----------------------
Keywords
----------------------
●● Dematerialized form of shares: Popularly known as Demat shares.
----------------------
●● Forfeiture: Forfeiture is the divestiture of specific property without
---------------------- compensation in consequence of some default or act forbidden by law.
----------------------
----------------------
1. What is meaning of “shares” explain what are various types of shares that
---------------------- a company can issue?
---------------------- 2. Enumerate and discuss the provisions of allotment of shares
3. What are the special provisions regarding application and allotment of
---------------------- shares?
---------------------- 4. What is meaning of term “Call on shares” explain the procedure of making
calls on shares.
100 Corporate Law
5. What is difference between “Transfer of shares” and “Transmission of Notes
shares”?
6. What is dividend; explain the rules related to issue of dividends? ----------------------
7. What is the meaning of “Equity shares”? ----------------------
8. What is the meaning of “Preference shares”? ----------------------
9. What is meant by “Cumulative Preference shares”?
----------------------
10. When can redeemable preference shares be redeemed?
----------------------
----------------------
----------------------
----------------------
1. Within how many days any redemption of redeemable preference shares
need to be notified to Registrar from the date of redemption? ----------------------
i. 30 days. ----------------------
----------------------
----------------------
1. True
1. The company must deliver share certificate within ___________ of share ----------------------
allocation by the company.
i. Two months ----------------------

1. The Articles of a company may empower the directors to declare interim
----------------------
dividends, i.e., dividends in between its two annual general meetings.
1. ________ is issued in acknowledgement of any indebtedness. ----------------------

i. Debenture certificate ----------------------
2. Own funds are called _______.
----------------------
ii. Share capital
----------------------
3. Debenture forms part of _________.
ii. Loan ----------------------
4. Shareholders are _________ ----------------------

ii. Creditors ----------------------

Notes
Suggested Reading
----------------------
---------------------- & Sons.
----------------------
Co.
---------------------- Reporter.
----------------------
5. Singh, Avtar. 2005. Partnership Act. Lucknow: Eastern Book Company.
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
102 Corporate Law

Borrowing, Lending and Investments
UNIT
6
Structure:
6.1 Introduction
6.2 Borrowing Powers
6.3 Mortgages and Charges
6.4 Debenture
6.5 Remedies of Debenture-Holders
6.6 Investment in Other Companies
Summary
Keywords
Suggested Reading
Borrowing, Lending and Investments 103

Notes
Objectives
----------------------
• Assess the needs and requirements of a company for borrowing and
----------------------
lending
---------------------- • Explain the procedure for borrowing, lending and investments
---------------------- • State the powers within which the company can borrow or lend
---------------------- • Analyse the kinds of charges that are created and its implications on the
company.
----------------------
---------------------- 6.1 INTRODUCTION

---------------------- A trading company can borrow money without any express power to do so
in its memorandum. Borrowing being incidental to trading, such a company has
---------------------- an implied power to borrow. But non-trading company must have borrowing
power clearly specified in its memorandum.
----------------------
A company needs money to finance its activities from time to time. A part
---------------------- of these requirements, as already seen, is met by the issue of shares; for the rest,
---------------------- the company has to resort to borrowing.
The present unit explains the different modes in which borrowing, lending
---------------------- or investments could be made by a Company.
----------------------
6.2 BORROWING POWERS
----------------------
Borrowing is incidental to the object of a trading company every trading
---------------------- company, unless prohibited by its Memorandum or Articles, has implied power
---------------------- to borrow money for the purposes of its business. It has also the power to give
security for the loan by creating a mortgage or charge in its property. The ground
---------------------- for the rule is that “the exigencies of commerce render such a power necessary.”
A non-trading company has no implied power to borrow. It requires express
---------------------- power to do so. This power, in case of such a company, must be taken in the
---------------------- Memorandum or the Articles. When a company has express or implied power to
borrow, it can borrow subject to the limits set by the Memorandum or the Articles.
---------------------- As per the section 179 (3)(c ) the Board of Director of a company shall exercise
the power to borrow money on behalf of the company by means of resolutions
---------------------- passed at general meeting of the Board. However, company in its general meeting
---------------------- imposes restrictions and conditions on exercising of this power of Board. The
power of a company to borrow is exercised by the Board of directors. This power
---------------------- may be unrestricted, but usually the authority of the directors, acting as the agent
of the company to borrow, is subject to the following two limitations-
----------------------
1. The statutory limitation -
----------------------
Prohibits the directors from borrowing money (apart from temporary
104 Corporate Law

loans obtained from the company’s bankers in the ordinary course of Notes
business) beyond the aggregate of paid-up capital of the company and its
free reserves (i.e., reserves not set apart for any specific purpose), unless ----------------------
they have first obtained sanction of the company in general meeting and.
----------------------
2. The limitation as contained in the Memorandum or the Articles –
----------------------
Sometimes, the Memorandum or the Articles limit the borrowing powers
of the company to a specific sum. This is however subject to the statutory ----------------------
limitation as contained in Sec.180 (1) (c). If any debt is incurred by a
company in excess of the limit imposed by Sec. 180 (1) (c), the debt shall ----------------------
not be valid or effectual, unless the lender proves that he advanced the
----------------------
loan (a) in good faith, and (b) without knowledge that the imposed has
been exceeded [Sec. 180 (5)]. ----------------------
Ultra Vires Borrowing
----------------------
Borrowing by a company may be – A borrowing which is ultra vires the
company, or A borrowing which is intra vires the company but ultra vires the ----------------------
directors, i.e., beyond the scope of their authority. ----------------------
Borrowing which is ultra vires the company
----------------------
If a company borrows money beyond its express or implied powers,
the borrowing is ultra vires the company is void. No debt is created and the ----------------------
securities given in respect thereof are inoperative and void and no ratification
can render the debt valid. ----------------------
Lender’s rights when borrowing is ultra vires – ----------------------

Where a borrowing is ultra vires a company, the lender of money has ----------------------
no legal or equitable debt against the company. As such, he can have no rights
against the company for the recovery of the loan. The lender has, however, in ----------------------
equity the following rights:
----------------------
●● Injunction - If the money lent to the company has not been spent, the
lender may get injunction from the Court to restrain the company from ----------------------
parting with the money. He continues to be the owner of the money and ----------------------
he has the right to recover the amount in specie.
●● Subrogation – If the money borrowed has been used by the company ----------------------
in paying off its lawful debts, the lender will rank as a creditor up to the
----------------------
amount so used, and can recover it from the company. He can sue the
company by virtue of principle of subrogation. He steps into the shoes ----------------------
of the creditor who have been paid off. In such a case, subrogation is
allowed because the ultra vires borrowing does not increase the general ----------------------
indebtedness of the company. The lender is, however, not entitled to any
----------------------
securities or priorities that the original creditors who are paid off may
have had over the other creditors of the company. ----------------------
●● Identification and tracing – If the lender can identify his money (this
----------------------
will be the case when the money is still in the hands of the company in its
original form) or, any property purchased with it, he can claim the money ----------------------

Notes or the property purchased with the money borrowed provided he can trace
and identify the money or property purchased with it. The company in
---------------------- such a case is regarded as holding the money lent on trust for the lender.
---------------------- ●● ecovery of damages – The lender under a ultra vires transaction may
R
recover damages from the directors for breach of their warranty of
---------------------- authority. But if the fact that the borrowing was ultra vires could have
been discovered from the public documents of the company, i.e., the
---------------------- Memorandum and the Articles, the lender cannot recover. He is deemed
---------------------- to know the contents of these public documents. If he knows that these
documents do not confer any authority on the directors to borrow, he
---------------------- cannot take the plea that he was mislead by their warranty.
---------------------- Borrowing which is intra vires the company but ultra vires the directors-
If the borrowing is in excess merely of the powers of the directors but not
---------------------- of the company, it can be ratified and rendered valid by the company. In such
---------------------- a case, the loan binds both the lender and the company as if it had been made
with the company’s authority in the first place. If the company refuses to ratify
---------------------- the directors’ act, the normal principles of agency apply. A third party who deals
with an agent knowing that the agent is exceeding his authority has no right of
---------------------- action against the principal. However if the excess borrowing consists of non-
---------------------- compliance with some internal regulation of the company, the lender may rely
on the rule in Royal British Bank v. Turquand, and recover the amount of the
---------------------- loan from the company.
----------------------
Activity 1
----------------------
Find out from the website of any Indian company, the Clause in its
----------------------
Memorandum and Articles on the powers of borrowing and write a short
---------------------- note on it.
----------------------
6.3 MORTGAGES AND CHARGES
----------------------
Power to give securities
----------------------
Where a company has the power to borrow, it has, as an incident to such
---------------------- power, a power to give security for the debt by a mortgage or charge on all
or any of its property. A power to borrow includes, if there is nothing to the
----------------------
contrary in the Memorandum and the Articles, the power to charge uncalled
---------------------- capital of the company.
A company cannot, however, borrow on the security of its reserve capital
----------------------
(i.e., capital which can be called up only in the event of its winding up) or its
---------------------- books. This is because reserve capital is nor capable of being called up except
in the event of the company being wound up, and books are required to be kept
---------------------- at the company’s office and open for inspection.
----------------------
106 Corporate Law

Registration of Charges Notes
The expression ‘charge’ includes a mortgage.
----------------------
The following charges shall be registered with the Registrar:
----------------------
– A charge for the purpose of securing any issue of debentures -
– A charge on uncalled share capital of the company. ----------------------
– A charge on any immovable property, wherever situate or any interest ----------------------
therein
----------------------
– A charge on any book debt of the company
----------------------
– A charge, not being a pledge, on any movable property of the company
– A floating charge on the undertaking or any property of the company ----------------------
including stock in trade
----------------------
– A charge on calls made but not paid
----------------------
– A charge on a ship or any share in a ship
– A charge on goodwill, on a patent or license under a patent, on a trademark ----------------------
or on a copyright or a license under a copyright. ----------------------
– A charge created out of India comprising solely property situated outside
----------------------
India
– A charge created in India comprising property outside India ----------------------
– A charge on a property acquired subject to charge. ----------------------
Deemed registration – If, for the purposes of registration of a charge, the ----------------------
charge-holder has duly submitted the particulars of the charge to the Registrar
and no defect has been pointed out by the Registrar in the particulars, the charge ----------------------
is deemed to be registered. ----------------------
Time of registration - The prescribed particulars of the charge, together
with the instrument, if any, by which the charge is created or evidenced, or a ----------------------
copy thereof, shall be filed with the Registrar may extend the period of 30 days ----------------------
or within the 300 days of such creation on payment of such additional fee as
the Registrar may determine, if the company satisfies the Registrar that it had ----------------------
sufficient cause for not filing the particulars and the instrument or copy within
30 days. When these requirements are complied with, the Registrar shall issue ----------------------
a certificate of registration of the charge. ----------------------
As per the Sec. 87 Central Government may also extend the time for the
----------------------
registration of a charge on such terms and conditions as it may think expedient,
in case the omission of file particulars of a charge within the prescribed period ----------------------
is accidental or due to inadvertence or some other sufficient cause.
----------------------
Effects of non-registration of a charge
The charge is void - If any charge required to be registered is not so ----------------------
registered, it shall be void as against the subsequent creditors as well as against
----------------------

Notes the liquidator. This does not mean that the debt is not recoverable. So long
as the company does not go into liquidation, the charge is good and may be
---------------------- enforced. It is void only against the liquidator and the creditors. The company
itself cannot have a cause of action arising out of non-registration.
----------------------
The money secured becomes immediately payable - When a charge
---------------------- becomes void under Sec. 77 (4), the money secured thereby shall become
immediately payable. Further, nothing in Sec. 77 (3) shall prejudice any contract
----------------------
or obligation for the repayment of the money secured by the charge.
---------------------- No right of lien on the documents of title - When a charge becomes void
for non-registration, no right of lien can be claimed on the documents of title, as
----------------------
they are ancillary to, and were delivered pursuant to, the charge.
---------------------- Penalties - Sometimes a default is made in filing with the Registrar,
namely, any charge created by the company the payment or satisfaction of a
----------------------
debt in respect of which a charge has been registered or the issue of debentures
---------------------- of a series.
---------------------- In such a case, unless the registration has been affected on the application
of some other person, the company shall be punishable with fine which shall not
---------------------- be less than one lakh rupees but which may extend to ten lakh rupees and every
officer of the company who is in default shall be punishable with imprisonment
---------------------- for a term which may extend to six months or with fine which shall not be less
---------------------- than twenty-five thousand rupees but which may extend to one lakh rupees, or
with both.
---------------------- Date of notice of the Charge - Where any charge on any property or
---------------------- assets of a company or any of its undertakings is registered under section 77,
any person acquiring such property, assets, undertakings or part thereof or any
---------------------- share or interest therein shall be deemed to have notice of the charge from the
date of such registration. (Sec. 80)
----------------------
Register of charges kept by the Registrar (Sec. 81 (1)
----------------------
The Registrar shall, in respect of every company, keep a register containing
---------------------- particulars of the charges registered under this Chapter in such form and in such
manner as may be prescribed.
----------------------
Particulars of charges to be forwarded by the company - A company shall
---------------------- give intimation to the Registrar in the prescribed form, of the payment or
satisfaction in full of any charge registered under this Chapter within a period
---------------------- of thirty days from the date of such payment or satisfaction and the provisions
of sub-section (1) of section 77 shall, as far as may be, apply to an intimation
----------------------
given under this section.
---------------------- Return of the instrument - After entering the particulars of all the
---------------------- charges required, the Registrar shall return the instrument, if any, or the verified
copy thereof, as the case may be, filed in accordance with the provisions of the
---------------------- Act to the person filing it.
----------------------
108 Corporate Law

Inspection of register - The register of charges shall be open to inspection Notes
by any person on payment of such fee as may be prescribed for each inspection.
----------------------
Index to register of charges - The Registrar shall keep a chronological
index of the charges registered with him. The index shall be in the prescribed ----------------------
form and contain the prescribed particulars.
----------------------
Certificate of registration - As per Sec. 77 (2) Where a charge is
registered with the Registrar under sub-section (1), he shall issue a certificate ----------------------
of registration of such charge in such form and in such manner as may be
prescribed to the company and, as the case may be, to the person in whose favor ----------------------
the charge is created.
----------------------
The penalty for neglect is that the company shall be punishable with fine
which shall not be less than one lakh rupees but which may extend to ten lakh ----------------------
rupees and every officer of the company who is in default shall be punishable
----------------------
with imprisonment for a term which may extend to six months or with fine
which shall not be less than twenty-five thousand rupees but which may extend ----------------------
to one lakh rupees, or with both.
----------------------
Charges to be registered by whom - It shall be the duty of the company
to register with the Registrar the particulars of every charge created by it and of ----------------------
every issue of debentures of a series. Registration of any such charge may also
be effected on the application of any person (normally the creditor) interested in ----------------------
the charge. Such a person is entitled to recover from the company the amount of ----------------------
any fees properly paid by him to the Registrar on the registration of the charge.
Provisions related to registration of charges to apply to modification ----------------------
also – Whenever the terms or conditions, or the extent or operation, of any ----------------------
charge registered are or is modified, the company shall send to the Registrar the
particulars of such modification. The provisions as to registration of a charge ----------------------
shall apply to such modification of the charge also. (Sec. 79)
----------------------
Copy of instrument creating charge to be kept by the company at
the registered office – Every company shall cause a copy of every instrument ----------------------
creating any charge requiring registration to be kept at the registered office of
the company. ----------------------
The Memorandum of Company to report satisfaction after a charge has ----------------------

been created and registered, the debt has to be paid or satisfied by the company.
----------------------
When the charge is paid off or satisfied in full, the company shall give notice
of this fact to the Registrar within 30 days from the date of such payment ----------------------
or satisfaction. On receipt of such intimation, the Registrar shall inform the
holder of the charge about the fact, of the payment or satisfaction of the charge. ----------------------
The Registrar shall further call upon the holder of the charge to show cause
----------------------
within a period, not exceeding 14 days, why payment or satisfaction should
not be recorded as intimated to him. If no cause is shown or if the holder of the ----------------------
charge raises no objection, the Registrar shall enter in the register of charges
a memorandum of satisfaction recording this fact. If cause is shown, or any ----------------------
objection is raised by the holder of the charge, the Registrar shall record a note
----------------------
to that effect in the register and inform the company accordingly (Sec. 82 & 83).

Notes Power of Registrar to make entries of satisfaction and release in
absence of intimation from company - The Registrar may, on evidence being
---------------------- given to his satisfaction with respect to any registered charge that the charge has
been paid off or the property has been cleared of it, enter the memorandum of
---------------------- satisfaction even when no such intimation has been received from the company.
---------------------- Copy of memorandum of satisfaction to be furnished to company -
Where the Registrar enters a memorandum of satisfaction in whole or in part,
----------------------
he shall furnish the company with a copy of the memorandum.
---------------------- Rectification by Central Government of register of charges - The
Central Government may extend the time for the registration of a charge. It
----------------------
may further require that the omission to file with the Registrar the particulars of
---------------------- any charge, or misstatement with respect to any such charge, shall be rectified,
If a charge is not registered within the proper time, or If there is an omission to
---------------------- file with the Registrar the particulars of any modification of any charge or of
any issue of debentures of a series, or if there is an omission to give intimation
----------------------
to the Registrar of the payment or satisfaction of a charge, or if the omission
---------------------- was accidental or due to some inadvertence or due to some other sufficient
cause or if there is some misstatement in the register or in a memorandum of
---------------------- satisfaction. (Sec. 87)
---------------------- Company’s register of charges - Every company shall keep at its
registered office a register of charges. It shall enter therein all charges specifically
---------------------- affecting property of the company and all floating charges on the undertaking
or any property of the company. It shall give therein in each case the following
----------------------
particulars: A short description of the property charges.
---------------------- The company shall be punishable with fine which shall not be less than
---------------------- one lakh rupees but which may extend to ten lakh rupees and every officer of
the company who is in default shall be punishable with imprisonment for a term
---------------------- which may extend to six months or with fine which shall not be less than twenty-
five thousand rupees but which may extend to one lakh rupees, or with both.
----------------------
Copy of instrument creating charge to be kept by company at
---------------------- registered office - Under Sec. 81, every company shall keep at its registered
office a copy of every instrument creating any charge requiring registration.
---------------------- The register of charges and the documents shall be open to inspection by any
---------------------- person.
Inspection of copies of instruments creating charges and company’s
---------------------- register of charges - The copies of instruments creating charges and the register
---------------------- of charges shall be open during business hours to the inspection of any creditor
or member of the company without fee, at the registered office of the company.
---------------------- The company in general meeting may impose reasonable restrictions on such
inspection so that not less than 2 hours in each day are allowed for inspection.
----------------------
The register of charges shall also be open during business hours (but
---------------------- subject to reasonable restrictions aforesaid) to the inspection of any other
person on payment of such sum as may be prescribed for each inspection, at the
----------------------
registered office of the company.
110 Corporate Law

Penalty - If inspection of the copies of instruments creating charges or register Notes
of charges is refused, the company shall be punishable with fine which shall not
be less than one lakh rupees but which may extend to ten lakh rupees and every ----------------------
officer of the company who is in default shall be punishable with imprisonment
for a term which may extend to six months or with fine which shall not be less ----------------------
than twenty-five thousand rupees but which may extend to one lakh rupees, or ----------------------
with both.
----------------------

1.
Charge includes ________. ----------------------
i. Loans
----------------------
ii. Mortgage
iii. Security ----------------------
iv. Hire ----------------------
2.
Commencement of winding up of a company does not affect the
nature of a _______. ----------------------
i. Fixed charge ----------------------
ii. Floating charge
----------------------
iii. Both i. and ii.
----------------------
6.4 DEBENTURES ----------------------
Sec. 71 of the Companies Act, 2013 deals with the debenture. Broadly ----------------------
speaking when a company takes a loan and issues a loan certificate, which
is a debenture. In the terms of section 2 (30) “debenture” includes debenture ----------------------
stock, bonds or any other instrument of a company evidencing a debt, whether
constituting a charge on the assets of the company or not.” ‘Debenture’ means ----------------------
a document, which either creates a debt or acknowledges it. ----------------------
Debentures are commonly issued in a manner similar to the issue of
----------------------
shares through a prospectus. The amount might be payable by installments on
application, allotment and calls. But usually the amount is payable in one lump ----------------------
sum.
----------------------
However, No company shall issue a prospectus or make an offer or
invitation to the public or to its members exceeding five hundred for the ----------------------
subscription of its debentures, unless the company has, before such issue or
offer, appointed one or more debenture trustees and the conditions governing ----------------------
the appointment of such trustees shall be such as may be prescribed. (Sec. 71
----------------------
(5)
----------------------

Notes The usual feature of a debenture are that it is a certificate issued under
the seal if any and with signature of authorized signatory of the company, it
---------------------- generally acknowledges a debt, it usually provides for the payment of principal
at a specified time with interest in the meantime it is usually one of a series it
---------------------- generally creates a charge on the company’s assets. These are usual but not
---------------------- compulsory features of a debenture.
Kinds of Debentures
----------------------
Debentures may be classified according to the following characteristics, viz.
---------------------- 1. Negotiability,
---------------------- 2. Security,
3. Permanence,
----------------------
4. Convertibility, and
---------------------- 5. Priority.
---------------------- Classification according to -
---------------------- 1. Negotiability,
Bearer debentures - These debentures, also known as unregistered
---------------------- debentures, are payable to its bearer. These are regarded as negotiable
---------------------- instruments and are transferable by delivery, and a bona fide transferee
for value is not affected by the defect in the title of the prior holder.
---------------------- Registered debentures - These are debentures which are payable to
---------------------- the registered holders. A holder is one whose name appears both on
the debenture certificate and in the company’s register of debentures.
---------------------- The registered holder of the debentures can transfer them like shares
(Sec. 52(2) but a transfer to be complete has to be registered with the
---------------------- company. It should further be noted that these debentures are transferable
---------------------- in the manner specified in the conditions endorsed thereon. Registered
debentures are not negotiable instruments.
----------------------
A registered debenture is issued under the seal if any and with
---------------------- signature of authorized signatory of the company. It usually contains
the following clauses: A covenant to pay the principal sum, a covenant to
---------------------- pay interest, a description of the charge on the company’s undertaking and
property, a statement that it is issued subject to the conditions endorsed
----------------------
thereon. The debenture is in the form of the certificate.
---------------------- 2. Security
---------------------- Secured debentures - Debentures, which create some charge on the
property of the company, are known as secured debentures. The charge
---------------------- may be a fixed charge or a floating charge.
---------------------- Unsecured debentures - Debentures, which do not create any charge on
the assets of the company, are known as unsecured or naked debentures.
---------------------- The holders of these debentures like ordinary unsecured creditors may
---------------------- sue the company for recovery of the debt.
112 Corporate Law

3. Permanence Notes
Redeemable debentures- Debentures are usually issued on the condition
----------------------
that they shall be redeemed after a certain period. Such debentures are
known as redeemable debentures. ----------------------
Irredeemable or perpetual debentures - When debentures are
----------------------
irredeemable, they are called perpetual debentures. A debenture will be
treated as irredeemable where either there is no period fixed for repayment ----------------------
of the principal amount or repayment of it is made conditional on the
happening of an event, which may not happen for an indefinite period ----------------------
or may happen only in certain specified and contingent events, e.g., the
----------------------
winding up of the company. They are not invalid because of the condition
that they are made irredeemable or redeemable only on the happening of ----------------------
some contingency or on the expiration of a period, however long, say, 100
years after the issue of debentures. ----------------------
4. Convertibility ----------------------
Convertible debentures - These debentures give an option to the holders ----------------------
to convert them into preference or equity shares at stated rates of exchange,
after a certain period. If the holders exercise the rights of conversion, ----------------------
they cease to be lenders to the company and become members instead.
The convertible debentures may be fully convertible (FCD) or partly ----------------------
convertible (PCD). However, it shall be approved by a special resolution ----------------------
passed at a general meeting.
Non-convertible debentures - These do not give any option to their ----------------------
holders to convert them into preference or equity shares. They are to be ----------------------
duly paid as and when they mature.
5. Priority ----------------------
First debentures - These are the debentures, which are to be repaid in ----------------------
priority to other debentures, which may be subsequently issued.
----------------------
Second debentures - These are the debentures which are to be paid after
the ‘first debentures’ have been redeemed. ----------------------
Debentures with voting rights not to be issued (Sec. 71(2) ----------------------
A company cannot issue any debenture carrying voting rights at any ----------------------
meeting of the company, whether generally or in respect of particular
classes of business. This has been done in view of the secured position of ----------------------
the debenture-holders and in order to keep them off from influencing the
policy of the general body of the shareholders. ----------------------
Issue of debentures at a discount ----------------------

Debentures can be issued at a discount, unless the Articles provide ----------------------
otherwise. Beneficiary Owner (BO), formalities, like the ones in case
of issue of shares, have to be gone through, the reason being that the ----------------------
debentures do not form part of the capital of a company. But particulars
----------------------
of such discount or any allowance or commission in relation to the issue

Notes of the debentures are to be filed with the Registrar for registration. Again,
interest payable on debentures may be paid out of capital.
----------------------
It should, however, be noted that convertible debentures cannot be issued
---------------------- at a discount entitling the holders to exchange them for shares of par
value, as this would be an indirect method of issuing shares at a discount.
---------------------- If convertible debentures are to be issued at a discount, compliance with
Sec. 53 would be necessary.
----------------------
Debentures and debenture stock
----------------------
The difference between debentures and debenture stock is the same as
---------------------- the difference between shares and stock. A debenture is a document evidencing
a particular debt. Debenture stock, on the other hand, is borrowed money
---------------------- consolidated into one mass for the sake of convenience. This is capable of being
divided and transferred into small fractional amounts. In this case, the company
----------------------
issues to each lender a certificate (known as debenture stock certificate) showing
---------------------- the fraction of the debt which the company owes to him. Thus where a person
lends Rs. 100 to a company, he may be a debenture-holder with a debenture for
---------------------- Rs. 100 or a debenture stockholder with a debenture stock certificate for Rs.
100 worth of stock. In either event, unlike a shareholder, he is not a member
----------------------
of the company. He is a creditor of the company and will receive interest at the
---------------------- specified rate on his loan. Debenture includes ‘debenture stock’.
---------------------- 6.5 REMEDIES OF DEBENTURE-HOLDERS

----------------------
The remedies of a debenture-holder of a company vary according
---------------------- to whether he is secured or unsecured. An unsecured debenture-holder is in
exactly the same position as an ordinary trade creditor. Like any other unsecured
---------------------- creditor, he has two remedies: Firstly, He may sue for principal amount and
interest. Secondly, He may, if he wishes, petition under Sec. 272 for the ending
----------------------
up of the company by the Tribunal on the ground specified in Sec. 271 (a),
---------------------- namely, that the company is unable to pay its debts. A secured debenture-holder
has both the above remedies but in addition, he has also the following courses
---------------------- open to him:
---------------------- Debenture-holders’ action - He may sue on behalf of himself and all
other debenture-holders of the same class to obtain payment and enforce his
---------------------- security by sale. This is known as debenture-holders’ action, and if several
debenture holders sue separately, the Tribunal can consolidate their suits into
----------------------
one.
---------------------- Appointment of receiver – Debenture holder may appoint a receiver
---------------------- of the conditions which give him power to do so are fulfilled or apply to the
Tribunal in a debenture-holders’ action to appoint one. On the appointment of
---------------------- a receiver, the assets become specifically charged in favour of the debenture-
holders, and the powers of the company to deal in them in the ordinary course
---------------------- of business cease although the company continues to exist until it is wound up.
----------------------
114 Corporate Law

Appointment of manager – Once the receiver has taken the possession Notes
of the company’s assets, they cannot be used by the company for business. Yet it
is necessary to carry on the business for beneficial winding up. In such situation ----------------------
debenture – holder may appoint a manager or he may be appointed under the
order of the court. ----------------------
The receiver or manager is not the officer of the company for the purpose ----------------------
of the Company Act.
----------------------
Foreclosure – He may apply to the Tribunal for foreclosure of the
company’s right to redeem the debentures. Foreclosure is a process by which ----------------------
the mortgagor, failing to repay the money lent on the security of a property, is
----------------------
compelled to forfeit his right to redeem the property.
Sale - He may sell the property charged as security if an express power ----------------------
to do so is contained in the terms of issue of debentures. He may also have the
----------------------
property sold through trustees of such power is given by the debenture trust
deed. ----------------------
Proof for the balance - If the company is insolvent and his security ----------------------
is insufficient, he may value his security and prove for the balance. In the
alternative, he may surrender his security and prove for the whole amount of ----------------------
his debt.
----------------------
If the debenture - holder owes a debt to the company, which is unable
to pay its debts in full, the holder cannot set off his debt against the liability he ----------------------
owes to the company. The rule is that a person who claims a share in a fund
must pay up everything he owes to the fund before he can claim a share ----------------------
Power to Re-Issue Redeemed Debentures ----------------------

Debentures may be Redeemable debentures, or Irredeemable/perpetual ----------------------
debentures.
----------------------
Normally debentures are redeemable at a certain specified future date.
Where a company has redeemed any debentures previously issued, it has the ----------------------
right to keep the debentures alive for the purpose of re-issue. The company may
re-issue such debentures or issue others in their place provided – There is no ----------------------
provision to the contrary, express or implied, in the Articles, or in the conditions
----------------------
of issue, or in any other contract entered into by the company, and the company
has not shown an intention to cancel them, e.g., by passing a resolution to that ----------------------
effect.
----------------------
Upon re-issue of redeemed debentures, the person entitled to them has
the same rights and priorities as if the debentures had never been redeemed. ----------------------
The power to re-issue debentures in place of the redeemed debentures does not
authorize the issue of debentures different in their terms from those, which have ----------------------
been redeemed. Re-issued debentures shall be treated as new debentures for the
----------------------
purpose of stamp duty.
Where with the object of keeping debentures alive for the purpose of re- ----------------------
issue, they have been transferred to a nominee of the company, a transfer from ----------------------
that nominee is deemed to be a re-issue of the debentures. Again, where the

Notes company has deposited any of its debentures to secure advances from time to
time on current account or otherwise, the debentures are not deemed to have
---------------------- been redeemed by reason only of the current account of the company having
ceased to be in debit whilst the debentures remained so deposited.
----------------------
Register and Index of Debenture-Holders (Sec. 88)
----------------------
Register of debenture-holders- Every company shall keep in one or
---------------------- more books a register of the holders of its debentures. It shall enter therein
the following particulars, namely - name and address, occupation if any, of
---------------------- each debenture-holder. The debentures held by each holder, distinguishing each
debenture by its number, except where such debentures are held with depository,
----------------------
and amount paid and agreed to be considered as paid on those debentures. The
---------------------- date on which each person was entered in the register as a debenture-holder and
the date on which each person ceased to be a debenture-holder.
----------------------
Index of debenture-holders - Every company shall keep an index of the
---------------------- debenture-holder as per the Sec. 88 of the Company Act, 2013. If the register is
in such a form as in itself to constitute an index, the company need not maintain
---------------------- a separate index.
---------------------- Penalty - If a company does not maintain a register of members or
debenture-holders or other security holders or fails to maintain them in accordance
---------------------- with the provisions of sub-section (1) or sub-section (2), the company and every
---------------------- officer of the company who is in default shall be punishable with fine which
shall not be less than fifty thousand rupees but which may extend to three lakh
---------------------- rupees and where the failure is a continuing one, with a further fine which may
extend to one thousand rupees for every day, after the first during which the
---------------------- failure continues. (Sec. 88(5)
---------------------- Exception - The provisions contained in Sec. 88 shall not apply with
respect to debentures which, ex facie, are payable to bearer thereof.
----------------------
Creation of Charges
----------------------
The debt owed by a person (debtor) to another (creditor) may be either
---------------------- unsecured or secured. In the former case, if the debtor defaults, the creditor can
sue for the amount owed, i.e., he has a right of action. If the debtor becomes
---------------------- insolvent or disappears, the creditor has no security. A wise creditor, therefore,
will demand security, i.e., a right over the debtor’s property, which is in addition
----------------------
to his right of action. A bank overdraft, for instance, is often secured by a deposit
---------------------- of the title deeds of the borrower’s house (a mortgage), or his share certificates
(a pledge). A company like any other person can, when it borrows money, give
---------------------- its creditors security. Often it mortgages or charges its property to its debenture-
holders.
----------------------
Fixed and Floating Charges
----------------------
The power of a company to borrow includes the power to create a charge
---------------------- upon its assets. The charge includes a ‘mortgage’ also. The charge that may be
created on the assets of a company may be a fixed charge or floating charge.
----------------------
116 Corporate Law

Fixed Charge Notes
A fixed or specific charge is one, which is created on some specific and
----------------------
definite assets of the company, e.g., a charge on land and building. It precludes
the company from dealing in the property without the consent of the holder of ----------------------
the charge. The company can, if it wants to deal in that property, do so subject
to the charge. ----------------------
Floating charge ----------------------
A floating charge is an equitable charge, which is created on some class
----------------------
of property, which is constantly changing, e.g., a charge on stock-in-trade, trade
debtors, etc. The company can deal in such property in the normal course of its ----------------------
business until the charge becomes fixed on the happening of an event. The main
idea behind a floating charge is to allow the company to carry on its business in ----------------------
the ordinary course as if no charge had been created.
----------------------
Debentures usually create a floating charge on the assets of a company.
----------------------
A floating charge is an equitable charge, which does not fasten on any
specific property but covers the whole of the company’s property whether it is ----------------------
or is not subject to a fixed charge. When it crystallizes or becomes fixed, the
assets thereafter comprised in the charge are subject to same restrictions and are ----------------------
affected in the same manner as under a specific charge ----------------------
Characteristics of a floating charge - The characteristics of a floating
charge are as follows: ----------------------
It is a charge on a class of assets of the company both present and future. ----------------------
That class of assets is one, which, in the ordinary course of the business of the
----------------------
company, is changing from time to time. It is contemplated by the charge that,
until some steps are taken by or on behalf of those interested in the charge, the ----------------------
company may carry on its business in the ordinary way.
----------------------
The following cases may be noted in this regard:
For example, a film company borrowed a sum of money against all assets, ----------------------
including machinery, etc., then lying with the company or that might be bought
----------------------
thereafter until repayment. This was held to be a floating charge as it covered
assets present and future of fluctuating nature and imposed no restrictions on ----------------------
the company to use them in any manner it liked.
----------------------
Effect of floating charge - Where a company is being wound up, a
floating charge on the undertaking or property of the company created within ----------------------
the twelve months immediately preceding the commencement of the winding
up, shall, unless it is proved that the company immediately after the creation of ----------------------
the charge was solvent, be invalid, except for the amount of any cash paid to the ----------------------
company at the time of, or subsequent to the creation of, and in consideration
for, the charge, together with interest on that amount at the rate of five per cent ----------------------
per annum or such other rate as may be notified by the Central Government in
this behalf. (Sec. 332) ----------------------
----------------------

Notes Crystallization of a floating charge - Crystallization is the conversion
of a floating charge into a fixed charge on the assets charged at the moment of
---------------------- Crystallization.
---------------------- A floating charge crystallizes or gets fixed when-
– The company goes into liquidation, or
----------------------
– The company ceases to carry on business, or
----------------------
– A receiver is appointed, or
---------------------- – A default is made in paying the principal and/or
---------------------- – Interest and the holder of the charge brings an action to enforce his
security.
----------------------

----------------------
---------------------- 1. Debenture holders are ________.
---------------------- i. Owners
ii. Creditors
---------------------- iii. Debtors
2. Return paid on shares is ________.
----------------------
i. Interest
---------------------- ii. Dividend
---------------------- iii. Commission
---------------------- 3. Which of the following have voting rights?
---------------------- i. Shareholders
ii. Debenture holder
----------------------
iii. Both i. and ii.
---------------------- 4. Debentures payable to a holder of certificate is called ________.
i. Bearer
----------------------
ii. Unregistered
---------------------- iii. Secured
iv. Both i. and ii.
----------------------
----------------------
6.6 INVESTMENT IN OTHER COMPANIES
----------------------
Board of Directors of a Company can invest in the shares and debentures of
---------------------- another company only up to the prescribed percentage (60%) of the subscribed
118 Corporate Law

capital of the other company. The aggregate of the investments in other company Notes
should not exceed the prescribed percentage of the subscribed capital and free
reserves of the investing company, and where all the other companies are in the ----------------------
same group, it should not exceed the prescribed percentage.
----------------------
These limits can be exceeded with a special resolution of the shareholder
company and previous approval of the Central Government. The restrictions ----------------------
will apply upon investments made by the company itself or together with its
----------------------
subsidiaries, upon acquisition of shares whether by way of subscription of
shares whether by way of subscription, purchase or otherwise, whether for ----------------------
itself or by any individual or association in trust for it or for its benefit or on its
account. The section says that the board of directors of the investing company ----------------------
shall be entitled to invest in shares such a percentage of the subscribed equity
----------------------
share capital or the aggregate of the paid up equity and preference share capital
of the other company, whichever is less, as may be prescribed. ----------------------
Two companies are said to be in the same group if they are under the
----------------------
same management. The Companies Act further provides that “group” means
any combination of two or more individuals, firms or bodies, corporate who are ----------------------
able to exercise control over the company.
----------------------
This does not apply to any banking company or insurance company, any
private company unless it is a subsidiary of a public company, any company ----------------------
established with the object of financing private industrial enterprises in India,
investments by a holding company in this subsidiary but not a subsidiary which ----------------------
falls within the meaning of a subsidiary by virtue of control over the composition
----------------------
of the board of directors.
Every such company has to maintain a register of investments showing ----------------------
the necessary particulars, such as the names of the companies in the same group, ----------------------
the amount and date of investments etc. A statement has also to be annexed to
the balance sheet. ----------------------
Investment in own name – Every company should hold its investments in ----------------------
its own name. If a Company’s nominee becomes a director in another company
and is required to hold qualification shares, they should be held jointly in the ----------------------
name of the company and such person.
----------------------
This however, does not apply to the case of company whose principal
business is buying and selling of securities, secondly, a company may hold ----------------------
shares in its subsidiary company in the name of one or more nominees if it
is necessary to prevent the number of members from going down below the ----------------------
statutory minimum. Thirdly, a company may deposit with its bankers shares or ----------------------
securities for collection of dividends or to facilitate their transfer. Fourthly, a
company may transfer its shares or securities to another person as a security for ----------------------
a loan or the performance of an obligation. All such exceptional transactions
shall be entered in a separate register. ----------------------
----------------------
----------------------

Notes
Activity 2
----------------------
---------------------- Evaluate the annual report of any company and find out its investment in
other company/ companies.
----------------------
---------------------- Summary
---------------------- ●● A company needs money to finance its activities from time to time. A
---------------------- part of these requirements is met by the issue of shares; for the rest, the
company has to resort to borrowing.
---------------------- ●● I t also has the power to give security for the loan by creating a mortgage
or charge in its property. This power may be unrestricted, but usually the
----------------------
authority of the directors, acting as the agent of the company to borrow,
---------------------- is subject to the following two limitations- the statutory limitation and the
limitation as contained in the Memorandum or the Articles. Borrowing
---------------------- by a company may be a borrowing, which is ultra vires the company, or a
borrowing, which is intra vires the company but ultra vires the directors,
----------------------
i.e., beyond the scope of their authority.
---------------------- ●● When a company takes a loan and issues a loan certificate, it is called
debenture. “Debenture” includes debenture stock, bonds or any other
----------------------
instrument of a company evidencing a debt, whether constituting a charge
---------------------- on the assets of the company or not.” Debenture means a document, which
either creates a debt or acknowledges it.
----------------------
●● The debenture could be further classified as Bearer debentures, Registered
---------------------- debentures, Secured debentures, Unsecured debentures, Redeemable
debentures, Irredeemable or perpetual, debentures Convertible debentures,
---------------------- Non-convertible debentures, First debentures, and Second debentures.
---------------------- ●● The power of a company to borrow includes the power to create a charge
upon its assets. The charge includes a ‘mortgage’ also. The charge that
---------------------- may be created on the assets of a company may be a fixed charge or
floating charge.
----------------------
●● Board of Directors of a Company can invest in the shares and debentures
---------------------- of another company only up to the prescribed percentage (60%) of the
subscribed capital of the other company. Every company should hold its
----------------------
investments in its own name.
----------------------
Keywords
----------------------
●● eserve Capital: Capital, which can be called up only in the event of its
R
---------------------- winding up.
●● Charge: Charge signifies a debt or liability, the word charge as a technical
----------------------
word of legal use conveys an idea of obligation. It is also used in the sense
---------------------- of lien, encumbrance or claim on a property.
120 Corporate Law

Notes
----------------------
1. What is the position of a person who has lent money to a company where
the borrowing power is ultra vires the company? ----------------------
2. Which charges must be registered with the Registrar? What particulars
----------------------
must be entered in the Registrar’s register?
3. What is the effect of non-registration of charges? ----------------------
4. Enumerate the remedies available to the debenture holders. ----------------------
5. Write a note on fixed and floating charges.
----------------------
6. What are different types of debentures?
7. Under what circumstances may a company issue or reissue debentures? ----------------------
8. Write a note on investment of a company in other companies. ----------------------

9. What is the difference between debenture and debenture stock? ----------------------
10. What is the penalty for default in filing of charge with the registrar?
----------------------
11. Who shall register the charges?
12. Where should the copy of instrument creating any charge be kept? ----------------------
13. What is the penalty if inspection of the copies of instruments creating ----------------------
charges or register of charges is refused?
----------------------
1. Charge includes
----------------------
iii. Security
----------------------
2. Commencement of winding up of a company does not affect the nature of a
iii. Both i. and ii. ----------------------
1. Debenture holders are
----------------------
ii. Creditors
2. Return paid on shares is ----------------------
ii. Dividend ----------------------
3. Which of the following have voting rights?
----------------------
i. Shareholders
----------------------
4. Debentures payable to a holder of certificate are called
i. Bearer ----------------------

Notes
Suggested Reading
----------------------
---------------------- & Sons.
----------------------
Co.
---------------------- 3. Singh, Avtar. 2015. Company Law. Eastern Law Publication.
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
122 Corporate Law

Directors and Other Managerial Personnel
UNIT
7
Structure:
7.1 Introduction
7.2 Position of Directors
7.3 Appointment of Directors
7.4 Removal of Directors
7.5 Duties of Directors
7.6 Register of Directors
7.7 Other Managerial Personnel
Summary
Keywords
Suggested Reading
Directors and Other Managerial Personnel 123

Notes
Objectives
----------------------
• Assess the functions of a director
----------------------
• State the qualifications and disqualifications of a director
----------------------
• Discuss the duties of a director towards the company
----------------------
---------------------- 7.1 INTRODUCTION

---------------------- A Company in the eyes of law is an artificial person. It has no physical
existence. It has neither soul nor body of its own. As, such, it cannot act in its
---------------------- own person. It can do so only through some of the human agency i.e. Directors.
---------------------- The directors are a body to whom is delegated the duty of managing the
general affairs of the company. A corporate body can only act by agents, and it
---------------------- is of course the duty of those agents so to act as best to promote the interests of
---------------------- the corporation whose affairs they are conducting.
The Directors are the brain of a company. They occupy a pivotal position
----------------------
in the structure of the company. They are in fact the mainspring of the company.
---------------------- Hence, this unit is dedicated to locate all those agents of the company who
act behind the mask of a Company, the unit would exhaustively deal with
---------------------- the meaning of the term Director, the qualification, appointment, powers and
functions of director and other managerial personnel.
----------------------
---------------------- 7.2 POSITION OF DIRECTORS

---------------------- The position that the directors occupy in the corporate enterprise is not
easy to explain. They are professional men hired by the company to direct its
---------------------- affairs. Yet they are not the servants of the company. They are rather officers
---------------------- of the company. A director may, however, become a servant in a different
capacity. For example, the creator and controller of an air farming company was
---------------------- also working as its pilot. He was lost in an accident. His widow was allowed
compensation under the Workmen’s Compensation Act.
----------------------
The Companies Act makes no effort to define their position. It only says
---------------------- that director includes any person occupying the position of the director, by
whatever name called. In the words of BOWEN LJ: “Directors are described
----------------------
sometimes as agents, sometimes as trustees and sometimes as managing
---------------------- directors. But each of these expressions is used not as exhaustive list of their
powers and responsibilities, but as indicating useful points of view from which
---------------------- they may for the moment and for the particular purpose be considered.”
---------------------- Directors as agents – It was clearly recognized that directors are in
the eyes of law agents of the company. The court said: “The Company has
---------------------- no person; it can act only through directors and the case is, as regards those
124 Corporate Law

directors, merely the ordinary case of principal and agent.” In this case, the Notes
directors allotted certain shares to the plaintiff. They were held not liable when
the company, having exhausted its shares, failed to give effect to the allotment. ----------------------
Similarly, where the plaintiff supplied certain goods to a company through its
chairman, who promised to issue him a debenture for the price, but never did so ----------------------
and the company went into liquidation, he was held not liable to the plaintiff. ----------------------
Directors as trustees – “Although directors are not properly speaking,
----------------------
trustees, yet they have always been considered and treated as trustees of money
which comes to their hands or which is actually under their control and ever ----------------------
since joint stock companies were invented directors have been held liable to
make good moneys which they have misapplied upon the same footing as if ----------------------
they were trustees.” Their office is of fiduciary nature. Most of their powers are
----------------------
powers in trust. The power to make calls, to forfeit shares, to issue further capital,
to approve transfer of shares, are all powers in trust which have to be exercised ----------------------
in good faith for the benefit of the company. Yet directors are not trustees in
the real sense of the word. It is only some of their functions and duties, which ----------------------
are like those of trustees. Directors are the trustees for the company and not
----------------------
for individual shareholders. Further, to a certain extent, directors are trustees
not merely of the company, but also of a public institution. A company is a ----------------------
social institution, and as such owes certain obligations to persons other than
shareholders, such as the labour, customers, consumers and the like. To the ----------------------
extent to which directors have to keep in mind such outside interests affected
----------------------
by corporate operations, they are trustees of such interests.
Directors as organs – The organic theory of corporate life “treats certain ----------------------
officials as organs of the company, for whose action the company is to be held
----------------------
liable just as a natural person is for the action of his limbs”. Thus, the modern
directors are something more than mere agents or trustees. The Board is also ----------------------
correctly reorganized 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 managers is the state of mind of the company
----------------------
and is treated by law as such.” The practical effects of this rule 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.
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------

Notes
----------------------

1. The minimum number of directors in case of a public company is
----------------------
_______.
---------------------- i. One
ii. Two
----------------------
iii. Three
---------------------- iv. Four
---------------------- 2. The minimum number of directors in case of a Private company is
_______.
---------------------- i. One
---------------------- ii. Two
iii. Three
----------------------
iv. Four
---------------------- 3. Age limit of directors in case of public company is ______.
---------------------- i. 65
ii. 70
---------------------- iii. 75
---------------------- iv. 80
----------------------
Activity 1
----------------------
---------------------- Diagrammatically represent the position of director in the context of a

company.
----------------------
----------------------
7.3 APPOINTMENT OF DIRECTORS
----------------------
The first directors of a company are to be appointed by the subscribers
---------------------- to the memorandum. If they do not appoint any, all the subscribers who are
individuals automatically become directors on the registration of the company.
---------------------- They hold office up to the first annual general meeting of the company and the
---------------------- subsequent directors are appointed at the meeting by the shareholders. In case
of a public company and its subsidiaries out of total number of directors, only
---------------------- one-third can be given permanent appointment. The office of the rest of them
must be liable to determination by rotation. But at one annual meeting, only one-
---------------------- third of such directors retire. Those who have been longest in office retire first.
---------------------- As between persons who became directors on the same day, retirement is to be
determined either by mutual agreement, of, in default, by lot. The vacancies thus
---------------------- created should be filled up at the same meeting, or the meeting may resolve that
126 Corporate Law

they shall not be filled up. If the meeting does neither, it is adjourned for a week. Notes
If at the reassembled meeting also no decision is taken, the retiring directors
are deemed to have been automatically re-appointed, except where a particular ----------------------
director’s appointment was lost on voting, or has expressed his unwillingness to
continue, or has incurred a disqualification or a special resolution is necessary ----------------------
for his appointment. ----------------------
If a new director is to be appointed, a notice in writing for his appointment
----------------------
should be left at the office of the company at least 14 days before the meeting
along with a deposit of Rs. 1,00,000/- or as such higher amount as may be ----------------------
prescribed which will be refunded to the depositor if the candidate gets elected
or get a more than 25% of total valid votes cast either on show of hands or ----------------------
on poll on such resolution. The company is required to inform the members
----------------------
in the prescribed manner (Sec. 160). Provided that requirements of deposit of
amount shall not apply in case of appointment of an independent director or a ----------------------
director recommended by the Nomination and Remuneration Committee, if any,
constituted under sub-section (1) of section 178 or a director recommended by ----------------------
the Board of Directors of the Company, in the case of a company not required
----------------------
to constitute Nomination and Remuneration Committee.
Company to have Board of Director- Sec. 149 ----------------------
(1) Every company shall have a Board of Directors consisting of individuals ----------------------
as directors and shall have—
----------------------
(a) a minimum number of three directors in the case of a public
company, two directors in the case of a private company, and one ----------------------
director in the case of a One Person Company; and
(b) A maximum of fifteen directors: ----------------------
Provided that a company may appoint more than fifteen directors ----------------------
after passing a special resolution:
Provided further that such class or classes of companies as may be ----------------------
prescribed shall have at least one woman director. ----------------------
(2) Every company needs to comply with above requirement within one year.
(3) Every company shall have at least one director who has stayed in India for ----------------------
a total period of not less than 182 in the previous calendar year. Provided ----------------------
that in case of a newly incorporated company the requirement under this
sub-section shall apply proportionately at the end of the financial year in ----------------------
which it is incorporated.
----------------------
Independent directors- Sec. 149 (5)
----------------------
Every listed public company shall have at least one-third of the total
number of directors as independent directors and the Central Government may ----------------------
prescribe the minimum number of independent directors in case of any class
or classes of public companies. Again Sec. 149 (6), an independent director ----------------------
in relation to a company, means a director other than a managing director or a
----------------------
whole-time director or a nominee director,—
(a) who, in the opinion of the Board, is a person of integrity and possesses ----------------------

Notes relevant expertise and experience; (b) (i) who is or was not a promoter of
the company or its holding, subsidiary or associate company; (ii) who is not
---------------------- related to promoters or directors in the company, its holding, subsidiary or
associate company; (c) who has or had no pecuniary relationship, other than
---------------------- remuneration as such director or having transaction not exceeding ten per cent.
---------------------- of his total income or such amount as may be prescribed with the company,
its holding, subsidiary or associate company, or their promoters, or directors,
---------------------- during the two immediately preceding financial years or during the current
financial year; (d) none of whose relatives – (i) is holding any security of or
---------------------- interest in the company, its holding, subsidiary or associate company during the
---------------------- two immediately preceding financial years or during the current financial year.
Provided that the relative may hold security or interest in the company of face
---------------------- value not exceeding fifty lakh rupees or two per cent. of the paid-up capital of
the company, its holding, subsidiary or associate company or such higher sum
---------------------- as may be prescribed; (ii) is indebted to the company, its holding, subsidiary or
---------------------- associate company or their promoters, or directors, in excess of such amount
as may be prescribed during the two immediately preceding financial years or
---------------------- during the current financial year; (iii) has given a guarantee or provided any
security in connection with the indebtedness of any third person to the company,
---------------------- its holding, subsidiary or associate company or their promoters, or directors of
---------------------- such holding company, for such amount as may be prescribed during the two
immediately preceding financial years or during the current financial year; or
---------------------- (iv) has any other pecuniary transaction or relationship with the company, or
its subsidiary, or its holding or associate company amounting to two per cent.
---------------------- or more of its gross turnover or total income singly or in combination with the
---------------------- transactions referred to in sub-clause (i), (ii) or (iii). (e) who, neither himself
nor any of his relatives— (i) holds or has held the position of a key managerial
---------------------- personnel or is or has been employee of the company or its holding, subsidiary
or associate company in any of the three financial years immediately preceding
---------------------- the financial year in which he is proposed to be appointed. Provided that in
---------------------- case of a relative who is an employee, the restriction under this clause shall
not apply for his employment during preceding three financial years. (ii) is or
---------------------- has been an employee or proprietor or a partner, in any of the three financial
years immediately preceding the financial year in which he is proposed to be
---------------------- appointed, of— (A) a firm of auditors or company secretaries in practice or
---------------------- cost auditors of the company or its holding, subsidiary or associate company;
or (B) Any legal or a consulting firm that has or had any transaction with
---------------------- the company, its holding, subsidiary or associate company amounting to ten
per cent or more of the gross turnover of such firm; (iii) Holds together with
---------------------- his relatives two per cent or more of the total voting power of the company; or
---------------------- (iv) Is a Chief Executive or director, by whatever name called, of any non-profit
organisation that receives twenty-five per cent or more of its receipts from the
---------------------- company, any of its promoters, directors or its holding, subsidiary or associate
company or that holds two per cent or more of the total voting power of the
---------------------- company; or (f) Who possesses such other qualifications as may be prescribed.
---------------------- (7) Every independent director shall at the first meeting of the Board in which
he participates as a director and thereafter at the first meeting of the Board
128 Corporate Law
in every financial year or whenever there is any change in the circumstances Notes
which may affect his status as an independent director, give a declaration that
he meets the criteria of independence as provided in sub-section (6). ----------------------
Explanation - For the purposes of this section, “nominee director” means ----------------------
a director nominated by any financial institution in pursuance of the provisions
of any law for the time being in force, or of any agreement, or appointed by any ----------------------
Government or any other person to represent its interests.
----------------------
Manner of selection of independent directors – Sec.150
----------------------
An independent director may be selected from a data bank containing
names, addresses and qualifications of persons who are eligible and willing to ----------------------
act as independent directors, maintained by anybody, institute or association,
as may be notified by the Central Government, having expertise in creation ----------------------
and maintenance of such data bank and put on their website for the use by the
----------------------
company making the appointment of such directors.
The appointment of independent director shall be approved by the ----------------------
company in general meeting according to the prescribed procedure. ----------------------
Appointment of director elected by small shareholder Sec. 151
----------------------
A listed company may have one director elected by such small shareholders
in such manner and with such terms and conditions as may be prescribed. “Small ----------------------
shareholders” means a shareholder holding shares of nominal value of not more
than 20,000/- or such other sum as may be prescribed. ----------------------
Appointment of Directors by Board of Director – Sec. 161 ----------------------

a. Additional Director ----------------------
The articles of a company may confer on its Board of Directors the power ----------------------
to appoint any person, other than a person who fails to get appointed as
a director in a general meeting, as an additional director at any time who ----------------------
shall hold office up to the date of the next annual general meeting or the
last date on which the annual general meeting should have been held, ----------------------
whichever is earlier. ----------------------
b. Alternative Director
----------------------
Subject to the provisions of the companies Act, 2013 the Board of Directors
of a company may, if so authorised by its articles or by a resolution passed ----------------------
by the company in general meeting, appoint a person, not being a person
holding any alternate directorship for any other director in the company ----------------------
or holding directorship in the same company to act as an alternate director ----------------------
for a director during his absence for a period of not less than three months
from India. ----------------------
c. Nominated Director ----------------------
Subject to the articles of a company, the Board may appoint any person as
----------------------
a director nominated by any institution in pursuance of the provisions of
any law for the time being in force or of any agreement or by the Central ----------------------

Notes Government or the State Government by virtue of its shareholding in a
Government company.
----------------------
Appointment of Directors by Company Law Tribunal – Sec. 242
---------------------- As per Sec. 242 (2) Company Law Tribunal has power to remove the
managing director, manager or any of the directors of the company to prevent
----------------------
the oppression and mismanagement in the company and subsequently appoint
---------------------- new for same purpose.
Casual vacancies - When the office of a director falls vacant prematurely,
----------------------
the casual vacancy thus created may be filled up in accordance with the articles.
---------------------- If the articles are silent, directors have the power to fill the vacancy. The
appointee holds office until the expiry of the period for which the outgoing
---------------------- director would have been in office.
---------------------- Additional directors – Additional directors may be appointed by the
directors if they have the power to do so in the company’s articles and subject
---------------------- to the maximum number fixed there. Such directors hold office until the next
---------------------- annual general meeting.
Consent to act as director – A person who wants to be appointed as a
---------------------- director has to file with the company a letter showing his consent as candidate
---------------------- for directorship and to act as a director, if appointed. A similar consent has
to be filed within 30 days of appointment with the Registrar and till he has
---------------------- filed it, he shall not act as a director. In case of appointment of an independent
director in the general meeting, an explanatory statement for such appointment,
---------------------- annexed to the notice for the general meeting, shall include a statement that in
---------------------- the opinion of the Board, he fulfils the conditions specified in this Act for such
an appointment (Sec. 152(5).
---------------------- Qualification of directors
---------------------- Share qualification – If the articles of a company require its directors to
hold a certain number of shares, they are called qualification shares.
----------------------
Disqualifications – A person is not capable of being appointed a director
---------------------- in the following cases:
---------------------- Where he is a person of unsound mind.
---------------------- Where he is an undischarged insolvent.

Where he has applied to be adjudicated as an insolvent.
----------------------
Where he has been sentenced to at least six months of imprisonment for
---------------------- an offence involving moral turpitude and five years have not passed since the
date of the expiry of the sentence.
----------------------
Where an order disqualifying him for appointment as a director has been
---------------------- passed by a court or Tribunal and the order is in force;
---------------------- Where he has not paid any calls in respect of any shares of the company
held by him, whether alone or jointly with others, and six months have elapsed
---------------------- from the last day fixed for the payment of the call;
130 Corporate Law

Where he has been convicted of the offence dealing with related party Notes
transactions under section 188 at any time during the last preceding five years;
or ----------------------
Where he has not complied with sub-section (3) of section 152. ----------------------
 A private company may, by its articles, provide for any additional
----------------------
disqualifications for appointment as a director.
Vacation of office – The office of a director is vacated when he incurs any ----------------------
of the above-mentioned disqualifications and also on the following additional
----------------------
grounds:
●● When he absents himself from all the meetings of the Board of Directors ----------------------
held during a period of twelve months with or without seeking leave of ----------------------
absence of the Board;
●● When he acts in contravention of the provisions of section 184 relating ----------------------
to entering into contracts or arrangements in which he is directly or
----------------------
indirectly interested;
●● When he fails to disclose his interest in any contract or arrangement ----------------------
in which he is directly or indirectly interested, in contravention of the
----------------------
provisions of section 184;
●● When he becomes disqualified by an order of a court or the Tribunal; ----------------------
●● When he is convicted by a court of any offence, whether involving moral ----------------------
turpitude or otherwise and sentenced in respect thereof to imprisonment
for not less than six months: ----------------------
●● Provided that the office shall be vacated by the director even if he has ----------------------
filed an appeal against the order of such court;
●● When he is removed in pursuance of the provisions of this Act; ----------------------
When he, having been appointed a director by virtue of his holding ----------------------
any office or other employment in the holding, subsidiary or associate
company, ceases to hold such office or other employment in that company. ----------------------
●● A private company may, by its articles, provide any other ground for the ----------------------
vacation of the office of a director
----------------------
7.4 REMOVAL OF DIRECTORS ----------------------
Removal by shareholders – Section 169 provides that “a company may ----------------------
by ordinary resolution, remove a director before the expiration of his period
of office”. This section is intended to do away with arrangements under which ----------------------
directors were either irremovable or removable only by special resolutions. The ----------------------
section does not deprive the person removed of his right to compensation for
breach of contract. The section admits the following exceptions- ----------------------
- it does not apply to the case of director appointed by the Tribunal in ----------------------
pursuance of Section 242.
- it does not apply to the case of a company, which has adopted the ----------------------

Notes system of electing two-thirds of its directors by the principle of proportional
representation.
----------------------
A notice of the intention to propose a resolution for the removal of
---------------------- a director should be given to the company not less than 14 days before the
meeting. This is to enable the company to inform the director concerned and
---------------------- the members beforehand. If the director sends a representation, the company
should circulate it among the members or read it out at the meeting. It has been
----------------------
held by the Supreme Court that it is not necessary to give in the notice reasons
---------------------- for the proposed removal.
The section applies to private companies as well. But they can evade it by
----------------------
attaching voting rights to shares on certain special occasions or by agreements
---------------------- between members regulating the exercise of voting rights.
Removal by Company Law Tribunal – Sec. 242(2)(h) On an application
----------------------
to the company Law Tribunal for prevention of oppression or mismanagement,
---------------------- the Company Law Tribunal may terminate or set aside any agreement between
the company and its Director or managing director or other managerial
---------------------- personnel. When the appointment of a director is terminated, he cannot serve
any company in managerial capacity for a period of five years except with the
----------------------
leave of the Company Law Tribunal.
---------------------- Resignation – Sec. 168
---------------------- A director may resign from his office by giving a notice in writing to the
company and the Board shall on receipt of such notice take note of the same
---------------------- and the company shall intimate the Registrar in such manner, within such time
---------------------- and in such form as may be prescribed and shall also place the fact of such
resignation in the report of directors laid in the immediately following general
---------------------- meeting by the company. A director shall also forward a copy of his resignation
along with detailed reasons for the resignation to the Registrar within 30 of
---------------------- resignation in such manner as may be prescribed.
---------------------- The resignation of a director shall take effect from the date on which the
notice is received by the company or the date, if any, specified by the director
---------------------- in the notice, whichever is later. However, the director who has resigned shall
---------------------- be liable even after his resignation for the offences, which occurred during his
tenure.
----------------------
Where all the directors of a company resign from their offices, or vacate
---------------------- their offices under section 167, the promoter or, in his absence, the Central
Government shall appoint the required number of directors who shall hold
---------------------- office till the directors are appointed by the company in general meeting.
---------------------- Powers of directors
---------------------- The board of directors is entitled to exercise all such powers and to do
all such acts and things as the company is authorised to exercise and do. In the
---------------------- exercise of their powers, the board is subject to the provisions of the Companies
Act, the memorandum and the articles and any regulations, not inconsistent
---------------------- with them, made by the company in general meeting.
132 Corporate Law

The powers that are vested in the board can be exercised only by the Notes
Board. The shareholders cannot interface in their exercise. Thus if the general
powers of management are vested in the directors, the shareholders cannot ----------------------
direct them to bring an action against a particular individual or to sell the assets
of the company, or to declare a dividend. The true relationship of the board with ----------------------
general meeting is more of federation than of subordinate and superior. ----------------------
But the fact should not be overlooked that the company is an institution
----------------------
owned and controlled by its shareholders. According to the legal theory, the
shareholder is the ultimate and final authority with the corporate enterprise. ----------------------
Therefore, in the following exceptional cases the general meeting is competent
to act even in a matter delegated to the board. ----------------------
Mala fide –When directors are themselves the wrongdoers, and have ----------------------
acted mala fide and their personal interest is in conflict with their duty in such a
way that they cannot and will not take steps to seek redress for the wrong done ----------------------
to the company, the majority of the shareholders (may take steps to redress the
----------------------
wrong).
Board incompetent – Majority of the shareholders may exercise a power ----------------------
which is vested in the board where the board is incompetent either because all
----------------------
or majority of the directors are interested in the transactions or are otherwise
disqualified. ----------------------
Deadlock – A third occasion for the shareholders to intervene would be ----------------------
when the directors are unwilling to act, or on account of a deadlock, unable to
act. ----------------------
Residuary powers – The inherent, residuary and ultimate powers of a ----------------------
company lie with the general meeting of shareholders. Thus, it has been held
that “where a power to allot shares is conferred by the articles of a company ----------------------
on its directors and they act in excess of that power, a residuary inherent power
remains in the company to validate the allotment by an ordinary resolution in ----------------------
the general meeting”. ----------------------
Statutory provisions
----------------------
The Act (also) tries to demarcate the area of proper management control
and proper shareholder control. Section 179 provides that the following powers ----------------------
of the company can be exercised only by means of resolutions passed at meetings
----------------------
of the Board: the power
●● to make calls, ----------------------
●● to authorize buy- back ----------------------
●● to issue debentures,
----------------------
●● to borrow money,
●● to invest funds of the company, and ----------------------
●● to make loans. ----------------------

●● to approve financial statements and the Board’s reports ----------------------

Notes ●● to diversify the business of the company
●● to approve amalgamation, merger or reconstruction
----------------------
●● to take over a company or to acquire a controlling or substantial interest
---------------------- in another company any other matter, which may be prescribed.
---------------------- The board can delegate these powers (by a resolution) to a committee
of directors or other principal officers of the company. The resolution should
---------------------- specify the extent to which the delegate can exercise the power.
---------------------- Further, the following powers can be exercised by the Board only with the
approval of the company in general meeting: a power
---------------------- — to sale or lease of the company’s undertaking
---------------------- — to remit or give time for repayment of any debt from a director.
---------------------- — investment of compensation received on acquisition of the company’s
assets in securities other than trust securities
----------------------
— borrowing of the money beyond the paid-up capital of the company
---------------------- — Contributions of any charitable fund in one financial year or 5% of
---------------------- the average net profits during the preceding three financial years. A
transaction entered into by the directors in excess of the above powers
---------------------- is not enforceable against the company unless the other party can show
that he acted in good faith and had no knowledge that the limit had been
---------------------- exceeded. The first mentioned restriction does not apply to the case of a
---------------------- company whose ordinary business is to sell or lease property. (Sec. 181)
The section does not apply to the following types of contract:
----------------------
(a) The title of a buyer or other person who buys or takes on lease any
---------------------- property, investment or undertaking as is referred to in that clause, in
good faith; or
----------------------
(b) The sale or lease of any property of the company where the ordinary
---------------------- business of the company consists of, or comprises, such selling or leasing.
---------------------- Powers to make political contributions - Before the Companies
(Amendment) Act, 1985 companies were not permitted to make contributions
---------------------- for political purposes. Now this ban has been lifted, except in the case of
Government companies and companies, which have been permitted to contribute
----------------------
money to any political party or to any person for political purposes. The amount
---------------------- should not exceed 7 and 1/2 per cent of the company’s board of directors and
that will be sufficient authorization for all-round validity. Donation given
---------------------- to enable a party to win public support would also be a contribution so also
dose for publication of a souvenir, brochure, tract, pamphlet or the like. The
----------------------
amount contributed must appear in annual accounts. Defaulting company will
---------------------- be punishable with 5 times the amount and defaulting officers with fine of the
same and imprisonment extending up to 6 months.
----------------------
Contributions to National Defence Fund etc. – This section sanctions
---------------------- contributions to National Defence Fund or other Funds approved by the Central
134 Corporate Law

Government. The section fully empowers the board of directors for this purpose Notes
without any limit.
----------------------
7.5 DUTIES OF DIRECTORS ----------------------
Corporate executives are today possessed of “immense power which must ----------------------
be regulated not only for the public good, but also for the protection of those
whose investments are involved”. The law tries to regulate the exercise of this ----------------------
power by imposing upon directors the following duties:
----------------------
1. Under the section 166 of Companies Act, 2013 Directors are having the
following duties: ----------------------
1) A director of a company shall act in accordance with the articles of ----------------------
the company.
----------------------
2) 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) A director of a company shall exercise his duties with due and ----------------------
reasonable care, skill and diligence and shall exercise independent
judgment. ----------------------
4) 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) 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) A director of a company shall not assign his office and any ----------------------
assignment so made shall be void. ----------------------
7) If a director of the company contravenes the provisions of this
----------------------
section such director shall be punishable with fine which shall not
be less than one lakh rupees but which may extend to five lakh ----------------------
rupees.
----------------------
The detail discussion of above stated duties are as follows.
1. Duty of good faith ----------------------
Liability for breach of trust – Directors being fiduciary agents of the ----------------------
company, they are bound by the principle of good faith. “Greatest good
faith is expected in the discharge of their duties.” As fiduciaries, they ----------------------
are bound to account to the company for any profit made by them while ----------------------
acting as directors or by the use of the company’s property. They should
not exploit to their own use the business opportunities of the company. ----------------------

Notes They are not at liberty to sacrifice the interests which they are bound
to protect, and, while ostensibly acting for the company divert in their
---------------------- own favor business which should properly belong to the company they
represent. Where a managing director resigned under pretense of ill
---------------------- health and obtained a gas-contract, which the Gas Board had refused to
---------------------- allot to the company, he was held liable to account for the profits of the
contract. Even where the company is financially unable to make use of its
---------------------- opportunities, directors should not use it for themselves. If they do so, and
make a profit, that also belongs to the company. If they were permitted
---------------------- to retain such profits, there would be temptation to induce such inability
---------------------- on the part of the company and to profit by it. A director may, however,
make use of a business opportunity where the company is insolvent, or
---------------------- the business is outside the scope of its objects and the company has shown
no interest in the opportunity or where the directors, in good faith, decide
---------------------- that the opportunity is one that the company ought not to take.
---------------------- Trading in corporate control – The Act provides that if the directors
receive any money on the sale of their controlling block of shares which
----------------------
is over and above the money received by the other selling shareholders,
---------------------- the extra money is in essence a price for the sale of controlling power and
the directors would hold it in trust for the selling shareholders. Sellers of
---------------------- controlling block also become liable when for their personal gain they
too negligently allow the control of the company to pass into the hands of
----------------------
persons who intend to loot the company.
---------------------- Misuse of corporate information – If a director makes any use of
unpublished and confidential information belonging to the company and
----------------------
the company suffers a loss in consequence, it can ask the directors to make
---------------------- good the loss. Any knowledge or information generated by the company
is the company’s property. Turnover of business, profit margins, list of
---------------------- customers, future plans, manufacturing formulae and processes are the
company’s trade secrets. Any gain made out of the use of such information
----------------------
has to be accounted for the company. If any inside information were used
---------------------- for the purpose of trading in the company’s shares, it would amount to
violation of SEBI (Insider Trading) Regulations, 1992. Insiders involved
---------------------- can be disqualified and also liable for the company’s losses or those of
any other victim.
----------------------
Competition by directors – A director commits no breach of duty if he
---------------------- competes with his company or holds some interest in a rival company
or is a director in a competing company. But he should not make use
----------------------
of the company’s secrets or assets or any special skill for which he has
---------------------- been trained by the company. By an agreement with a director, he can be
restrained from engaging himself in activities of competing nature.
----------------------
2. Duty of care
---------------------- Liability of Negligence – Fidelity alone is not enough. A director has
---------------------- to perform his functions with reasonable care and skill. “His duties will
136 Corporate Law

depend upon the nature of the company’s business and the manner in Notes
which the work of the company is distributed among the directors and
other officials of the company. In discharging these duties, a director must ----------------------
exercise some degree of skill and diligence. But he does not owe to the
company to take all possible care or to act with best care. Indeed, he ----------------------
need not exhibit in the performance of his duties a greater degree of skill ----------------------
than may reasonably be expected from a person of his knowledge and
experience. Directors are not liable for mere errors of judgment.” This ----------------------
is the well-known observation of Romer J in the celebrated case of City
Equitable Fire Insurance Co, Re. A director of an insurance company ----------------------
plunged the company into winding up by his frauds, misappropriations ----------------------
and bad investments. He was accordingly convicted. The question was
whether his co-directors were not guilty of negligence in not detecting ----------------------
such extensive frauds. The court held that they were, but they escaped
liability because under the company’s articles directors could be made ----------------------
liable only for gross negligence. ----------------------
“This acquittal caused such ferment as to lead to legislation abolishing
----------------------
contracting out.” Accordingly, Section 201 renders void any provision in
the articles or in any agreement, which excludes liability for negligence, ----------------------
default, misfeasance and breach of duty or breach of trust. The company
is also not allowed to indemnify its officers against such liability. But ----------------------
where an officer sued or prosecuted has been acquitted, the company may
----------------------
indemnify him for his costs.
3. Duty to attend board meetings ----------------------
Liability for non-attendance – Duties of directors are of an intermittent ----------------------
nature to be performed at periodical board meetings. A director is not
even bound to attend all meetings. “They do not undertake to manage the ----------------------
company.” The Act only says that the office of a director is automatically
----------------------
vacated if he fails to attend three consecutive meetings of the board or all
meetings for a period of three months, whichever is longer. Moreover, ----------------------
a director’s habitual absence may become evidence of negligence. In
an early case in which liability was imposed in this respect, the court ----------------------
said: “If some persons are guilty of gross non-attendance, and leave
----------------------
the management entirely to others, they may be guilty by this means if
breaches of trust are committed by others.” ----------------------
4. Duty not to delegate ----------------------
Liability for co-director’s defaults – Directors being agents are bound by
the maxim delegates’ non-protest delegare. A director should not delegate ----------------------
his functions to another person. But delegation of function may be made ----------------------
to the extent to which it is authorised by the Act or the constitution of
the company. Secondly, there are certain duties, which keeping in mind ----------------------
the exigencies of business may be left to some other officials. In Dovey
vs. Cory, the defendant’s two co-directors manipulated the accounts ----------------------
and showed profits when there was loss, but assured the defendant of ----------------------

Notes the correctness of the accounts. The defendant gave his authority to the
payment of dividend, which was obviously paid out of the capital. But he
---------------------- was held not liable for this loss of capital. He had the right to trust his co-
directors unless there was something to create a doubt about their integrity
---------------------- and competence. Similarly, where one of the directors misappropriated
---------------------- the security money of employees, his co-directors were not held liable
unless there was something to create a doubt about their integrity and
---------------------- competence.
---------------------- This does not, however mean that, directors can always throw up their
hands and say, ‘we know nothing and believed that everything was alright’.
---------------------- Thus, where in the case of a banking company, dividends were paid for
as many as twenty-two years on the basis of manipulated accounts; the
----------------------
directors were not permitted to say that they relied upon competent staff
---------------------- and auditors.
1. Duty to disclose interest
----------------------
Where a director is personally interested in a transaction of the company,
---------------------- he is required to disclose his interest to the board. If he is a member of a
company or a firm with which the company has to deal, he should give
----------------------
a yearly notice to the board of his interest in that concern. Secondly, an
---------------------- interested director is neither to vote on the matter of his interest nor his
presence shall count for the purposes of quorum. If he does vote, his vote
---------------------- shall be void. These provisions are based upon the principles that an agent
should not allow a conflict between his interest and duty. Thus, where
----------------------
the directors took part in and voted at a meeting of the board, which
---------------------- granted debentures to two of them, the resolution was held bad. But the
appointment of a director as a chairman or as a managing director, or
---------------------- allotment of shares to a director, is not such an interest as would exclude
the director from voting.
----------------------
Every director of the company who is in any way whether directly or
---------------------- indirectly interested in an actual or proposed contract or arrangement to
---------------------- be entered into - 1. With a body corporate in which such director either
himself or in association with any other director, holds more than 2 %
---------------------- shareholding or is a promoter, manager chief executive officer of that
body corporate, or 2. With a firm or other entity in which such director
---------------------- is a partner, owner or member, he has to disclose the nature of his
---------------------- concern or interest at the meeting of the Board in which the contract or
arrangement is discussed. He has not to participate in such meeting. If he
---------------------- became subsequently so interested, he must make the disclosure at the
first meeting of the Board otherwise the contract become voidable.
----------------------
Quorum - The quorum is one-third of the total strength or two, whichever
---------------------- is higher, but where this quorum cannot be attained, the interested
directors then as many as are present (being not less than two) shall be the
---------------------- quorum. If the meeting cannot be held for want of quorum, it is adjourned
---------------------- till the same day [not being a public holiday] in the next week. If even
138 Corporate Law

then no quorum is present, those actually present constitute quorum. The Notes
business is done in the form of resolutions. A resolution may be passed at
the meeting or by circulation. The proceedings of every meeting should ----------------------
be recorded in a minute book.
----------------------
----------------------
Fill in the blanks.
1. The position of directors in respect to a company’s properties and the ----------------------
rights conferred upon them to be exercised as directors is that of a
----------------------
______________.
2. ______is the landmark case law on Liability for Co-director’s ----------------------
Defaults.
----------------------
----------------------
7.6 REGISTER OF DIRECTORS
----------------------
Companies are required to maintain the following registers concerning their
directors. ----------------------
1. Register of directors – Every company has to maintain a register of its ----------------------
directors, managing director, manager and secretary, showing particulars
of names and addresses etc. and of directors nominated by a company or ----------------------
firm.
----------------------
2. Register of directors’ shareholding – Every company has to maintain
a register showing the directors’, managing directors’, managers’, ----------------------
secretary’s, shareholding in the company and in its subsidiaries or holding
----------------------
company and in the subsidiaries of the same holding company and shares
held in trust for any of them. ----------------------
3. Register of contracts, etc. – A company has also to maintain a register of
----------------------
such contracts in which a director is interested and of contracts with such
companies or firms in which a director is interested. ----------------------
Loans to directors – The Act is very strict to provide the loan to the directors. ----------------------
In the following cases, loans to the director is not allowed -
– to the directors of the company, or to the directors of its holding company ----------------------
or to any partner or relative of any director. ----------------------
– to any firm in which a director or his relative is a partner.
----------------------
– to any private company in which a director is a member or director.
----------------------
– to anybody corporate at whose general meeting any director or directors
control 25% of voting. ----------------------
– to any company whose managers or board are accustomed to act in
----------------------
accordance with instructions of the board of directors, or any director or
directors of the lending company. ----------------------

Notes The company can neither guarantee nor provide any security for the loan
taken or given by any of the above persons.
----------------------
Remuneration of directors
---------------------- Regulation of directors’ remuneration becomes necessary for several
reasons, prominent among them being the prevention of diversion of corporate
----------------------
funds for personal use and the impact, which an unduly high executive reward
---------------------- has upon the rest of the society. Remuneration is to be determined in accordance
with the company’s articles or by a resolution of the company in a general
---------------------- meeting, but it will be subject to the provisions of Sections 198 and 309. The
total amount of remuneration payable to all the managerial personnel cannot
----------------------
exceed 11% of the net profits of the company. If in any particular year there
---------------------- are no inadequate profits, the company may, with the approval of the Central
Government, pay by way of minimum remuneration any sum as may be
---------------------- authorised. The Government may sanction more in the case of a managing or
whole-time director or manager.
----------------------
Compensation for loss of office - A company may make payment to a
---------------------- managing director or whole-time director holding the office of manager, or in
the whole-time employment of the company, by way of compensation for loss
----------------------
of office, or as consideration for retirement from office. No other director is
---------------------- entitled to compensation. Further in the following cases no compensation is
payable:
----------------------
(a) Where the director resigns from his office as a result of the reconstruction
---------------------- of the company, or of its amalgamation with any other body corporate
or bodies corporate, and is appointed as the managing or whole-time
---------------------- director, manager or other officer of the reconstructed company or of the
---------------------- body corporate resulting from the amalgamation;
(b) Where the director resigns from his office otherwise than on the
---------------------- reconstruction of the company or its amalgamation as aforesaid;
---------------------- (c) Where the office of the director is vacated under sub-section (1) of section
167;
----------------------
(d) Where the company is being wound up, whether by an order of the
---------------------- Tribunal or voluntarily, provided the winding up was due to the negligence
or default of the director;
----------------------
(e) Where the director has been guilty of fraud or breach of trust in relation to,
---------------------- or of gross negligence in or gross mismanagement of, the conduct of the
affairs of the company or any subsidiary company or holding company
----------------------
thereof; and
---------------------- (f) Where the director has instigated, or has taken part directly or indirectly
---------------------- in bringing about, the termination of his office.
Director with unlimited liability - A limited company may make the
---------------------- liability of its directors or manager unlimited. A provision to that effect will have
---------------------- to be inserted in the company’s memorandum either originally or by subsequent
140 Corporate Law

alteration. If it is inserted by alteration, it will become effective against an office Notes
when he gives his consent in writing or in his re-appointment after the expiry of
his term. ----------------------
Prohibition of assignment - A director cannot assign his office in favour ----------------------
of anyone else. Any such assignment is void.
----------------------
Irregular appointment and validity of acts - Sec. 176 state that, no act
done by a person as a director shall be deemed to be invalid, notwithstanding ----------------------
that it was subsequently noticed that his appointment was invalid by reason
of any defect or disqualification or had terminated by virtue of any provision ----------------------
contained in this Act or in the articles of the company:
----------------------
Provided that nothing in this section shall be deemed to give validity
to any act done by the director after his appointment has been noticed by the ----------------------
company to be invalid or to have terminated.
----------------------
Alternate director - If a director is absent for more than three months
from the State in which the meetings of the Board are ordinarily held, the ----------------------
directors may, either in accordance with the articles or a resolution of the ----------------------
company, appoint an alternate director. He vacates office when the original
director returns to the State or when his term expires. ----------------------
----------------------
----------------------
----------------------
1. A limited company may make the liability of its directors or manager
unlimited. ----------------------
2. A director cannot assign his office in favour of anyone else. Any such
----------------------
assignment is void.
----------------------
7.7 OTHER MANAGERIAL PERSONNEL ----------------------
The general principle is that the board of directors should direct and control ----------------------
the company’s affairs. But at the same time the Act allow a person to accept ----------------------
directorship in twenty companies and does not prescribe the time and attention
that he should devote to a particular company. Moreover, a board meeting is a ----------------------
very formal affair and cannot be called very frequently, whereas the business
has to be managed every day. Accordingly, the day-to-day management has to ----------------------
be delegated to professional management. ----------------------
Managing or whole-time director or manager
----------------------
A managing director, as defined in Section 2(54), “managing director”
means a director who, is entrusted with substantial powers of management ----------------------
of the affairs of the company and includes a director occupying the position
----------------------
of managing director, by whatever name called. The “substantial powers”
of management may be conferred upon him by virtue of an agreement with ----------------------

Notes the company, or by a resolution of the company or board or by virtue of its
memorandum and articles. The powers so conferred are alterable by the
---------------------- company. He is also removable the same way as he was appointed irrespective
of the fact that his appointment has been approved by the Central Government.
---------------------- But if he is prematurely removed from office, he is entitled to compensation. A
---------------------- managing director is whole time employee of the company, but not to the extent
so as to be entitled to preferential payments.
----------------------
Procedure of appointment - Every whole-time key managerial personnel
---------------------- of a company shall be appointed by means of a resolution of the Board containing
the terms and conditions of the appointment including the remuneration.
----------------------
A whole-time key managerial personnel shall not hold office in more than
---------------------- one company except in its subsidiary company at the same time:
Provided that nothing contained in this sub-section shall disentitle a key
----------------------
managerial personnel from being a director of any company with the permission
---------------------- of the Board:
---------------------- Provided further that whole-time key managerial personnel holding office
in more than one company at the same time on the date of commencement
---------------------- of this Act, shall, within a period of six months from such commencement,
choose one company, in which he wishes to continue to hold the office of key
---------------------- managerial personnel:
---------------------- Provided also that a company may appoint or employ a person as its
managing director, if he is the managing director or manager of one, and of not
---------------------- more than one, other company and such appointment or employment is made
---------------------- or approved by a resolution passed at a meeting of the Board with the consent
of all the directors present at the meeting and of which meeting, and of the
---------------------- resolution to be moved thereat, specific notice has been given to all the directors
then in India.
----------------------
If the office of any whole-time key managerial personnel is vacated, the
---------------------- resulting vacancy shall be filled-up by the Board at a meeting of the Board
within a period of six months from the date of such vacancy.
----------------------
The appointment has to be the subject to the provisions of the section 197
---------------------- and Schedule V of the Act. Also as per section 203, he is an employee of the
company.
----------------------
Disqualifications – The following cannot be appointed managing or
---------------------- whole-time directors:
---------------------- A person who is an undischarged insolvent or has at any time been
adjudged insolvent.
----------------------
A person who suspends or has at any time suspended payment to his
---------------------- creditors or makes or has made a composition with them.
---------------------- A person who is or has been convicted by a court of an offence involving

moral turpitude.
----------------------
142 Corporate Law

A person who is below the age of 21 years or has attained the age of 70 Notes
years. The appointment of a person who has attained the age of 70 years may be
made by passing a special resolution. ----------------------
A person who is or has been convicted by a court of an offence and ----------------------
sentenced to imprisonment for a period of more than six months.
----------------------
Manager – Sec. 2(53) A “manager” means an individual who has
the management of the whole or substantially the whole of the affairs of a ----------------------
company. He is subject to the control and superintendence of the company’s
Board. A managing director is a part of the company’s board of directors and ----------------------
not subordinate to it. A manager is subject to the control, superintendence and
----------------------
directions of the board. A firm, company or association cannot be appointed as
manager. Further, the following are disqualified: ----------------------
A person who is an undischarged insolvent or has at any time been
----------------------
adjudged insolvent.
A person who suspends or has at any time suspended payment to his ----------------------
creditors or makes or has made a composition with them. ----------------------
A person who is or has been convicted by a court of an offence involving
moral turpitude. ----------------------
A person who is below the age of 21 years or has attained the age of 70 ----------------------
years. The appointment of a person who has attained the age of 70 years may be
made by passing a special resolution. ----------------------
A person who is or has been convicted by a court of an offence and ----------------------

sentenced to imprisonment for period of more than six months.
----------------------
The procedure of appointment and requirement of approval are now the
same as in the case of a managing director. Appointment as manager in more ----------------------
than one company is subject to the same condition as that of managing director.
----------------------
There are the same restrictions as to remuneration.
Secretary - Section 2(24) provides that the expression “secretary” means ----------------------
a company secretary within the meaning of Section 2(1)(c) of the Company ----------------------
Secretaries Act, 1980 and includes any other individual possessing the prescribed
qualification and appointed to perform the duties which may be performed by ----------------------
a secretary under this Act and any other ministerial or administrative duties.
This transformation of the definition has been brought about by the amendment ----------------------
of 1988 which has also introduced the concept of a “secretary in whole-time ----------------------
practice” and defines it by saying that it means a secretary who shall be deemed
to be in practice within the meaning of Section 2(2) of the Company Secretaries ----------------------
Act, 1980 and who is not in full-time employment. The changes introduced by
the amendments are: ----------------------
●● Only an individual can be a secretary; ----------------------
●● Sec. 203 makes it obligatory for such class or classes of companies as ----------------------
may be prescribed to have a whole-time secretary.
----------------------

Notes ●● He is no more a “purely” ministerial officer, this word having been
dropped. A modern secretary is not a mere clerk but an officer of the
---------------------- company with extensive duties and responsibilities and has authority to
sign contracts connected with the administrative side of a company’s
---------------------- affairs and has ostensible authority to enter into a wide range of contracts.
---------------------- Functions of Company Secretary- 205
---------------------- The company Secretary needs to perform the following functions:
●● To report to the Board about compliance with the provisions of the Act, its
----------------------
rule and other rules and laws applicable to the company.
---------------------- ●● To ensure that company complies with the applicable secretarial standards.
---------------------- ●● To discharge other such other duties as may be prescribed.
Sole selling agents - The expression “sole selling agent” is not defined
---------------------- in the Act. The definition of “agent” in Section 182 of the Indian Contract Act,
---------------------- therefore, applies. Thus, he means a person who has the exclusive right to sell
a company’s goods in a particular manufacturer’s goods. But whenever he is an
---------------------- “agent” or a “buyer” will depend upon the substance of the transaction and not
upon the terminology of the parties. A sole selling agent can be appointed by the
---------------------- board, but “subject to the condition that the appointment shall cease to be valid
---------------------- if it is not approved by the company in the first meeting” held after the date of
appointment. If this condition is not expressly mentioned in the appointment by
---------------------- the Board, the appointment is invalid ab initio. Further, if the appointment is
not approved at the first general meeting it ceases to be valid from the date of
---------------------- meeting and cannot be received or ratified at a subsequent meeting.
---------------------- The appointment can be made for a prescribed period, which may be
extended from time to time for prescribed period on each occasion.
----------------------
Officer who is in default – Sec. 2(60) There are many penal provisions
---------------------- in the Act. Almost all of them provide for punishment by way of fine or
imprisonment of directors or other principle officers of the company. It is
----------------------
common with companies to grant position merely for ceremonial purposes.
---------------------- Such persons may not be much concerned with the affairs of the company and,
therefore, may not deserve to be punished. In order to find out those who really
---------------------- deserve to be punished, the Companies Act has all along used the expression for
all serious defaults “the officer who is in default”. In actual practice, however, it
----------------------
is very difficult to find out who is in-charge of a particular affair of a company
---------------------- in respect of which a default has been registered so as to hold him liable as an
office in default. Many cases failed for this reason. Hence, this provision was
---------------------- redrafted and its effect is that profession managers, like managing directors,
managers, whole-time directors or secretaries etc., will be regarded as officer in
----------------------
default without any further inquiry.
----------------------
----------------------
----------------------
144 Corporate Law

Notes
Activity 3
----------------------
Find out the other managerial persons of companies from the website of any ----------------------
Indian Company and write a note on them.
----------------------
Summary ----------------------
●● The directors are a body to which is delegated the duty of managing the ----------------------
general affairs of the company. A corporate body can only act by agents ----------------------
and it is of course the duty of those agents so to act as best to promote the
interests of the corporation whose affairs they are conducting. ----------------------
●● The Directors are the brain of a company. Directors hold different
----------------------
positions with the company, which are - Directors as agents, Directors as
trustees, Directors as organs. ----------------------
●● The first directors of a company are to be appointed by the subscribers
----------------------
to the memorandum. If they do not appoint any, all the subscribers who
are individuals automatically become directors on the registration of the ----------------------
company. They hold office up to the first annual general meeting of the
company and the subsequent directors are appointed at the meeting by the ----------------------
shareholders. They could also be appointed in case of Casual vacancies
----------------------
or as Additional directors or could be appointed by Central Government.
●● A company may by ordinary resolution, remove a director before the ----------------------
expiration of his period of office.
----------------------
●● The board of directors is entitled to exercise all such powers and to do
all such acts and things as the company is authorised to exercise and do. ----------------------
The law tries to regulate the exercise of this power by imposing upon
----------------------
directors the following duties: Duty of good faith, Duty of care, Duty to
attend board meetings, Duty not to delegate and Duty to disclose interest. ----------------------
●● Though the general principle is that the board of directors should direct
----------------------
and control the company’s affairs; the day-to-day management has to
be delegated to professional management who constitute Managing or ----------------------
whole-time director, Manager, Secretary or Sole selling agents.
----------------------
Keywords
----------------------
●● Agents: An “agent” is a person employed to do any act for another or to
represent another in dealings with third persons. The person for whom ----------------------
such act is done or who is so represented is called the Principal.
----------------------
●● Trustees: One to whom property is entrusted to be administered for the
benefit of another. Trustee includes every person holding, expressly, by ----------------------
implication or constructively, a fiduciary character.
----------------------
●● Mala fide: In bad faith, as opposed to bona-fide.
----------------------

Notes ●● Deadlock: State of affairs in which it is impossible to advance or recede,
a state of suspended animation in business affairs.
---------------------- ●● Residuary Powers: Those are in nature of residue after eliminated all
---------------------- other explicit powers.
●● Negligence: Negligence in law signifies a coming short of the performance
---------------------- of duty. It is absence of care according to the circumstances.
---------------------- ●● Delegates non-protest delegare: The delegate cannot delegate it further.
A delegated power cannot be further delegated
----------------------

---------------------- 1. Describe a Director of a Company.
---------------------- 2. What is the procedure for appointment of a Director?
3. What is the nature of the position of Director in a Company?
----------------------
4. What is the procedure for removal of Director?
----------------------
5. Explain various duties of a Director.
---------------------- 6. Write a note on remuneration of a Director.
---------------------- 7. Who is a Managing or whole-time director or manager? State the
procedure of his appointment and also state the disqualifications.
----------------------
8. Write a note on Manager.
----------------------
9. Write a note on Sole selling agent.
---------------------- 10. What is a qualification share?
---------------------- 11. How can a company remove a director before the expiration of his period
of office?
----------------------
12. When can Central Government remove managerial personnel from office?
----------------------
----------------------

----------------------
1. The minimum number of directors in case of a public company is
----------------------
iii. Three
---------------------- 2. The minimum number of directors in case of a private company is
---------------------- ii. Two
---------------------- 3. Age limit of directors in case of public company is

ii. 70
----------------------
----------------------
146 Corporate Law

Check your Progress 2 Notes
Fill in the blanks.
----------------------
1. The position of directors in respect to a company’s properties and the
rights conferred upon them to be exercised as directors is that of a trustee. ----------------------
2. Dovey vs. Cory is the landmark case law on Liability for Co-director’s ----------------------
Defaults.
----------------------
1. False ----------------------
2. True ----------------------
----------------------
Suggested Reading
----------------------
& Sons. ----------------------
Co.
----------------------
Reporter. ----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------

Notes
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
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----------------------
----------------------
----------------------
----------------------
----------------------
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148 Corporate Law

Reconstruction, Amalgamation and Meetings
UNIT
8
Structure:
8.1 Introduction to Compromises and Arrangements
8.2 Duties and Powers of Tribunal
8.3 Reconstruction, Merger and Amalgamation
8.4 Meetings
8.5 Types of Meetings
8.6 Procedure of Meetings
8.7 Kinds of Resolution
Summary
Keywords
Suggested Reading
Reconstruction, Amalgamation and Meetings 149

Notes
Objectives
----------------------
• State the meaning of reconstruction, amalgamation and compromises
----------------------
• Compare and contrast reconstruction, amalgamation and compromises
---------------------- • Appraise the procedures of reconstruction, amalgamation and
---------------------- compromises
• Discuss the kinds and procedures of various meetings to be conducted
---------------------- by a company
----------------------
8.1 INTRODUCTION TO COMPROMISES AND
----------------------
ARRANGEMENTS
----------------------
A “Compromise” presupposes the existence of a dispute, for, “there can
---------------------- be no compromise unless there is some dispute”. The dispute may then be
resolved by drawing up a scheme of compromise. Even when there is a dispute,
---------------------- but the scheme is such that the members have to give up their rights entirely,
---------------------- it will not be a compromise or arrangement. Surrender of rights without any
compensation or any measure of accommodation on both sides cannot be
---------------------- regarded as a compromise.
---------------------- But “arrangement” is a term of wider connotation. A re-arrangement of
rights or of liabilities is possible without the existence of any dispute. Thus,
---------------------- where under a scheme each shareholder of a company had to transfer some of
his shares to another company and some to its shareholders the tribunal refused
---------------------- to uphold the scheme as there was no dispute which the scheme purported to
---------------------- resolve. But the Court of Appeal held that the word “arrangement” should not
be taken to mean the same thing as a compromise.
----------------------
The company, or its liquidator (if it is in winding up), or any member or
---------------------- creditor may make an application to the Tribunal. An application can be made
only by a member or creditor of the class which is affected by the compromise
---------------------- or arrangement proposed by the company. The company has to place different
interests in separate classes. Classification of members or creditors in a scheme
----------------------
is necessary only when different members or creditors are affected differently
---------------------- under the scheme.
If an application is properly made, the tribunal may order a meeting of the
----------------------
class of creditors or members to be called, which shall be held and conducted in
---------------------- the manner directed by the Tribunal. A single joint application by all companies
involved in a scheme for convening of meetings and for sanction has been held
---------------------- to be permissible. An application can be entertained even when proceedings
against the company are pending before the Appellate Authority under the Sick
----------------------
Industrial Companies (Special Provisions) Act, 1985.
----------------------
150 Corporate Law

A statement of the terms of the compromise or arrangement and its effects Notes
has to be sent with every notice calling the meeting. The power of the Tribunal
being of judicial nature, it is necessary for its proper exercise that notice should ----------------------
be given to all the interested parties including the shareholders and the Central
Government. The role of the Government is that of an impartial observer. The ----------------------
statement should explain in particular any material interest of the directors, ----------------------
managing director, managing agents, secretaries and treasurers or manager of
the company and the effect of the compromise on their interests in so far as ----------------------
that effect is different from the effect on likes or interests of other persons. The
extent of disclosure required must depend on the nature of the scheme. ----------------------
If the notice calling the meeting is given by advertisement, the statement ----------------------
should be included in the advertisement or the advertisement should indicate
----------------------
the place at which or the manner in which copies of such a statement may be
obtained. When a member or creditor entitled to receive a copy applies for it, ----------------------
the company shall be bound to supply him one free of charge.
----------------------
Every officer of the company is required to give notice to the company of
such matters related to him as may be necessary for the purposes of the scheme. ----------------------
If the scheme is approved by a majority representing three-fourths in
----------------------
value of the creditors or members, as the case may be, it may then be sanctioned
by the Tribunal. This requirement has been held to be directory, not mandatory. ----------------------
Where a scheme was not approved by the appropriate majority of creditors at
their meeting, but subsequently the creditors to the extent of requisite majority ----------------------
filed individual affidavits before the Tribunal that is considered to be a sufficient
----------------------
compliance with the statutory requirements.
----------------------
8.2 DUTIES AND POWERS OF TRIBUNAL
----------------------
Where the Tribunal makes an order under section 230 sanctioning a
----------------------
compromise or an arrangement in respect of a company, it—
(a) Shall have power to supervise the implementation of the compromise or ----------------------
arrangement; and
----------------------
(b) May, at the time of making such order or at any time thereafter, give
such directions in regard to any matter or make such modifications in the ----------------------
compromise or arrangement as it may consider necessary for the proper ----------------------
implementation of the compromise or arrangement.
If the Tribunal is satisfied that the compromise or arrangement sanctioned ----------------------
under section 230 cannot be implemented satisfactorily with or without ----------------------
modifications, and the company is unable to pay its debts as per the
scheme, it may make an order for winding up the company and such an ----------------------
order shall be deemed to be an order made under section 273.
----------------------
Advantages of Tribunal’s Sanction
----------------------
The Tribunal’s sanction is advantageous from several points of view. The
scheme becomes binding upon all the parties to it including the shareholders, ----------------------

Notes the company and creditors. The word ‘creditor’ includes all kinds of creditors
and also the State to which some sales tax is due. For example, the scheme
---------------------- envisages the payment of four annas in the rupee “in full and final settlement”
of the claim of every unsecured creditor, the State can also recover only 1/4th of
---------------------- the tax due. It cannot proceed to recover the entire amount due even if the final
---------------------- assessment was completed after the scheme was sanctioned.
This way the majority of a class of members or creditors can bind the
----------------------
minority. For example, where one of the merging companies was at Bombay
---------------------- and the other in Gujrat and a director of the transferor company at Bombay
and the other in Gujrat and a director of the transferor company at Bombay
---------------------- did not raise any objection when the Bombay High Court granted its approval,
he became bound and was precluded from raising any objection while the
----------------------
transferee company sought the approval of the Gujrat High Court. The company
---------------------- is rescued from its financial straits. The trouble and expense of winding up and
of forming a new company are saved.
----------------------
The Tribunal sanctioning the scheme has the power to supervise its
---------------------- implementation.
An appeal can be preferred against the scheme to the next Appellate
----------------------
Tribunal. The order of the Tribunal takes effect when a certified copy has been
---------------------- filed with the Registrar.

----------------------
----------------------
1. The term ‘arrangement’ has wider connotation than the term
---------------------- ‘compromise’.
---------------------- 2. The Tribunal sanctioning the scheme of reconstruction has the power to
supervise its implementation.
----------------------
---------------------- 8.3 RECONSTRUCTION, MERGER AND AMALGAMATION

---------------------- Reconstruction - “There is ‘reconstruction’ of a company when that
---------------------- company’s business and undertaking are transferred to another company
formed for that purpose, so that as regards the new company substantially the
---------------------- same business is carried on and the same persons are interested in it as in the
case of the old company.” A reconstruction may become necessary for several
----------------------
purposes. A Tribunal may not, for example sanction a radical change of objects.
---------------------- New objects can then be adopted only by the process of reconstruction. A
reconstruction may also become necessary to cause material alterations of the
---------------------- rights of a class of shareholders or creditors.
---------------------- Amalgamation - “Amalgamation occurs when two or more companies
are joined to form a third entity or one is absorbed into or blended with
----------------------
152 Corporate Law

another.” The effect is to wipe out the merging companies and to fuse them all Notes
into the new one created. The new company comes into existence having all the
property, rights and powers and subject to all the duties and obligations, of both ----------------------
the constituent companies.
----------------------
Power of amalgamation - There should be power in the company’s
memorandum to amalgamate. If it is not there it should be acquired by altering ----------------------
the memorandum. It is not necessary that the company adopting a scheme ----------------------
should be in financial difficulties or that it should not be an affluent company.
The expression “any company liable to be wound up under this Act” does not ----------------------
mean a company which is insolvent, but any company registered under the Act,
----------------------
every such company being subject to the winding up provision of the Act.
Forms of reconstruction and amalgamation - A reconstruction or ----------------------
amalgamation may take any of the following forms: ----------------------
●● By sale of shares.
----------------------
●● By sale of undertaking.
----------------------
●● By sale and dissolution.
●● By a scheme of arrangement. ----------------------
Sale of shares is the simplest process of amalgamation or takeover. Shares ----------------------
are sold and registered in the name of the purchasing company. The selling
shareholders receive either compensation or shares in the acquiring company. If ----------------------
nine-tenths of the holders of a class have approved the terms, shares of the rest
----------------------
can be acquired.
The second method involves a sale of the whole of the undertaking of ----------------------
the transferor company as a going concern. Sec. 232 of the Act applies to every ----------------------
scheme which involves transfer of the whole or any part of the undertaking
or liability of a company to another company. Where the application is made ----------------------
to the Tribunal under sec. 230 it may be shown that it is necessary to have the
----------------------
reconstruction, amalgamation, or merger of the two or more companies.
The third and fourth method is where the existing company dissolves in ----------------------
the former and the new company is formed by way of arrangement in the latter. ----------------------
Official report - As per the 2013 Act, Any such scheme should not be
----------------------
sanctioned unless there is the certificate of the company’s auditor to the effect
that the scheme is in conformity with the prescribed accounting standards. ----------------------
Notice to Central Government - Fairness of Exchange Ratio the Tribunal ----------------------
has also to give notice of every application to the Central Government and has
to take into account the representation, if any, made by the Government before ----------------------
sanctioning the scheme.
----------------------
Vesting of Rights and Transfer of Obligations -
----------------------
All rights and obligations of the amalgamated company become vested
in the amalgamating company. A company taking over another was allowed ----------------------

Notes to continue eviction proceedings. A formal transfer or substitution was not
necessary. Where the transfer of property takes place in terms of an order under
---------------------- Section 394, the right to continue the proceedings arises automatically. Where
the whole undertaking is taken over, all the rights pass whether mentioned in a
----------------------
schedule or not. The company which emerges from the amalgamation becomes
---------------------- the new tenant because the property rights which pass to the transferee company
include tenancy rights also.
----------------------
Reduction of Capital in Amalgamation - Where a scheme of
---------------------- amalgamation involves the merger of two companies into a new company, and
the merging companies are to be dissolved without winding up, the fact that the
----------------------
preference shareholders of the merging companies are to be paid back under the
---------------------- scheme does not amount to reduction of capital.
---------------------- There is no prohibition or legal impediment on reduction of share capital

when it is a part of a scheme of amalgamation. The only thing is that the
---------------------- procedure required for reduction of capital has to be complied with. A similar
procedure has to be observed where the reduction is that of the share premium
----------------------
account and the scheme is not covered by the permitted range of utilization of
---------------------- such account.
---------------------- Increase of authorized share capital - Where the scheme of amalgamation

involved an increase of the authorized capital of the transferee company, the
---------------------- court said that the procedure prescribed for such increase would have to be
observed without any exemption in this respect. The transferee company is
----------------------
bound to carry out the requirements of the scheme.
---------------------- Change of name – There is no automatic change of name of the company
---------------------- involved in an amalgamation. Proceedings for change of name would have to
be followed.
----------------------
Amalgamation in Public Interest – (Sec. 237) Where the Central
---------------------- Government is satisfied that an amalgamation of two or more companies is
essential in the public interest, then, the Government may by order notified
---------------------- in the Official Gazette provide for the amalgamation of those companies into
---------------------- a single company. The amalgamated company shall have such constitution,
property, powers, rights, interests, authorities and privileges and shall be with
---------------------- such liabilities, duties and obligations as may be specified in the Government’s
order. The order may also contain consequential, incidental and supplementary
----------------------
provisions.
---------------------- Every member or creditor of each of the companies before the
amalgamation shall have, as nearly as may be, the same rights and interests in
----------------------
the amalgamated company as he had in the company of which he was originally
---------------------- a member or creditor. But if his rights in the amalgamated company are less
than those, he shall be entitled to compensation. The Government may prescribe
---------------------- some authority for the assessment of compensation and it will be paid by the
---------------------- company resulting from the amalgamation.
154 Corporate Law

Before making any order of amalgamation, the Central Government is Notes
required to send copy of the proposed order in draft to each of the companies
concerned. This is necessary to enable such companies to file their objections and ----------------------
suggestions. The period for filing objections shall be fixed by the Government,
----------------------
but should not be less than two months. The Government may modify the draft
order in the light of any suggestions so received. ----------------------
Copies of every such order have to be laid before Houses of Parliament at ----------------------
the earliest convenience.
----------------------
Preservation of Books and Papers of Amalgamated Company- (Sec.
239) Where a company has been amalgamated with another company under ----------------------
any of the above provisions of the Act, or whose shares have been acquired by
another company, the books and papers of such a company shall not be disposed ----------------------
of without the prior permission of the Central Government. Before granting ----------------------
such permission, the Government may appoint a person to examine the books
and papers for the purpose of ascertaining whether they contain any evidence ----------------------
of the commission of an offence in connection with the promotion or formation
----------------------
of or the management of the affairs of the company.
----------------------
8.4 MEETINGS
----------------------
The management of a company’s business is necessarily left to the
----------------------
discretion of the directors However, the ultimate control of the actions of the
Board of directors is vested in the members or shareholders of the company, and ----------------------
from time to time they must meet to ratify, or express their disapproval of, the
directors’ past conduct, and to consider their future plans. The members express ----------------------
their will at general meetings by passing resolutions. ----------------------
Shortly after the formation of a public company, a statutory meeting is
----------------------
held. This is the first general meeting of the company. Then each year an annual
general meeting is summoned to consider the routine matters relating to the ----------------------
report of the directors, appointment of directors and auditors, accounts and
declaration of a dividend. In addition, occasions may arise when it is necessary ----------------------
to consult the members on some urgent and unusual matter which justifies the ----------------------
summoning of an extraordinary meeting.
----------------------
Further, there are class meetings of shareholders of different classes of
shares, and of creditors and debenture-holders. ----------------------
8.5 TYPES OF MEETINGS ----------------------
----------------------
Annual general meeting
Every company is required to call at least one meeting of its shareholders ----------------------
in each year. The meeting is known as the annual general meeting. The first ----------------------
annual general meeting must be held within 9 months from the date of closing
of the first financial year, and then no meeting will be necessary for the year ----------------------

Notes of incorporation. Thereafter one meeting must be held every year. The gap
between one meeting and the next should not be of more than fifteen months.
---------------------- Any default in holding this meeting has two consequences.
---------------------- Any member can apply under section 97 of the Act to the Tribunal for an
order requiring the company to call the meeting.
----------------------
The failure to call this meeting either generally or in pursuance of the
---------------------- order of the Tribunal is an offence punishable with fine. This is applicable to
---------------------- private company also. The penalty is imposed on the company as well as every
officer of the company who is in default.
----------------------
The Registrar has the power, for any special reason, to extend the time
---------------------- for holding an annual meeting for a period of only three months. But the time
for holding the first annual meeting cannot be extended. The business to be
---------------------- transacted at the meeting is generally provided for in the company’s articles and
---------------------- that is known as ordinary business. The meeting may take up any other business
and that will be known as special business.
----------------------
Extraordinary general meeting – (Sec. 100) Any meeting other than
---------------------- the annual general meeting is known as an extraordinary general meeting.
The directors may call it whenever they think fit and must call it when it is
----------------------
requisitioned by the shareholders. The requisition must be signed by the holders
---------------------- of at least one-tenth paid-up capital having the right to vote on the matter of
requisition. If the company has no share capital the requisition must be signed
---------------------- by as many as have one-tenth of the total voting power.
---------------------- The requisition must set out the matter for the consideration of which
the meeting is requisitioned. When a meeting is requisitioned for the purpose
----------------------
of removing directors, it is not necessary to state reasons for the same. The
---------------------- directors should move within twenty-one days to call the meeting which should
actually be held within forty-five days. If they fail to do so, the requisitioners
---------------------- may themselves call the meeting and recover the necessary expenses from the
---------------------- company.
---------------------- Power of Tribunal to call meeting (Sec. 98)

If for any reason it is impracticable to call a meeting of a company,
----------------------
other than an annual general meeting, in any manner in which meetings of the
---------------------- company may be called, or to hold or conduct the meeting of the company in
the manner prescribed by this Act or the articles of the company, the Tribunal
---------------------- may, either suo moto or on the application of any director or member of the
---------------------- company who would be entitled to vote at the meeting,—
---------------------- (a) order a meeting of the company to be called, held and conducted in such
manner as the Tribunal thinks fit; and
----------------------
(b) give such ancillary or consequential directions as the Tribunal thinks
---------------------- expedient, including directions modifying or supplementing in relation to
156 Corporate Law

the calling, holding and conducting of the meeting, the operation of the Notes
provisions of this Act or articles of the company:
----------------------
Provided that such directions may include a direction that one member of
the company present in person or by proxy shall be deemed to constitute ----------------------
a meeting.
----------------------
(2) Any meeting called, held and conducted in accordance with any order
made under sub-section (1) shall, for all purposes, be deemed to be a ----------------------
meeting of the company duly called, held and conducted.
----------------------
----------------------
1. Every company is required to call at least one meeting of its ----------------------
shareholders each year.
----------------------
2. Tribunal has suo moto power to call the annual general.
----------------------
8.6 PROCEDURE OF MEETINGS ----------------------
Meeting should be called by a properly constituted meeting of the Board of ----------------------

directors. Except when the meeting has, in the event of default by the directors, ----------------------
been called by requisitionist or by the Tribunal. Otherwise the meeting will be
held invalid. ----------------------
Notice – Sec. 101 : Proper notice of the meeting should be given to ----------------------
the members. Deliberate omission to give notice to a single member may
invalidate the meeting, although an accidental omission to give notice to, or ----------------------
non-receipt of it by, a member is not fatal. Notice should be given twenty-one
----------------------
days before the date of the meeting. “Twenty-one days” are to be computed
from the date of the receipt of the notice by members and the notice shall be ----------------------
deemed to have been received at the expiration of forty-eight hours from the
time of posting. ----------------------
Contents of notice - Notice must specify the place and day and hour of ----------------------
the meeting and the meeting to be valid must be held accordingly. But where the
directors locked up the premises, a meeting held by the shareholders at some ----------------------
other place was held to be valid. ----------------------
The notice must also contain a statement of the business to be transacted
at the meeting. Section 102 puts business into two kinds: ----------------------
General business – At the annual meeting the business of considering ----------------------

accounts and directors’ report, the declaration of dividends, the appointment of
----------------------
directors and auditors and fixing their remuneration are called general business.
Special business – Any other business at an annual meeting and all business at ----------------------
an extraordinary meeting are regarded as special business.
----------------------

Notes If any special business is to be transacted, a statement of that business
must be annexed to the notice calling the meeting. Thus, where the terms
---------------------- of appointment of managing agents were proposed to be changed, but the
notice only disclosed the resolutions to be proposed, the resolutions were
---------------------- held to be invalid. Similarly, where the proposed regulations were not sent
---------------------- with the notice, but the members were requested to see them at the office of
the company, the notice was held to be not proper. But it was pointed out by
---------------------- the Privy Council in Parashuram v Tata Industrial Bank Ltd that a shareholder
who by his conduct shows that he knew the real effect of the work to be
----------------------
transacted at the meeting cannot complain of the notice on the ground of
---------------------- insufficiency.
Quorum – Sec. 103- Quorum means the minimum number of members
----------------------
that must be present at the meeting. Section 103 provides that unless the articles
---------------------- provide for a larger number, five members personally present in the case of a
public company and two in the case of a private company shall be the quorum.
---------------------- If within half an hour a quorum is not present, the meeting will stand dissolved
if it was called on requisition. In other case it will automatically adjourned to
----------------------
re-assemble on the same day in the next week. If at the re-assembled meeting
---------------------- also a quorum is not present, as many members as are actually present shall
constitute the quorum. But there should be at least more than one member.
---------------------- But where in a meeting of preference shareholders all the shares are held by
---------------------- one person, he alone constituted a valid meeting. Similarly, when the Tribunal
calls a meeting it may direct that only one member of the company present in
---------------------- person or by proxy shall be deemed to constitute a meeting. Where there is
a quorum when the meeting proceeds to business, the subsequent departure
---------------------- of a member reducing the number below quorum, does not invalidate the
---------------------- meeting. A court in England ordered a single member to constitute a valid
meeting where of the only two member-directors of a company, the majority
---------------------- shareholder wanted to remove the other from directorship and the other would
not attend the meeting. But where, of the two members present, the one in
---------------------- majority wanted to get himself appointed as liquidator, the other left in protest,
---------------------- it was held that the self appointment as liquidator at the meeting attended by
himself was not valid.
---------------------- Chairman – Sec. 104 The chairman of the meeting is appointed in
---------------------- accordance with the articles. But if there is nothing in the articles, “the
members personally present at the meeting shall elect one of themselves to
---------------------- be the chairman”. The Tribunal has also the power to appoint an independent
chairman to preside over a meeting in cases where the meeting is called at
----------------------
Tribunal order, but not when the meeting is called otherwise. The Tribunal has
---------------------- no inherent power to appoint a chairman. The chairman has only a limited power
of adjourning a meeting. He has to act according to the sense of the meeting.
---------------------- When he postpones an overcrowded meeting to hold it at a different venue the
same evening without ascertaining the sense of the meeting, his decision was
----------------------
held to be wrong.
---------------------- Voting rights - The business of a meeting is done in the form of resolutions
158 Corporate Law

passed at the meeting. Every holder of equity shares has the right to vote. The Notes
company cannot prohibit any member from exercising his voting rights on
the ground that he has not held his shares for any specified period before the ----------------------
meeting or on any other ground. The only grounds of exclusion are the non-
payment of any calls or other sums due against a member or where the company ----------------------
has exercised lien over his shares. A preferential shareholder has the right to ----------------------
vote only on resolutions which directly affect the rights attached to such shares.
----------------------
Initially voting takes place by show of hands and one member has one
vote. In such cases the declaration by the chairman that the resolution is carried ----------------------
is conclusive, unless a poll is demanded or his declaration is otherwise erroneous
in fact. ----------------------
“The voting right of a member on a poll shall be in proportion to his share ----------------------
of the paid up equity capital of the company.” Shares with disproportionate
voting rights are not allowed to be issued. ----------------------
On a poll a member is free to split his votes for as well as against the same ----------------------
resolution.
----------------------
A member may vote either in person or by proxy. Unless the articles allow
the proxy to vote on a show of hands, he can vote only on a poll. A proxy is a ----------------------
representative of the shareholder and, therefore, has to follow his instructions.
A proxy does not have the right to speak. The instrument appointing a proxy ----------------------
must be in writing, signed by the shareholder and should be deposited with the ----------------------
company forty-eight hours before the meeting. A proxy is always revocable by
the shareholder. The articles generally provide that revocation must be received ----------------------
before the commencement of the meeting. Where the articles are silent, the
----------------------
power of revocation can be exercised at any time before the votes are actually
cast. ----------------------
Representation of companies and Government – Where a Government
----------------------
or company is a member of the company it may attend meetings through a
representative. The person nominated as representative holds the position of ----------------------
proxy.
----------------------

1. The time gap between two AGMs shall not exceed ________. ----------------------
i. 15 months
----------------------
ii. 18 months
iii. 16 months ----------------------
----------------------
----------------------

Notes 8.7 KINDS OF RESOLUTION
---------------------- Resolutions are of two kinds: Sec. 114
---------------------- (1) Ordinary resolution, and
---------------------- (2) Special resolution.

A resolution is said to be ordinary when the votes cast in favour of it
----------------------
at a general meeting of a company exceed the votes, if any, cast against it.
---------------------- It means a resolution passed by a single majority of the shareholders present
and voting. A special resolution, on the other hand, requires the support of a
---------------------- three-fourth majority of shareholders present and voting. The intention to
propose the resolution as a special resolution should have been mentioned in
----------------------
the notice calling the meeting. A copy of the resolution must be registered with
---------------------- the Registrar within thirty days of its date.
If any member proposes to move a resolution requiring special notice, the
----------------------
intention must be notified to the company at least 7 days before the meeting.
---------------------- Sometimes an ordinary resolution also requires a special 7 days’ notice. Such
a notice is necessary, for example, for removing a director or an auditor or
---------------------- for proposing the appointment of a new director. Every member has a right to
give a special notice of this kind relating to a proposed resolution, but he does
----------------------
not have the right to have the resolution included in the agenda of the meeting
---------------------- unless he is supported by as many members as can requisition a meeting or can
ask for circulation of a member’s resolution.
----------------------
Circulation of members’ resolutions – Sec. 111
---------------------- Where certain members of a company desire to propose a resolution at the
---------------------- company’s meeting a requisition may be served on the company requiring it to
gives the members notice of the resolution. The requisitionists have to deposit
---------------------- at the registered office of the company two or more copies of the requisition
signed by all of them. Where the requisition requires notice of a resolution to be
---------------------- given to the members. It must be deposited six weeks before the meeting. In any
---------------------- other case two weeks before. They have also to deposit with a requisition a sum
reasonably sufficient to meet the expenses of the requisition. The requisition
---------------------- may require the circulation of any statement with respect to the matter referred
to in any proposed resolution of any business to be dealt with at the meeting.
----------------------
Where a copy of requisition for circulation of a resolution has been
---------------------- deposited at the registered office of the company and thereafter an annual
general meeting has been called on the date within six weeks then even if the
---------------------- copy was not deposited within the requisite time, it would be taken to have been
---------------------- properly deposited.
Minutes - Within thirty days of every meeting of the company, or of its
---------------------- board or committees thereof, entries of the proceedings must be made in the
---------------------- books kept for the purpose and their pages must be consecutively numbered.
Minutes kept in accordance with these provisions are evidence of the proceedings
---------------------- recorded in them.
160 Corporate Law

Service of documents on members – Sec. 20 Notes
Document can be served on company or its officers by sending them to the
----------------------
registered office of the company by registered post or by speed post or by courier
service or by leaving them at the registered office of the company. Where the ----------------------
securities are held in a depository the record of the beneficial ownership may be
served by such depository on the company by means of electronic mode or by ----------------------
delivery of floppies or discs.
----------------------
----------------------
1. A preferential shareholder has the right to vote on all resolutions. ----------------------
----------------------
Summary ----------------------
●● A “Compromise” presupposes the existence of a dispute, for, there can be ----------------------
no compromise unless there is some dispute. There is ‘reconstruction’ of
a company when that company’s business and undertaking are transferred ----------------------
to another company formed for that purpose, so that as regards the new
company substantially the same business is carried on and the same persons ----------------------
are interested in it as in the case of the old company. ----------------------
●● Amalgamation occurs when two or more companies are joined to form a
third entity or one is absorbed into or blended with another. ----------------------
●● The management of a company’s business is necessarily left to the discretion ----------------------
of the directors However, the ultimate control of the actions of the Board of
directors is vested in the members or shareholders of the company, and from ----------------------
time to time they must meet to ratify, or express their disapproval of, the
directors’ past conduct, and to consider their future plans. These meetings ----------------------
could be further classified as meetings of shareholders of different classes
----------------------
of shares, and of creditors and debenture-holders. The meetings have to
conducted with the requisite procedure of notice, quorum agenda etc. ----------------------
Keywords ----------------------
●● Liquidator: Person appointed by the shareholders or unsecured creditors, or ----------------------
on a court order, to manage the winding up of a firm by selling off its assets.
Most countries require a suitably qualified liquidator who (as in the UK) is ----------------------
also called an insolvency practitioner. On appointment, the liquidator assumes
----------------------
control of the business, collects and auctions off its free (un-pledged) assets
in a reasonably short time, pays the unsecured creditors from the proceeds of ----------------------
the sale, and (if any money is left) distributes it among the shareholders in
proportion to their shareholdings. ----------------------
●● Takeover: It is control of another (usually smaller) firm through purchase of
----------------------
51 percent or more of its voting shares or stock.
----------------------

Notes ●● Prima facie evidence: Evidence that either establishes a fact but is not a
conclusive evidence of its existence, or supports a judgment until contradictory
---------------------- evidence is produced in its rebuttal. It is also called presumptive evidence.
----------------------
----------------------
1. What is the difference between compromise, reconstruction and
---------------------- amalgamation?
---------------------- 2. State the different types of meetings.

3. What are the powers of the court in context of amalgamation?
----------------------
4. State in brief the procedure of conducting a meeting.
----------------------
5. Write a note on different types of resolution and its procedure.
---------------------- 6. Write a note on Vesting of Rights and Transfer of Obligations.
---------------------- 7. What is difference between compromise and arrangement?
---------------------- 8. Which is the simplest form of amalgamation or takeover?

9.
What is a prerequisite for compromise or arrangement in connection with
----------------------
the amalgamation of a company in winding up with any other company or
---------------------- companies?
10. When can reduction of share capital happen in amalgamation?
----------------------
11.
When can Government order that an amalgamation of two or more companies
---------------------- is essential?
---------------------- 12. What could be the contents of the order of the Government?
---------------------- 13.
What is the reason behind the preservation of books and papers of
amalgamated companies?
---------------------- 14. With whom does the power to amalgamate lie?
----------------------
----------------------
----------------------
---------------------- 1. True
---------------------- 2. True

----------------------
1. True
----------------------
2. False
----------------------
----------------------
162 Corporate Law

Check your Progress 3 Notes
----------------------
1. The time gap between two AGMs shall not exceed
----------------------
i. 15 months

1. False ----------------------
----------------------
Suggested Reading
----------------------
& Sons. ----------------------
Co.
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Notes
----------------------
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164 Corporate Law

Winding up
UNIT
9
Structure:
9.1 Introduction
9.2 Types of Winding up
9.3 Conduct of Winding up
Summary
Keywords
Suggested Reading
Winding up 165
Notes
Objectives
----------------------
• Explain the meaning of winding up
----------------------
• Appraise the steps undertaken in the winding-up procedure
---------------------- • Compare the various types of winding up
----------------------
9.1 INTRODUCTION
----------------------
Winding up is the process by which the life of a company is ended and its
---------------------- property administered for the benefit of its members and creditors. Winding up of
a company is different from the insolvency of an individual because a company
----------------------
can never be declared insolvent and, on the other hand, a perfectly solvent
---------------------- company may be wound up. Winding up is also different from dissolution. It
is only at the end of winding up that the company is dissolved. “Winding up
---------------------- precedes dissolution”. This unit explains the concept of winding up, various
modes of winding, the legal implications of winding and the procedure of the
----------------------
winding up of the Company.
----------------------
9.2 TYPES OF WINDING UP
----------------------
The Act provides for two kinds of winding up: Compulsory Winding up
---------------------- under the order of the tribunal. Voluntary winding up, which itself is of two
---------------------- kinds, namely, members’ and creditors’ voluntary winding up;
Winding up by Tribunal
----------------------
Section 271 has laid down certain circumstances in which company may
---------------------- wound up by tribunal. These circumstances are as follows;
---------------------- (a) if the company is unable to pay its debts; (b) if the company has, by
special resolution, resolved that the company be wound up by the Tribunal; (c)
---------------------- 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; (d) if the Tribunal has ordered the winding up of the company
---------------------- under Chapter 19; (e) if on an application made by the Registrar or any other person
authorized by the Central Government by notification under this Act, 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 fraudulent and unlawful purpose or the
---------------------- persons concerned in the formation or management of its affairs have been guilty
of fraud, misfeasance or misconduct in connection therewith and that it is proper
---------------------- that the company be wound up; (f) if the company has made a default in filing with
---------------------- the Registrar its financial statements or annual returns for immediately preceding
five consecutive financial years; or (g) if the Tribunal is of the opinion that it is just
---------------------- and equitable that the company should be wound up.
----------------------
166 Corporate Law

●● pecial resolution – When the company has, by special resolution,
S Notes
resolved that it be wound up by the Tribunal. These powers of the tribunals
are discretionary. ----------------------
●● cts against sovereignty – if the company has acted against the interests
A ----------------------
of sovereignty and integrity of India, the security of the State, friendly
relations with foreign states public order, decency or morality. ----------------------
●● ick Company – if the tribunal has ordered winding up of the company
S ----------------------
under Chapter 19 for having a sick company.
●● I nability to pay debts – Where the company is unable to pay its debts. A ----------------------
company is said to be unable to pay its debts in the following three cases: ----------------------
— if a creditor, by assignment or otherwise, to whom the company is
indebted for an amount exceeding one lakh rupees then due, has served ----------------------
on the company, by causing it to be delivered at its registered office, by
----------------------
registered post or otherwise, a demand requiring the company to pay the
amount so due and the company has failed to pay the sum within twenty- ----------------------
one days after the receipt of such demand or to provide adequate security
or re-structure or compound the debt to the reasonable satisfaction of the ----------------------
creditor;
----------------------
— if any execution or other process issued on a decree or order of any court
or tribunal in favour of a creditor of the company is returned unsatisfied in ----------------------
whole or in part; or
----------------------
— if it is proved to the satisfaction of the Tribunal that the company is
unable to pay its debts, and, in determining whether a company is unable ----------------------
to pay its debts, the Tribunal shall take into account the contingent and ----------------------
prospective liabilities of the company.
Fraudulent conduct of affairs – the tribunal is of opinion that affairs ----------------------
of the company have been conducted in a fraudulent manner or the company ----------------------
was formed for fraudulent or unlawful purpose or persons concerned in its
formation or management of its affairs have been guilty of fraud, misfeasance ----------------------
or misconduct in those connections and that it is proper that the company be
wound up. This clause can be activated by an application by the Registrar or by ----------------------
any other person authorized by the Central Government by notification. ----------------------
Default in filing financial statement – if a company has made a default
in filing with the Registrar, its financial statements or annual returns for ----------------------
immediately preceding five consecutive financial years. ----------------------
Just and equitable – Where the court is of the opinion that it is just and
----------------------
equitable to wind up the company. This gives the court a wide discretionary
power to order winding up when it is desirable in the circumstances. Taking ----------------------
the interests of members, creditors, employees and of public into account and
also whether the petition has been brought bona fide, the court may either order ----------------------
winding up or refuse it.
----------------------
----------------------
Winding up 167
Notes Winding up orders on above ground have been passed in the following
cases:
---------------------- ●● Where there is deadlock in the management of the company. This occurs
---------------------- when the only two members of a company are not on speaking terms. Mere
dispute is not enough.
---------------------- ●● When the main object of the company has failed to materialize or its
substratum has failed. This occurred when a company incorporated to work
----------------------
a German patent could not obtain it, or when a company’s assets were seized
---------------------- by a creditor. Temporary acquisition or difficulty is not the same thing.
●● When the business of the company cannot be carried on except at losses.
----------------------
●● Where the principal or majority shareholders have adopted an aggressive or
---------------------- oppressive or squeezing policy towards the minority. Where a director of a
private company was removed only on the ground that he refused to consent
---------------------- to a transaction, the court held that to be an abuse of power which made it
just and equitable to wind up the company.
----------------------
●● Where the company is conceived and brought forth in fraud or for illegal
---------------------- purposes. Where the evidence showed that the company had inadequate
records; it was a share vending company but pretended to be playing an
---------------------- advisory role for investment purposes and was advising inventors to purchase
such shares of American companies as were not freely tradeable, this was
----------------------
held to be an unlawful operation and against public interest.
---------------------- ●● When no alternative remedy is available except winding up.
---------------------- Public Interest – Winding up can also be ordered under this section when
public interest demand it.
----------------------
Who can apply?
---------------------- A winding up petition can be presented by any of the following:
---------------------- Petition by company – The Company is entitled to petition when it has
passed a special resolution requesting that it be wound up by the Tribunal.
----------------------
Creditor’s petition – A creditor, secured or otherwise, debenture-holder
---------------------- and a trustee for debenture-holders can apply for winding up. Where the petition
is brought by a contingent or prospective creditor, the Tribunal may admit it if
---------------------- there is a prima facie case and the security for costs is given.
---------------------- Contributory’s petition – On the winding up of a company its members
are called contributories. Where the ground is reduction in membership, any
---------------------- contributory can apply. But when the application is founded on any other
---------------------- ground, it will be requisite that the shares in respect of which the petitioner is a
contributory were originally allotted to him or he has been the registered holder
---------------------- for at least six months during the eighteen months immediately before the
commencement of the winding up or the shares have devolved on him through
---------------------- the death of a former holder. A contributory is entitled to present a petition even
---------------------- if he is the holder of fully paid shares.
----------------------
168 Corporate Law

Registrar’s petition – The Registrar is entitled to apply on all the grounds Notes
specified in Section 271 except the second, namely, special resolution. But he
cannot present a petition on the grounds of the company’s inability to pay debts ----------------------
“unless it appears to him either from the financial condition of the company as
disclosed in its balance-sheet or of an inspector appointed under Section 210. ----------------------
In all cases he has to obtain permission of the Central Government which is ----------------------
granted after giving the company opportunity to show cause.
----------------------
Central Government’s petition – The Government can apply when an
investigation shows that the condition specified in Section 224, 206 or 213 are ----------------------
satisfied. Government may authorize any person its behalf for the same purpose.
----------------------
Powers of Tribunal on hearing petition
On hearing the petition, the Tribunal may dismiss it with or without costs; ----------------------
adjourn the hearing; make any interim order as it thinks fit; make a winding
----------------------
up order or any suitable order. Where an important member-cum-director of a
company died and his fellow member, being his father, made no provision for ----------------------
the widow of his son, the Tribunal ordered in a petition for winding up that the
widow be made a director on the same basis as her husband was. Tribunal may ----------------------
appoint a provisional liquidator.
----------------------
Commencement of winding up
----------------------
Winding up is deemed to commence from the date of the presentation of
the petition. But where the petition is based on the company’s special resolution, ----------------------
winding up is deemed to commence from the date of the resolution.
----------------------
Consequences of winding up order
----------------------
●● The Tribunal has to cause intimation of the winding up order to be sent to
the official liquidator and the petitioner and the company are required to ----------------------
send a copy of the tribunal’s order to the Registrar, who notifies the fact
in the Official Gazette. ----------------------
●● Winding up order is deemed to be a notice of discharge to the officers and ----------------------
employees of the company, except when the business is continued.
●● The order operates in favour of all the creditors and all the contributories ----------------------
of the company.
----------------------
●● The Official Liquidator, by virtue of his office, becomes the liquidator of
the company. ----------------------
●● No suit or legal proceeding can be commenced against the company
----------------------
except with the leave of the tribunal and subject to such terms as the
tribunal may impose. ----------------------
Similarly, pending suits cannot be further proceeded with except with
----------------------
similar leave. “The object of winding up provisions is to put all unsecured
creditors upon equality and pay them pari passu, and to prevent the assets of ----------------------
the company from being frittered away in vexatious litigation”. The Tribunal
in granting leave considers all the circumstances of the case and decides as to ----------------------
whether leave to sue should or should not be granted so that the assets may be
----------------------
preserved for the benefit of the creditors.
Winding up 169
Notes Procedure of winding up by Tribunal
As soon as a winding up order is passed, the tribunal may on the
----------------------
presentation of the petition appoint a provisional liquidator. However before
---------------------- doing this tribunal should give sufficient chance to company to represent it. The
official liquidator conducts winding up and performs such other duties as the
---------------------- tribunal may impose. The acts of the liquidator are valid notwithstanding any
defect in his qualifications or appointment.
----------------------
Statement of affairs – Where a petition for winding up is filed before the
---------------------- Tribunal by any other person than the company, Tribunal after its satisfaction
needs to direct the company to file the objections along with a statement of its
----------------------
affairs within 30 days in the prescribed form and manner.
---------------------- The directors, manager, or secretary of the company have to submit to
the liquidator a statement showing the assets of the company, its debts and
----------------------
liabilities; its creditors secured and otherwise; its debtors and the amount due
---------------------- from them and any other information that may be required. The time limit is 21
days of winding up order or appointment of provisional liquidator.
----------------------
Report by Company Liquidator –
---------------------- After the winding up order or appointment of the company liquidator, the
---------------------- company liquidator within the 60 days from the order needs to submit the report
in a prescribed form containing following information;
---------------------- (a) the nature and details of the assets of the company including their
---------------------- location and value, stating separately the cash balance in hand and in the bank,
if any, and the negotiable securities, if any, held by the company: Provided
---------------------- that the valuation of the assets shall be obtained from registered valuers for
this purpose; (b) amount of capital issued, subscribed and paid-up; (c) the
---------------------- existing and contingent liabilities of the company including names, addresses
---------------------- and occupations of its creditors, stating separately the amount of secured and
unsecured debts, and in the case of secured debts, particulars of the securities
---------------------- given, whether by the company or an officer thereof, their value and the dates
on which they were given; (d) the debts due to the company and the names,
---------------------- addresses and occupations of the persons from whom they are due and the
---------------------- amount likely to be realised on account thereof; (e) guarantees, if any, extended
by the company; (f) list of contributories and dues, if any, payable by them and
---------------------- details of any unpaid call; (g) details of trademarks and intellectual properties,
if any, owned by the company; (h) details of subsisting contracts, joint ventures
---------------------- and collaborations, if any; (i) details of holding and subsidiary companies, if
---------------------- any; (j) details of legal cases filed by or against the company; and (k) any other
information which the Tribunal may direct or the Company Liquidator may
---------------------- consider necessary to including the viability of the business.
---------------------- The company liquidator also has power to appoint the professional expert
for their assistance with the permission of the Tribunal.
----------------------
Company Liquidator also needs to submit periodical report.
----------------------
170 Corporate Law

Power of Company Liquidator – The liquidator can exercise the following Notes
powers with the sanction of the Tribunal:
(a) to carry on the business of the company so far as may be necessary for ----------------------
the beneficial winding up of the company; (b) to do all acts and to execute, in ----------------------
the name and on behalf of the company, all deeds, receipts and other documents,
and for that purpose, to use, when necessary, the company’s seal if any; (c) to ----------------------
sell the immovable and movable property and actionable claims of the company
by public auction or private contract, with power to transfer such property to any ----------------------
person or body corporate, or to sell the same in parcels; (d) to sell the whole of the
undertaking of the company as a going concern; (e) to raise any money required ----------------------
on the security of the assets of the company; (f) to institute or defend any suit, ----------------------
prosecution or other legal proceeding, civil or criminal, in the name and on behalf
of the company; (g) to invite and settle claim of creditors, employees or any other ----------------------
claimant and distribute sale proceeds in accordance with priorities established
under this Act; (h) to inspect the records and returns of the company on the files of ----------------------
the Registrar or any other authority; (i) to prove rank and claim in the insolvency of
any contributory for any balance against his estate, and to receive dividends in the
----------------------
insolvency, in respect of that balance, as a separate debt due from the insolvent and ----------------------
rateably with the other separate creditors; (j) to draw, accept, make and endorse any
negotiable instruments including cheque, bill of exchange, hundi or promissory ----------------------
note in the name and on behalf of the company, with the same effect with respect to
the liability of the company as if such instruments had been drawn, accepted, made ----------------------
or endorsed by or on behalf of the company in the course of its business; (k) to take
----------------------
out, in his official name, letters of administration to any deceased contributory,
and to do in his official name any other act necessary for obtaining payment of any ----------------------
money due from a contributory or his estate which cannot be conveniently done in
the name of the company, and in all such cases, the money due shall, for the purpose ----------------------
of enabling the Company Liquidator to take out the letters of administration or
recover the money, be deemed to be due to the Company Liquidator himself; (l) ----------------------
to obtain any professional assistance from any person or appoint any professional,
----------------------
in discharge of his duties, obligations and responsibilities and for protection of the
assets of the company, appoint an agent to do any business which the Company ----------------------
Liquidator is unable to do himself; (m) to take all such actions, steps, or to sign,
execute and verify any paper, deed, document, application, petition, affidavit, bond ----------------------
or instrument as may be necessary—
----------------------
(i) for winding up of the company;
----------------------
(ii) for distribution of assets;
(iii) in discharge of his duties and obligations and functions as Company ----------------------
Liquidator; and
----------------------
(n) to apply to the Tribunal for such orders or directions as may be necessary
for the winding up of the company. Also to perform all other such duties ----------------------
specified by Tribunal.
----------------------
Advisory Committee –
----------------------
The Tribunal may, constitute an advisory committee to advise the Company
Liquidator and to report to the Tribunal on such matters as the Tribunal may direct. ----------------------
Winding up 171
Notes The advisory committee appointed by the Tribunal shall consist not more than
twelve members, including creditors and contributories of the company or such
---------------------- other persons. The Company Liquidator shall convene a meeting of creditors and
contributories, as ascertained from the books and documents, of the company within
---------------------- 30 days from the date of order of winding up for enabling the Tribunal to determine
the persons who may be members of the advisory committee. The advisory
----------------------
committee has the right to inspect the books of account and other documents, assets
---------------------- and properties of the company under liquidation at a reasonable time. The meeting
of advisory committee shall be chaired by the Company Liquidator.
---------------------- General Powers of Tribunal – Sec. 273.
---------------------- The Tribunal may, on receipt of a petition for winding up under section 272
pass any of the orders such as (a) dismiss it, with or without costs; (b) make any
---------------------- interim order as it thinks fit; (c) appoint a provisional liquidator of the company
till the making of a winding up order; however, before doing this Tribunal shall
----------------------
give notice to the company and afford a reasonable opportunity to it to make its
---------------------- representations, if any, unless for special reasons to be recorded in writing, the
Tribunal thinks fit to dispense with such notice: (d) make an order for the winding
---------------------- up of the company with or without costs; or (e) any other order as it thinks fit:
Provided that an order under this sub-section shall be made within ninety days
---------------------- from the date of presentation of the petition:
---------------------- Provided also that the Tribunal shall not refuse to make a winding up order
on the ground only that the assets of the company have been mortgaged for an
---------------------- amount equal to or in excess of those assets, or that the company has no assets.
---------------------- Where a petition is presented on the ground that it is just and equitable
that the company should be wound up, the Tribunal may refuse to make an order
---------------------- of winding up, if it is of the opinion that some other remedy is available to the
petitioners and that they are acting unreasonably in seeking to have the company
----------------------
wound up instead of pursuing the other remedy.
---------------------- Settlement of list of contributories – The Tribunal may make a list of
contributories who are liable to contribute to the assets of the company. If this
---------------------- requires rectification of the register of members, the tribunal has the power to do
---------------------- this. The Tribunal may call upon the contributories requiring them to pay any money
which it considers necessary to satisfy the debts and liabilities of the company, for
---------------------- the expenses of winding up and for adjustment of the rights of contributories.
---------------------- Right to set-off – Where a contributory has been called upon a pay and the
company also owes him something, can he require the two claims to be mutually
---------------------- set-off? Not in all cases, but a limited right of set-off is given in the following
cases:
----------------------
In the case of an unlimited company, a contributory may set-off his debt
---------------------- against any money due to him from the company on any independent dealing
or contract with the company, but not in respect of any money due to him as
---------------------- dividend or profit; If, in the case of a limited company, there is any director
or manager whose liability is unlimited, he has the same right to set-off, as is
----------------------
described in above; In the case of any company whether limited or unlimited,
---------------------- when all the creditors have been paid in full, any money due on any account
172 Corporate Law

whatever to a contributory may be allowed to him by way of set-off against any Notes
subsequent call.
----------------------
Delivery of property – If any contributory, trustee, receiver, banker,
agent, officer or other employee of the company has any property or papers ----------------------
of the company, the Tribunal may decide that question. If any one of them is
suspected to be in possession of the company’s property, he may be apprehended ----------------------
and brought before the Tribunal. If the examination revels that he is indebted to
----------------------
the company, the Tribunal may order him to pay the debt or deliver the property
of the company. ----------------------
Public examination – Where the official liquidator has made a report
----------------------
to the Tribunal stating that a fraud has been committed by any person in the
promotion or management of the company, the Tribunal may call upon him to ----------------------
stand public examination. The report must attribute to the person concerned
specific acts of fraud and a general statement that the company over-borrowed ----------------------
on forged documents. Where a director was not charged with fraud in the
----------------------
liquidator’s report, but he assumed responsibility for the act constituting
the fraud, the Tribunal ordered him to stand public examination. The person ----------------------
concerned should be given an opportunity to show cause before any order for
his examination is passed. ----------------------
Dissolution of company – When the affairs of the company have been ----------------------
completely wound up or when, for want of funds, the liquidator cannot proceed
with the winding up or if it is just and reasonable to do so, the Tribunal makes ----------------------
an order that the company be dissolved from the date of the order. Within thirty
----------------------
days the liquidator should file a copy of the order with the Registrar.
The Tribunal also has power to make the calls and order the cost under section ----------------------
296 and 298 respectively. ----------------------
Voluntary winding up
----------------------
A company may be wound up voluntarily at any time by passing a special
resolution. But where the articles provide for a period on the expiry of which ----------------------
the company is to be wound up and that period has expired, or for a contingency
on the happening of which the company is to be dissolved and that contingency ----------------------
has happened, winding up may be commenced with an ordinary resolution ----------------------
Within fourteen days the resolution should be advertised in the Official
----------------------
gazette and in a newspaper circulating in the district of the registered office
of the company. Winding up commences from the date of the resolution. The ----------------------
corporate status and powers of the company shall continue until the company
is dissolved, but it shall stop its business, except so far as may be necessary for ----------------------
beneficial winding up.
----------------------
If a declaration of solvency is made in accordance with the provision
of the Act, it will be the members’ winding up and if it is nor made, it is the ----------------------
creditors’ winding up. The declaration has to be made by a majority of directors
----------------------
and within five weeks immediately before the resolution and delivered to the
Registrar. The declaration should state that the directors have made full inquiry ----------------------
Winding up 173
Notes into the affairs of the company and formed an opinion that the company shall
be able to pay all its debts within a period not exceeding three years. If the
---------------------- directors are not able to pay the debts within that period, the liquidator shall call
a meeting of the creditors and it then becomes the creditor’s winding up.
----------------------
Meeting of the members and creditor:
----------------------
Under the 2013 Act no need of separate meeting of the member and
---------------------- creditor as per section 306 The company shall along with the calling of meeting
of the company also call the meeting of its creditors at which the resolution for
---------------------- the voluntary winding up is to be proposed, either on the same day or on the
next day and shall cause a notice of such meeting to be sent by registered post
----------------------
to the creditors with the notice of the meeting of the company under section
---------------------- 304. The Board of Directors has to put before a full statement of affairs of the
company with a list of creditors, copy of the solvency and the amount of claim.
---------------------- Appoint one of the directors to preside at the meeting. If two-thirds in value of
creditors of the company are of the opinion that it is in the interest of all parties
----------------------
then company shall wound up voluntarily. If they are of opinion that company
---------------------- cannot pay its debt in full from the proceeds of assets in voluntary winding up
and they pass a resolution that it is in the interest of all parties if the company
---------------------- is wound up by the Tribunal, the company has to file an application within 14
days before the Tribunal. Notice of the same needs to be given by the company
----------------------
to Registrar within 10 days.
---------------------- Penalty – 306 If a company contravenes then the company shall be
punishable with fine which shall not be less than 50,000 but which may extend
----------------------
to 2, 00,000 and the director of the company who is in default shall be punishable
---------------------- with imprisonment for a term which may extend to six months or with fine
which shall not be less than 50,000 but which may extend to 2, 00,000, or with
---------------------- both.
---------------------- Provisions applicable to every voluntary winding up
---------------------- A company liquidator has to be appointed from the panel prepared by

the Central Government for winding up its affairs and distribute its assets and
---------------------- recommends the fee to be paid to the liquidator. The same company liquidators’
appointment needs to be approved by the creditor’s majority in value. If it is
---------------------- not approved then they can appoint another liquidator and pass the suitable
---------------------- resolution for his fee. After the appointment of the company liquidator the
powers of the Boards comes to an end.
---------------------- The Company liquidator needs to perform such functions and duties as
---------------------- may by required by the company or creditors. The company liquidator has the
following additional powers:
----------------------
• The power of setting the list of contributories;
---------------------- • The power of making calls:
---------------------- • To maintain the appropriate books of accounts;
---------------------- • He has to observe the due care and diligence in the discharge in his duties.
174 Corporate Law

• He has to pay the debts of the company any adjust the rights of the Notes
contributories.
• The power of calling general meetings of the company. ----------------------
The company liquidator appointed by the company can be removed by the ----------------------
company and the company liquidator appointed by the creditor can be removed
----------------------
by them.
Final meeting and dissolution: Sec, 318 ----------------------
After completion of affairs of winding up, the company liquidator has to ----------------------
prepare a report of the winding up showing that the asset and property of the
company has been dispose of and all debts fully discharged or discharge to the ----------------------
satisfaction of the creditors. At the last he needs to call the general meeting of
----------------------
the company and lay before it a final account with his explanation.
– Any creditor, contributory or person may apply to the tribunal for an ----------------------
order to set aside any attachment, distress or execution put into force against the ----------------------
estate or effects of the company after commencement of winding up.
----------------------
----------------------

1. Among the following, who cannot apply for the winding of the ----------------------
company?
----------------------
i. company
ii. creditor of the company ----------------------
iii. registrar of the company ----------------------

iv. auditor of the company. ----------------------
Multiple Choice Multiple Response.
----------------------
1. Which of the powers mentioned below can be exercise by the company
liquidator? ----------------------
i. To do all acts and execute all deed on behalf of company. ----------------------
ii. To carry on the business of the company for the benefit of ----------------------
company winding up.
iii. To transfer the company assets to his relatives. ----------------------
iv. All of the above. ----------------------
----------------------
9.3 CONDUCT OF WINDING UP
----------------------
Winding-up of a company is a process of putting an end to the life of a
----------------------
company. Winding up is conducted in accordance with uniform rules. One of the
foremost duties of a liquidator is to get in the company’s assets for the purpose ----------------------
Winding up 175
Notes of satisfying its debts and liabilities. An important asset which is available for
winding up is the uncalled capital, if any, of the company.
----------------------
Contributories Sec. 2(26)
---------------------- To realize the uncalled residue of the company’s capital, the liquidator
has to call upon the shareholders, who are then called contributories, to pay the
---------------------- unpaid balance. A contributory means a person liable to contribute to the assets
---------------------- of a company in the event of winding up and includes the holders of any shares
which are fully paid-up. Of such persons the liquidator has to make lists. The
---------------------- liability extend to an amount which would be sufficient for payments of the
company’s debts and liabilities and the cost charges and expenses of winding
---------------------- up and for the adjustment of the rights of the contributories among themselves.
---------------------- “The liability of a member of a company to be included in the list of
contributories is not ex contractu, that is, it does not arise by virtue of his contract
---------------------- to take shares. His liability is ‘ex lege’ which means that it arises by reason of
the fact that his name appears on the register of members of the company. It is,
----------------------
therefore, no answer for the contributory against the claims of the company to
---------------------- say that, although his name appears on the register, he is not liable because the
allotment to him was void”
---------------------- It should, however, be noted that “a contributory is not liable to pay one
---------------------- farthing of the uncalled share money until the Tribunal has made such an order
and a call notice has been served upon the contributory in accordance with
---------------------- the Tribunals’ order”. The Tribunal will authorise a call to be made only when
it is satisfied that the financial condition of the company is such that a call is
---------------------- necessary to discharge the liabilities of the company.
---------------------- But once a call has been made, the liability for the contributory to pay it
becomes a statutory debt. A new liability to pay the unpaid balance commences.
---------------------- “It is settled in a long course of decisions that the members of a company in
liquidation are liable in respect of unpaid calls even though the calls were made
----------------------
by the company before it went into liquidation and the suit of the company for
---------------------- its realization had become barred by time.
If a contributory dies during winding up, his liability automatically falls on
----------------------
his legal representatives. “Where a contributory dies before his name is entered
---------------------- in the list of contributories and an order is made by the court for payment of the
balance, such balance is recoverable from his legal representatives and heirs.
---------------------- But in such a case, the proper procedure for the company or liquidator to enforce
payment is to adopt proceedings for administration of the estate of the deceased
----------------------
and not seek an order for payment personally against the representative”. Where
---------------------- a contributory is adjudged insolvent, his assignee in insolvency, shall take his
place. Where the contributory is a company which is ordered to be wound up,
---------------------- its liquidator shall become the contributory.
---------------------- Liability of past members
Past members are also liable as contributories in certain circumstances.
----------------------
The liability of a past member is subject to the following qualifications provided
---------------------- in Section 285:
176 Corporate Law

(a) a person who has been a member shall not be liable to contribute if Notes
he has ceased to be a member for the preceding one year or more
before the commencement of the winding up; ----------------------
(b) a person who has been a member shall not be liable to contribute in ----------------------
respect of any debt or liability of the company contracted after he
ceased to be a member; ----------------------
(c) no person who has been a member shall be liable to contribute unless ----------------------
it appears to the Tribunal that the present members are unable to
satisfy the contributions required to be made by them in pursuance ----------------------
of this Act;
----------------------
(d) in the case of a company limited by shares, no contribution shall be
required from any person, who is or has been a member exceeding ----------------------
the amount, if any, unpaid on the shares in respect of which he is
----------------------
liable as such member;
(e) in the case of a company limited by guarantee, no contribution ----------------------
shall be required from any person, who is or has been a member ----------------------
exceeding the amount undertaken to be contributed by him to the
assets of the company in the event of its being wound up but if ----------------------
the company has a share capital, such member shall be liable to
contribute to the extent of any sum unpaid on any shares held by ----------------------
him as if the company were a company limited by shares. ----------------------
Payment of liabilities
----------------------
Another important duty of the liquidator is to pay off the company’s
liabilities. All the persons who are entitled to receive money from the company ----------------------
have the right to claim their respective amounts from the liquidator. Indeed,
Section 324 declares so clearly that “in every winding up….. all debts payable ----------------------
on a contingency and all claims against the company, present or future, certain ----------------------
or contingent, ascertained or sounding only in damaged shall be admissible to
proof against the company”. A just estimate shall have to be made, so far as ----------------------
possible, of the value of such debts or claims as are subject to any contingency,
or may sound only in damages, or for some other reason may not bear a ----------------------
certain value. But where the company in liquidation is insolvent, insolvency ----------------------
rules will apply and only such claims shall be provable against the company
as are provable against an insolvent person. According to the present law of ----------------------
insolvency, demands in the nature of unliquidated damage arising other than
by reason of a contract or breach of trust and debts and liabilities which are ----------------------
incapable of being fairly estimated are not provable in insolvency. ----------------------
A secured creditor need not come in winding up. He has the right to realize
----------------------
his security, but he shall be liable to pay the expenses incurred by the liquidator
for the preservation of the security before its realization by the creditor. Under ----------------------
this scheme a secured creditor was able to rule out all other claims including
claims of workmen. ----------------------
----------------------
Winding up 177
Notes Preferential payments
The first payments to be made are called “preferential payments”. They
----------------------
have to be paid in priority to all the other debts. Such payments are:
---------------------- • All revenues, taxes, cesses and rates due to the Central or a State Government
or to a local authority. The amount should have become due and payable
---------------------- within twelve months before the winding up.
---------------------- • All wages or salary of any employee, in respect of services rendered to the
company and due for a period of four months only within twelve months
---------------------- before the winding up and any compensation payable to any workman under
---------------------- Chapter V-A of the Industrial Disputes Act, 1947. The amount is not to
exceed one thousand rupees in the case of any one claimant.
---------------------- • All secured holiday remuneration becoming payable to any employee on the
---------------------- termination of his employment before, or by the effect of, the winding up.
• All amounts due in respect of contributions payable during the twelve months
---------------------- before the winding up under the Employees’ State Insurance Act, 1948 or
---------------------- any other law.
• All amounts due in respect of any compensation or liability for compensation
---------------------- under the Workmen’s Compensation Act, 1923 in respect of death or
---------------------- disablement of any employee of the company.
• All sums due to any employee from a provident fund, pension fund, gratuity
---------------------- fund or any other fund for the welfare of the employees, maintained by the
company.
----------------------
• The expenses of any investigation held in pursuance of Section 210 or 213 in
---------------------- so far as they are payable by the company.
---------------------- After retaining sums necessary for meeting the expenses of winding up,
the above debts have to be discharged forthwith so far as the assets are sufficient
---------------------- to meet them. They rank equally among themselves and have to be paid in full.
---------------------- But when the assets are insufficient to meet them, they shall abate in equal
proportion.
---------------------- Where the liquidator carries on business for beneficial winding up, the
---------------------- taxes that become due on the profits are expenses of winding up and so is the fee
payable to a chartered accountant for preparing the statement of affairs. These
---------------------- are payable even before preferential payments.
---------------------- Similarly, deposits held by the company in trust are outside winding up
and are refunded to the beneficiary. Money deposited for securing the agency of
---------------------- a mill was held to be deposit on trust. A deposit in general without earmarking
it with a specific purpose will not acquire the status of a trust. E.g., deposit by a
----------------------
tenant with his landlord or that of a distributor with his producer.
---------------------- Other Payments
---------------------- Next, the liquidator has to pay the general creditors of the company. The
surplus, if any, is then used to pay back the shareholders in accordance with
---------------------- their rights and interests. Dividends paid to members are not their income, but
178 Corporate Law

refund of capital. This will be so even if the dividends include some profits Notes
earned by the liquidator.
----------------------
Unclaimed Dividends – Dividends which have not been claimed by any
contributory or creditor for a period of six months have to be deposited into a ----------------------
separate special account to be known as the Company liquidation Dividend and
undistributed Asset Accounts maintain in a schedule bank. ----------------------
If the money remains in the account unclaimed for a period of 15 years ----------------------
they merge in the general revenue of the Central Government.
----------------------
Antecedent and other transactions
Fraudulent preference ----------------------
The expression ‘fraudulent preference’ is borrowed from the law of ----------------------

insolvency. According to that law any transfer of property or payment made by
a person who is unable to pay his debts in favour of a creditor with a view to ----------------------
giving him a preference over other creditors is regarded as fraudulent preference, ----------------------
if within three month an insolvency petition is presented against him and he is
adjudicated insolvent. Such a transaction becomes invalid. Any such transaction ----------------------
entered into by a company within six months before the commencement of
its winding up is deemed a fraudulent preference of its creditors and invalid ----------------------
accordingly. Thus, where a creditor, in accordance with his rights, executed a ----------------------
charge on the company’s assets at his desire, and winding up having followed
in two months, the charge was held to be void. Where preference is given to a ----------------------
creditor for the company’s own benefit, e.g., to save the company’s buses from
attachment, it will not be void. ----------------------
Further, any transfer or assignment by a company of all its property to ----------------------

trustees for the benefit of all its creditors shall be void.
----------------------
Avoidance of voluntary transfer
----------------------
A transfer of immovable or movable property or any delivery of goods
made by a company within a period of one year before the presentation of a ----------------------
winding up petition or the passing of a resolution for voluntary winding up, is
void against the liquidator. But the following transactions are protected from ----------------------
the operation of this rule:
----------------------
- a transfer or delivery of property made in the ordinary course of the
business of the company, and ----------------------
- a transfer or delivery of property in favour of a purchaser or encumbrancer ----------------------
in good faith and for valuable consideration.
----------------------
Avoidance of Transfer of shares and disposition of property Sec. 334.
----------------------
In the case of voluntary winding up, any transfer of shares of the company
and any alteration in the status of the members of the company, made after the ----------------------
commencement of the winding up, is void. But a transfer made to, or with the
sanction of, the liquidator is valid. In the case of winding up by the Tribunal, ----------------------
any disposition of the company’s property, and transfer of shares or alteration in
----------------------
the status of its members made after the commencement of winding up is void
Winding up 179
Notes except when the Tribunal orders otherwise. The sanction of the Tribunal may
be obtained either before or after the transfer is made. Complete discretion has
---------------------- been given to the Tribunal to do whatever it may think just in a matter of this
kind.
----------------------
Avoidance of attachment, executions etc.
----------------------
This provision will come into picture when the companies is wound up by
---------------------- the Tribunal. Any attachment, distress or execution put in force without leave
of the Tribunal, against the estate of effects of the company or any sale held of
---------------------- any property or effects of the company after the commencement of winding up
shall be void.
----------------------
Disclaimer of onerous property
----------------------
The liquidator may abandon onerous properties belonging to the company.
---------------------- Following kinds of properties are regarded as onerous for the purposes of
Section 333 –
----------------------
- land of any tenure, burdened with onerous covenants;
---------------------- - shares or stock in companies;
---------------------- - any other property which is unsaleable or is not readily saleable by reason
of the fact that it requires the possessor to perform certain acts or pay a
----------------------
sum of money;
---------------------- - unprofitable contracts.
---------------------- The company liquidator may with the leave of the Tribunal disclaim
any such property. The Tribunal before granting leave should satisfy itself that
---------------------- the property has become really onerous. Where leave was granted to disown
---------------------- a lease which, in fact, was not really burdensome, the leave was set aside on
appeal. The disclaimer should be in writing signed by the liquidator. It has to be
---------------------- made within twelve months after the commencement of the winding up or such
extended period as the Tribunal may allow. Where, however, the liquidator does
---------------------- not come to know of the existence of an onerous property within one month of
---------------------- the commencement of the winding up, the above period of twelve months shall
begin to run from the date of his knowledge.
---------------------- The disclaimer determines in respect of the property disclaimed, the
---------------------- rights, interests and liabilities of the company. It releases the company and the
property from liability. But it does not affect the rights or liabilities of any
---------------------- other person in respect of that property. The Tribunal may, before granting the
disclaimer, require notices to be given to persons interested in the property.
----------------------
Sometimes a person interested in any such property may have required the
---------------------- liquidator to decide whether he will or will not disclaim the property. In such a
case the liquidator should, within twenty-eight days, give notice to the applicant
---------------------- that he intends to apply to the court for leave to disclaim. If he does not do so,
---------------------- he shall not be entitled to disclaim the property and where the property is a
contract which he has not disclaimed within the above time he shall be deemed
---------------------- to have adopted it.
180 Corporate Law

Proceedings against delinquent officers Notes
Liability for fraudulent conduct of business
----------------------
These powers are vested in the Tribunal. Sometimes it may appear in
the course of winding up that the business of the company has been carried on ----------------------
with intent to defraud creditors of the company or any other person or for any
----------------------
fraudulent purpose. In such a case the court, on the application of the liquidator
or any creditor or contributory of the company, may declare that the persons ----------------------
who were parties to such business shall be personally responsible for such debts
of the company as the Tribunal may direct. Besides, every person who was ----------------------
knowingly a party to such conduct of business is punishable with imprisonment
----------------------
or fine or both. Thus, where goods were purchased on credit when the managing
director knew that the company was hopelessly insolvent he was held liable. ----------------------
Even a single act of fraud can amount to fraudulent trading. A recent
----------------------
illustration is a case where a company obtained the price of certain goods to
be supplied by it in advance knowing that it would not be able to supply the ----------------------
goods and paid off a creditor with that money. This was held to be sufficient to
constitute fraudulent trading and both the company and the creditor, who knew ----------------------
how he was paid, were liable to refund the money.
----------------------
Falsification of books
----------------------
If any officer or contributory of a company has, with intent to defraud
or deceive any person, destroyed, mutilated, altered, falsified or secreted any ----------------------
books, papers or securities of the company, he is punishable with imprisonment
and fine. A person who is privy to such acts is also punishable. There is similar ----------------------
penalty for making any false or fraudulent entry in any book or register or ----------------------
document of the company.
Frauds by officers ----------------------
The section provides a penalty for any of the following acts done by any ----------------------
officer of a company which subsequently goes into liquidation:
----------------------
- where he has, by fraud or false pretenses, induced any person to give
credit to the company; ----------------------
- where he has, with intent to defraud creditors of the company, made any ----------------------
gift or transfer of any property of the company or has created a charge
on, or caused the levying of any execution against, any property of the ----------------------
company;
----------------------
- where he has, with intent to defraud creditors of the company, concealed
or removed any property of the company within two months before, or ----------------------
since the date of any judgment for payment against the company. ----------------------
Misfeasance proceedings
----------------------
Section 340 empowers the Tribunal to assess damages and require the
delinquent officer to pay the amount to the company. The power of the Tribunal ----------------------
comes into play when, in the course of winding up, it appears that any person
----------------------
who has taken part in the promotion or formation of the company or any past or
Winding up 181
Notes present director, manager, liquidator or officer of the company has misapplied
or retained or become liable for any money or property of the company or has
---------------------- been guilty of misfeasance or breach of trust in relation to the company. The
company liquidator, or any creditor or contributory may apply to the Tribunal for
---------------------- action against the delinquent officer. The Tribunal shall examine his conduct. If
---------------------- he is found guilty he may be required to repay or restore the money or property
of the company or to contribute such a sum to the assets of the company by way
---------------------- of compensation as the Tribunal thinks just. Where certain debts owing to the
company became time-barred because of the directors’, including managing
---------------------- director’s inaction, they were required to make good the company’s loss. A
---------------------- payment to a creditor was made to relieve a director of his guarantee and it
amounted to a fraudulent preference, this was misfeasance making the directors
---------------------- accountable for the amount. The jurisdiction of Section 283 to secure delivery
of property to the company liquidator is exercisable “at any time after making
---------------------- a winding up order” and is not barred by any length of time. Thus, where a
---------------------- company’s agent received money without authority in 1956, the court ordered
its delivery to the company in 1964, the company having gone into liquidation
---------------------- in 1959.
---------------------- An application under this section has to be made within five years from
the date of the order of winding up or of the first appointment of the liquidator
---------------------- or of the alleged offence, whichever is longer. The period of five years begins to
run from the date of the first appointment of the liquidator. Time does not start
----------------------
afresh every time a new liquidator is appointed.
---------------------- There is no such distinct wrongful act known to law as “misfeasance”. The
section does not create any new right or offence, but only provides a summary
----------------------
and cheap remedy for enforcing such rights as are otherwise enforceable by
---------------------- law. There are two conditions of liability under the section, i.e., an act in the
nature of breach of trust, and an act which results in a loss to the company.
----------------------
Prosecution of delinquent officers and members
---------------------- Section 342 provides that if it appears to the Tribunal, in the course of
---------------------- a compulsory winding up, that any past or present officer or member of the
company has been guilty of any offence in relation to the company, the Tribunal
---------------------- may direct the company liquidator either himself to prosecute the offender or
to refer the matter to the Registrar. The Registrar may, if he thinks fit, refer
---------------------- the matter to the Central Government for further investigation. If the Registrar
---------------------- finds that the case is not one in which proceedings ought to be taken by him, he
shall inform the liquidator accordingly. The company liquidator may then with
---------------------- the sanction of the Tribunal himself take proceedings against the offenders.
Where the company liquidator does not make any report to the Registrar, but
---------------------- an offence appears to the Tribunal to have been committed, the Tribunal may
---------------------- direct the company liquidator to make such a report.
Special statutory protection
----------------------
The Act, however, in Section 463, extends special protection against a
---------------------- liability that may have been incurred in good faith. Where it appears to the
182 Corporate Law

Tribunal that the director sued “has acted honestly and reasonably, and that Notes
having regard to all the circumstances of the case ….., he ought fairly to be
excused, the Tribunal may relieve him, either wholly or partly from his liability ----------------------
on such terms as it may think fit”. Thus, three circumstances must be shown
to exist. The position must be such that the person to be excused is shown to ----------------------
have acted honestly and reasonably. Having regards to all the circumstances, he ----------------------
ought fairly to be excused.
----------------------
Wrongful withholding of property
If an officer wrongfully obtains possession of a company’s property or ----------------------
being already in possession, wrongfully refuses to deliver it to the company, a
----------------------
complaint can be made to a magistrate by the company or by any creditor or
contributory. The magistrate can award punishment in terms of the section and ----------------------
can also order the officer in possession to deliver the property to the company. A
flat was allotted to an officer. He refused to vacate it on retirement. It was held ----------------------
that he was not entitled to the protection of tenancy law as and could be ordered
----------------------
under Section 452 to vacate the premises of the company. In another similar
case a retired officer was refusing to vacate premises at Cochin. A complaint ----------------------
before a magistrate at Calcutta, where the company had its registered office,
was held to be competent. Taking a different view, the Bombay High Court did ----------------------
not allow criminal proceedings at the company’s headquarters at Bombay when
----------------------
the property was situate at Jamshedpur.
The machinery of this section will not be available where there is a bona ----------------------
fide dispute between an employee and the company as to a title to the property.
----------------------
Annulment of dissolution
----------------------
After a company has been dissolved in pursuance of any of the provisions
of the Act, it is open to the Tribunal to declare the dissolution to have been void. ----------------------
But this can be done only within two years of the date of the dissolution and on
an application by the company liquidator or any other person who appears to ----------------------
the Tribunal to be interested. A person entitled to claim damages for negligence ----------------------
from the company is a person “interested” for this purpose, but not his lawyer.
The Tribunal’s order may be subject to such terms as it thinks fir to impose. Any ----------------------
proceedings may then be taken as might have been taken if the company had
not been dissolved. ----------------------
The person on whose application the order is passed should within thirty ----------------------
days or such further time as the Tribunal may allow, file a certified copy of the
order with the Registrar. ----------------------
Winding up of unregistered company ----------------------

The expression “unregistered company” includes any partnership, ----------------------
association or company consisting of more than seven members at the time of
the petition, but does not include – ----------------------
- a railway company incorporated by an Act of Parliament or other Indian ----------------------
law or any Act of the British Parliament;
- a company registered under the Companies Act; ----------------------
Winding up 183
Notes - a company registered under any previous company law, excepting
those having registered offices in Burma, Aden or Pakistan before their
---------------------- separation from India.
---------------------- An unregistered company can be wound up under the Act and with some
exceptions all the provisions of the Act relating to winding up are applicable.
----------------------
For the purposes of jurisdiction the company shall be deemed to be
---------------------- registered in the State where it has the principal place of business. If it has
a principal place of business in more than one State, proceedings may be
---------------------- commences in any such State.
---------------------- An Unregistered company can be wound up only by the court, not
voluntarily nor under supervision. The company may be wound up in the
---------------------- following circumstances:
---------------------- - If the company has been dissolved, or has ceased to carry on business, or
is carrying on business only for the purpose of winding up;
----------------------
- If the company is unable to pay its debts;
---------------------- - If the tribunal is of the opinion that it is just and equitable to wind up the
---------------------- company.
It has been held that the word “association” has to be understood in its
----------------------
general sense and not with reference to the provisions in Section 11 of the Act.
---------------------- Thus construed, there would be no bar to the winding up of the Ex-Servicemen’s’
Rehabilitation Association, registered under the Societies Registration Act, as
---------------------- an unregistered company, though its membership was more than that of 20
persons.
----------------------
The company is said to be unable to pay its debts in the following cases:
----------------------
Where a creditor to whom the company is indebted for more than Rs.
---------------------- 1,00,000/- has served a notice, but the company has not settled with him for
three weeks;
----------------------
If any case has been filed against a member for a debt due from the
---------------------- company or from the member in his character as member, and the company has
not within ten days settled the demands or procured the case to be stayed or has
---------------------- not indemnified the member against the sum due and the expenses etc.;
---------------------- - If any execution or other process has been returned unsatisfied in whole
or in part;
----------------------
- If it is otherwise proved to the satisfaction of the Tribunal that the company
---------------------- is unable to pay its debts.
---------------------- Where a foreign company, having had a place of business in India,
has ceased to carry on the business, it may be ordered to be wound up as an
---------------------- unregistered company even if it has already been dissolved in its mother country.
---------------------- These provisions are additional to the rest of the provisions of the Act
relating to winding up, all of which are also applicable.
----------------------
184 Corporate Law

Period of limitation Notes
In computing the period of limitation for the purposes of the claims of a
----------------------
company in winding up, the period from the date of the petition to the date of
the order of winding up (both inclusive) and the period of one year immediately ----------------------
following the winding up order is to be excluded. Thus, the company in
winding up has the benefit of an addition period covering the time from the ----------------------
commencement of the proceeding to the date of the order and one more year
----------------------
from the date of the order.
----------------------
----------------------
1. Winding-up of a company is a process of ______________. ----------------------
2. On the winding up of a company, its members are called ______________.
----------------------
Multiple Choice Single Response
----------------------
1. The expression “unregistered company” includes.
i. a railway company incorporated by an Act of Parliament ----------------------
ii. a company registered under the Companies Act ----------------------
iii. a company registered under any previous company law ----------------------
iv. partnership firm
----------------------
----------------------
Activity 1
----------------------
Interview the director and or CEO of a company and try to understand the
----------------------
procedure for winding up of the company. Also, try to discuss the difference
between the winding up of companies and winding up of partnership firms. ----------------------
----------------------
Summary
----------------------
●● inding up is the process by which the life of a company is ended and its
W
property administered for the benefit of its members and creditors. There are ----------------------
two kinds of winding up: Winding up by Tribunal; Voluntary winding up.
----------------------
●● In winding up by Tribunal, a winding up petition can be presented by any
of the following: Petition by company, Creditor’s petition, Contributory’s ----------------------
petition, Registrar’s petition and Central Government and State Government
petition. ----------------------
●● A company may be wound up voluntarily at any time by passing a special ----------------------
resolution. But where the articles provide for a period on the expiry of
which the company is to be wound up and that period has expired, or for ----------------------
a contingency on the happening of which the company is to be dissolved
----------------------
Winding up 185
Notes and that contingency has happened, winding up may be commenced with an
ordinary resolution.
---------------------- ●● Winding up is conducted in accordance with uniform rules. One of the
foremost duties of a liquidator is to get in the company’s assets for the
----------------------
purpose of satisfying its debts and liabilities like Liability of past members,
---------------------- Payment of liabilities, preferential payments, Other Payments, Unclaimed
Dividends.
----------------------
Keywords
----------------------
●● Just and equitable: Impartial or reasonable; fair; just an equitable decision
---------------------- law relating to or valid in equity, as distinct from common law or statute law.
Law formerly recognized in a court of equity only, as claims, rights, etc.
----------------------
●● “Company Liquidator”, in so far as it relates to the winding up of a company,
---------------------- means a person appointed by— (a) the Tribunal in case of winding up by the
Tribunal; or (b) the company or creditors in case of voluntary winding up,
---------------------- as a Company Liquidator from a panel of professionals maintained by the
Central Government under sub-section (2) of section 275;
----------------------
●● Official Liquidator: 359. (1) 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.
----------------------
●● Contributory: A member or former member of a company liable to
---------------------- contribute to the assets on the winding-up of the company.
---------------------- ●● Encumbrances: A person who holds an encumbrance on property belonging
to another.
---------------------- ●● Misfeasance: The improper performance of an act that is lawful in itself or a
form of wrongdoing, especially the doing of something lawful in an unlawful
----------------------
way so that the rights of others are infringed.
---------------------- ●● Annulment: A formal termination of a legal relationship or a judicial
proceeding etc. Invalidation, dissolution, the termination or disintegration of
---------------------- a relationship between persons or nations.
----------------------
----------------------
1. What is meaning of winding up and what are different kinds of winding
----------------------
up?
---------------------- 2. Who can apply for the winding up by Tribunal?
---------------------- 3. What are the powers of Tribunal on hearing petition for winding up?
---------------------- 4. Explain in detail: what is voluntary winding up.

5. Write a detailed note on the satisfying of liabilities by the liquidator
---------------------- during winding up process.
----------------------
186 Corporate Law

6. What are the other antecedent transactions in the winding up which need Notes
to be taken care of?
----------------------
7. Whose interests have to be taken into consideration, in case of just and
equitable winding up of the company? ----------------------
8. Who can apply for winding up?
----------------------
9. When is winding up is deemed to commence?
----------------------
10. When can a Tribunal call upon to stand public examination?
----------------------
----------------------
----------------------
----------------------
1. Among the following, who cannot apply for the winding of the company?
iv. auditor of the company. ----------------------
Multiple Choice Multiple Response. ----------------------

1. Which of the powers mentioned below can be exercise by the company ----------------------
liquidator?
----------------------
i. To do all acts and execute all deed on behalf of company.
ii. To carry on the business of the company for the benefit of company ----------------------
winding up. ----------------------
----------------------
Fill in the blanks.
1.
Winding-up of a company is a process of putting an end to the life of a ----------------------
company. ----------------------
2. On the winding up of a company its members are called contributories.
----------------------
----------------------
1. The expression “unregistered company” includes
iv. Partnership firm ----------------------
----------------------
Suggested Reading
----------------------
----------------------
& Sons.
Co.
----------------------
----------------------
----------------------
Winding up 187
Notes
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
188 Corporate Law

Minority Protection and Audit & Accounts
UNIT
10
Structure:
10.1 Introduction
10.2 Rule in Foss vs. Harbottle
10.3 Prevention of Oppression and Mismanagement
10.4 Investigations
10.5 National Company Law Tribunal and Appellate Tribunal
10.6 Accounts
10.7 Audit
10.8 Corporate Social Responsibility (CSR)
Summary
Keywords
Suggested Reading
Minority Protection and Audit & Accounts 189

Notes
Objectives
----------------------
• Analyse the provisions for protection of the minority.
----------------------
• Explain the rules regarding maintenance of accounts and audit of the
---------------------- company.
---------------------- • Summarise the powers of the National Company law Tribunal and the
government in the affairs of the company.
---------------------- • State the rules regarding investigations of company affairs.
----------------------
---------------------- 10.1 INTRODUCTION
---------------------- The modern Companies Acts contain a large number of provisions for
the protection of the interest of investors in incorporated companies. The aim
---------------------- of these provisions is to require those who control the affairs of a company
to exercise their powers according to certain principles of natural justice
----------------------
and fair play. The present unit would explain the meaning of term “Minority
---------------------- protection” in terms of Company Law with the help of the land mark case of
Foss V. Harbottle where the term evolved. Further it would explain the ways in
---------------------- which the Company tries to prevent the oppression and mismanagement in the
Company to protect the minority interests.
----------------------
---------------------- 10.2 RULE IN FOSS VS. HARBOTTLE

---------------------- The basic principle relating to the administration of the affairs of a
company is that the court does not, at the instance of a shareholder, interfere
---------------------- in the administration of the company by its directors. This is known as the rule
---------------------- in Foss V Harbottle. In this case certain shareholders had brought an action
against the directors to force them to make good the loss they had caused to the
---------------------- company by their illegal and fraudulent transactions. The action was dismissed
in respect of matters which a majority of the shareholders had the power to
---------------------- confirm. Thus, the rule is:
---------------------- ●● that for any wrong done to the company either by directors or by outsiders,
the proper plaintiff is the company itself; and
----------------------
●● where the alleged wrong is a transaction which the majority can affirm, it
---------------------- is no use litigating about it the ultimate end of which is going to be that a
meeting has to be called and the wishes of the majority will prevail.
----------------------
The briefest possible statement of the rule occurs in the observation of
---------------------- CARDOZO J that for erring (directors or) shareholders there may be absolution
if the shareholders are satisfied. The two recent English cases, Hogg v Cramphorn
---------------------- Ltd and Banford v Bamford bear witness to this absolving power of the majority
---------------------- of the shareholders. In either case there was the disposal by the directors of the
190 Corporate Law

unissued capital of the company as a tactical move in the battle for control of Notes
the company. The court conceded that the power to allot shares was exercised
for an improper motive and the directors were guilty of misfeasance, but held ----------------------
that it is a common place of company law that the directors can by making a full
and frank disclosure and calling together the general body of the shareholders ----------------------
obtain absolution and forgiveness of their sins. ----------------------
There are, however, certain situations in which a shareholder may sue to
----------------------
enforce obligations owned to the company. He brings the action as a representative
of the corporate interest. In the American literature a representative action of ----------------------
this kind is called the “derivative action”. Such situations are as follows:
----------------------
●● cts Ultra Vires – Every shareholder can restrain the company from
A
acting ultra vires. A shareholder can also sue to recover the assets of the ----------------------
company from any person to whom they have been given in an ultra vires
transaction and also the directors responsible for the transaction. ----------------------
●● raud on minority – The conduct of a majority of shareholders can be
F ----------------------
impeached if it constitutes a “fraud on the minority”. This phrase refers
to such a conduct of the majority which has the effect of discriminating ----------------------
“between the majority shareholders and minority shareholders, so as to
----------------------
give to the former an advantage of which the latter were deprived”. Thus,
in Menier v Hooper’s Telegraph Works, the majority shareholders were ----------------------
not permitted to sacrifice the rights of the company in favour of another
company in which they had an interest. ----------------------
Similarly, the majority cannot be allowed to expropriate the interest of ----------------------
minority shareholders. Thus, the holder of 2% interest in a company was not
allowed to be compelled at the pain of confiscation of his interest to contribute ----------------------
further capital.
----------------------
Thus, it appears that the majority powers must be exercised in good faith
for the benefit of the company as a whole. “Individual interest may be sacrificed ----------------------
to the economic exigencies of the enterprise and the judgment of directors as to
----------------------
this must prevail.” Thus, the majority of a company was permitted to acquire the
interest of competing members. Where a similar power was taken in reference ----------------------
to members who refused to buy the company’s product, which was held to
be improper as the action was beyond what was necessary for protecting the ----------------------
company’s interests.
----------------------
It is for the shareholders to decide what is genuinely for the benefit of
their company. The courts cannot manage the company for the shareholders. ----------------------
The only restriction is that whatever they decide they must do so in good faith
----------------------
as reasonable businessmen.
But all this is subject to the principle which still holds ground that the ----------------------
right to vote is the private property of the shareholder and, therefore, he “may ----------------------
vote as he pleases even when his interests are different from or opposed to
those of the company. Shareholders are not trustees for the company or for ----------------------
one another and the relations between them cannot be identified with relations
between partners”. ----------------------

Notes The present trend is towards a principle that any breach of duty which
causes loss to company should be regarded as a fraud on the minority. In an
---------------------- English case the sale of a company’s property below its natural market value
was held to be a fraud. Welcoming this decision, it has been observed that “in
---------------------- view of the inactivity of the legislature in the area of minority protection, it
---------------------- is welcome that the courts have taken it upon themselves to extend that area
and to enable minorities more frequently than before to have their grievances
---------------------- ventilated in court”.
---------------------- Minority shareholders can sue majority shareholders if the latter having
been guilty of gross negligence profited from that negligence notwithstanding
---------------------- the absence of fraud. The plaintiffs who were minority shareholders brought
an action against the company and two of its directors, who were the majority
----------------------
shareholders. They alleged that in 1970 the company, on the instructions of the
---------------------- two directors had sold the company’s land to one of the two, who was the wife
of the other, for £ 4250 when they knew or ought to have known that it was
---------------------- worth a great deal more. It was resold in 1974 for £ 1,20,000. It was held that
the minority shareholders had a cause of action.
----------------------
●● cts requiring special majority – There are certain acts which can
A
---------------------- only be done by a special resolution. If the majority purport to do any
such act by passing only an ordinary resolution or in a different manner
----------------------
than required by the law, any member can bring an action to restrain the
---------------------- majority.
●● rongdoers in control – Sometimes an obvious wrong may be done
W
----------------------
to the company, but the controlling shareholders would not permit an
---------------------- action to be brought against the wrongdoer or they themselves being the
wrongdoers, would not enforce the company’s right. Thus, where the
---------------------- majority shareholders had converted the company’s assets to their own
use, minority action was allowed.
----------------------
●● I ndividual membership rights – Every member has vested in him certain
---------------------- rights conferred by the Act or by the constitution of the company and
which are called individual membership rights. The ordinary examples
----------------------
are the right to vote, the right to have his vote recorded or his right to
---------------------- stand for directorship at an election. Where a director refused to retire
in accordance with the articles, a shareholder was allowed to sue “as the
---------------------- individual rights of the plaintiff as a member were invaded”.
----------------------
Activity 1
----------------------
Search a case law, which is based on the principles laid down in Foss V.
----------------------
Harbottle.
----------------------
----------------------
----------------------
192 Corporate Law

10.3 PREVENTION OF OPPRESSION AND MISMANAGEMENT Notes
Chapter 16 of Part 6 of the Companies Act, 2013 provides for judicial as well ----------------------
as administrative remedies for relief against oppression and mismanagement.
----------------------
Prevention of oppression
Who can apply – The first statutory remedy in the hands of the oppressed ----------------------
shareholder is to move the Tribunal. The application must be signed by at ----------------------
least 100 members of the company or by one-tenth of the total number of its
members, whichever is less, or by any member or member holding one-tenth ----------------------
of the issued share capital of the company. If the company is without share
capital, the application should be signed by one-fifth of the total number of its ----------------------
members. Once the requisite number has signed the application, the application ----------------------
may be proceeded with, even of some of the signatories have withdrawn their
consent or disposed of their shares. A person, who is entitled, to have his name ----------------------
entered in the company’s register of members, may apply for relief, and so also
the representative of a deceased shareholder. The Central Government has also ----------------------
the power to apply. The conduct of the petitioner is an important factor in the ----------------------
matter of the relief that he deserves. Generally he would be required to move
out of the company at a fair value being put upon his stakes in the company. ----------------------
Meaning of oppression – The grounds on which an application can be ----------------------
made under Section 241 is that the affairs of the company are being conduct
in a manner oppressive to a member or some members or in a manner which ----------------------
is prejudicial to the public interest or company interest. A material change
----------------------
has taken place in the management or control of the company whether by an
company’s shares or its membership or in any other manner whatsoever, and ----------------------
that by reason of such change, it is likely that the affairs of the company will be
conducted in a manner prejudicial to its interests or its members or any class or ----------------------
members. The National Company law Tribunal may then make such an order
----------------------
“with a view to bringing to an end the matter complained of as it thinks fit”.
The circumstances in which oppression may arise are so “infinitely various ----------------------
that it is impossible to define them with precision”. The noble attempt by LORD
----------------------
COOPER to define the expression in the Scotish case of Elder v Elder & Watson
Ltd was cited with approval by WANCHOO J. (afterwards CJ) of the Supreme ----------------------
Court of India in Shanti Prasad Jain v Kalinga Tubes. “The essence of the matter
seems to be that the conduct complained of should at the lowest involve a visible ----------------------
departure from the standards of fair dealing, and a violation of the conditions of
----------------------
fair play on which every shareholder who entrusts his money to the company
is entitled to rely”. The complaining shareholder must be under a burden which ----------------------
is unjust or harsh or tyrannical. “A persistent and persisting course of unjust
conduct must be shown.” Thus, where the non-trading members of a company ----------------------
were deprived of their right to vote, to elect directors and to receive dividends;
----------------------
where the need of a subsidiary company ceased to exist, and its parent company
adopted the policy of running down its business which depressed the value of ----------------------
its shares; where a majority controller persistently flouted the decisions of the
board and made it possible for the company to function; where there was an ----------------------

Notes unreasonable refusal to accept a transfer or transmission of shares, oppression
was held to have been established and the appropriate relief was granted.
----------------------
But where there were broad charges like this that tickles travelling on the
---------------------- company’s buses was not checked, or that second-hand buses were sold at a low
price or that the managing director had been unwise, inefficient, and careless in
---------------------- the performance of his duties, or that the majority had offered further issue of
shares to outsiders only to strengthen their own following in the company and
----------------------
in shares to outsiders only to strengthen their own following in the company
---------------------- and in violation of a private agreement between the groups in control that an
equilibrium of voting power should be maintained, these did not amount to
---------------------- oppression. In a case before the Supreme Court irregularities were committed
by the management of a company in offering the block of rights shares to its
----------------------
own foreign holding company. The result was that the holding company was
---------------------- not able to participate in crucial meetings. Its block of shares was allotted to
others. Even otherwise it would not have been able to participate in the rights
---------------------- issue because of statutory restrictions. The Supreme Court held that there was
no oppressive policy in evidence. The company’s real loss lay in the fact that
----------------------
the market value of the shares was higher than their nominal value and the
---------------------- allotment was at par. The court ordered that the Indian allottees of such shares
should pay the difference to the holding company. A member can complain of
---------------------- oppression only in his capacity as member and not as director. The remedy can
be availed of by a majority of shareholders as well, of in the circumstances of
----------------------
the case, they have been completely nullified by the minority in control. This
---------------------- ingenious remedy has not only permitted redress of many abuses, but its mere
availability has had a deterrent effect upon the management.
----------------------
Prevention of mismanagement
---------------------- Section 241 (1) (b) provides for relief against mismanagement. It has
to be established that the affairs of the company are being conducted in a
----------------------
manner prejudicial to the interest of the company or public interest or that, by
---------------------- reason of a change in the management or control of the company, it is likely
that its affairs will be conducted in that manner. The Tribunal may make an
---------------------- appropriate order relief against mismanagement. There should be present and
continuing mismanagement. The charges of mismanagement in the past, even
----------------------
if proved, are not necessary for the Tribunal to find cause for winding up in
---------------------- cases of mismanagement in order to grant relief. Thirdly, the section enables
the court to take into consideration outside interests. Thus, the Calcutta High
---------------------- Court refused to order the winding up of a grossly mismanaged company and
appointed special officers to manage it because the company was engaged in
----------------------
special industries necessary for the implementation of the country’s plans.
---------------------- Power of Tribunal Sec. 242
---------------------- If, on any application made under section 241, the Tribunal is of the
opinion—
----------------------
●● that the company’s affairs have been or are being conducted in a manner
---------------------- prejudicial or oppressive to any member or members or prejudicial to
194 Corporate Law

public interest or in a manner prejudicial to the interests of the company; Notes
and
●● that to wind up the company would unfairly prejudice such member ----------------------
or members, but that otherwise the facts would justify the making of a ----------------------
winding-up order on the ground that it was just and equitable that the
company should be wound up, the Tribunal may, with a view to bringing ----------------------
to an end the matters complained of, make such order as it thinks fit.
Without prejudice to the generality of the powers under sub-section 1 of ----------------------
section 241, an order under that sub-section may provide for— ----------------------
●● the regulation of conduct of affairs of the company in future;
----------------------
●● the purchase of shares or interests of any members of the company by
other members or by the company; ----------------------
●● in the case of a purchase of its shares by the company as aforesaid, the
----------------------
consequent reduction of its share capital;
●● restrictions on the transfer or allotment of the shares of the company; ----------------------
●● the termination, setting aside or modification, of any agreement, between ----------------------
the company and the managing director, any other director or manager, as
just and equitable. ----------------------
●● the termination, setting aside or modification of any agreement between ----------------------
the company and any person. Provided that no such agreement shall
be terminated, set aside or modified except after due notice and after ----------------------
obtaining the consent of the party concerned;
----------------------
●● the setting aside of any transfer, delivery of goods, payment, execution
or other act relating to property made or done by or against the company ----------------------
within three months before the date of the application.
----------------------
●● removal of the managing director, manager or any of the directors of the
company; ----------------------
●● Recovery of undue gains made by any managing director, manager or ----------------------
director during the period of his appointment.
●● appointment of such number of persons as directors, who may be required ----------------------
by the Tribunal to report to the Tribunal on such matters as the Tribunal ----------------------
may direct;
●● imposition of costs as may be deemed fit by the Tribunal; ----------------------
●● any other matter for which, in the opinion of the Tribunal, it is just and ----------------------
equitable that provision should be made.
----------------------
A certified copy of the order of the Tribunal needs to be filed by the
company with the Registrar within 31 days of the order of the Tribunal. ----------------------
The Tribunal may, on the application of any party to the proceeding, make
----------------------
any interim order which it thinks fit. Upon such terms and conditions as appear
to it to be just and equitable. ----------------------
----------------------

Notes Where an order of the Tribunal makes any alteration in the memorandum
or articles of a company, then, the company shall not have power, except to
---------------------- the extent, permitted in the order, the alterations made by the order in the
memorandum or articles of a company shall, in all respects, have the same
---------------------- effect as if they had been duly made by the company in accordance with the
---------------------- provisions.
A certified copy of every order altering, shall within 30 days after the
----------------------
making needs to be filed by the company with the Registrar.
----------------------
10.4 INVESTIGATIONS
----------------------
“Efficient functioning of the incorporated enterprise, that is, a performance
---------------------- that will ensure an adequate return on capital, is ultimately the best protection of
---------------------- those who provide capital.” The elementary philosophy of the Companies Act
is to trust the shareholders for assuring efficient performance. But for reasons
---------------------- more than one the shareholder has already receded to the background.
---------------------- He is an investor who, for the most part, does not wish to be bothered
except by dividends,
----------------------
Due to great diffusion of stock, shareholders become indifferent to voting
---------------------- and controlling.
The shareholders are ill-equipped to challenge the wisdom and expertise
----------------------
of officers.
---------------------- “Few shareholders have the means or ability to act against management”.
---------------------- For these reasons, shareholder democracy has been a failure. “The reality
of control can only be found in the action of public opinion and in the organized
---------------------- supervision exercised by Government agencies. Hence the importance of
---------------------- investigations.”
Power of investigation Sections 210-229 provide for investigation of the
---------------------- affairs of a company. Section 210 enables the Central Government to appoint
---------------------- inspectors for investigation in the following cases:
1. On members’ application -
----------------------
On the application of two hundred members, or members holding one-
---------------------- tenth of the total voting power; and where the company is without share
capital, on the application of one-fifth of the members. The applicants
----------------------
must show a good cause for requiring the investigations. The Tribunal
---------------------- will give an opportunity to the concerned parties of being heard. The
Tribunal then with the sufficient evidence demanding the investigation
---------------------- may then declare that the affairs of the company ought to be investigated.
On such declaration being made, the Central Government has to appoint
----------------------
one or more competent inspectors to investigate the affairs and to submit
---------------------- a report in such manner as the Government may direct.
----------------------
196 Corporate Law

2. On a report by Registrar or inspector – The Registrar or inspector Notes
can make a report for investigation purpose when any information or
explanation submitted to him by a company is not satisfactory. Then the ----------------------
Central Government may order an investigation in to the affairs of the
company. ----------------------
3. Under Section 213 – This section is in two parts. The first part requires ----------------------
the Central Government to appoint inspectors if the company by special
----------------------
resolution or the Tribunal by order declares that the affairs of the company
ought to be investigated. ----------------------
The second part enables the Central Government to appoint inspectors whenever
----------------------
in its opinion there are circumstances suggesting:
●● t hat the business of the company is being conducted with intent to defraud ----------------------
creditors, members, or any other persons, or for a fraudulent or unlawful
----------------------
purpose, or in a manner oppressive to certain members, or that the
company was formed for any fraudulent or unlawful purpose; ----------------------
●● that the persons concerned in the formation of the company or with the
----------------------
management of the company have been guilty of fraud, misfeasance or
other misconduct towards the company or its members; ----------------------
●● that the member of the company have not been given all the information
----------------------
with respect to its affairs which they might reasonably expect.
Thus, the Tribunal does not have the power to order a fishing expedition. ----------------------
The order must be based on a prima facie existence of any of the above grounds.
----------------------
But subject to these considerations “the order of the Central Government is not
justifiable when it is reasonably made bona fide even though the reasons given ----------------------
do not appeal to a tribunal”. Thus, where the Government came to hold the
opinion that the working results and the dividends declared were not compatible, ----------------------
an order of investigation was upheld. The Government cannot withhold reasons
----------------------
for the order from the tribunal, unless some privilege is claimed in respect of
them. ----------------------
Procedure and Powers of inspectors: Sec. 217.
----------------------
The officers in charge of the company have to submit to the inspectors all
papers and books necessary for their work. The inspectors may examine any such ----------------------
person on oath or any other person with the order of the Central Government.
----------------------
It is the duty of all officers and other employees and agents existing and former
of a company which is under investigation, and where the affairs of any other ----------------------
body corporate or a person are investigated under section 219, of all officers
and other employees and agents existing and former of such body corporate ----------------------
or a person— (a) to preserve and to produce to an inspector or any person
----------------------
authorised by him in this behalf all relevant books and papers of company. (b)
to give to the inspector all assistance. Duty to ask from anybody corporate, to ----------------------
furnish such information to or produce such books and papers before him or
any person authorised. The inspector shall not keep in his custody any books ----------------------
and papers produced to him for more than one 180 days and return the same.
----------------------
However, after that if they are needed again for a further period of 180 days by

Notes an order in writing. An inspector may examine on oath any of the persons, as
per the prescribed rule in relation to the affairs of the company or other body
---------------------- corporate or person. However, an investigation under section 212 require the
prior approval of Director or Serious Fraud Investigation Office.
----------------------
The inspector, shall have all the powers as are vested in a civil court
---------------------- under the Code of Civil Procedure, 1908, while trying a suit in respect of the
following matters, namely:—
----------------------
(a) the discovery and production of books of account and other documents,
---------------------- at such place and time as may be specified by such person; (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.
If any director or officer of the company disobeys the direction issued
----------------------
by the Registrar or the inspector under this section, the director or the officer
---------------------- shall be punishable with imprisonment which may extend to one year and with
fine which shall not be less than twenty-five thousand rupees but which may
---------------------- extend to one lakh rupees and from the date on which he is so convicted, be
deemed to have vacated his office as such and on such vacation of office, shall
----------------------
be disqualified from holding an office in any company.
---------------------- Notes of such an examination are taken in writing and signed by the person
---------------------- examined and may be used in evidence against him. Where the inspector has
reasonable grounds to believe that the relevant books etc., may be destroyed or
---------------------- falsified, he may, with the permission of a first class magistrate, enter the place
where they are and seize them. He should return them at the conclusion of the
---------------------- investigation. The inspector submits his report to the Government. If the report
---------------------- shows that any person has committed an offence for which he is criminally
liable, the Government may prosecute him for the same.
---------------------- Investigation of ownership of company– Sec. 216
---------------------- Public interest may sometime require the Central Government to know the
persons who are financially interested in a company or who control its policy
---------------------- or materially influence it or who have or had beneficial interest in shares of a
---------------------- company or who are or have been beneficial owners or significant beneficial
owner of a company. For this the Government may appoint inspectors, to
---------------------- investigate and report on matters relating to the company, and its membership
for the purpose of determining the true persons, who are or have been financially
---------------------- interested in the success or failure, whether real or apparent, of the company, or
---------------------- who are or have been able to control or to materially influence the policy of the
company.
----------------------
The Tribunal has been empowered, while dealing with any proceedings
---------------------- before it, to declare by an order that the affairs of the company ought to be
investigated as regards the ownership for the purpose of determining as to who
---------------------- are or have been financially interested in the success or failure of, whether real
or apparent, of the company or able to control or materially influence the policy
----------------------
of the company. The Government becomes bound to appoint inspectors.
198 Corporate Law

Imposition of restrictions upon securities (Sec 222) – If, by reason of Notes
any of the above investigations or otherwise, it appears to the Tribunal that
there is a good reason to find out full facts about any securities issued or to ----------------------
be issued by company and the tribunal is of the opinion that such facts cannot
be found out unless certain restrictions, as it may deem fit, however such ----------------------
restriction should not be exceeding three years. Extra care has to be taken in ----------------------
imposing restrictions of this kind because of the likely damage to the image of
the company, the market of its shares and the prospects of lending institutions ----------------------
supporting the company.
----------------------
Section 226 – enacts that an investigation may be initiated even when an
application for prevention of oppression or mismanagement is pending or the ----------------------
company has passed a special resolution for voluntary winding up. Similarly, an
----------------------
investigation which is in progress is not suspended by reason merely of the fact
that an application for prevention of oppression or mismanagement has been ----------------------
made or a special resolution for winding up has been passed.
----------------------

1. A member can complain of oppression only in his capacity as a ----------------------
member and not in his capacity as __________.
----------------------
2. The inspectors may examine any such person on ______ or any other
person with the order of the _________. ----------------------
3. The directors exercise their powers through meetings of ____, _____ ----------------------
and shareholders exercise their power through _____.
----------------------
10.5 NATIONAL COMPANY LAW TRIBUNAL AND ----------------------

APPELLATE TRIBUNAL ----------------------
Constitution of National Company Law Tribunal --- Sec. 408 ----------------------
The Central Government shall, by notification, constitute, with effect from ----------------------
such date as may be specified therein, a Tribunal to be known as the National
Company Law Tribunal consisting of a President and such number of Judicial ----------------------
and Technical members, as the Central Government may deem necessary, to
be appointed by it by notification, to exercise and discharge such powers and ----------------------
functions as are, or may be, conferred on it by or under this Act or any other law ----------------------
for the time being in force.
Appeal from orders of Tribunal — Sec. 421 ----------------------
Any person aggrieved by an order of the Tribunal may prefer an appeal ----------------------
to the Appellate Tribunal. No appeal shall lie to the Appellate Tribunal from
----------------------
an order made by the Tribunal with the consent of parties. Every appeal under
sub-section (1) shall be filed within a period of forty-five days from the date ----------------------

Notes on which a copy of the order of the Tribunal is made available to the person
aggrieved and shall be in such form, and accompanied by such fees, as may be
---------------------- prescribed: Provided that the Appellate Tribunal may entertain an appeal after
the expiry of the said period of forty-five days from the date aforesaid, but
---------------------- within a further period not exceeding forty-five days, if it is satisfied that the
---------------------- appellant was prevented by sufficient cause from filing the appeal within that
period. On the receipt of an appeal under sub-section (1), the Appellate Tribunal
---------------------- shall, after giving the parties to the appeal a reasonable opportunity of being
heard, pass such orders thereon as it thinks fit, confirming, modifying or setting
---------------------- aside the order appealed against. The Appellate Tribunal shall send a copy of
---------------------- every order made by it to the Tribunal and the parties to appeal.
Constitution of Appellate Tribunal --- Sec. 410.
----------------------
The Central Government shall, by notification, constitute, with effect
---------------------- from such date as may be specified therein, an Appellate Tribunal to be known
as the National Company Law Appellate Tribunal consisting of a chairperson
----------------------
and such number of Judicial and Technical Members, not exceeding eleven, as
---------------------- the Central Government may deem fit, to be appointed by it by notification, for
hearing appeals against the orders of the Tribunal or of the National Financial
---------------------- Reporting Authority.
---------------------- Appeal to Supreme Court – Sec. 423
---------------------- Any person aggrieved by any order of the Appellate Tribunal may file an
appeal to the Supreme Court within sixty days from the date of receipt of the
---------------------- order of the Appellate Tribunal to him on any question of law arising out of
such order. if it is satisfied that the appellant was prevented by sufficient cause
---------------------- from filing the appeal within the said period, allow it to be filed within a further
---------------------- period not exceeding sixty days.
Establishment of the Special Court – Sec. 435
----------------------
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. A Special Court shall consist of (a) a single judge
---------------------- holding office as Session Judge or Additional Session Judge, in case of offences
---------------------- punishable under this Act with imprisonment of two years or more; and (b) a
Metropolitan Magistrate or a Judicial Magistrate of the First Class, in the case
---------------------- of other offences, 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. 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.
---------------------- Offences Triable by Special Courts --- Sec.436
All offences under this Act shall be triable only by the Special Court
----------------------
established for the area in which the registered office of the company in relation
---------------------- to which the offence is committed or where there are more Special Courts than
200 Corporate Law

one for such area, by such one of them as may be specified in this behalf by Notes
the High Court concerned. Where a person accused of, or suspected of the
commission of, an offence under this Act is forwarded to a Magistrate under ----------------------
sub-section (2) or sub-section (2A) of section 167 of the Code of Criminal
Procedure, 1973, such Magistrate may authorize the detention of such person in ----------------------
such custody as he thinks fit for a period not exceeding fifteen days in the whole ----------------------
where such Magistrate is a Judicial Magistrate and seven days in the whole
where such Magistrate is an Executive Magistrate. ----------------------
----------------------
----------------------
Fill in the blanks.
----------------------
1. Attaching _______________ to every balance sheet is mandatory.
----------------------
2. Board’s report should be signed by the ____________ of the Board,
if so authorised, and if not so authorised, then by _________ of the ----------------------
company, one of whom shall be the ________, where there is one.
----------------------
3. The _________ has been empowered to conduct investigation into
the affairs of the company in circumstances as specified under the act. ----------------------
4. Only an individual or individuals may be appointed as _________ to ----------------------
conduct the investigation into the affairs of the company and to report
thereon in the prescribed manner. ----------------------
----------------------
10.6 ACCOUNTS
----------------------
Every company required to keep at its registered office books of account
and other relevant books and papers and financial statement for every financial ----------------------
year which give a true and fair view of the state of the affairs of the company, ----------------------
including that of its branch office or offices, if any, and explain the transactions
effected both at the registered office and its branches and such books shall be ----------------------
kept on accrual basis and according to the double entry system of accounting.
----------------------
The books of account and other relevant papers may be kept at such other
place in India decided by the Board of Directors. Within seven days all needs to ----------------------
be file with the Registrar a notice in writing giving the full address of that other
place. The company may keep such books of account or other relevant papers ----------------------
in electronic mode in prescribed manner. ----------------------
Where a company has a branch office in India or outside India, then the
----------------------
books of account relating to the transactions effected at the branch office are
kept at that office and proper summarized returns periodically are sent by the ----------------------
branch office to the company at its registered office or the other such agreed
place. ----------------------
The books of account and other books and papers maintained by the ----------------------
company within India shall be open for inspection by any director during
business hours, and in the case of financial information, if any, maintained ----------------------

Notes outside the country, copies of such financial information shall be maintained
and produced for inspection by any director subject to prescribed conditions.
---------------------- The inspection in respect of any subsidiary of the company shall be done by
authorized person.
----------------------
The books of account of every company with the relevant vouchers
---------------------- needs to be preserved in good order for the period of eight financial year from
immediately preceding a financial year. Provided that where an investigation
----------------------
has been ordered in respect of the company under Chapter XIV, the Central
---------------------- Government may direct that the books of account may be kept for such longer
period as it may deem fit.
----------------------
Penalty – Sec. 128
---------------------- If the managing director, the whole-time director in charge of finance, the
Chief Financial Officer or any other person of a company charged by the Board
----------------------
with the duty of complying with the provisions of this section, contravenes such
---------------------- provisions, such managing director, whole-time director in charge of finance,
Chief Financial officer or such other person of the company shall be punishable
---------------------- with imprisonment for a term which may extend to one year or with fine which
shall not be less than 50, 000 rupees but which may extend to 1, 00, 000 rupees
----------------------
or with both.
---------------------- Every company is required to keep at its registered office books of account
---------------------- showing all sums received and expended by the company, all sales and purchase
of goods, all assets and liabilities, and in the case of a company engaged in
---------------------- production, processing, manufacturing or mining activities, particulars relating
to utilization of material and labour. Where the company has a branch office,
---------------------- such accounts relating to the branch business must be kept at the branch and
---------------------- at intervals of three months summarized accounts should be forwarded to the
registered office. At every annual general meeting the board of directors has to
---------------------- lay before the meeting the following:
---------------------- 1. Balance-Sheet for the year;

2. Profit and Loss account;
----------------------
3. irectors’ report - The directors’ report should deal with the state of
D
---------------------- the company’s affairs, the amounts which are proposed to be carried
to reserves, recommended dividend, material charges in the financial
----------------------
position of the company or in its business, and conservation of energy,
---------------------- technology absorption, foreign exchange earnings and in such a manner
as may be prescribed. The report has also to state the classes of business
---------------------- in which the company has interest and the position of its subsidiaries; a
statement showing the name of every employee of the company whose
----------------------
remuneration was not less than a sum as may be prescribed; the name of
---------------------- every employee who was the relative of a director or manager showing
also the name of such a director or manager. In the case of company not
---------------------- carrying on business for profit, an income and expenditure account has to
be laid before the meeting.
----------------------
202 Corporate Law

In the case of the first annual general meeting after incorporation, the profit Notes
and loss account must be up to date to a period not more than 9 months
before the date of the meeting. In the case of subsequent annual general ----------------------
meetings the gap between the date of the meeting and the date of accounts
should not be of more than six months. The period for which accounts are ----------------------
prepared is called “financial year.” It may be less than calendar year but ----------------------
should not exceed 15 months, or 18 months with the special permission of
the Registrar. Under Section 3 of the Income Tax Act, 1961, the accounting ----------------------
year has to be ending with March 31st each year.
----------------------
A copy of such accounts and report must be sent 21 days before the
meeting to every member of the company and every trustee of debenture- ----------------------
holders whether he is entitled to a notice of the meeting or not.
----------------------
The profit and loss account is to be annexed to the balance sheet. The
auditors’ report, including separate, special or supplementary report, if any, ----------------------
has to be only attached to the balance sheet. Board’s report has also to be
----------------------
attached. The auditors can examine that part of the board’s report which
contains information which ought to have been given in the accounts. ----------------------
The accounts have to be authenticated by the signature of the company’s
----------------------
manager or secretary and by at least two directors [except One Man Company]
of the company one of whom should be managing director, if there is any. If at ----------------------
the relevant time there is only one director in India, he should sign explaining
the reason why the accounts have been inadequately signed. This mode of ----------------------
authentication is on behalf of the company’s board of directors and, therefore,
----------------------
it is necessary that before such authentication and before they are submitted for
auditing, they should be approved by the board. ----------------------
The accounts must give a true and fair view of the state of affairs of the company. ----------------------
“A balance sheet must not be a mere inventory. It is supposed to be a pictorial
representation of trading position of the company. To determine whether a ----------------------
statement is false, its effect upon an ordinary investor should be the test. Thus,
where loans given to an embryonic firm were described as “other deposits”, ----------------------
the accounts were held to be false. Section 128 provides that proper books of ----------------------
account shall not be deemed to be kept if there are not kept such books as are
necessary to give a true and fair view of the state of affairs of the company and ----------------------
if they are not kept on accrual basis according to the double entry system of
accounting. ----------------------
Right of inspection - Every director has the right to inspect the books of account ----------------------
during business hours. Section 207 and 208 extends the right of inspection to
the Registrar and any officer of the Central Government. The inspector has ----------------------
been vested with the powers of a civil court for discovery of documents and ----------------------
summoning of persons. He submits his report to the Central Government. The
right of inspection under the Section is restricted to books of account and other ----------------------
books and papers. The inspectors cannot under the guise of this right, undertake
a roving inquiry into all the papers of the company. Account books for the ----------------------
preceding eight years should be preserved in good condition. ----------------------

Notes
Activity 2
----------------------
---------------------- Find out the accounts and balance sheets from the website of any Indian
company filed during the Annual General Meeting and make a note of it.
----------------------
----------------------
10.7 AUDIT
----------------------
Appointment of auditors - Auditors are appointed by the shareholders
---------------------- every year at the annual general meeting. An individual or a firm can be
appointed as auditor. Such appointee can hold office from the conclusion of
---------------------- the first annual general meeting till the conclusion of its sixth annual general
---------------------- meeting and afterwards till the conclusion of every sixth AGM. The auditor
has to be selected and appointed by the members according to the prescribed
---------------------- procedure. It is necessary that written consent of the auditor is to be taken
before he is appointed as auditor. A certificate has also to be taken from him that
---------------------- his appointment is in accordance with criteria provided under section 141 the
---------------------- prescribed rules. The auditor or firm needs to inform about fact of appointment.
The notice of appointment has to be sent to the registrar within 15 days of the
---------------------- meeting in the prescribed manner.
---------------------- No listed company or a company belonging to such class or classes of

companies as may be prescribed, shall appoint or re-appoint— an individual
---------------------- as auditor for more than five consecutive years; and an audit firm as auditor
for more than two terms of five consecutive years. Further that as on the date
---------------------- of appointment no audit firm having a common partner or partners to the other
---------------------- audit firm, whose tenure has expired in a company immediately preceding the
financial year, shall be appointed as auditor of the same company for a period of
---------------------- five years. Within three years from the date of commencement of this Act every
company require to comply with this section. However, this section will not
---------------------- affect the right of the company to remove an auditor or the right of the auditor
---------------------- to resign from such office of the company.
A casual vacancy can be filled by the board of director within 30 days. If
---------------------- casual vacancy caused by resignation of the auditor then the appointment would
---------------------- have to be approved by the company in general meeting within 3 months of the
recommendation of the Board of director.
----------------------
Auditor of a Government company or any other company owned or
---------------------- controlled, directly or indirectly, by the Central Government, or by any State
Government or Governments, or partly by the Central Government and partly
---------------------- by one or more State Governments, the Comptroller and Auditor-General of
India shall, in respect of a financial year, appoint an auditor duly qualified to
----------------------
be appointed as an auditor of companies under this Act, within a period of one
---------------------- hundred and eighty days from the commencement of the financial year, who
shall hold office till the conclusion of the annual general meeting.
----------------------
204 Corporate Law

A retiring auditor may be re-appointed at an annual general meeting, if he Notes
is not disqualified for re-appointment, or he has not given the company a notice
in writing of his unwillingness to be re-appointed; and a special resolution has ----------------------
not been passed at that meeting appointing some other auditor or providing
expressly that he shall not be re-appointed. ----------------------
Removal – According to the section 140 an auditor can be removed, ----------------------

after giving him a reasonable opportunity of being heard, before the expiry
----------------------
of his term by the company only by special resolution after obtaining the
approval of the Central Government in prescribed manner. The auditor who has ----------------------
resigned has to file within 30 days from the date of resignation a statement in
the prescribed form with the company and Registrar. ----------------------
Qualification - A person cannot be appointed as auditor of a company unless he ----------------------
is a chartered accountant. A firm may be appointed provided all the partners are
qualified for appointment. None of the following can be appointed: ----------------------
●● A body corporate; ----------------------
●● An officer or employee of the company;
----------------------
●● A partner or employee of an officer or employee of the company;
----------------------
●● A person who, his relative or partner (i) is holding any security of or
interest in the company or its subsidiary, or of its holding or associate ----------------------
company or a subsidiary of such holding company; a relative may hold
security or interest in the company of the face value not exceeding 1,000 ----------------------
Rs. Or such sums as may be prescribed; (ii) is indebted to the company,
----------------------
or its subsidiary, or its holding or associate company or a subsidiary of
such holding company, in excess of such amount as may be prescribed; ----------------------
(iii) has given a guarantee or provided any security in connection with the
indebtedness of any thirst person to the company, or its subsidiary, or its ----------------------
holding or associate company or a subsidiary or such holding company,
----------------------
for such sum as may be prescribed.
●● A person or a firm, who, whether directly or indirectly, has business ----------------------
relationship with the company, or its subsidiary, or its holding or associate
company or subsidiary of such holding company or associate company of ----------------------
such nature as may be prescribed. ----------------------
●● person whose relative is a director or is in the employment of the
A
company as a director or key managerial personal. ----------------------
●● A person who is in full time employment elsewhere or a person or a partner ----------------------
of a firm holding employment as its auditor, if such person or partner is
at the date of such appointment or reappointment holding appointment as ----------------------
auditor of more than 20 companies. ----------------------
●● A person who has been convicted by a court of an offence involving fraud
an a period of ten years has no elapsed from the date of such conviction. ----------------------
●● Any person whose subsidiary or associate company or any other form ----------------------
of entity is engaged as on the date of appointment in consulting and
specialized services as provided in section 144. ----------------------

Notes Powers and duties of auditors - Every auditor has the right of access
to the books and accounts and vouchers of the company. He may require
---------------------- from the officers, any information he thinks necessary for the performance
of his duties. The auditor has to inquire whether the loans and advances
---------------------- are properly secured, and their terms are not prejudicial to the company;
---------------------- whether the book-entry transactions are not prejudicial; whether the
company is not an investment or a banking company and whether any
---------------------- securities have been sold by the company at a price less than that at which
they were purchased; whether loans and advances have been shown as
---------------------- deposits; whether personal expenses have been charged to revenue account
---------------------- and whether cash has actually been received for shares shown to have
allotted for cash, and if no cash has been received, whether the position
---------------------- as stated in the books is correct. The auditor has to submit a report to the
members of the company. The report should state whether the accounts
---------------------- are kept in accordance with the provisions of the Act and whether they
---------------------- give a true and fair view of the state of affairs of the company. His duty
is “not to confine himself merely to the task of verifying the arithmetical
---------------------- accuracy of the balance sheet, but to inquire into its substantial accuracy”.
Thus, where an auditor failed to verify the cash balance claimed by the
---------------------- management and the actual cash in hand turned out to be much less than
---------------------- was shown in the books, he was held not liable when relied upon the
manager of a cotton mill, unless there was suspicion of something wrong.
----------------------
●● Secondly, the auditor must exercise reasonable care and skill in the
---------------------- discharge of his duty. The auditor “is a watchdog, but not a blood hound”.
“He is not an insurer.” If the company owns securities the auditor should
---------------------- see that they are in proper custody. Thus, where the stock brokers of a
company certified to its auditors that they were holding the company’s
----------------------
securities when in fact they did not do so and the company suffered loss,
---------------------- the auditors were held guilty of negligence. They should have at once
reported the matter to the shareholders. Similarly, where the auditors
---------------------- failed to ask of the directors as to why a selling agency commission paid
to managing agents was not included in their remuneration and where
----------------------
they confidentially told the directors that the securities were inadequate
---------------------- and told the shareholders only this that the value of the assets depended
upon realization, they were held liable. If they approve of accounts
---------------------- showing false income, they will be liable for the extra income tax that
company had to pay, or for dividends paid on the basis of such accounts.
----------------------
Auditors are under no responsibility to persons other than shareholders
---------------------- unless they undertake any such duty under a contract with them, should
they be misled by any error in the audited accounts.
---------------------- Power of Registrar to call for special information - If, while pursuing
---------------------- the documents filed by a company, the Registrar is of the opinion that any
information or explanation is necessary in respect of a matter to which a
---------------------- document relates, he may require the company to furnish the same. If the
explanation discloses an unsatisfactory state of affairs, the Registrar may
---------------------- take the appropriate action.
206 Corporate Law

Seizure of documents by Registrar - Where the Registrar has reasonable Notes
ground to believe that the books of account of a company may be destroyed, or
falsified or otherwise tampered with, he may, with the authority of a First class ----------------------
Magistrate, enter and search the place where such books are kept and seize
them. The Registrar may make copies of such books but he has to return them ----------------------
within 180 days. ----------------------
Audit of cost accounts - Where a company is required to include in its
----------------------
books the particulars relating to its costs, the Government may order an audit of
the company’s cost accounts. The auditor shall be a cost accountant within the ----------------------
meaning of the Cost and Works Accountants Act, 1959. But if cost accountants
are not available in sufficient numbers, the Government may by notification ----------------------
authorize the appointment of chartered accountants. The appointment is made
----------------------
by the Board of directors with the previous approval of the Central Government.
He will submit his report to the Central Government and forward a copy of the ----------------------
report to the company.
----------------------
10.8 Corporate Social Responsibility ----------------------
Under Sec. 135 the 2013 Act makes an effort to introduce the culture ----------------------
of corporate social responsibility (CSR) in Indian corporates by requiring
companies to formulate a corporate social responsibility policy and at least ----------------------
incur a given minimum expenditure on social activities.
----------------------
Corporate Social Responsibility Committee: - Every company having
net worth of 500 crore or more, or turnover of rupees one 1000 crore or more ----------------------
or a net profit of 500 crore or more during any financial year shall constitute
----------------------
a Corporate Social Responsibility Committee of the Board consisting of three
or more directors, out of which at least one director shall be an independent ----------------------
director. The Board's report under sub-section (3) of section 134 shall disclose
the composition of the Corporate Social Responsibility Committee. ----------------------
The Corporate Social Responsibility Committee shall (a) formulate and ----------------------
recommend to the Board, a Corporate Social Responsibility Policy which shall
indicate the activities to be undertaken by the company as specified in Schedule ----------------------
VII; (b) recommend the amount of expenditure to be incurred on the activities
----------------------
referred to in clause (a); and (c) monitor the Corporate Social Responsibility
Policy of the company from time to time. ----------------------
The Board of every company -- (a) after taking into account the
----------------------
recommendations made by the Corporate Social Responsibility Committee,
approve the Corporate Social Responsibility Policy for the company and disclose ----------------------
contents of such Policy in its report and also place it on the company's website,
if any, in such manner as may be prescribed; and (b) ensure that the activities ----------------------
as are included in Corporate Social Responsibility Policy of the company are
----------------------
undertaken by the company.
The Board of every company shall ensure that the company spends, in ----------------------
every financial year, at least two percent of the average net profits of the company ----------------------

Notes made during the three immediately preceding financial years, in pursuance of
its Corporate Social Responsibility Policy. The company shall give preference
---------------------- to the local area and areas around it where it operates, for spending the amount
earmarked for Corporate Social Responsibility activities. if the company fails
---------------------- to spend such amount, the Board shall, in its report made under clause (o) of
---------------------- sub-section (3) of section 134, specify the reasons for not spending the amount.
For the purposes of this section “average net profit” shall be calculated in
---------------------- accordance with the provisions of section 198.
----------------------
Activity 3
----------------------
---------------------- Find out the names of the auditors from the website of any Indian company
appointed during the Annual General Meeting and make a note of it.
----------------------
---------------------- Summary
---------------------- ●● Companies Acts contain a large number of provisions for the protection
---------------------- of the interest of investors in incorporated companies. The basic principle
relating to the administration of the affairs of a company is that the court
---------------------- does not, at the instance of a shareholder, interfere in the administration of
the company by its directors. This is known as the rule in Foss V Harbottle.
----------------------
●● The Companies Act provides for judicial as well as administrative
---------------------- remedies for relief against oppression and mismanagement. The first
remedy the oppressed members have is to move the National Company
---------------------- law Tribunal.
---------------------- ●● The National Company law Tribunal is empowered to make any order
for the regulation of the conduct of the company’s affairs and upon such
---------------------- terms and conditions as it thinks fit.
---------------------- ●● The investigations can be conducted for investigating the affairs of a
company. The Central Government and the National Company law
---------------------- Tribunal can appoint inspectors in case on member’s application, on a
---------------------- report by Registrar or by special resolution. The inspector is conferred
with many powers in respect of inspection.
----------------------
Keywords
----------------------
●● National Company law Tribunal: An adjudicating authority constituted
---------------------- under Companies Act for resolution of disputes under the Companies Act.
---------------------- ●● mens rea: malafide intention behind the commission of a crime or a
wrong.
----------------------
----------------------
----------------------
208 Corporate Law

Self-Assessment Questions Notes
1. Explain the rule in Foss v. Harbottle. ----------------------

2. What is meaning of oppression and who can apply for it? State procedure ----------------------
of application.
----------------------
3. Explain the powers of National Company law Tribunal in context of
Minority protection. ----------------------
4. What is “investigation”? Enumerate the provisions in context of powers ----------------------
of investigation.
----------------------
5. What are the powers of the inspector in context of investigation?
6. Explain the Constitution and power of National Company law Tribunal. ----------------------
7. Explain meaning of prevention of mismanagement. ----------------------
8. What are the powers of National Company law Tribunal in terms of ----------------------
regulation of the conduct of the company’s affairs?
9. Explain the extent of the Powers of Central Government to appoint ----------------------
directors. ----------------------

1. A member can complain of oppression only in his capacity as a member ----------------------
and not in his capacity as director or creditor.
----------------------
2. The inspectors may examine any such person on oath or any other person
with the order of the Central Government. ----------------------
3. The directors exercise their powers through meetings of BOD, AGM and
----------------------
shareholders exercise their power through general meeting.
1. Attaching Board’s report to every balance sheet is mandatory. ----------------------
2. Board’s report should be signed by the Chairman of the Board, if so
----------------------
authorised and if not so authorised, then by not less than two directors of
the company, one of whom shall be the MD, where there is one. ----------------------
3. The Central Government has been empowered to conduct investigation
----------------------
into the affairs of the company in circumstances as specified under the
Company Act. ----------------------
4. Only an individual or individuals may be appointed as inspector(s) to
----------------------
conduct the investigation into the affairs of the company and to report
thereon in the prescribed manner. ----------------------

Notes
Suggested Reading
----------------------
---------------------- & Sons.
----------------------
Co.
---------------------- Reporter.
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
210 Corporate Law

General Features of Partnership
UNIT
11
Structure:
11.1 Introduction
11.2 Nature of Partnership and its Essentials
11.3 Difference between Partnership and Co-ownership, Club/Society,
Company and Joint Hindu Family
11.4 Kinds of Partnership
11.5 Formation of Partnership
Summary
Keywords
Suggested Reading
General Features of Partnership 211

Notes
Objectives
----------------------
• Summarise the concept and nature of partnership
----------------------
• Differentiate partnership agreement from other agreements
----------------------
• Classify the different types of partnerships
----------------------
---------------------- 11.1 INTRODUCTION

---------------------- The law related to Partnership was originally contained in Chapter XI of
---------------------- the Indian Contract Act (1872). The Indian Partnership Act of 1932 repealed
and superseded this chapter. The new enactment was mainly based on the
---------------------- corresponding English Act viz., the Partnership Act of 1890. The chapter
on “registration of firms” and on “Incoming and Outgoing Partners” are the
---------------------- special features of the Indian Act. The present unit would explain the meaning
---------------------- and nature of partnership, different kinds of partnership and the procedure of
formation of partnership.
----------------------
11.2 NATURE OF PARTNERSHIP AND ITS ESSENTIALS
----------------------
---------------------- Partnership is the relation between persons who have agreed to share the
profits of a business carried on by all or any of them acting for all. Persons who
---------------------- have entered into partnership, with one another are called individually “partners”
and collectively a firm, and the name under which their business is carried on
---------------------- is called the firm name. The definition has widened the one previously in the
---------------------- Indian Contract Act according to which, “partnership” is the relation which
subsists between persons who have agreed to combine their property, labour
---------------------- or skill in some business, and to share the profits thereof between them. The
limitations effected by the words “property, labour and skill,” has been removed.
---------------------- Now there need only be an agreement to share the profits of a business.
---------------------- Essentials of Partnership
---------------------- According to the statement of objects and reasons, “The definition of

partnership contains three elements:
----------------------
●● There must be an agreement entered into by all the persons concerned;
---------------------- ●● The agreement must be to share the profits of a business; and
---------------------- ●● The business must be carried on by all or any of the persons concerned
acting for all.”
---------------------- The essentials of partnership may further be analysed as under -
---------------------- Relation between persons - The term “partnership” is defined as the
abstract legal relationship subsisting between number of person. Actually it
---------------------- cannot be used as a collective name for all partners, as is sometimes wrongly
212 Corporate Law

assumed. Essentially there must be two or more persons to constitute a Notes
partnership. Though the Partnership Act does not state the maximum number of
persons who could form a partnership, it is restricted to twenty in all cases by ----------------------
the Companies Act and to ten in the case of banking business.
----------------------
Agreement - The relation of partnership arises from contract and not from
status. This essential feature of partnership distinguishes it from co-ownership. ----------------------
Where two brothers jointly inherit a house and one of them is entrusted with
----------------------
the letting of the house and to effect repairs to it, and from time to time the
brother look into the accounts and share the rents after payments of the taxes ----------------------
and the cost of repairs, it cannot be said that the two brothers are partners. The
relationship is not one arising from a contract. The brothers are co-owners and ----------------------
not partners.
----------------------
Pooling resources - the repealed section 239 of the Contract Act was
based on Kent’s definition which was as follows: ----------------------
“Partnership is a contract of two or more competent persons to place their ----------------------
money, effects, labour and skill, or some or some or all of them, in lawful
commerce or business, and to share the profit and bear the loss in certain ----------------------
proportions.” It may be common in every partnership that the partners would
----------------------
agree to pool their property, labour or skill. But it has been held not to be an
essential ingredient. A person would be a partner if he undertakes the liability ----------------------
of a partner even though he has not contributed anything. Hence, s.4 of the
Partnership Act has simplified the definition on the lines of the English Act ----------------------
whereby a partnership is, “The relation which subsists between persons carrying
----------------------
on a business in common with a view of profit.” Contribution by an individual
member of a joint Hindu family of his “skill and labour” is sufficient to enter ----------------------
into a partnership with the Karta.
----------------------
Business - A partnership is formed with the motive of acquisition of gain
and this shall be by carrying on a business. “Business” is defined as including ----------------------
every trade, occupation or profession. “Business” would include a single
commercial adventure. ----------------------
Sharing of profits - As pointed above, the agreement entered into by the ----------------------
partners must be to share the profits of a business. The profits contemplated
by the Act are “net profits” i.e., the returns obtained after deducting the cost ----------------------
obtaining it. ----------------------
A branch of agency - It is often said that “the law of partnership is a
branch of the law of agency.” The business of the partnership can be carried on ----------------------
by all the partners together or any of them acting for all of them. Each partner ----------------------
is bound by the acts of the other partners in the business of partnership. This
is based on the principle of agency. Agency is the foundation of a partner’s ----------------------
liability. Every partner is in contemplation of the law the general and accredited
agent of the partnership. Each partner is therefore, both an agent and principal ----------------------
for himself and others. He is bound by the acts of other partners; at the same ----------------------
time he is capable of entering into transactions binding the other partners in the
business of the partnership. ----------------------

Notes
----------------------

1. A Hindu Joint Family can be regarded as a partnership.
----------------------
2. In a partnership, a new member can be added only with the consent
---------------------- and approval of all the partners.
3. A partner cannot transfer his share of the partnership to a stranger
---------------------- without the consent of his partners.
----------------------
---------------------- Activity 1
----------------------
Visit any partnership firm. Go through the partnership firm’s agreement and
---------------------- evaluate the essentials of partnership clauses.
----------------------
11.3 DIFFERENCE BETWEEN PARTNERSHIP AND CO-
----------------------
OWNERSHIP, CLUB/SOCIETY, COMPANY AND JOINT
---------------------- HINDU FAMILY
---------------------- Partnership can be distinguished from co-ownership as follows:
---------------------- 1. Partnership is necessarily the result of agreement; co-ownership is not.
If A by his will left his house to X and Y jointly, then the latter two are
----------------------
co-owners of the house, but not partners although the rent will be shared
---------------------- equally between them.
2. Partnership involves sharing of profits and losses. But co-ownership may
----------------------
not always involve this element.
---------------------- 3. A partner cannot transfer his share of the partnership to a stranger without
the consent of his partners. A co-owner can always transfer his share
----------------------
without the consent of the other.
---------------------- 4. Every partner is an agent of the other partners and is capable of binding
---------------------- the other partners. A co-owner has no implied authority to bind the other
co-owners.
---------------------- 5. A partner, being an agent of the other partners, has a lien on the partnership
---------------------- properties. A co-owner has no such lien.
6. A partner is not entitled to get a division of the partnership properties in
----------------------
specie. His right is only to claim his legitimate share in the profits of the
---------------------- business. But a co-owner has a right of division in specie.
7. A partnership necessarily involves the working for gain whereas a co-
----------------------
ownership need not necessarily be for gain.
----------------------
214 Corporate Law

Partnership and a Club or Society - Social service associations, sports Notes
clubs, debating societies etc., are not bound by the debts incurred by each other.
Each member is not liable to contribute to the losses of the club beyond the ----------------------
amount of his subscription.
----------------------
Partnership and a Company
----------------------
1. A partnership has no separate legal entity distinct from the several
partners who collectively form the firm. A company or a corporation is an ----------------------
artificial or a fictitious person, a legal entity capable of acquiring rights
and incurring obligations in its own name. ----------------------
2. In a partnership, each partner is jointly and severally liable for the debts ----------------------
and obligations of the firm. In the case of a limited company each member
or share holder will only be liable up to the extent of the value of shares ----------------------
taken by him.
----------------------
3. In a joint stock company no shareholder is considered to be an agent of
the other members. The mutual confidence which is at the root of the ----------------------
relationship of partnership is of less importance to a company. ----------------------
4. A partner cannot assign his share to a stranger without the consent of
the other partners. As a general rule a shareholder can make a valid ----------------------
assignment of his shares to any one. ----------------------
5. Death, retirement or insolvency of a partner dissolves the firm. But it
would not affect the continuance of a company. ----------------------
6. Registration of a partnership is not compulsory but the very existence of a ----------------------

company depends upon incorporation and registration as required by the
----------------------
Companies Act.
Partnership and Joint Family Business - When a Hindu joint family ----------------------
carries on its traditional business for the benefit of all members of the joint
----------------------
family drawing its capital from the joint family fund it is called a Hindu joint
family firm. As in the case of partnership business, here also the business is ----------------------
carried on by an association of a number of persons called co-parceners. For
example one or more members of a Hindu undivided with a stranger and the ----------------------
stranger can become partners. The Contract Act imposes no disability upon
----------------------
them in the matter of entering into a contract inter se or with a stranger.
If the relationship as is referred to in s.4 of the Partnership Act Exists, ----------------------
partnership will not be invalid merely because two or more of the persons ----------------------
agreed to share the profits of the business, are members of a Hindu undivided
family. ----------------------
Following are the points of distinction between a Partnership and a Hindu ----------------------
Joint Family:
1. A partnership is the result of an agreement between the partners. A joint ----------------------
family business results from status, i.e., from the position given by the ----------------------
personal law of Hindus, to members of a joint family carrying on its
family business. ----------------------

Notes 2. A new partner can be admitted into the partnership only with the consent
of other partners. The membership in the joint family is automatically
---------------------- increased by new births in the family.
---------------------- 3. A partnership is dissolved by the death of a partner while the death of a
co-parcener of Hindu joint family does not dissolve a Hindu joint family
---------------------- business.
---------------------- 4. The management of a joint family business is generally by the karta,
the senior male member of the family. In a partnership, all partners are
---------------------- equally entitled to take part in the partnership business. The manager is
the only person entitled to pledge the credit of the family.
----------------------
5. A co-parcener is not entitled, on severing his connection with the Hindu
---------------------- joint family business, to ask for accounts of past profits and losses. It is
otherwise in the case of partnership.
----------------------
6. A partner is jointly and severally liable for the partnership debts. The
---------------------- co-parceners are liable only to the extent of their interest in the family
---------------------- property unless they are also parties to the transaction creating the
obligation. However, in the case of the Karta or manager, he is liable
---------------------- not only to the extent of his share in the joint family property but also
personally liable, he himself being a party to the contracts entered into by
---------------------- him for the business.
---------------------- 7. On insolvency, a partner ceases to be a member of the firm; but the
insolvency of a co-parcener does not prevent him from continuing to be a
---------------------- member of a Hindu joint family.
---------------------- 8. Even a minor becomes entitled to the benefits of a trading family solely
by reason of his birth in the family. On the other hand, a minor has to e
---------------------- admitted by the other partners to the benefits of the partnership.
---------------------- 9. A partnership continues to be alive until it is actually dissolved by the
act of parties or by a decree of court. But the disruption of joint family
----------------------
business takes place by the mere filing of a suit for partition.
---------------------- Partnership Not a Creation of Status - Section 5 declares that, “the
relation of partnership arises from contract and not from status.” The provision
----------------------
emphasizes one of the element in the definition, namely, that partnership is the
---------------------- result of a voluntary agreement. There is no similar provision in the English Act.
In India there are a vast number of non-contractual quasi-partnership relations.
---------------------- The Hindu trading family is the outstanding example (see the differences
pointed out above). Hence it is deemed expedient to include this provision also
----------------------
to prevent all possible doubts.
---------------------- The section itself points out in particular, two instances. Accordingly:
---------------------- ●● The members of Hindu undivided family carrying on a family business
as such, or
----------------------
●● A Burmese Buddhist husband and wife carrying on business as such are
---------------------- not partners in such business.
216 Corporate Law

When the manager of a joint Hindu family enters into partnership with a Notes
stranger, acting for the joint family and employing the family funds, he alone
must be taken to be the partner. In the words of Mayne, “Where a managing ----------------------
member of a joint family enters into a partnership with a stranger the other
members of a joint family do not ispo facto become partners in the business ----------------------
so as to clothe them with all the rights and obligations of a partner. In such of ----------------------
its members as in fact enter into a contractual relation with the stranger: the
partnership will be governed by the Act.” ----------------------
Mode of Determining Existence of Partnership - All writers who have ----------------------
attempted to define partnership at common law are unanimous that a necessary
element of partnership is an agreement among the partners to share profits. ----------------------
This ingredient of the conception was once so dominant that it was a rule
----------------------
that all persons sharing profits in a business were liable as partners to outside
creditors, whatever might be the terms as between them and the persons actually ----------------------
conducting the business.
----------------------
The principle was followed in England till 1860 when it was changed by the
decision of the House of Lords in the leading case of Cox v. Hickman .It was held ----------------------
that “sharing of profits of an undertaking is not of itself a partnership though the
existence of partnership may often be inferred from it.” In that case some traders ----------------------
being in difficulties assigned their properties to trustees empowering them to
----------------------
carry on the said business. One Cox, who was a creditor trustee, did not take part
in that business, but he was sought to be made liable on the ground that although ----------------------
the right to participate in the profits is in general a sufficiently accurate test for
deciding whether a person is in law a partner or not, it is not conclusive. It was ----------------------
said that the real test of partnership liability was whether “the trade was carried
----------------------
on, on his behalf, i.e., whether he stood in the relation of principal towards the
persons acting ostensibly as the traders, by whom the liability has been incurred ----------------------
and under whose management the profits have been made.”
----------------------
The above-mentioned case was followed by another famous case viz.,
Mullwo, March & Co. v. Court of Wards. There, the powers of control and ----------------------
retaining profits, or a percentage of them, towards payment of his debt were
given to a single creditor. It was held that creditors who supervise the conduct of ----------------------
their debtor’s trade with an agreement to pay themselves off out of the profits do
----------------------
not thereby become his partners. The Privy Council laid down that the question
whether the relation of partnership does, or does not, exist “must depend on the ----------------------
real intention and contract of the parties.”
----------------------
Section 6 of the Indian Partnership Act, embodies the rule, now contained
in s.2 of the English Act of 1890. According to this section, “in determining ----------------------
whether a group of persons is or is not a firm, or whether a person is or is not
a partner in firm, regard shall be had to the real relation between the parties, as ----------------------
shown by all relevant facts taken together.” ----------------------
The sharing of profits or of gross returns arising from property by persons
holding a joint or common interest in that property does not itself make such ----------------------
persons partners. ----------------------

Notes The receipt by a person of a share of the profits of a business, or of a
payment contingent upon the earning of profits or varying with the profits
---------------------- earned by a business, does not of itself make him a partner with the persons
carrying on the business.
----------------------
Some illustrative instances are given in the same section. Accordingly the
---------------------- receipt of such share or payment does not of itself make the receiver a partner
with the persons carrying on the business, particularly in the following cases:
----------------------
●● By a lender of money to persons engaged or about to engage in any
---------------------- business;
---------------------- ●● By a servant or agent as remuneration;
●● By the widow or child of a deceased partner, as annuity; or
----------------------
●● By a previous owner or part owner of the business, as consideration for
---------------------- the sale of the goodwill or share thereof.
---------------------- A mere statement that the parties are to be partners will not necessarily
constitute them partners in law. On the other hand, an agreement for a so-called
---------------------- loan which in effect gives the lender the position and powers of a partner may
make him liable as a partner to creditors of the business.
----------------------
Firm and Firm Name - The persons who have entered into partnership
---------------------- with one another are collectively called “a firm”. The name under which
their business is carried on is called the “firm name”. The mercantile notion
---------------------- of a firm is that it is a body distinct from the members composing it, having
---------------------- rights and obligations distinct from those of the members. In other words, a
firm is considered by laymen as a kind of corporation. But this position is not
---------------------- recognized by law. In the eye of law, the firm is only a collective name for the
persons carrying on the partnership business. However in practice under the
---------------------- law of procedure, actions may be brought by and against partners under the
---------------------- name of the firm and even between firms and their members Firm is not a legal
entity and therefore, there cannot be a partnership of firms. If two firms join
---------------------- together the legal effect is that the individual partners in the two constituent
firms become members of the new partnership.
----------------------
Firm name is only a short way of expressing the names of all the partners.
---------------------- When Smith and Baker carry on business in partnership as “Smith and Co.,”
the title only represents the names of the partners. The word “limited” shall
----------------------
not be added to the firm name. It shall not use words expressing or implying
---------------------- the sanction, approval or patronage of Government except when the State
Government signifies its consent to the use of such words. The present trend is
---------------------- to recognize a “firm” as a unit for tax purposes.
----------------------
11.4 KINDS OF PARTNERSHIP
----------------------
Partnership at Will - When the agreement creating a partnership makes
---------------------- no provision regarding the duration of the partnership for its determination, it
is called a “partnership at will” (s.7). It suggests the method of dissolution. It
----------------------
218 Corporate Law

means that the partnership can be dissolved when one of the partners express his Notes
willingness or desire to do so. Such a partnership is terminated by giving notice
in writing to all the partners by the one desiring to dissolve the partnership. The ----------------------
dissolution will be effective from the time specified in such notice (s.43). If no
time is specified the dissolution will take effect from the time when the notice ----------------------
is communicated to all the partners. In the case of other kinds of partnership ----------------------
dissolution can be effected only under certain conditions and by following the
prescribed procedure. ----------------------
for example, the terms of a partnership formed for the purpose of taking ----------------------
up the managing agency of certain mills clearly suggested that the duration of
the partnership would be the same as the duration of the managing agency. But ----------------------
it was uncertain at the time of the partnership. Such a partnership for a period of
----------------------
duration is not a partnership at will. There are two exceptions to a partnership
at will as contemplated by the section: ----------------------
●● Where there is a provision express or implied in the contract for the
----------------------
duration of partnership, and
●● Where there is provision which may also be express or implied, for the ----------------------
determination of the partnership.
----------------------
Partnership for a Fixed Term - As distinguished from partnership at
will, where the partnership agreement specifies a particular period for which ----------------------
the partnership shall be in existence, it is called a partnership for a fixed term. It
----------------------
cannot be dissolved at the will of one or more of the partners.
Particular Partnership - Where persons agree to carry jointly a particular ----------------------
adventure or undertaking the relation so created may be called a Particular
----------------------
Partnership. Therefore, in cases of joint adventures or undertakings the position
of the parties is recognized by law as that of partners. Section 8 provides: “A ----------------------
person may become a partner with another person in particular adventure or
undertakings.” However, all the requisites of a partnership must be present ----------------------
before a partnership between two persons limited to a single adventure can
----------------------
be held to be a partnership. Where two or more persons agree together for the
purchase of a particular thing in an auction sale with a view to make a re-sale ----------------------
jointly for getting profit, the position of the parties will be deemed to be that of
partners. ----------------------
Limited Partnership - In England, under the Limited Partnership Act of ----------------------
1907 limited partnership may be formed. The position of limited partnership is
between a partnership and a limited company. It must be registered. A limited ----------------------
partner is one who contributes a specified amount of capital or property and
----------------------
who is not liable for the firm’s debts beyond that amount. A limited partnership
shall not consist, in the case of partnership carrying on the business of banking ----------------------
of more than ten persons and, in the case of any other partnership, of more than
twenty persons. It must consist of one or more parsons called general partners ----------------------
who shall be liable for all the debts and obligations of the firm and at least
----------------------
one may be limited partner. The limited partner has no right to take part in
management but he may give advice. He has no power to bind the firm. He ----------------------

Notes cannot dissolve it by notice. His death, insanity or insolvency will not dissolve
the firm. In India there is no corresponding legislation.
----------------------
A Sub-partnership - A sub-partnership is one implied by law. It is
---------------------- implied when one of the original partners transfers his interest in the partnership
property by sale, mortgage or otherwise. In that case, the assignee is entitled
---------------------- only to the assigned rights and not to the general rights of a partner.
----------------------
----------------------

---------------------- 1. Which of the following is not a kind of partnership?
i. Partnership at will
----------------------
ii. Partnership for fixed time period
---------------------- iii. Partnership at law
---------------------- iv. Limited liability partnership
----------------------
11.5 FORMATION OF PARTNERSHIP
----------------------
A partnership being essentially based on a contract, all the elements
----------------------
required for the formation of a contract must exist. Section 3 specifically
---------------------- mentions that the unrepealed provisions of the Contract Act shall be applicable
to partnership firms.
----------------------
Agreement - There must be an agreement between the persons entering
---------------------- into the partnership. |the terms of the offer and acceptance may generally be
written down. The instrument containing the agreement is called the “deed of
---------------------- partnership”. But law does not require it to be in writing. It might very well be
---------------------- oral. A deed of partnership need not be registered according to the provisions
of the Registration Act unless the deed creates, transfers or affects an interest in
---------------------- immovable property.
---------------------- Effect of fraud or misrepresentation: A partnership agreement is

based on mutual confidence. It can be rescinded on the ground of fraud or
---------------------- misrepresentation by the partner misled by such fraud or misrepresentation. In
addition to his other rights such a partner rescinding the partnership agreement
---------------------- is entitled to the following rights:
---------------------- ●● Right of lien on the surplus assets of the firm for purchase price paid by
him for his share and for his capital contribution to the firm;
----------------------
●● Right to rank as creditor of the firm in respect of any debts of the firm
---------------------- paid by him;
---------------------- ●● Right to be indemnified by the partners guilty of the fraud or misrepresentation
against the debts of the firm.
----------------------
220 Corporate Law

Consideration - Law of partnership can be deemed to be a branch of the Notes
agency. Every partner is an agent, as well as a principal with respect to the other
partners. The promise of each of them to be a partner with the others involves ----------------------
detriment which can be treated as sufficient consideration for the agreement.
----------------------
Premium: In such cases, a person may be admitted to an existing
partnership with an already established business, in consideration of the ----------------------
payment of an amount call premium for the benefit of the existing partners. The
----------------------
consideration for such payment is also for the consideration of the partnership
for the term fixed by the original agreement. ----------------------
Return of premium: Where a partner has paid a premium on entering
----------------------
into partnership for a fixed term and the firm is dissolved before the expiry
of the term, he is entitled to get back the premium. It may be the whole or a ----------------------
reasonable part of it. In fixing the latter, the terms of the contract on which he
was admitted and the length of time during which he was a partner must be ----------------------
considered.
----------------------
Exceptions: The rule regarding return of premium does not apply in the
following: ----------------------
●● If dissolution is caused by the misconduct of the partner so admitted; ----------------------
●● If the dissolution is in pursuance of an agreement containing no provision
----------------------
for the return of premium or any part of it.
Capacity of Parties - The general principles regarding competency of ----------------------
parties, as contained in ss. 11 and 12 of the Contract Act, are applicable to
----------------------
partners as well.
Position of a Minor - A minor is incompetent to enter into a valid ----------------------
enforceable contact. Therefore he is not competent to create the relationship ----------------------
of partnership, for the very definition of partnership postulates the existence of
a valid agreement. By s. 11 of the Contract Act and the rule established by the ----------------------
Privy Council in the case of Mohori Bibee v. Dharmdas Ghose, it is now well
settled that a minor cannot be bound by a contract. A minor, therefore, cannot ----------------------
be a partner in a firm. But in the case of agency a minor can be an agent, though ----------------------
not a principal. In partnership the principles of agency are made applicable.
Hence, though a minor cannot be a partner it is a recognized rule that he may be ----------------------
“admitted to the benefits of a partnership”, already in existence.
----------------------
When a minor is admitted to the benefits of a partnership, he will be
entitled to get a certain share in the profits of the business. The admission of ----------------------
the minor for the benefits of the partnership shall be done only with the consent
of all the partners. When a minor is so admitted his rights and liabilities are ----------------------
governed by s. 30 of the Partnership Act. According to English Law, a minor can ----------------------
enter into a partnership and the contract is binding on him unless he repudiates
it before or within a reasonable time after his attaining majority. The rights and ----------------------
liabilities of a minor admitted to the benefits of a partnership are as follows:
----------------------
1. He has a right to get a share in the property and profits of the firm as agreed
between the parties. ----------------------

Notes 2. He is entitled to have access to, inspect and get copies of the accounts of
the firm. But he is not entitled to have access to all the “books” kept by
---------------------- the firm as they might contain secret information restricted to the partners
alone.
----------------------
3. His agreed share in the property and profits of the firm is liable for the act
---------------------- of the firm, but minor is not personally liable for any such act. So also his
personal property will not be liable for debts of the partnership.
----------------------
4. When a minor continues to get the benefits of the partnership he shall not
---------------------- file a suit against the other partners for an account or for the payment of
his share.
----------------------
5. If he wants to sever his connection from the firm he can file a suit for
---------------------- accounts and for getting his due share.
---------------------- 6. The rule that a partner is liable to the debts of the partnership jointly and
severally is not applicable to a minor.
----------------------
7. Option to repudiate: The minor is entitled to exercise an option, on
---------------------- becoming a major, to continue his membership or to repudiate it. A
period, during which the option is to be exercised, is also suggested by
---------------------- the provision. A minor should elect either to become or not to become
---------------------- a member of the partnership within six months of attaining majority or
of his knowing that he has been admitted to the benefits of a partnership
---------------------- whichever date is later. For this he should give public notice and such
notice shall determine his position as regards the firm. Public notice under
---------------------- the Act means a notice to the Registrar in the case of a registered firm and
---------------------- a notice in the official gazette and in at least one local newspaper. If he
fails to give such notice within the prescribed period, he shall be deemed
---------------------- to have elected to become a member.
---------------------- 8. On becoming a member: When the minor admitted to the benefits elects
to become a member his rights and liabilities are the following:
----------------------
(a) As between himself and the partners the rights and liabilities
---------------------- continue to be the same as they were before, till the date on which
he becomes a partner.
----------------------
(b) With regard to third persons, he will also be liable personally for all
---------------------- acts of the firm from the time when he was admitted to the benefits
of the partnership. The exercise of the election to become a partner
---------------------- relates back and he would be deemed to have been a member of the
firm from the time he was admitted. He is, therefore, liable to third
----------------------
persons not only from the time when he gives notice or from the
---------------------- date of his attaining majority but from the time he was admitted to
the benefits.
----------------------
For example- Two partners were carrying on trade. They had
---------------------- incurred large debts to the plaintiff. This partnership was later
dissolved. The defendant was one admitted to the benefits of the
---------------------- partnership and continued to be a minor at the time of dissolution.
222 Corporate Law

Even after attaining majority he did not exercise the option not to Notes
become a partner. The plaintiff sought to declare the three parties
as insolvent. It was held that the defendant could not be declared ----------------------
insolvent together with the two other partners as he was still a minor
at the time of dissolution of the firm. On attaining majority a minor ----------------------
admitted to the benefits of a partnership could either opt to become ----------------------
a member or opt not to become a member of the partnership. In
case he is not exercising this option, he would become a partner of ----------------------
the firm after the expiry of a period of six months. Then he would
become personally liable to third parties for all acts of the firm done ----------------------
since he was admitted to the benefits of partnership. In that case he ----------------------
could be adjudicated insolvent for the acts of insolvency committed
by the partners. But in the instant case the partnership was dissolved ----------------------
while the defendant was a minor and therefore when he became a
major there was no partnership in existence. ----------------------
(c) His share in the profits and property of the firm shall be the same as ----------------------
he was entitled to, as a minor.
----------------------
9. Not becoming a partner:
----------------------
(a) The rights and liabilities as between the partners shall continue the
same as before till the notice is given. ----------------------
(b) His share in the property or profits shall not be liable for the acts of ----------------------
the firm after the date of notice.
(c) He will be entitled to sue the partners for accounts and for the ----------------------
payment of the share due to him. ----------------------
Partnership Property
----------------------
The assets of a partnership will be formed by the following properties
taken together: ----------------------
●● Property originally brought into the firm by the partners and the interest ----------------------
on such assets.
----------------------
●● Property acquired by the firm subsequent to the formation.
●● Property acquired for the purpose of the business by one or more of the ----------------------
individual partners in the course of the business of partnership. Unless the
----------------------
contrary intention appears, property and rights and interests in property
acquired with money belonging to the firm are deemed to have been ----------------------
acquired for the firm.
●● Goodwill of the firm. ----------------------
Subject to contract between the partners, the property of the firm shall be ----------------------
held and used by the partners exclusively for the purpose of the business.
----------------------
The “goodwill” of a business depends upon a variety of circumstances
or a combination of them. The location, the service, standing of the business, ----------------------
the honesty of those who run it and the lack of competition and many other
----------------------
factors go individually or together to make up the goodwill, though location

Notes always plays a considerable part. At the same time, locality is not everything.
“Goodwill” represents business reputation.
----------------------
“The goodwill of a trade or business comprises every advantage which
---------------------- has been acquired by carrying on the business, whether connected with the
premises in which the business has been carried on, or with the name of the firm
---------------------- by whom it has been conducted”
---------------------- Goodwill is a commercial term rather than a legal one. It is difficult to
define goodwill. It can be described as the advantage or benefit which arises
---------------------- from a business which has been carried on for some time in a particular house,
or by a particular person or firm, or from the use of a particular trade mark or
----------------------
trade name. Its value consists in the probability of a particular set of customers
---------------------- continuing to be customers notwithstanding change in firm or place of business.
It is the result of the general public patronage and encouragement which a
---------------------- business received from constant and habitual customers. It is “the whole
advantage, whatever it may be, of the reputation and connection of the firm”.
----------------------
One important point regarding goodwill is that it is recognized by law as part of
---------------------- the assets of a partnership. When the partnership property is sold the goodwill
can also be separately valued.
----------------------
Partnership by Holding Out - When a person represents himself or
---------------------- permits himself to be represented as a partner of a firm to anyone and on the
basis of that representation that other person gives credit to the firm, the first
---------------------- person will be deemed to be liable as a partner. Such representation may be
made orally or in writing or by conduct. It is not necessary that the person
----------------------
making the representation should be aware that the other was entering into the
---------------------- transaction only on the faith of that representation. The principle underlying
this is the rule of estoppels. It is a rule of evidence according to which a person,
---------------------- who by his representation has induced another person to alter his position, will
be stopped from denying the truth of his original representation. The rule of
----------------------
estoppel is contained in s. 115 of the Evidence Act, 1872.
---------------------- When a partner retires from a partnership he should give notice to that
---------------------- effect to the person who has dealings with that firm. Otherwise he will be liable
as if he is continuing as a partner. So also a retired partner, who allows his name
---------------------- to remain part of the firm name, is a partner by holding out.
---------------------- Exceptions:
●● The above rule is not applicable in case of death of one partner. When one
---------------------- of the partners is dead, the firm is dissolved and estoppel is not applicable.
---------------------- It may happen that after a partner’s death the business is continued in
the old firm name, or the deceased partner’s name may form part of it.
---------------------- Such continued use shall not of itself make the legal representative of the
deceased partner of his estate liable for any act of the firm done after his
---------------------- death.
---------------------- ●● The doctrine of “holding out” is not applicable to liability for civil wrongs.
For example - Scarf was one of two partners in the firm Rogers and Co.
---------------------- When he retired, the partnership continued business with a new partner
224 Corporate Law

under the old firm name. Jardine sold goods to the firm without notice of Notes
Scarf’s retirement. On failure of payment of price he sued Scarf and the
other members of the firm. It was held that the creditor could not sue the ----------------------
present partners on the basis of estoppel. The liability based on estoppels
is quite different from that of the actual partners, and the ex-partner is not ----------------------
a joint debtor with them. The creditor might sue at his option the members ----------------------
of the old firm or the partners of the new firm. He cannot sue them all, the
basis of each liability being different. ----------------------
Illegal Partnership - A partnership is deemed illegal in the following cases: ----------------------
●● When it consists of more than twenty members in cases of ordinary
business, or ten in the case of one carrying on banking business. ----------------------
●● If it is formed for an illegal purpose. In general, a partnership may be ----------------------

illegal, if it is formed for a purpose forbidden by the current notions of
morality, religion or public policy. ----------------------
Regarding the effect of an illegal partnership, Lindley points out “The ----------------------
illegality of a partnership affords no reason why it should not be sued. It cannot
indeed be effectually sued by any person who being aware of all the facts, ----------------------
seeks to enforce a demand arising out of a transaction tainted with the illegality ----------------------
which affects the firm. But the illegality of the firm does not per se afforded
any answer to a demand against it, arising out of a transaction to which it is ----------------------
a part, and which transaction is legal in itself. Unless the person dealing with
the firm is particepis criminis there can be no turpis causa to bring him within ----------------------
the operation of the rule, ex turpi causa non oritur actio; and he, not being ----------------------
implicated in any illegal act himself, cannot be prejudiced by the fact that the
persons with whom he has been dealing are illegally associated in partnership. ----------------------
So, if a partnership or company has been established by fraud, and ----------------------
persons have been induced to join it by false and fraudulent representations,
still the fraud so perpetuated affords no answer to creditor of the firm unless that ----------------------
creditor has himself been a party to the fraud.”
----------------------
Activity 2 ----------------------
----------------------
Assume you have to start a business and you want to enter into a
partnership with few of your friends with whom you want conduct a ----------------------
business. With this assumption, make the checklist of following: ----------------------
1. Decide the type of business you would want to do.
----------------------
2. Decide the most suitable kind of partnership that you can enter into for
the given business. ----------------------
3. Make a checklist of procedural requirements (dos and don’ts) that you ----------------------
will need for incorporating the partnership business.
----------------------
----------------------

Notes Summary
---------------------- ●● Partnership is the relation between persons who have agreed to share the
profits of a business carried on by all or any of them acting for all, the
----------------------
Essentials of Partnership are –
----------------------  There must be an agreement entered into by all the persons
concerned.
----------------------
 The agreement must be to share the profits of a business.
----------------------
 The business must be carried on by all or any of the persons
---------------------- concerned acting for all.
---------------------- ●● Further there is a Difference between Partnership and co-ownership, Club/

Society, Company and Joint Hindu Family Partnership and co-ownership
---------------------- ●● In following ways - In co-ownership the partners are not bound by the
---------------------- debts incurred by each other, whereas in case of partnership they are
bound. A partnership has no separate legal entity distinct from the several
---------------------- partners who collectively form the firm. A company or a corporation is an
artificial or a fictitious person, a legal entity capable of acquiring rights
---------------------- and incurring obligations in its own name. In case of Hindu joint family
---------------------- it carries on its traditional business for the benefit of all members of the
joint family drawing its capital from the joint family fund it is called a
---------------------- Hindu joint family firm, whereas in case of partnership it is the partners
for whom the business is carried.
----------------------
●● The partnership could be classified in different types as Partnership at
---------------------- Will, Partnership for a Fixed Term, Particular Partnership, Limited
Partnership, and A Sub-partnership
----------------------
●● A partnership being essentially based on a contract, all the elements
---------------------- required for the formation of a contract must exist like along with other
formalities like – Agreement, Effect of fraud or misrepresentation,
---------------------- Consideration, Premium, Return of premium, sharing of profits etc.
----------------------
---------------------- Keywords
---------------------- ●● Repealed and Superseded: A revocation of a statute, it signifies the
abrogation of statute by another one
----------------------
●● Karta: Head of the family in a Joint Hindu Family
---------------------- ●● Co-parceners: Male members of the Joint Hindu family
---------------------- ●● ispo facto: By the fact itself; by the very act itself. Automatically
●● Lien: Charge on a property for the payment of a debt or duty, and for
----------------------
which it may be sold in discharge of the lien. It signifies an obligation, tie,
---------------------- or claim annexed to, or attaching upon, any property without satisfying
which such property cannot be demanded by its owner.
----------------------
226 Corporate Law

●● Rule of Estoppels: An estoppel is an admission, or something which the Notes
law treats as an equivalent to an admission of so high and conclusive a
nature that anyone who is affected by it is not permitted to contradict it. ----------------------
●● ex turpi causa non oritur action: No action arises on an immoral contract ----------------------
●● particepis criminis: Sharer of a crime cannot be
----------------------
●● turpis causa: A base or immoral consideration
----------------------
----------------------
----------------------
1. Explain the nature and essentials of partnership.
----------------------
2. What is the difference between the partnership and co-ownership?
----------------------
3. How is a Company different than a partnership?
4. Is joint family same as partnership? Give reasons for your answer. ----------------------
5. What are different types of partnerships? ----------------------

6. Give a brief account of formation of partnership. ----------------------
----------------------

1. False
----------------------
2. True
----------------------
3. True
----------------------
----------------------
----------------------
1. Which of the following is not a kind of partnership?
----------------------
iii. Partnership at law
----------------------
----------------------
----------------------
----------------------
----------------------

Notes
Suggested Reading
----------------------
---------------------- & Sons.
----------------------
Co.
---------------------- Reporter.
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
228 Corporate Law

Relations of Partners
UNIT
12
Structure:
12.1 Introduction
12.2 Relation of Partners Inter-se
12.3 Relation of Partner to Third Parties
12.4 Liability of Partner to Third Person
12.5 Position of Incoming and Outgoing Partners
Summary
Keywords
Suggested Reading
Relations of Partners 229

Notes
Objectives
----------------------
After going through this unit, you will be able to:
----------------------
• Assess the relationship of partners in a partnership firm
----------------------
• Categorise the duties and liabilities of a partner
---------------------- • Judge the relationship of partners with third parties
---------------------- • Compare and contrast the position and status of incoming and outgoing
partners
----------------------
----------------------
12.1 INTRODUCTION
----------------------
The entity of partnerships is not different from the entity of the partners
---------------------- who constitute the firm, unlike the Companies where the status of members
---------------------- of a Company is separate than the legal artificial entity of the Company. The
partnership is based on the partnership agreement; hence it is very crucial to
---------------------- determine the status and relation of the partners with different stakeholders in
the partnership firm like, the co-partners and third parties. It is also important to
---------------------- decide the terms and condition of the tenure and work of partners.
---------------------- This unit would elaborate the relation of the partners amongst themselves,
between partners and third party, and the duties and liabilities of the partners.
----------------------
---------------------- 12.2 RELATION OF PARTNERS INTER-SE

---------------------- The rights and liabilities of the partners inter se with relation to the
partnership business are contained in ss. 9-17. They can be grouped as follows:
----------------------
Good Faith
---------------------- Every partner is bound by law to carry on the business of the firm to the
---------------------- greatest common advantage of the firm. The partners shall be just and faithful to
each other and shall, give full information of all things affecting the firm to any
---------------------- partner or his legal representative. In fact, the whole law of partnership and the
duties of partners are founded on the general tradition of good faith and honour.
---------------------- It is a contract uberrimae fidei i.e. a contract of utmost good faith. Each partner
---------------------- shall act for the furtherance of the common object of obtaining profits to be
shared among them.
----------------------
To Indemnify
---------------------- Every partner shall indemnify the firm for any loss caused to it by his
fraud in the conduct of the business of the firm. Here also, as in the first, the
----------------------
liability is an absolute one, and a partner cannot escape liability by contracting
---------------------- him to be out of it.
----------------------
230 Corporate Law

The Agreement Notes
Leaving apart the fundamental duties mentioned above the rights
----------------------
and liabilities, the duties and obligations, etc. of the partners inter se are to
be determined with reference to the agreement creating the partnership. The ----------------------
partners may choose to incorporate terms and conditions governing their rights
and liabilities, in the deed of partnership which is also called partnership articles. ----------------------
The agreement may be in writing or implied by a long course of conduct. The
----------------------
terms can be modified at any time with the unanimous consent of all the partners.
In the absence of a contract to the contrary among the partners, some general ----------------------
rules are given by the Act for fixing the rights and liabilities of the partners.
They are mentioned below. ----------------------
No Competition ----------------------
When a partnership is in existence for the conduct of one particular
----------------------
business no one of the partners shall be entitled to carry on a similar business
in competition with the partnership business. An agreement to that effect will ----------------------
not be void as an agreement in restraint of trade, as contemplated in s. 27 of the
Contract Act. ----------------------
Conduct of Business ----------------------
In the actual management of business the partners’ rights and liabilities ----------------------
are as follows:
●● Every partner has a right to take part in the conduct of the business. ----------------------
●● Every partner is bound to attend diligently to his duties in the conduct of ----------------------
the business.
----------------------
●● Any difference as to ordinary matters may be decided by a majority. But
no change in the nature of the business may be made without the consent ----------------------
of all the parties.
----------------------
●● Every partner has a right to have access to and to inspect and copy any of
the books of the firm. ----------------------
They are, however, subject to contract between the partners.
----------------------
Mutual Rights and Liabilities
----------------------
Subject to contract between the parties, the partners are entitled to the
following rights and liabilities regarding remuneration and profits: ----------------------
●● A partner is not entitled to receive remuneration for taking part in the ----------------------
conduct of the business.
●● The partners are entitled to share equally in the profits earned and shall ----------------------
contribute equally to the losses sustained by the firm. ----------------------
●● Where a partner is entitled to interest on the capital subscribed by him
such interest shall be payable only out of profits. ----------------------
●● A partner making any payment or advance beyond the amount of capital ----------------------
is entitled to interest at the rate of six per cent per annum.
----------------------

Notes Mutual Rights to Indemnity
Mutual rights of indemnity between the firm and the partners are also
----------------------
provided for by s. 13. Accordingly, the firm shall indemnify a partner in respect of
---------------------- payments made and liabilities incurred by him in the ordinary and proper conduct
of the business. It also applies for doing an act in an emergency for protecting
---------------------- the firm from loss, if it is such as a prudent man would do in his own case, under
similar circumstances. Similarly a partner is bound to indemnify the firm for loss
----------------------
caused to it by his wilful neglect in the conduct of the business of the firm.
---------------------- After a Change in the Firm
---------------------- When a change occurs in the constitution of the firm and yet it carries
on business, the partners continuing in the business will in the eye of law form
---------------------- a new and different firm. It is called a “reconstituted firm”. It may happen in
---------------------- one of the following circumstances: (i) By new members coming in; or (ii)
by some partners going out by death or retirement; or (iii) by the firm being
---------------------- carried on after the expiry of a fixed term; or (iv) by the partnership carrying
on additional undertakings. In these cases the rights and obligations of partners
---------------------- in the reconstituted firm remain the same as they were before. This is subject
---------------------- to contract between the parties. In the case of a firm carrying on business even
after the expiry of the fixed time the rights and liabilities will continue only so
---------------------- far as is consistent with a partnership at will.
----------------------
----------------------

1. Every partner is bound by law to carry on the business of the firm to
---------------------- the greatest common advantage of the ___________.
---------------------- i. Firm
ii. Individual partners
---------------------- iii. Public
2. The deed through which the partners may choose to incorporate terms
----------------------
and conditions governing their rights and liabilities is called________.
---------------------- i. Memorandum of Association
ii. Deed of partnership
----------------------
iii. Articles of Association
---------------------- iv. Sale deed
----------------------
12.3 RELATION OF PARTNER TO THIRD PARTIES
----------------------
---------------------- Scope of Authority of Partners

A partner is the agent of the firm for all purposes of the business of the
---------------------- firm. The relationship of partnership is created by agreement between parties
232 Corporate Law

for sharing the profits of a business. Any one of the partners is by law entitled Notes
to conduct the business for and on behalf of the remaining partners. Each is
a principal and each is an agent for the other. Each is bound by the other’s ----------------------
contract in carrying on the trade as much as a single principal would be by the
act of an agent. Sir W.M. James, L.J. observed in Bairds’ case: ----------------------
“Ordinary partnerships are by the law assumed and presumed to be based ----------------------
on the mutual trust and confidence of each partner in the skill, knowledge, and
----------------------
integrity of every other partner. As between the partners and the outside world
each partner is the unlimited agent of every other in every matter connected ----------------------
with the partnership business, and not being in its nature beyond the scope of
the partnership.” ----------------------
Implied Authority ----------------------
Section 19 deals with the positive rule of implied authority given to a
----------------------
partner. Accordingly, the act of a partner which is done to carry on, in the usual
way, business of the kind carried on by the firm, binds the firm. In other words, ----------------------
if the act of a partner is of a nature which is common in the type of business
carried on by the firm and is done by him in the usual way of carrying on the ----------------------
particular partnership business; it will bind the other members of the partnership
----------------------
as well. Such authority of a partner is called his ostensible, or apparent or
implied authority. In the dealings of the partnership with third persons it is very ----------------------
important to see whether an act comes within the actual or at least the ostensible
authority. ----------------------
In the case of commercial partnerships it has been held that in the absence ----------------------
of express prohibition the authority of a partner would extend to buying goods
on credit for the partnership, borrowing money, contracting debts, paying debts, ----------------------
pledging and selling partnership goods and signing, accepting, endorsing and ----------------------
negotiating negotiable instruments. It is not a business of a commercial nature
(non-trading partnership) and does not involve selling or buying of goods, a ----------------------
partner will have no ostensible authority to borrow, pledge or to make or issue
negotiable instruments, though he may sign cheques. ----------------------
In order to bind the firm, an act or instrument done or executed by a ----------------------

partner or other person on behalf of the firm shall be in the firm name. This
may be done either expressly or impliedly. It must be made in some manner ----------------------
expressing or implying an intention to bind the firm. A signature of partner “per ----------------------
procuratum” (or per pro), i.e., on behalf of the firm, would be sufficient to bind
the firm. ----------------------
The implied authority of a partner is subject to the rule in s. 22 stated ----------------------
above. The very application of the principles of agency in partnership is subject
to the other provisions of the Partnership Act. It is also expressly provided that ----------------------
the partners may, by contract extend or restrict the implied authority of any
partner. When partners have agreed to restrict or curtail the ostensible authority ----------------------
between the partners, an act of one partner done within the scope of the implied ----------------------
authority but beyond the actual authority fixed by the contract, would be binding
on the members of the firm. But if the third party knows of the restriction or if ----------------------

Notes do not believe that person to be a partner the act may bind the firm (s. 20).
Restrictions: Some restrictions are imposed by the Act itself. In the
----------------------
absence of a custom or usage of trade to the contrary, the implied authority of a
---------------------- partner does not empower him to do the following:
●● To refer a dispute relating to a business of the firm to arbitration.
----------------------
●● To open a bank account on behalf of the firm in his own name.
----------------------
●● To compromise or relinquish any claim or portion of a claim by the firm.
---------------------- ●● To withdraw a suit or proceeding filed on behalf of the firm.
---------------------- ●● To admit any liability in a suit or proceeding against the firm.
●● To acquire immovable property on behalf of the firm.
----------------------
●● To transfer immovable property belonging to the firm.
---------------------- ●● To enter into partnership on behalf of the firm.
---------------------- For effecting the above said purposes there must be express authority
given to one or more of the partners or all of them must join together for
---------------------- effecting such transactions.
---------------------- For the extent of agent’s authority reference may also be made to ss.188,
189 and 237 of the Contract Act.
----------------------
Emergency Powers
---------------------- A partner is also given the authority to act as an agent of necessity. A
---------------------- partner’s authority in an emergency extends to do all such acts as are necessary
to protect the partnership from loss. In order to fix the extent to such authority,
---------------------- the test of reasonableness is to be applied. The authority would be acting under
similar circumstances for his own benefit. The acts done by one partner in cases
---------------------- of emergency to protect the firm from loss will be binding on the firm.
---------------------- English law does not enable a partner to bind the firm by acts done in an
emergency for saving the business. But there, he will be entitled to indemnity
----------------------
from his co-partners for the acts done by him to protect or preserve the business
---------------------- or partnership property.
Admissions
----------------------
An admission or representation made by a partner concerning the affairs
---------------------- of the firm or partnership business is evidence against the firm as a whole.
It is also necessary that such admission or representation is made during the
----------------------
ordinary course of business. This is also a result of the application of the general
---------------------- rule of agency.
---------------------- Notice to Partner

As general principle, notice to an agent of matters relating to the agency
---------------------- is notice to the principal. Partnership is one branch of the law of agency and
---------------------- therefore it follows that notice to one partner is notice to the firm. Section 24
provides that notice to a partner who habitually acts in the business of the firm
----------------------
234 Corporate Law

of any matter relating to the affairs of the firm operates as notice to the firm. It is Notes
not applicable in the case of fraud on the firm committed by, or with the consent
of that partner receiving the notice. ----------------------
----------------------
----------------------
1. A person who is declared by word of mouth as partner of a firm is
called: ----------------------
i. Active partner ----------------------
ii. Estoppel partner
----------------------
iii. Dormant partner
iv. Nominal partner ----------------------
----------------------
12.4 LIABILITY OF PARTNER TO THIRD PERSON ----------------------
Nature of the Liability ----------------------
Every partner is liable, jointly with the other partners and also severally,
----------------------
for all acts of the firm done while he is a partner. This section is supported by s.
43 of the Contract Act which declares that joint promises of every kind create a ----------------------
joint and several obligations in the absence of express agreement to the contrary.
Section 2 (a) defines an “act of a firm” as “any act or omission by any partner or ----------------------
agent of the firm which gives rise to a right enforceable by or against the firm.”
----------------------
A partnership firm has no legal entity. Therefore, when a partnership firm
A B C enters into a contract with another person X, it is deemed that there are ----------------------
three joint promisors namely A, B and C. Each one of them is, therefore, jointly
----------------------
and severally liable for the breach of that contract.
In England, the House of Lords decided in Kendall v. Hamilton that ----------------------
during a partner’s lifetime his liability is joint liability. That principle has ----------------------
been followed by the Partnership Act. Accordingly in England the contractual
liability of a partner is joint liability, during his lifetime. After his death his ----------------------
estate is also severally liable for the unsatisfied debts incurred by the firm while
he was a partner. In Scotland the liability is joint and several. In England also ----------------------
regarding the liability for torts liability is joint and several. But this distinction ----------------------
between contractual and tortuous liability is not recognized in India. Here it is
always joint and several. As a consequence of this rule, the creditor of a firm ----------------------
may sue any one of the partners or all of them and failure to implead all of them
is no defence to a suit against some only. ----------------------
Liability for Wrongful Acts of Partner ----------------------
Partners are liable for the wrongs of each of the partners committed in the ----------------------
ordinary course of the firm’s business. In English law, Hamlyn v. John Houston
& Co. is the leading case. There, H and S were partners and the conduct of the ----------------------

Notes business was with H. H bribed Hamlyn’s clerk to get some secret information.
The clerk allowed H to have possession of Hamlyn’s books containing
---------------------- confidential entries concerning some contracts. On discovering this, Hamlyn
sued the firm for damages and the suit was decreed. The question then arose
---------------------- whether S was liable, though the bribery was carried out without his knowledge
---------------------- or consent. It was held that he was liable. The rule is based on the law of agency.
A principal is liable for the fraud or other illegal acts committed by his agent if
---------------------- done within the general scope of authority given to him.
---------------------- The principle is the person who has selected the agent and the risk shall,
therefore, lie with him. The principal delegates the performance of certain class
---------------------- of acts to the agent. Then it is not unjust that he who will have the benefit of his
efforts if successful should bear the risk of exceeding his authority in matters
----------------------
incidental to the doing of the acts the performance of which has been delegated
---------------------- to him. In the above mentioned case S was a “sleeping partner”, yet he was held
liable for the acts of his partner committed in the course of the business of the
---------------------- firm.
---------------------- Section 26 of the Partnership Act contains the same rule. Where, by the
wrongful act or omission of a partner loss or injury is caused to any third party
---------------------- or any penalty is incurred, the firm is liable therefore to the same extent as
the partner. The partner doing the wrongful act must be acting in the ordinary
----------------------
course of the business of the firm.
---------------------- Accountability of Partners for Private Profit
---------------------- By virtue of s. 29 (1) of the Partnership Act, 1890 (English statute) every
partner must account to the firm for any benefit derived by him without the
---------------------- consent of the other partners from any transaction concerning the partnership or
---------------------- from any use by him of the partnership property, name or business connection.
R. and A. were partners in the business of selling Caltex Petrol from the
---------------------- service station belonging to Calttex (Ceylon) Ltd. They had been the approved
---------------------- agents of the Caltex (Ceylon) Ltd. They carried on their business under the
name of “R. & A”.
---------------------- Due to difference between them, A. gave three months’ notice of
---------------------- dissolution of the partnership. R. wrote to Caltex enclosing the notice and
without the consent or knowledge of A. He requested the company to alter on
---------------------- the business name into “R”.
---------------------- R subsequently carried on the business in his own name and he did not
account to his partner for his share of the profits. A. claimed that he was entitled
---------------------- to get share by virtue of s. 29 (1) of the Act, 1890 and the Court granted the
claim.
----------------------
According to S. 67 of the Trust Act (1882), “if a partner being a trustee
---------------------- wrongfully employs trust property in the business or on account of the
partnership, no other partner is liable in his personal capacity to the beneficiary,
----------------------
unless he had notice of the breach of trust.”
----------------------
236 Corporate Law

Misapplication of Funds Notes
Where a partner receives money or property from a third party and
----------------------
misapplies it, the firm is liable to make good the loss. The partner must be acting
within his apparent authority. It depends upon the facts of each case whether the ----------------------
money has been received when acting within the apparent authority, or not.
----------------------
So also where a firm receives money or property from a third party and
it is misapplied by one of the partners the firm will be liable to make good ----------------------
the loss. The firm must receive the money in the course of its business. The
misapplication must be when the money or property is in the custody of the ----------------------
firm. If it is in the custody of a partner and then it is misappropriated the firm
----------------------
will not be liable.
Rights of a Transferee of a Partner’s Share: Sub-partnership ----------------------
A partner may transfer his interest in the firm to another person. It may ----------------------
be by absolute transfer or by mortgage or by the creation of a charge of such
interest. Then the transferee is not exactly in the position of the partner (his ----------------------
transferor). He may be called a “sub-partner”. His rights are specially declared ----------------------
by s. 29. They are:
●● During the continuance of the partnership such transferee is not entitled ----------------------
to interfere in the conduct of the business, or to require accounts, or to ----------------------
inspect the books of the firm.
●● He is only entitled to receive the share of the profits of the transferring ----------------------
partner. ----------------------
●● He is bound to accept the account of profits agreed to by the partners.
----------------------
●● If the firm is dissolved or if the transferring partner ceases to be partner,
the transferee is entitled to receive the share of the assets of the firm to ----------------------
which the transferring partner was entitled. For the purpose of ascertaining
that share the transferee may require an account from the date of the ----------------------
dissolution.
----------------------
Narayanappa v. Krishnappa: The Supreme Court points out that the
whole concept of partnership is to embark upon a joint venture; and for that ----------------------
purpose to bring in as capital, money or even property including immovable
----------------------
property; that once that is done whatever is brought in ceases to be the exclusive
property of the person who brought it in and becomes a trading asset of the ----------------------
partnership in which all the partners would have interest in proportion to their
shares in the joint venture of the business; that he would not be able to exercise ----------------------
his right even to the extent of his share in the partnership; that where a partner
----------------------
assigns during the subsistence of the partnership his share to another what
the assignee would get is only that which he is permitted by section 29 (1) of ----------------------
the Partnership Act, namely, the right to receive the share of the profits of the
assignor and accept the account of profits agreed to by the partners. ----------------------
Where a karar executed by a partner recited that as the partnership had ----------------------
come to an end he had given up his share in the machine etc., and the business
and made over to the other partner by way of adjustment and that he himself ----------------------

Notes had been given certain immovable property by one require registration for its
validity.
----------------------
---------------------- Activity 1
---------------------- Find out two case laws on the Liability for Wrongful Acts of Partner.
----------------------
----------------------
12.5 POSITION OF INCOMING AND OUTGOING PARTNERS
---------------------- Section 31-38 collect together and set out in a convenient form all rules
relating to the coming in of a partner and the going out of a partner in so far
---------------------- as they do not relate to the dissolution of the firm or to the consequences of
dissolution. They relate mainly to “a change in the firm” i.e. a change in the
---------------------- constitution of the firm which has not resulted in the dissolution of the firm.
---------------------- Introduction of New Partner
---------------------- For introducing a new partner into a firm consent of all the existing
partners is essential. This rule is subject to contract between the partners and to
---------------------- the provisions of s. 30 regarding the admission of a minor to the benefits of the
partnership. Therefore, if the partnership articles give a right to one partner to
----------------------
introduce a new partner, it will be permissible. A partner newly introduced is
---------------------- not liable for the acts of the firm done before he became a partner.
Retirement
----------------------
A partner may retire:
----------------------
●● With the consent of all the partners:
---------------------- ●● In accordance with an express agreement by the partners; or
---------------------- ●● Where the partnership is at will, by giving the notice in writing to all the
other partners of his intention to retire.
----------------------
In this section the word “retire” is properly confined to cases where a
---------------------- partner withdraws from a firm and the remaining partners continue to carry on
the business of the firm without dissolution of partnership as between them. It
---------------------- does not cover the case where a partner withdraws from a firm by dissolving
it, which should properly be referred to as dissolution and not a retirement. By
----------------------
mere retirement of a partner a firm is not dissolved.
---------------------- Liability on retirement: Regarding liability for acts of the firm done before
---------------------- the retirement of one partner, he continues to be liable for the same. But a retiring
partner may be discharged from such liability to any third party by an agreement
---------------------- made by him with such third party and the partners of the reconstituted firm.
This is the application of the principle of “novation” as contained in s. 62 of the
---------------------- Contract Act. Such an agreement may be express, or implied by a course of dealing
---------------------- between such third party and the reconstituted firm, after he had knowledge of the
retirement. Where an agreement is not with the concurrence of the creditor, the
---------------------- creditor’s rights against the retiring partner are unaffected.
238 Corporate Law

Public notice essential: Even after retirement of a partner, he and the Notes
partners continue to be liable as partners to third parties for any act done by any
of them which would have been an act of the firm if done before retirement, ----------------------
until public notice is given of the retirement. The notice as required by the Act
may be given by the retired partner or by any partner of the reconstituted firm. ----------------------
A dormant partner may, however, retire without giving notice to the ----------------------
world. The provision to section 32 (3) says that a retired partner is not liable to
----------------------
any third party who deals with the firm without knowing that he was a partner.
Expulsion of a Partner ----------------------
A partner may be expelled from the partnership if the partnership ----------------------
deed gives a power to do so. Unless there is such authority a partner cannot
be expelled by any majority of the partners. However, such power must be ----------------------
exercised in good faith. It must be made with an honest view to the interests of
----------------------
the firm, and after giving notice to the partner affected and an opportunity of
being heard. An irregular expulsion is inoperative. That partner will continue to ----------------------
have all the rights of a partner. The only remedy when one partner misconducts
in the business of the partnership is to seek judicial dissolution. ----------------------
Insolvency of Partner ----------------------
Where a partner is adjudicated insolvent he ceases to be a partner on the ----------------------
date of adjudication. Before the Partnership Act the insolvency of a partner did
not automatically dissolve the partnership but was only a ground for dissolution ----------------------
at the suit of the other partners. But now it will dissolve the partnership unless
there is a contract between the partners to the effect that the partnership will not ----------------------
be dissolved by the insolvency of a partner. ----------------------
When the partnership is not dissolved, s. 34 provides for two rules:
----------------------
●● The estate of the insolvent is not liable for any act of the firm done after
the date of adjudication. ----------------------
●● It also contains the complementary rule that the firm is not bound by the ----------------------
acts of the insolvent done after the date of adjudication.
Effect of Death ----------------------
When a contract between the partners provides that the firm will not be ----------------------
dissolved by the death of a partner, the estate of a deceased partner is not liable
----------------------
for any act of the firm done after his death.
The continuance by the surviving partners of a firm to carry on the business ----------------------
in the old firm’s name does not by itself render the effects of a deceased partner
----------------------
liable for any partnership debts contracted after his death.
Rights of Outgoing Partner ----------------------
An outgoing partner may carry on a business competing with that of the ----------------------
firm and he may advertise such business. However, a partner when going out
may agree with his partners that he will not carry on a similar business. If ----------------------
such restriction is reasonable as regards time as well as space (i.e., within a ----------------------

Notes specified period or within specified local limits) the agreement will be valid
notwithstanding s. 27 of the Contract Act.
----------------------
Restrictions to Prevent Unfair Competition
---------------------- Subject to contract to the contrary an outgoing partner may not:
---------------------- ●● Use the firm name;
●● Represent himself as carrying on the business of the firm; or
----------------------
●● Solicit the custom of persons who were dealing with the firm before he
---------------------- ceased to be a partner.
---------------------- The position is equated with that of a sale of goodwill. The typical and
most frequent case is that of a partner who retires from the firm. He has received,
---------------------- presumably, payment for value of his share in the property of the firm, and this
property includes the goodwill of the business. A retiring partner, therefore, may
----------------------
be regarded as having sold his share of the goodwill of the business along with
---------------------- his share in other assets to his fellow partners. He is vis-à-vis his partners in the
same position of a person who sells the goodwill of his business to another. The
---------------------- same is the case with an expelled partner and an insolvent
---------------------- To Share Subsequent Profits
It may happen that when a partner has died or otherwise left the firm the other
----------------------
partners continue to carry on the business with the property of the firm without any
---------------------- final settlement of accounts as between them and the outgoing partner or his estate.
---------------------- In such a case the outgoing partner or his estate is entitled to one of the
following rights:
---------------------- ●● A share of the profits made since he ceased to be a partner as id attributable
---------------------- to the use of his share of the property of the firm.
●● Interest at the rate of six per cent per annum on the amount of his share in
---------------------- the property of the firm.
---------------------- The outgoing partner is given a right to choose between the two. The
right, however, is subject to contract to the contrary among the partners.
----------------------
In some cases by contract between the partners, an option may be given to
---------------------- the other partners to purchase the interest of the deceased or outgoing partner. If
that option is duly exercised the above mentioned rights are not available to the
---------------------- deceased partner’s estate or the outgoing partner or his estate. But if the terms
---------------------- of the contract are not properly complied with the rights will be enforced.
Effect of Reconstitution on a Continuing Guarantee
----------------------
A continuing guarantee is one given on account of personal confidence,
---------------------- and so, where the members of the partnership are changed, the risk of the surety
is altered and therefore the guarantee is revoked. According to the section,
----------------------
a continuing guarantee given to a firm, or to a third party in respect of the
---------------------- transactions of a firm is revoked as to future transactions from the date of any
change in the constitution of the firm. There may be agreement to the contrary
---------------------- but it must be clear.
240 Corporate Law

In a Calcutta case, A was surety of the firm of “N.C. Mookerji” for B’s Notes
conduct as cashier to the firm. The constitution of the firm was subsequently
changed, and its name was altered to “N. Mookerji & Son”. A was held not ----------------------
liable for B’s defalcations subsequent to the change.
----------------------
----------------------
----------------------
1. When all partners are insolvent, creditors will be:
i. Paid fully ----------------------
ii. Paid rateably
----------------------
iii. Taken over by the partners
iv. Paid by government ----------------------
2. Retirement or death of a partner means: ----------------------
i. Dissolution of partnership agreement
----------------------
ii. Dissolution of a firm
iii. May or may not be a dissolution of partnership agreement ----------------------
iv. None of above
----------------------
3. The liability of partners is ______________, and a partner cannot
escape liability by contracting him to be out of it. ----------------------
i. Limited ----------------------
ii. Perfect
iii. conditional ----------------------
iv. Absolute ----------------------
----------------------
Summary
----------------------
●● The entity of partnerships is not different form the entity of the partners ----------------------
who constitute the firm, unlike the Companies where the status of
members of a Company is separate than the legal artificial entity of the ----------------------
Company. The rights and liabilities of the partners inter se with relation
----------------------
to the partnership business are grouped under various head which are as
follows - Good Faith, To Indemnify, The Agreement, No Competition, ----------------------
Conduct of Business, Mutual Rights and Liabilities, Mutual Rights to
Indemnity and After a Change in the Firm ----------------------
●● Any one of the partners is by law entitled to conduct the business for ----------------------
and on behalf of the remaining partners. Each is a principal and each
is an agent for the other. The partnership is an instance of the specific ----------------------
application of the general rule of agency and it is highly necessary to fix ----------------------
the scope of authority of a partner which might be implied or expressed
authority. A partner’s authority in an emergency extends to do all such ----------------------

Notes acts as are necessary to protect the partnership from loss. Notice to one
of the partners of matters relating to the agency is notice to the all other
---------------------- partners. Every partner is liable, jointly with the other partners and also
severally, for all acts of the firm done while he is a partner. For introducing
----------------------
a new partner into a firm consent of all the existing partners is essential.
---------------------- A partner may retire-
●● With the consent of all the partners.
----------------------
●● In accordance with an express agreement by the partners.
---------------------- ●● Where the partnership is at will, by giving the notice in writing to all the
---------------------- other partners of his intention to retire.
●● A partner may be expelled from the partnership if the partnership deed
---------------------- gives a power to do so Where a partner is adjudicated insolvent he ceases
---------------------- to be a partner on the date of adjudication.
---------------------- Keywords
---------------------- ●● Uberrimae fidei: utmost good faith

●● Per procuratum: on behalf
----------------------

---------------------- 1. Write a detailed note on the rights of the partners inter-se.
---------------------- 2. What is the scope of authority of the partners?
3. What is the difference between implied authority and expressed authority?
----------------------
4. What are the restrictions on the exercise of an implied authority?
---------------------- 5. What are the emergency powers of the partner?
---------------------- 6. Explain the extent of liability of a partner to a third person.
7. Write a note on accountability of a partner for personal profits.
----------------------
8. What are the modes of retirement of a partner?
----------------------
9. When can a partner be expelled?
---------------------- 10. What are the other two synonyms of “Implied Authority”?
---------------------- 11. Which emergency power is vested with the Partner?
12. What is the consequence of an admission or representation made by a
---------------------- partner concerning the affairs of the firm or partnership business?
---------------------- 13. What is the nature of the liability of the partners?
----------------------
----------------------
----------------------
----------------------
242 Corporate Law

1. Every partner is bound by law to carry on the business of the firm to the
greatest common advantage of the ___________. ----------------------
i. Firm ----------------------
2. The deed through which the partners may choose to incorporate terms and ----------------------
conditions governing their rights and liabilities is called________.
----------------------
ii. Deed of partnership
----------------------

1. A person who is declared by word of mouth as partner of a firm is called:
----------------------
ii. Estoppel partner
----------------------

1. When all partners are insolvent, creditors will be: ----------------------
ii. Paid rateably
----------------------
2. Retirement or death of a partner means
----------------------
i. Dissolution of partnership agreement
3. The liability of partners is ______________, and a partner cannot escape ----------------------
liability by contracting him to be out of it. ----------------------
iv. Absolute
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------

Notes
Suggested Reading
----------------------
---------------------- & Sons.
---------------------- 2. Ramaiya, A. 2004. Guide to the Companies Act. New Delhi: Wadhwa and
Co.
----------------------
---------------------- Reporter.
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
244 Corporate Law

Registration and Dissolution of a Firm
UNIT
13
Structure:
13.1 Introduction
13.2 Registration of Firms
13.3 Methods of Dissolution
13.4 Consequences of Dissolution
Summary
Keywords
Suggested Reading
Registration and Dissolution of a Firm 245

Notes
Objectives
----------------------
• Explain the process of registration of partnership firms
----------------------
• Describe the methods of dissolution of partnership
----------------------
• Judge the consequences of non-registration and dissolution of partnership
----------------------
---------------------- 13.1 INTRODUCTION

---------------------- Legally the Partnership Firm comes into existence by an agreement,
however, for enforcing this agreement it is important that the firm is registered.
----------------------
The formation and dissolution of the firms have to be conducted in accordance
---------------------- with the provisions of law. Hence, it is important to know the process of
registration and dissolution. The present unit would deal exhaustively with
---------------------- the procedural requirements of registration of firms and their dissolution. It
would further discuss the implications of non registrations and dissolution of
----------------------
Partnership firms.
----------------------
13.2 REGISTRATION OF FIRMS
----------------------
Chapter VII (ss. 56-71) of the Partnership Act is newly introduced in
----------------------
India, by the Act. It is a departure from the English Act. Of these provisions, ss.
---------------------- 56-57 are purely procedural in nature, dealing with the procedure for registering
etc.
----------------------
The State Government may appoint Registrars of Firms for the purpose of
---------------------- registration of firms and may define the areas within which they shall exercise
their powers and perform their duties. The Government may by order declare
---------------------- that the provisions for registration would not be applicable to the State or any
part of it. The government shall make rules prescribing the fee which is to be
----------------------
paid for registration of any document and also for the details regarding the
---------------------- forms and procedure for registration.
---------------------- 1. Mode of Registration

The application for registration shall be sent to the Registrar of the area
---------------------- by filing a statement in the prescribed form and accompanied by the prescribed
---------------------- fee. The statement shall contain
●● the firm name,
----------------------
●● the place of business,
---------------------- ●● the names of any other places where the firm carries on business,
---------------------- ●● the date at which each partner joined the firm,
●● the names in full and permanent addresses of the partners, and
---------------------- ●● the duration of the firm.
246 Corporate Law

These with subsequent alterations shall be noted in the Register. Thus, Notes
change in the firm name, or in the principal place of business, change in the
names and addresses of partners, the exercise of the option by a minor on ----------------------
attaining majority to become or not to become partner, etc., are to be notified
to the Registrar. The Registrar can rectify errors in entries made by him with ----------------------
regard to documents filed with him, on application of all parties concerned with ----------------------
such documents. The Registrar of Firms is open to all persons for inspection
on payment of the prescribed fees. Section 68 provides that any statement, ----------------------
intimation or notice recorded or noted in the Register of Firms shall be conclusive
proof of all facts stated therein. Persons furnishing false statement or particulars ----------------------
are punishable with three months imprisonment or with fine or with both. ----------------------
In England, the law governing the registration of names is contained in the
----------------------
Registration of Business Names Act, 1916. By virtue of s. 1 of the Act, change
in name has to be duly informed to the concerned authority under the Act. It has ----------------------
been held that a married woman, who does not register her married name after
marriage and continues, trading under her maiden name, was guilty under s. 1. ----------------------
The accused was a manufacturer of leather handbags under the business name
----------------------
of “Jean Francis” which was her true Christian name and her true surname.
She married Mr. Cherikeef whereupon her true surname was changed into Mrs. ----------------------
Cherikeef. Even after her marriage she continued to carry her business under
the name of “Jean Francis” and failed to furnish statement of particulars to the ----------------------
Registrar in the new name.
----------------------
2. Effect of Non-registration
----------------------
Section 69 of the Act provides for the consequences of non-registration.
“Its effect, stated broadly, is to put a firm in a registration district of it does ----------------------
not choose to be registered, and also its partners, under disabilities which may
be extremely inconvenient. There is no direct compulsion but a pretty strong ----------------------
persuasive to come on the register. No member of an unregistered firm can
----------------------
enforce his rights under the partnership contract against either the firm or any
present or past member of it. So also the firm cannot sue its customers on their ----------------------
contracts. The firm remains liable to be sued by persons outside it, and cannot
plead a set-off”. In short, the disabilities arising from non-registration are that ----------------------
●● no partner can enforce his right against the others (while the firm is ----------------------
continuing), in a court of law by means of a suit and that
----------------------
●● the firm also cannot enforce its claims against third parties.
Chandra Gupta v. Kajaria Traders - The decision shows the ----------------------
effectiveness of the provisions of the Partnership Act requiring registration of
----------------------
firms. Though registration is not compulsory, it becomes essential at one time
or other because s. 69 cut short the capacity of unregistered firms would, by ----------------------
providing for arbitration in the partnership deed, be able to escape the disability
contained in the section. ----------------------
Section 69 in mandatory. Registration of the firm is a condition precedent ----------------------
to the right to institute the suit and the court has no jurisdiction to proceed
with the trial when the condition precedent has not been fulfilled. However, ----------------------

Notes registration can be effected at any time and it is not necessary that the firm
should registered from its beginning. The provision only requires registration
---------------------- before filing of the suit. If a firm has not been registered at the time of the
presentation of the plaint, but is registered subsequently the only course open to
----------------------
the court is to dismiss the suit.
---------------------- Exceptions: In spite of non-registration the following are maintainable:
---------------------- ●● Suit for dissolution of a firm;
---------------------- ●● Suit for accounts of a dissolved firm;
●● Suit for realization of the property of a dissolved firm;
----------------------
●● The power of the official assignee or a receiver of the estate of an insolvent
---------------------- partner to realize the property of the insolvent;
---------------------- ●● Firms which have no place of business in India; i.e., foreign firms; and
●● Suits for claims for set-off, not exceeding Rs. 100 in value, which are
----------------------
filed in the small causes and to proceedings incidental to such suits.
---------------------- In England, under the Registration of Business Names Act (1916), every
firm having a place of business in the United Kingdom and carrying on a
----------------------
business under a business name not identical with the usual name or names of
---------------------- the persons concerned, is required to be necessarily registered. The registration
certificate must be exhibited in a conspicuous position. Failure to comply with
---------------------- the provisions of the Act will make the trader liable for a penalty.
---------------------- 3. Effect of Fraud and Negligence – Right of Rescission (s. 52)
---------------------- The relationship of partnership is one which is essentially a creation of
agreement between partners. A partnership agreement is based on the utmost
---------------------- confidence among the partners. Therefore, no fraud or misrepresentation should
---------------------- be practiced by any one of the partners on the others either in bringing about the
partnership or in the dealing among partners. If there is fraud by any member of
---------------------- the partnership, the partner misled or induced to the following rights:
---------------------- ●● He can exercise a lien on the surplus assets of the firm for the money
contributed by him and also for the price for anything given by him.
----------------------
●● If he has advanced any amount apart from the contribution to the capital he
---------------------- can rank as a creditor of the firm. He is given priority over other partners
as he is in the position of a third party creditor.
----------------------
●● He is also entitled to be indemnified by the partners who are guilty of the
---------------------- fraud or misrepresentation.
---------------------- When there is willful neglect on the part of any partner which has caused
loss to the firm, the partner guilty of the negligence is bound to compensate
---------------------- the firm for the loss. Here the liability to indemnify the firm arises only if the
partner willfully and intentionally causes loss or by omitting to do some act
----------------------
deliberately causes such loss. In other words, no indemnity is payable in respect
---------------------- of their carelessness.
248 Corporate Law

4. Public Notice Notes
The Act requires giving of public notice in various circumstances. The
----------------------
manner of giving such notice is also expressly provided for by the Act. In certain
cases, where the firm is registered, notice is necessarily required to be given to ----------------------
the Registrar also.
----------------------
Notice to the Registrar of Firms and publication in the local official gazette
and in at least one local vernacular newspaper is necessary in the following ----------------------
cases:
----------------------
●● The retirement or expulsion of a partner from a registered firm;
●● The dissolution of a registered firm; ----------------------
●● The election to become a partner in a registered firm by a person attaining ----------------------
majority who was admitted as minor to the benefits of partnership.
----------------------
●● The election not to become a partner in a registered firm by a minor
admitted to the benefits of a partnership on attaining majority. ----------------------
In all other cases, publication in the local official gazette and in at least
one local vernacular newspaper is sufficient. ----------------------
----------------------
Activity 1 ----------------------
Find out the landmark case law which discusses principle of registration of ----------------------
partnership firm. ----------------------
----------------------
13.3 METHODS OF DISSOLUTION
----------------------
The dissolution of partnership between all the partners of a firm is called
the “dissolution of firm”. A firm is not said to be dissolved by the fact of one or ----------------------
more member ceasing to be partners in it while others remain, but only when
all and every one of the members of the firm cease to carry on its business in ----------------------
partnership. ----------------------
Methods of Dissolution
----------------------
A Partnership may be dissolved in any one of the following ways:
----------------------
●● By mutual consent. (s. 40);
●● Compulsory dissolution by operation of laws (s. 41); ----------------------
●● Automatically on the happening of certain contingencies (s. 42); ----------------------
●● Optionally in case of partnership at will (s. 43);
----------------------
●● Judicially by a decree of the court (s. 44).
1. By mutual consent (s. 40) - A firm may be dissolved with the consent of ----------------------
all the partners or in accordance with a contract between the partners. As ----------------------
a partnership is created by agreement, so also it can be dissolved by all
partners agreeing to dissolution. The original partnership articles might ----------------------

Notes contain terms regarding dissolution also. “Contract between the partners”
obviously means a contract already made, the most possible position
---------------------- being the original partnership articles providing for dissolution on the
happening of an event, etc. “when the partnership consists of only two
---------------------- partners and one partner agreed to retire, there can be no doubt that it will
---------------------- amount to dissolution of the partnership”
2. Compulsory dissolution by operation of laws (s. 41)
----------------------
●● Insolvency: A firm is dissolved by the adjudication of all the partners
---------------------- or of all partners but one as insolvent. In the case of insolvency of
one or more of the partners (not all but one), the firm might be
----------------------
continued with the other partners unless there is a contract to the
---------------------- contrary.
●● Business becoming illegal: If the business of the partnership is
----------------------
prohibited by law or becomes illegal, the partnership is dissolved.
---------------------- It is possible that a business may be prohibited or become illegal
because the partners have becomes alien enemies due to declaration
---------------------- of war. So also the business carried on by the partnership may be
prohibited by some statute. (But the fact that one separate adventure
----------------------
or undertaking of a partnership becomes unlawful will not put an
---------------------- end to the whole firm.)
In the two instances mentioned above the partnership will be compulsorily
----------------------
dissolved. It is not open to the partners to enter into any contract to the contrary.
---------------------- 3. Automatically on the happening of certain contingencies (s. 42)
---------------------- A firm may be automatically dissolved on the happening of certain contingencies.
But the partners can make contracts to the contrary.
----------------------
The instances given are:
---------------------- ●● On the expiry of the term if the partnership is constituted for a fixed term.
---------------------- ●● On the completion of the adventure or undertaking if formed for such
purpose.
----------------------
●● By the death of a partner.
---------------------- ●● By a partner being adjudicated insolvent.
---------------------- In the four above mentioned cases, the partnership might continue on the
basis of agreement between the partners. Contract to continue a partnership
---------------------- after death of a partner may be express or implied.
---------------------- Commissioner of Income-tax v. G.S. Mills - There was a partnership
consisting of two partners. One of the terms in the partnership agreement was
---------------------- that on the death of the one partner his heirs should take his place. The question
was whether on the death of one partner his heir would automatically become a
----------------------
partner.
---------------------- By s. 42, on the death of a partner, the firm is dissolved “subject to a
---------------------- contract between the partners.” Therefore, if there are more than two it may be
250 Corporate Law

agreed that the others might carry on the business. Therefore it was held that in Notes
case where there were only two partners the partnership would be dissolved by
the death of one of them. ----------------------
It should also be kept in mind that a partnership is a creation of contract ----------------------
and not one arising from status. Therefore, the heirs of one partner could not
become partners without the consent of the other partners. If they join, of course ----------------------
it would be a new partnership.
----------------------
4. Optionally in case of partnership at will (s. 43)
----------------------
When the partnership is at will, the firm may be dissolved by any partner
giving notice in writing to all the other partners of his intention to dissolve the ----------------------
firm.
----------------------
The provision requires three things, namely
●● the giving of a notice; ----------------------
●● which must be in writing and ----------------------
●● which must express an intention to dissolve the firm. ----------------------
The notice must be given to all other partners of the firm. The firm is
dissolved from the date mentioned in the notice as the date of dissolution and if ----------------------
no date is so mentioned, then from the date of communication of the notice. If a
----------------------
partner giving the notice dies while it is course of the post, it has been held that
the dissolution is by death and not by notice. ----------------------
5. Judicially by a decree of the court (s. 44). ----------------------
When a partnership is one for a fixed term, it cannot be dissolved by the
court at the mere wish of the one or more of the partners. When there is no ----------------------
possibility for dissolution under the above mentioned provisions, the partnership ----------------------
may be dissolved by the court at the suit of a partner provided that any one of
the conditions prescribed by s. 44 is satisfied. Section 44 is not made subject ----------------------
to the contract between the parties. It gives a right to each partner to seek the
assistance of a court to have a partnership dissolved on ground specified in the ----------------------
section. Section 11 makes the contract between partners is subject to the right ----------------------
under s. 44. It may also be noted that a partnership could be dissolved only in
the mode prescribed by s. 40-44 and not by forcible expulsion in violation of the ----------------------
contract of partnership (s. 44). The grounds are:
----------------------
Insanity: Lunacy or insanity of one partner is a sufficient ground for
bringing a suit for dissolution of the firm. It does not ipso facto dissolve the ----------------------
firm. A suit may be filed by the next friend of the partner who has become of
unsound mind or by any other partner. The reason is obvious. As a partner must ----------------------
be one capable of entering into a contract, it may not be permissible to carry on ----------------------
the business when one partner becomes a lunatic.
----------------------
Incapacity: If one of the partners becomes permanently incapable of
performing his duties then the other partners can have recourse to the court ----------------------
for getting dissolution. The relationship can exist on the basis that all partners
would attend diligently to the business of the partnership. ----------------------

Notes Misconduct: If one partner is guilty of conduct which is likely to affect
prejudicially the business of the firm, any other partner can sue for dissolution.
---------------------- The question whether misconduct is sufficient for dissolution depends on the
nature of the business carried on by the firm. In an English case where one
----------------------
partner was convicted for traveling without a ticket, the conviction was held
---------------------- to be a sufficient justification for an action for dissolution. Misappropriation of
funds belonging to a customer of the firm would also amount to such conduct.
----------------------
Breach of partnership agreement: If one partner commits breaches of
---------------------- the partnership agreement and the other member find to not practicable to carry
on the business, recourse can be had by dissolution through a decree of court.
----------------------
Utmost good faith is the essence of the relationship. For dissolution on the
---------------------- ground of lack of confidence it must be shown that a partner other than the
partner suing, willfully or persistently commits breaches of agreements relating
---------------------- to the management of the affairs of the firm or the conduct of the business,
---------------------- or otherwise so conducts himself in matters relating to the business that it is
not reasonably practicable for the other partners to carry on the business in
---------------------- partnership with him.
---------------------- Transfer of interest of a partner: Where a partner other than the partner
suing, has in any way transferred the whole of his interest in the firm to a third
---------------------- party, any other partner can sue for dissolution. The same rule is applicable
---------------------- where he has allowed his share to be charged in execution of a decree against
him. So also when a partner has allowed his interest in the firm to be sold in the
---------------------- recovery of arrears of land revenue or of any dues recoverable as arrears of land
revenue due by the partner.
----------------------
Business running at loss: When the business of the firm is carries
---------------------- on not with any profit but only at a loss, it may be dissolved. In such a case
---------------------- the continuance of the business is not advantageous and the court can order
dissolution even before expiry of the period prescribed under the contract.
----------------------
When just and equitable: Sometimes the articles of the partnership
---------------------- may not contain any provision for the dissolution of partnership and the other
situations or grounds enabling the parties to get a dissolution like lunacy,
---------------------- misconduct, etc. might not be present. One of the partners may nevertheless
---------------------- feel that the partnership ought to be dissolved in the interests of all concerned.
To meet such a situation the last clause of s. 44 empowers the court to dissolve
---------------------- the partnership “on any other ground which renders it just and equitable that the
firm should be dissolved.”
----------------------
Where the dissolution was wanted by 4 out of 9 partners holding a
---------------------- major share and there was no co-operation or mutual confidence, it was held
---------------------- the circumstances provided just and equitable ground to order dissolution. A
partner’s adultery with his co-partner’s wife is a good ground for dissolution
---------------------- under this clause.
----------------------
252 Corporate Law

Notes
----------------------
1. If all the partners, but one are insolvent it means:
----------------------
i. Dissolution of an agreement
ii. Dissolution of firm ----------------------
iii. May or may not cause dissolution
----------------------
iv. None of above
2. At the time of dissolution: ----------------------
i. All the assets are transferred to realisation account ----------------------
ii. Only current assets are transferred to realisation account
----------------------
iii. Non-cash assets are transferred to realisation account
iv. Only liquid and current assets are transferred to realisation ----------------------
account
----------------------
3. At the time of dissolution, non-cash assets are credited with:
i. Market value ----------------------
ii. Book value ----------------------
iii. As the agreed amount among the partners
iv. Cost or market whichever is low ----------------------
----------------------
13.4 CONSEQUENCES OF DISSOLUTION ----------------------
Continuing Liability of Partners till Notice (s. 45) ----------------------
After dissolution of a firm, public notice of it must be given. Until then the
----------------------
partners will continue to be liable to third parties. Persons dealing with the firm
are entitled to assume that the partnership still continues though it has actually ----------------------
been dissolved. The liability is only for acts which if done before dissolution
would have been acts of the firm. Notice is public notice as required by s. 72. ----------------------
It must be published in the local official gazette and in at least one vernacular
----------------------
newspaper of the district where the firm has its principal place of business. If
it is a registered firm notice must be given to the Registrar of Firms also. The ----------------------
notice may be given by any of the partners.
----------------------
Exceptions
The proviso to the section provides for three exceptions to the general ----------------------
rule of continuing liability till notice. ----------------------
●● Death of partner: No notice is necessary to terminate the liability of a
deceased partner for debts contracted by the firm after his death. ----------------------
●● Insolvency: The estate of a partner who is adjudicated insolvent is not ----------------------

liable for the acts done after the date on which he ceases to be a partner
(i.e., the date of adjudication). ----------------------

Notes ●● Dormant partner: A dormant partner is one who is not actively taking
part in the conduct of the business and is not known to the outside world as
---------------------- a partner. He may retire without giving notice, for the reason that he was
not known as a partner to third parties dealing with the firm. Therefore,
---------------------- if one of the partners was not known to the third parties as a partner, his
---------------------- estate will cease to be liable for the subsequent acts of other partners from
the date of the dissolution of the firm even without notice.
---------------------- Winding Up of the Business (ss. 46, 47)
---------------------- The dissolution of the firm results in the termination of the relationship
of partnership. The general authority of a partner to act as agent of the other
---------------------- partners will come to an end from the time of dissolution. But the affairs of the
---------------------- firm will have to be continued till final settlement of accounts and distribution
of assets and liabilities. The authority of a partner in the relations of partners
---------------------- inter se will continue after dissolution only to the extent necessary for winding
up the affairs of the firm and for completing the transactions pending at the
---------------------- time of dissolution (s. 47). The partners, however, are not bound by such acts
---------------------- of a partner, if he is adjudicated insolvent, unless they have held him out as a
partner.
----------------------
Each partner is entitled to enforce the winding up of the firm,
---------------------- ●● by requiring the other partners to apply the property of the firm for
discharging the debts of the firm and
----------------------
●● by distributing the surplus among the members of the partnership (s. 46).
---------------------- A suit to enforce the right provided for by s. 46 is called a suit for an
account.
----------------------
As a general rule no suit will lie by one partner against another for
---------------------- partnership accounts without praying for dissolution.
---------------------- Lien on Dissolution
The above mentioned right of a partner over the partnership assets at the
----------------------
time of dissolution is something like an equitable lien or a quasi-lien. Each
---------------------- partner may be said to have an equitable lien on the partnership property for the
purpose of having it applied in discharge of the debts of the firm. So also a lien
---------------------- exists on the surplus assets for the purpose of having them applied in payment
of what may be due to the partners. An equitable lien is distinguished from a
----------------------
possessory lien in that the former attaches independently of any possession of
---------------------- property. It is binding not only on the other partners but also on all persons who
acquire the property with notice of the lien. The lien does not extend to any
---------------------- ordinary debts due from the partner to the firm. The lien is lost by conversion
of the partnership property into the separate property of another partner by
----------------------
agreement at the time of dissolution.
---------------------- Settlement of Accounts (s. 48)
---------------------- Section 48 lays down the rules regarding the manner in which partnership
accounts are to be settled after the dissolution of the firm. The rules contained
---------------------- in the section are subject to agreement between the parties.
254 Corporate Law

●● Losses including losses of capital must be paid in the following order: First Notes
out of profits, next out of capital and lastly if necessary by the partners
individually in the proportion in which they are entitled to share profits. ----------------------
●● Assets of the firm including any sums contributed by the partners to make ----------------------
up deficiencies of capital, shall be applied in the following manner and
order: ----------------------
– In paying the debts of the firm to third parties ----------------------
– In paying to each partner according to rates what is due to him from
the firm for advances as distinguished from capital ----------------------
– In paying to each partner according to rates what is due to him on ----------------------

account of capital
----------------------
– The residue, if any, shall be divided among the partners in the
proportion in which they were entitled to share profits. ----------------------
Where the profits are not equally divided losses are also to be divided ----------------------
in the same proportion. Liability to share losses may be excluded by special
agreement. ----------------------
Garner v. Murray: Where the contributions to capital are unequal, but ----------------------
the partners share the profits equally and if a deficiency of capital occurs all the
partners are bound to contribute equally. The assets of the firm will thereafter ----------------------
be distributed to the partners rateably as return of capital. This is called the ----------------------
rule in Garner v. Murray. in this case, G.M. and W. were partners on the terms
that profits should be divided equally. The capital was contributed unequally, ----------------------
G contributing more than M. On dissolution, the assets though sufficient to
pay the creditors, were insufficient to repay the capital in full. It was held that ----------------------
the true principle of division was for each partner to be treated as liable to ----------------------
contribute a third of the deficiency, and then to apply the assets in paying each
partner rateably his share of capital. ----------------------
Payment of Firm Debts and Separate Debts (s. 49) ----------------------
When there are joint debts due from the firm and also separate debts due
from any partner the administration or appropriation of the partnership property ----------------------
and the individual property shall be in the following manner. ----------------------
●● The property of the firm shall be first applied in the instance in payment of
----------------------
the debts of the firm, If there is any surplus, then the share of each partner
shall be applied in payment of his separate debts or be paid to him. ----------------------
●● The separate property of a partner shall be first applied to discharge his
separate debts. The surplus, if any, shall be applied for the payment of the ----------------------
debts of the firm. ----------------------
Personal Profits After Dissolution
----------------------
Where a firm is dissolved by the death of a partner and the surviving
partner or the representative of the deceased partner carries on the business ----------------------
of the firm, any personal profits made them by such means before the firm is
----------------------

Notes fully wound up, must be accounted for by them to the other partner’s estate (s.
50). This rule is subject to contract to the contrary. Section 53 contains a rule
---------------------- complementary to s. 50. Section 53 gives a power to the other partners or their
representatives to prevent any partner absolutely from using the firm name or
---------------------- property until the winding up is completed. In both cases the rights of a partner
---------------------- who has bought the goodwill of the firm, are saved. When any partner or his
representative has bought the goodwill of the firm he is entitled to use the firm
---------------------- name.
---------------------- Return of Premium (s. 51)
A partner, who has paid any premium on entering the partnership for a
----------------------
fixed term and that partnership is dissolved before the expiry of that term, is
---------------------- entitled to an additional right. By s. 51 it is provided as follows:
Where a partner has paid a premium on entering into partnership for a
----------------------
fixed term, and the firm is dissolved before the expiration of that term otherwise
---------------------- than by the death of a partner, he shall be entitled to repayment of the premium
or of such part thereof as may be reasonable, regard being had to the terms upon
---------------------- which he became a partner, and to the length of time during which he was a
partner, unless –
----------------------
●● The dissolution is mainly due to his own misconduct, or
----------------------
●● The dissolution is in pursuance of an agreement containing no provision
---------------------- for the return of the premium or nay part of it.
In the case of a partnership consisting only of two partners, no partnership
----------------------
remains on the death of one of them and therefore, it is contradiction in terms
---------------------- to say that on the death of one of them the partnership will not be dissolved but
will continue with remaining partner and the minor son of the deceased partner.
----------------------
Sale of Goodwill after Dissolution
---------------------- As already seen “goodwill” is not defined by the Act. It is an intangible but
---------------------- valuable thing attached to a prosperous business and is included in the property
of a firm. Section 55 re-asserts this from a particular point of view, and requires
---------------------- the goodwill of a business to be sold like any other part of the property of the
firm when the affairs of the firm are wound up. It may be done either along with
---------------------- other property or separately. When the goodwill of a firm is sold, the purchaser
---------------------- of the goodwill acquires a right to carry on the same business of the old firm that
he is the successor in business of the dissolved firm.
---------------------- The Act also deals with the rights of partners selling the goodwill of a
---------------------- firm on dissolution as against the purchaser of that goodwill. Such partners,
entitled to carry on a similar business, can compare with the business of the old
---------------------- firm and can also advertise their business as they wish.
---------------------- A partner on selling goodwill may enter into any agreement with the
purchaser that the seller will not carry on a similar business within certain
---------------------- specified limits for a fixed time. If from the facts and circumstances of the
case, such restrictions are reasonable they will be valid notwithstanding the
----------------------
provisions contained in s. 27 of the Contract Act.
256 Corporate Law

Subject to contract between the partner selling the goodwill and the Notes
purchaser, the seller may not
----------------------
●● Use the firm name;
●● Represent himself as carrying on the old business; or ----------------------
●● Solicit the customers of the old firm. ----------------------
The last mentioned rule was established by. There, on dissolution of
a partnership the goodwill belonged solely to one of the partners. The other ----------------------
partner made a list of the firm’s customers and tried to obtain their custom for ----------------------
himself. An injunction was issued restraining him from doing so.
----------------------
----------------------
1. When goodwill is bought in cash by new partner, the method is known ----------------------
as:
----------------------
i. Premium method
ii. Revolution method ----------------------
iii. Memorandum revolution method ----------------------
2. Upon the sale of an established business, its goodwill is of: ----------------------
i. Marketable value ----------------------
ii. Not marketable value
----------------------
iii. Capital value
iv. Stock value ----------------------
----------------------
Activity 2 ----------------------
----------------------
Meet the partner in the partnership firm and discuss with him the steps in the
process of dissolution of partnership firm. ----------------------
----------------------
Summary
----------------------
●● Registration of partnership firm is optional. The non registration of firms
----------------------
results in incapacity of suing the partners inter se and the third parties.
Hence, registration of firms is important with the registrar. However, ----------------------
the suits are still allowed in certain circumstances by the partners of
an unregistered firm. A partnership agreement is based on the utmost ----------------------
confidence among the partners. Therefore, no fraud or misrepresentation
----------------------
should be practiced by any one of the partners.
----------------------

Notes ●● Dissolution of a Partnership results in termination of Partnership agreement.
The registered partnership on dissolution ceases to be liable for its acts
---------------------- only on issuance of a public notice. The Firm may be dissolved in various
modes like, mutual consent; compulsory dissolution by operation of laws;
---------------------- automatically on the happening of certain contingencies; optionally in
---------------------- case of partnership at will; judicially by a decree of the court.
---------------------- Keywords
---------------------- ●● Mandatory: Compulsory as opposed to directory.

●● Rescission: The act of rescinding, to abrogate, annul, avoid or cancel a
----------------------
contract.
---------------------- ●● Insolvency: Bankruptcy.
---------------------- ●● Lunacy or insanity: An idiot or unsound person, it is an abnormal state
of mind rendering a person incapable of understanding the consequences
---------------------- of his acts.
---------------------- ●● Lien: Charge on a property for the payment of a debt or duty, and for
which it may be sold in discharge of the lien. It signifies an obligation, tie,
---------------------- or claim annexed to, or attaching upon, any property without satisfying
which such property cannot be demanded by its owner.
----------------------
●● Premium: A reward; a consideration; something given to invite a loan or
---------------------- bargain.
---------------------- ●● Goodwill: A benefit which arises from the establishment of particular

trade or occupation. Intrinsic value of good repute and custom of an
---------------------- established trade or business.
----------------------
----------------------
1. State what are the effects of registration or non-registration of a Partnership?
----------------------
2. What are the effects of fraud or registration?
---------------------- 3. What is dissolution of a partnership firm? And what are various modes of
dissolution?
----------------------
4. Write a note on dissolution of partnership firm by court.
----------------------
5. What are the consequences of the dissolution of a partnership firm?
---------------------- 6. Write a short note on sale of goodwill after dissolution of a partnership firm.
----------------------
----------------------
----------------------
----------------------
----------------------
258 Corporate Law


1. If all the partners, but one are insolvent it means: ----------------------
ii. Dissolution of firm
----------------------
2. At the time of dissolution:
----------------------
iii. Non-cash assets are transferred to realisation account
3. At the time of dissolution, non-cash assets are credited with: ----------------------
ii. Book value ----------------------
----------------------
----------------------
1. When goodwill is bought in cash by new partner, the method is known as:
----------------------
i. Premium method
2. Upon the sale of an established business, its goodwill: ----------------------
i. Marketable value ----------------------
----------------------
Suggested Reading ----------------------
1. Kapoor, N.D. 2008. Elements of Company Law. New Delhi: Sultan Chand ----------------------
& Sons. ----------------------
Co. ----------------------
3. Ravichandran, K.S. 2010. The LLP Law in India. Nagpur: All India ----------------------
Reporter.
----------------------
----------------------
6. AvtarSingh ,Introduction to Company law, Eleventh Edition. Eastern ----------------------
Book Company 2014
----------------------
7. AvtarSingh ,Company law, Fifteenth Edition. Eastern Book Company
----------------------
8. Taxxmann, Companies Act with Rules
----------------------
----------------------
----------------------
----------------------

Notes
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
260 Corporate Law

Limited Liability Partnership
UNIT
14
Structure:
14.1 Introduction
14.2 Nature of Limited Liability Partnership
14.3 Partners of Limited Liability Partnership
14.4 Incorporation of Limited Liability Partnership
14.5 Rights, Duties and Liabilities of Partners
Summary
Keywords
Suggested Reading
Limited Liability Partnership 261

Notes
Objectives
----------------------
• Analyse the concept of limited liability partnership
----------------------
• Describe the procedure for borrowing, lending and investments
----------------------
• Classify the kinds of charges that are created and its implications on the
---------------------- company
----------------------
---------------------- 14.1 INTRODUCTION

---------------------- The concept of limited liability partnerships is new to India. It aims to
remove the fear of a business man about losing personal wealth while doing
---------------------- business in partnership with another. It aims to make it easier for the enterprising
---------------------- Indian youth to take up business activity. It would not be an exaggeration to say
that the legislature has done a commendable job in introducing the concept
---------------------- of limited liability to partnerships. At the same time it goes without saying a
legislative effort gets shaped when a piece of legislation is put to work.
----------------------
The law relating to partnerships is not new. Originally they were part of
---------------------- the Indian Contract Act, 1872. When a partnership commences it is founded on
principles of partnerships which are enshrined in the Indian Partnership Act,
---------------------- 1932. Merely because there is a new law relating to limited liability partnerships,
---------------------- it does not in any manner dilute or do away with the requirement for adhering
to the established principles of partnerships. Mutual trust must exist at all times
---------------------- amongst partners. The essence of a partnership lies in maintaining the fabric
of faith between the partners. The concept of limited liability coupled with
---------------------- conferment of the statute of a body corporate has allowed a partnership to have
---------------------- perpetual succession. If partners are unable to resolve disputes amongst them
that does not signal the dissolution of the partnership itself. The legislature
---------------------- has paved way for preserving the entity and allowing the business to continue
without being affected by entry and exit of partners.
----------------------
The LLP Act combines best of both worlds. It draws heavily from the
---------------------- Indian Partnership Act, 1932 to incorporate partnership principles, duties and
liabilities of partner, mutual rights and liabilities of partners, and grants adequate
----------------------
liberty of partners to organize their role and responsibility as regards their LLP.
---------------------- The LLP Act has drawn heavily from Sections 9 to 36 of the Indian Partnership
Act. At the same time draws heavily from the provisions of the Companies Act,
---------------------- in order to provide built in safeguards to protect not only partners but also third
parties who deal with an LLP. The LLP Act has drawn heavily from the provisions
----------------------
of the Companies Act as regards procedural aspects relating to changes in name,
---------------------- registered office, changes amongst partners, compliance requirements, scheme
of compromises and arrangements, offences and prosecution, compounding of
---------------------- offences, and also as regards winding up and dissolution.
262 Corporate Law

The LLP Agreement is essentially an agreement that falls under Section Notes
23 of the Indian Contract Act, 1872. The entire edifice of an LLP is going to be
built on the basis of the foundation set out in the LLP Agreement. Partners have ----------------------
to devote a lot of attention to the covenants of LLP Agreement. The LLP Act
contains certain default clauses in its First Schedule. Partners must discuss about ----------------------
their mutual rights, duties, responsibilities in the context of the legal position ----------------------
contained in the LLP Act such that the partnership between them commences
with a proper and complete understanding. There are 81 sections in the LLP ----------------------
Act, 2008.
----------------------
----------------------
----------------------
1. The LLP Agreement is essentially an agreement that falls under
Section _________ of the Indian Contract Act, 1872. ----------------------
i. 23 ----------------------
ii. 21
----------------------
iii. 22
iv. 24 ----------------------
2. There are ______ Sections in the LLP Act, 2008. ----------------------
i. 81 ----------------------
ii. 91
----------------------
iii. 62
iv. 52 ----------------------
----------------------
14.2 NATURE OF LIMITED LIABILITY PARTNERSHIP ----------------------
Limited liability Partnership is a body corporate – ----------------------
An LLP is a body corporate. An LLP is a legal entity separate from that of its
----------------------
partners. The benefit of being a body corporate lies in the fact that the law accords
the status of an independent (legal) personality much similar to a natural person ----------------------
in all respects. Being a body corporate, it goes without saying that an LLP will be
known by its name irrespective of the persons who are its Partners. In fact, this ----------------------
status is fortified by another declaration of this law contained in Section 29 of the
----------------------
LLP Act that where after a partner’s death if the business of the LLP is continued
in the same name, the continued use of that name or of the deceased partner’s name ----------------------
as a part thereof shall not by itself make the legal representatives of the deceased
partner or his estate liable for any act of the LLP done after his death. ----------------------
An LLP may buy or sell properties in its name; sue or be sued. By declaring ----------------------
that an LLP has perpetual succession, the law put a lid on the usual question
whether the partnership is at will or otherwise. ----------------------

Notes Perpetual succession
An LLP has perpetual succession. Any change in partners of an LLP shall
----------------------
neither affect the body corporate status of the LLP not it rights or liabilities.
---------------------- Partners may come and partners may go; but an LLP will remain alive
and will operate as a legal entity separate from its partners. In that sense, an
----------------------
LLP has a perpetual succession. The general saying that a company (under the
---------------------- Companies Ace,) remains alive, even if all its shareholders were to die applies
to LLP also, mutatis mutandis. In order to amplify the legal position of an LLP,
---------------------- Section 4 of the LLP Act declares that any change in partners dies not affect
the body corporate status of the LLP. Thus notwithstanding any changes in the
----------------------
partners of an LLP, the rights and liabilities of an LLP will continue to remain
---------------------- intact, binding and enforceable in law by or against the LLP.
The provisions of this Section should be read in conjunction with
----------------------
several other provisions of the LLP Act. Under Section 14 of the LLP Act, on
---------------------- registration, an LLP shall, by its name, be capable of – Suing and being sued;
Acquiring, owning, holding and developing or disposing of property, whether
---------------------- movable or immovable, tangible or intangible; Having a common seal, if it
decides to have one; and Doing and suffering such other acts and things as
----------------------
bodies corporate may lawfully do and suffer. Section 24 of the LLP Act says
---------------------- that upon the dissolution of the LLP, a person shall cease to be a partner of the
LLP. Section 42 of the LLP Act says that a mere transfer of interest of a partner
---------------------- does not cause dissolution of the LLP.
---------------------- Section 4 declares that except to the extent specifically provided, the
Indian Partnership Act, 1932 does not apply to an LLP. An LLP is basically a
---------------------- partnership. In this context, the declaration in Section 4 signifies the conceptual
---------------------- departure the legislature has made in construing the legal position of an LLP in
contradistinction with Partnership Firm. Though Indian Partnership Act, 1932
---------------------- does not apply, the LLP Act is replete with the principles of the partnership
heavily drawn from the said Act.
----------------------

----------------------
Fill in the blanks.
---------------------- 1. An LLP is a legal entity __________from that of its partners.
----------------------
2. ______of the LLP Act declares that any change in partners does not
---------------------- affect the body corporate status of the LLP.
----------------------
14.3 PARTNERS OF LIMITED LIABILITY PARTNERSHIP
----------------------
---------------------- Who may become a partner of an LLP?

Section 3 of the LLP Act declares that an LLP is a body corporate. Any
---------------------- individual or a body corporate may be a partner in an LLP. It goes without saying
264 Corporate Law

that what is meant by the word ‘individual’ is a natural person. The expression Notes
‘body corporate’ has been defined in the LLP Act. The expression, under the
LLP Act, include a ‘Company’ as defined under Section 3 of the Companies ----------------------
Act, and also an LLP incorporated in India or outside India. There should be
atleast two partners. Only when there are atleast two partners, a partnership is ----------------------
possible. ----------------------
LLP Act does not prescribe any ceiling to the maximum number of
----------------------
partners an LLP may have. This is very important facility which is not available
to a Partnership Firm or a private limited company. In this respect the LLP ----------------------
Act has made a significant departure from the usual provisions. In a private
or public company under the Companies Act, it is not proper to designate an ----------------------
officer of the company as a director unless he is part of the Board of Directors
----------------------
of the Company. However in the case of an LLP, any number of persons could
be designated as partners whether or not such persons have the obligation to ----------------------
make potential contributions other than service. For instance, it is possible for
a professional firm to induct hundreds of professionals as partners without any ----------------------
limit on the maximum number of partners. Registration and other fees prescribed
----------------------
under the LLP Act are not based on number of partners. They are based on the
value of contribution. ----------------------
If an LLP carries on business with two or more partners and if due to death
----------------------
or cessation due to disqualification or due to any other reason, only one partner
remains, and if such surviving or remaining sole partner carries on business of ----------------------
the LLP for more than 6 months while being aware that he is remaining to be the
sole partner of the LLP, he shall be liable for the obligations of the LLP incurred ----------------------
during such period.
----------------------
The liability of partners of an LLP, unlike partners of Partnership Firm, is
limited to the extent of the obligation of a partner to make contribution as per the ----------------------
LLP Agreement. No partner can be called upon to settle or meet the obligations
----------------------
and liabilities of the LLP. Provided a partner of an LLP has not yet brought his
contribution which he ought to have made as per the LLP Agreement, a creditor ----------------------
is entitled to enforce such obligation of the partner. Section 6 of the LLP Act, is
an exception to the general rule in the LLP Act as regards liability of a partner. ----------------------
In other words, the debts and obligations of the LLP will not affect the partners
----------------------
personally. However, if only one partner remains and if that partner, knowing
that he is the sole surviving or remaining partner, carries on business of the LLP ----------------------
for more than 6 months, while remaining to be its sole partner, due to operation
of the law containing in sub-section (2) of Section 6 of the LLP Act, his liability ----------------------
becomes unlimited for the obligations of the LLP incurred during that period.
----------------------
As per Section 2(1)(j) “designated partner” means any partner designated
as such pursuant to Section 7. There must be a minimum of two Designated ----------------------
Partners. It means any number of partners of an LLP may be named as Designated ----------------------
Partners. In fact, all the partners of LLP may be Designated Partners. Only
individuals can be Designated Partners. In the case of an LLP which consists ----------------------
of only bodies corporate as its Partners, the bodies corporate shall appoint any
of its nominees as the Designated Partners. In case one or more LLPs are the ----------------------

Notes Partners of an LLP, formed and incorporated in India, two individuals who
are Partners of the LLP or LLPs which are Partners of the Indian LLP should
---------------------- be the Designated Partners. Of the two, one should be a resident in India. As
per the explanation under this sub-section, for a person to be considered as a
---------------------- Resident, he should have stayed in India for not less than 182 days in India
---------------------- in the year immediately preceding the year in which the question whether the
person concerned is a resident or not, arises.
----------------------
Where the incorporation document states the names of Designated
---------------------- Partners, they shall be the Designated Partners of that LLP. If the incorporation
documents say that each partner of the LLP, from time to time, would be
---------------------- Designated Partners, it could be construed accordingly. LLP Agreement should
contain clear provisions on appointment and on cessation of office of Designated
----------------------
Partners.
---------------------- In order to become a Designated Partner, the individual concerned should
give his consent in the prescribed form.
----------------------
LLP should file with the Registrar particulars of every individual who has
---------------------- accorded his consent to act as a Designated Partner. The filing should be done
in the prescribed form within 30 days of appointment of a Designated Partner.
----------------------
An individual becoming a Designated Partner should satisfy all such
---------------------- conditions and requirements as may be prescribed. Rule 9(1) of the LLP Rules,
---------------------- 2009 contains the prescribed conditions and requirements.
Every Designated Partner should have a Designated Partner Identification
---------------------- Number.
---------------------- Rule 2(1)(iv) of the LLP Rules, 2009 states that “Designated Partner
Identification Number” (DPIN) means an identification number which the
---------------------- Central Government may allot to any individual or nominee of a body corporate,
---------------------- intending to be appointed as designated partner of a limited liability partnership
(LLP), for the purpose of his identification as such.
----------------------
DPIN is similar to Director Identification Number (DIN) under the
---------------------- Companies Act.
Under this Section, the LLP Act clearly reveals of the scheme of the
----------------------
Act relating to the mandatory need for appointment of Designated Partners. A
---------------------- Designated Partner is liable to do all acts, matters and things as are necessary to
be done by the LLP for securing compliance of the LLP Act. Such compliances
---------------------- may include the filing of documents, returns, statements and reports in
pursuance of any requirement under the LLP Act. As a sequel to the above
----------------------
requirements, and in order to ensure that Designated Partners do really comply
---------------------- with the requirements under the LLP Act, Section 8 (b) of the LLP Act provides
that the Designated Partners are liable for any penalties imposed in the LLP for
---------------------- any contravention of the provisions of the LLP Act.
---------------------- Section 9 requires the LLP to appoint a Designated Partner within 30
(thirty) days of any vacancy arising in the office of the Designated Partnership.
----------------------
266 Corporate Law

The person who is going to be appointed as a Designated Partner should Notes
give his consent to act as a Designated Partner and he should also satisfy the
conditions and requirements. ----------------------
If no Designated Partner is appointed or if at any time there is only one ----------------------
Designated Partner, each Partner shall be deemed to be a Designated Partner.
----------------------
Sub-section (1)
●● Two or more persons desirous of being associated for carrying on a ----------------------
lawful business with a view to make profit may subscribe their names to
----------------------
‘incorporation document’ for incorporating an LLP.
●● The ingredients are as follows: ----------------------
– There must be two or more persons; ----------------------
– They have to be associated for a particular purpose;
----------------------
– Such association should be to carry on any business;
----------------------
– The business should be lawful.
– Their objective should be to carry on that business with a view to ----------------------
make profit. ----------------------
– They must subscribe to ‘incorporation document’ in order to form
----------------------
an LLP.
●● The ‘incorporation document’ should be in the prescribed form and it ----------------------
should be filed with the Registrar with the prescribed fee. Annexure A to
----------------------
the LLP rules, 2009 contains the prescribed fee.
●● It is necessary to add a statement to the ‘incorporation document’ to state ----------------------
that all the requirements of the LLP Act and the Rules made there under
----------------------
have been complied with in respect of incorporation and matters precedent
and incidental thereto. The statement should be in the prescribed form. ----------------------
It should be made jointly (1) by an advocate, or a company secretary,
or a chartered accountant, or a cost accountant and (2) by anyone who ----------------------
subscribed his name to the ‘incorporation document’.
----------------------
The incorporation document should be in the prescribed form. Form 2
is the prescribed form for this purpose. For more details read notes under the ----------------------
caption ‘Rules and Forms’ in this Chapter.
----------------------
This sub-section contains a warning against false statements. Clause (c)
of sub-section (1) of Section 11 requires a statement [Part B of form 2] to be ----------------------
made jointly by a Partner and a Professional that all requirements of the LLP
----------------------
Act and the Rules made there under have been complied with in respect of
incorporation and matters precedent and incidental thereto. In case a person ----------------------
makes statement which he knows to be false or which he does not believe to be
true, he is liable for the punishment prescribed in sub-section (3). ----------------------
----------------------
----------------------

Notes
----------------------

1. Any individual or a body corporate may be a partner in an LLP.
----------------------
2. The LLP Act does not prescribe any ceiling to the maximum number
---------------------- of partners an LLP may have.
---------------------- 3. The liability of partners of an LLP, like partners of partnership firm,
is unlimited to the extent of the obligation of a partner to make
---------------------- contribution as per the LLP Agreement.
----------------------
---------------------- Activity 1
----------------------
Compare the general Partnership Agreement with Limited Liability
---------------------- Partnership.
----------------------
----------------------
14.4 INCORPORATION OF LIMITED LIABILITY PARTNERSHIP
---------------------- Incorporation by registration

This Act requires the Registrar to retain the incorporation document and
----------------------
after ensuring that all requirements have been satisfactorily complied with he shall
---------------------- register the incorporation document and issue a certificate of incorporation of the
LLP. Before doing so, the Registrar should ensure that the requirements of clauses
---------------------- (a) to (c) of sub-section (1) of Section 11 have been complied with. These clauses
are the basic clauses which have to be complied with for the purpose of forming
----------------------
an LLP. Clause (a) of sub-section (1) of Section 11 states that two or more persons
---------------------- associated for carrying on any lawful business may subscribe their names to the
incorporation document for the purpose of registering an LLP of them. Clause (b)
---------------------- of sub-section (1) of Section 11 states that the incorporation document should be
in the prescribed form and it should be filed with the prescribed fee. Clause (c)
----------------------
of the sub-section (1) of Section 11 requires the statement that all requirements
---------------------- of the Act and Rules have been complied with. Once the Registrar is satisfied
that those requirements have been satisfactorily complied with, he is supposed to
---------------------- retain the incorporation document and issue the certificate of incorporation. The
certificate of incorporation should be issued within 14 days of the filing of the
----------------------
incorporation document.
---------------------- The statement referred to in clause (c) of sub-section (1) of Section
11 is very significant. Once the statement that all requirements of the Act
----------------------
and Rules have been complied with is made in the prescribed manner, the
---------------------- Registrar is entitled to consider the same as constituting sufficient evidence
that the requirement under clause (a) of sub-section (1) of Section 11 has been
---------------------- complied with. In other words, the statement issued under clause (c) of sub-
268 Corporate Law

section (1) of Section 11 would operate as sufficient evidence of the existence Notes
of the requirement under clause (a) of sub-section (1) of Section 11 that the
incorporation document has been duly subscribed by not less than two persons ----------------------
associated for carrying on a lawful business.
----------------------
The certificate of incorporation should be signed by the Registrar of LLP
and it should be authenticated by his official seal. ----------------------
The certificate of incorporation operates as the conclusive evidence of ----------------------
the formation and incorporation of the LLP of the name mentioned in that
certificate. ----------------------
Every LLP should have a registered office. All communications and notices ----------------------
to the LLP could be addressed to the registered office and such communications
and notices should be capable of being received at the registered office. It means ----------------------
not only that an LLP should maintain a physical office, the registered office
----------------------
should be such a place where there should be a responsible person to receive
those communications and notices as addressed to the LLP. ----------------------
To serve any document lawfully [in a valid manner, for legal purposes] ----------------------
on the LLP or any Partner or Designated Partner of the LLP, it is sufficient
if the document is served on the registered office of the LLP. It may be sent ----------------------
by post under a certificate of posting or by registered post or by any other
manner as may be prescribed to the address of the registered office of the LLP. ----------------------
Services of document through courier may also be permitted. Even a telegram ----------------------
may be sent to notify urgent legal requirements. Delivering a document directly
at the registered office would also be valid and binding. There is an ‘in-built’ ----------------------
additional feature in this sub-section. An LLP may specify any other address for
the purpose of serving documents upon the LLP or its Partners or Designated ----------------------
Partners. However in order to avail this facility, the other address should be ----------------------
declared by the LLP in such form and manner as may be prescribed. In such a
case, besides serving the document or notice upon the address of the registered ----------------------
office of the LLP, it should be served upon such other address also.
----------------------
Change in the address of registered office is possible. The procedure for
such change should be as per the LLP Agreement. Notice of change should ----------------------
be filed with the Registrar of LLP in such form and in such manner as may be
prescribed. It is important to note that the change in registered office would ----------------------
come into force only after filing with the Registrar the notice of change in ----------------------
registered office.
The sub-section is a penal provision. Contravention of any requirement ----------------------
of this section creates a punishable offence. In case there is any contravention, ----------------------
the LLP and its every partner are punishable with fine which shall not be less
than Rs. 2,000/- [Rupees Two Thousand] but which may extend to Rs. 25,000/- ----------------------
[Rupees Twenty Five Thousand].
----------------------
Capacity of Limited Liability Partnership -
----------------------
Being a body corporate formed and incorporated under the LLP Act, on
registration, an LLP is capable of – ----------------------

Notes ●● Suing and being sued. In other words, an LLP may initiate legal action
against anyone for claiming or protecting its contractual and legal rights.
---------------------- And similarly third parties and even its Partners may initiate legal action
against the LLP.
----------------------
●● Acquiring, owning, holding and developing or disposing of property,
---------------------- whether movable or immovable, tangible or intangible. An LLP is a body
corporate; a legal entity; an artificial person. Therefore it is entitled to
---------------------- acquire, possess, own, or alienate any property in such manner as it deems
---------------------- fit. It will be matter of internal regulation if there are any restrictions or
conditions with regard to acquisitions and alienations.
---------------------- ●● Having a common seal, if it decides to have one. An LLP, by a provision
---------------------- in the LLP Agreement or by a resolution of its Partners, may adopt a seal
of its own. Common seal symbolizes the authority of the LLP. However it
---------------------- is clear from this provision that it is not a mandatory requirement.
---------------------- ●● Doing and suffering such other acts and things as bodies corporate may
lawfully do and suffer. This is an omnibus provision explaining that an
---------------------- LLP, as a body corporate, may do or suffer anything in the course of its
existence. If anything is done lawfully, there may be contractual liability if
---------------------- the LLP commits any breach of its obligations and commitments, just like
---------------------- any other party to a contract. If anything is done illegally or unlawfully,
such action will be illegal and therefore void besides the prospects of the
---------------------- LLP and its Partners getting penalized.
Name of Limited Liability Partnership -
----------------------
The name of an LLP should always carry the suffix “Limited Liability
---------------------- Partnership” or the acronym “LLP”. In order to distinguish an LLP from a
---------------------- Partnership Firm or a company, it becomes essential to communicate to general
public that the entity they are dealing with is a special form of organization
---------------------- known as LLP. Otherwise, it is possible that it passes off as a Partnership Firm
and traders deal with an LLP or its Partners without knowing the aspect of
---------------------- limited liability concept or other consequences of such dealings. The proposition
---------------------- contained in Section 26 of the LLP Act that every Partner of an LLP is an
agent of an LLP but no partner is an agent of other Partners is one of the most
---------------------- distinguishing feature of an LLP.
---------------------- An LLP cannot be registered with a name which, in the opinion of the
Central Government, is undesirable or is identical or too nearly resembles to
---------------------- that of –
---------------------- ●● Any other Partnership Firm; or
●● Any other LLP; or
----------------------
●● Any other body corporate; or
---------------------- ●● Any registered trademark of a person other than the applicant; or
---------------------- ●● A trademark which is the subject matter of an application for registration
of any other person under the Trademarks Act, 1999
----------------------
270 Corporate Law

The states an enabling clause for making applications for reservation of Notes
name for an LLP proposed to be formed or for change of name of an existing
LLP. Persons who intend to form an LLP should first make an application to the ----------------------
Registrar of LLP for ascertaining whether the name could be made available to
the said applicant. This process has been described as the Name Reservation ----------------------
process. This provision applies for applicants who intend to form and incorporate ----------------------
a new LLP and also to an existing LLP whose partners would want to change its
name. ----------------------
Before reserving the name applied for, the Registrar would apply the ----------------------
provisions of sub-section (2) of Section 15 of the LLP Act, 2008 and Rule 18(2)
of the LLP Rules, 2009. If the name applied for is hit by any of the factors ----------------------
stipulated in sub-section (2) of Section 15 of the LLP Act, 2008 and Rule 18(2)
----------------------
of the LLP Rules, 2009, the Registrar will reject the application.
Clause (a) of sub-section (1) of Section 11 of the LLP Act, 2008 states ----------------------
that for an LLP to be incorporated two or more persons associated for carrying
----------------------
on a lawful business with a view to profit shall subscribe their names to an
Incorporation Document. Section 22 of the LLP Act clearly declares that ----------------------
“Persons who subscribed their names to the Incorporation Document shall be
Partners of the LLP”. It may be noted that the subscribers to an Incorporation ----------------------
Document may be individuals or bodies corporate. If a body corporate subscribes
----------------------
its name to an Incorporation Document, it becomes a Partner of the LLP, though
it may be signing the Incorporation Document through an authorised signatory. ----------------------
Further Section 22 of the LLP Act states that a person may become a Partner of
an LLP by and in accordance with the LLP Agreement. ----------------------
Thus a person may become a Partner of an LLP in two ways: ----------------------
●● He may subscribe to the Incorporation Document of an LLP under ----------------------
incorporation within the meaning of Clause (a) of sub-section (1) of
Section 11 of the LLP Act, 2008 and become a Partner of the LLP if it is ----------------------
thereby incorporated.
----------------------
●● He may join the LLP as a Partner at any point of time after formation and
incorporation of an LLP by complying with the requirements of the LLP ----------------------
Agreement.
----------------------
14.5 RIGHTS, DUTIES AND LIABILITIES OF PARTNERS ----------------------
The Act prescribes following rights and duties of partners- ----------------------
The mutual rights and duties of the partners of an LLP -
----------------------
●● Such mutual rights and duties will be governed by the LLP Agreement
between the Partners of the LLP or the agreement between the LLP and ----------------------
its partners.
----------------------
●● The most fundamental aspect of doing business in the form of a Partnership
Firm is to allow the partners to define their rights and duties. The law does ----------------------
not make inroads into the liberty the Partners of a Firm has in doing their
----------------------

Notes business according to their own agreement. One of the challenges the
Ministry had faced while introducing the law on LLP was the formidable
---------------------- task of allowing the partners of an LLP also to enjoy the same liberty they
would have had, had they constituted a Partnership Firm to carry on their
---------------------- business. However the limited liability aspect of an LLP would require
---------------------- sufficient safeguards to be built in so that unwary traders and those who
deal with the LLP are protected thoroughly.
---------------------- ●● With this object in mind, the LLP law has allowed the partners of the LLP
---------------------- and the LLP also to have their own arrangements as regards all matters
other than that are specifically required to be done or complied with by
---------------------- the LLP or its Partners, more particularly the Designated Partners.
---------------------- – The LLP Agreement and any changes, if any, made therein should
be filed with the Registrar in the prescribed form. The prescribed
---------------------- fee should be paid.
---------------------- – Partners have to take great care while drafting their agreement.
LLP Agreement should be constructed with a lot of application of
---------------------- mind. Salient features of an LLP Agreement should be filed with the
Registrar. Further whenever there are changes to the LLP Agreement
---------------------- such changes should also be notified to the Registrar. The Registrar
---------------------- has the powers to direct the Partners of an LLP to file with him the
LLP Agreement itself. Presently the Rules require only the filing of
---------------------- an abstract of select matters of the LLP Agreement.
---------------------- An agreement in writing made before the incorporation of an LLP between
the persons who subscribe their names to the incorporation document
---------------------- impose obligations on the LLP, provided such agreement is ratified by all
the partners after the incorporation of the LLP.
----------------------
●● In the absence any agreement as regards a particular matter, the LLP
---------------------- Act would come to the rescue. Sub-section (4) of Section 23 of the LLP
Act states that in such a case the mutual rights and duties of the partners
----------------------
and the mutual rights and duties of the LLP and the partners will be
---------------------- determined by the provisions relating to that matter as are contained in
the First Schedule to the LLP Act.
----------------------
●● Therefore while construction an LLP Agreement it should be remembered
---------------------- that if the LLP Agreement is silent on any matter, the provisions of the First
Schedule to the LLP Act with regard to that matter shall apply. However
---------------------- nothing prevents the Partners of the LLP to carry out an amendment to
the LLP Agreement so as to add a provision to deal with such matter in
----------------------
such manner as they may think fit. Until such amendment takes place and
---------------------- comes into force, the Partners are bound to comply with the corresponding
provisions in the First Schedule to the LLP Act.
---------------------- – An LLP is not bound by anything done by a partner in dealing with
---------------------- a person if –
1. The partner in fact has no authority to act for the LLP in doing
----------------------
a particular act; and
272 Corporate Law

2. The person knows that he has no authority or does not know Notes
or believe him to be a partner of the LLP.
----------------------
– Sub-section (1) contains a declaration of law. This provision offers
a word of caution to parties who deal with the LLP. It is incumbent ----------------------
upon a party who deals with the LLP to be sure of the authority of
the partner who is interacting with him on behalf of the LLP. The ----------------------
third party who intends to deal with an LLP must note that if the
----------------------
partner who is dealing with him has no authority of the LLP to do
that act or if the third party does not even know or believe that the ----------------------
person who is dealing with him is a partner of the LLP, LLP does
not incur any liability arising from such dealing. Therefore while ----------------------
there is no doubt that any person who deals with an LLP would
----------------------
have to naturally deal through a partner of the LLP, it is necessary
to apply caution and he must check the following things: ----------------------
1. Whether the person who is representing the LLP is its partner?
----------------------
2. Whether such partner has the authority of the LLP to do that
act? ----------------------
●● The LLP is liable if a partner of the LLP is liable to any person as a result ----------------------
of the wrongful act or omission on his part in the course of the business
of the LLP or with its authority. ----------------------
●● Section 26 of the LLP Act declares that every partner of an LLP is an ----------------------
agent of the LLP. This statement should be understood in the conventional
sense of an agent vis-a‘-vis his principal. For binding the LLP, a Partner ----------------------
should have acted for and on behalf of the LLP and within his authority
----------------------
and he should have acted in the name of the LLP. Normally a person
acts as an agent for a principal and represents the principal before third ----------------------
parties. Contracts concluded by an agent with third parties on behalf of
his principal would bind the principal to the third party. ----------------------
●● The most important words in this sub-section are the words “in the course ----------------------
of the business of the LLP”. If in the ordinary course of business, if a
partner of an LLP acts and a wrongful act or omission occurs, the LLP ----------------------
shall be liable for the consequences thereof. If a partner of an LLP acts
----------------------
negligently and causes losses to a third party, the LLP is certainly liable.
In other words, if a partner is inefficient or careless or acts in a negligent ----------------------
or reckless manner while purporting to act on behalf of the LLP in the
course of the business of the LLP or while acting for the LLP within his ----------------------
authority, the LLP is liable for the consequences of such acts.
----------------------
●● An obligation of the LLP whether arising in contract or otherwise, shall
be solely the obligation of the LLP. ----------------------
●● This is a seemingly simple provision carrying a heavy legal proposition. ----------------------
It is important for third parties who deal with an LLP to do so after being
conscious about this declared legal position. Parties are expected to deal ----------------------
with an LLP after carefully registering in their mind that no partner of the
----------------------

Notes LLP could be called upon to carry out personally any of the obligations
undertaken by the LLP. This proposition is one of the reasons why Section
---------------------- 15 of the LLP Act mandatorily requires every LLP to suffix its name with
the acronym LLP or add the words limited liability partnership. However
---------------------- the question whether traders and general public in India would be wary of
---------------------- this legal position is an altogether different question.
The liabilities of the LLP shall be met out of the property of the LLP. As
---------------------- a direct consequence of the statement of law contained in the previous
---------------------- sub-section, this sub-section clearly declares that the liabilities of an LLP
would have to be met only out of the properties of the LLP. Unlike a
---------------------- Partnership Firm, a creditor of an LLP cannot seek to recover his dues
from the personal assets of any partner of the LLP. Section 25 of the LLP
---------------------- Act contains an exception to this proposition that a partner of an LLP
---------------------- is personally liable for his wrongful act or omission. Section 30 of the
LLP Act contains another exception to this proposition that in respect of
---------------------- liabilities or debts of the LLP arising from fraudulent acts, the liability of
the LLP and its Partners who had acted with intent to defraud creditors is
---------------------- unlimited.
---------------------- ●● A partner is not personally liable, directly or indirectly for an obligation
referred to in sub-section (3) of Section 27 solely by reason of being a
---------------------- partner of the LLP.
---------------------- ●● In order to bind the LLP, the Partner should have acted within his authority;
the third party should have been aware that the partner concerned who
---------------------- dealt with him is in fact a partner of the LLP. The essence of the law
---------------------- contained in Section 27 of the LLP Act is that an LLP is liable for any
wrongful act or omission of the partner provided the partner had acted on
---------------------- behalf of the firm in the ordinary course of business and with authority.
Section 27 further states that an obligation of an LLP is solely that of the
---------------------- LLP only. Section 28 extends the same law to specify in clear words that
---------------------- a partner is not personally liable directly or indirectly for any obligation
of the LLP merely because he happens to be a partner of the LLP.
---------------------- ●● In order to fasten personal liability upon a partner of an LLP, it is not
---------------------- sufficient to show that the person concerned is a partner of the LLP. A
partner of an LLP does not suffer any personal liability unlike the partner
---------------------- of a Partnership Firm. In an LLP, the liability of a partner is limited to
the extent of the contribution he had agreed to make. Therefore in order
---------------------- to fasten personal liability on a partner of an LLP, he should have acted
---------------------- beyond his authority or he should have by his own wrongful act or
omission caused any loss to any third party.
---------------------- ●● Sub-section (3) of Section 27 of the LLP Act states that the obligation of
---------------------- a LLP is solely the obligation of that LLP. Sub-section (1) of Section 28
of the LLP Act states that a partner is not personally liable merely because
---------------------- he happens to be a partner.
----------------------
274 Corporate Law

●● Sub-section (2) makes it clear that a partner is personally liable for his own Notes
wrongful acts or omission. This provision should be read in conjunction
with sub-section (2) of Section 27 of the LLP Act. However, wrongful act ----------------------
or omission complained of should be of such nature that it could shown to
be the cause for the loss or penalty occasioned to the third party. ----------------------
●● This sub-section further clarifies a partner shall not be personally liable ----------------------
for the wrongful act or omission of any other partner of the LLP.
----------------------
Conversion of Limited liability partnership -
The following are the legal propositions spelt out in the law contained in ----------------------
Section 30 of the LLP Act. ----------------------
●● In certain specific circumstances in order to protect the interests of
----------------------
creditors or others who are dealing with an LLP or its partners who purport
to act for the LLP, the law contained in this section provides for automatic ----------------------
conversion of limited liability into unlimited liability.
●● Such a conversion takes place when the LLP or its partners act with a ----------------------
view to defrauding the creditors or others dealing with the LLP. ----------------------
●● The conversion is justified because the unique legal status of an LLP
cannot be allowed to be used as a device to defraud. ----------------------
●● The partner or partners who are responsible for the fraudulent act incur ----------------------
personal liability. Their liability is unlimited.
----------------------
●● The LLP is also liable to the same extent to which the person responsible
for the fraudulent act is liable. ----------------------
●● The person who has done the fraudulent act knowingly is liable for the
----------------------
punishment enjoined under sub-section (2) of Section 30.
●● LLP or any partner or designated partner or employee of such LLP is ----------------------
liable to pay compensation to any person who has suffered any loss or
----------------------
damage of such conduct.
– If the LLP or any of its partners do any act with an intention to ----------------------
defraud the creditors of the LLP or any other person or do any act
----------------------
for a fraudulent purpose, the liability of the LLP and the partner who
commits the fraudulent act is unlimited for all or any of the debts ----------------------
and liabilities of the LLP. Leaving aside the incongruities, the sum
and substance of the law contained in this provision is very simple. ----------------------
It seeks to convert the limited liability into unlimited liability in
----------------------
certain circumstances.
– The distinctive feature of an LLP vis-a‘-vis a Partnership Firm that ----------------------
the liability of partners of an LLP is limited. Sub-section (3) of
----------------------
Section 27 of the LLP Act clearly states that the obligation of an
LLP is an obligation of the LLP only. Sub-section (4) of Section 27 ----------------------
of the LLP Act clearly states that the liabilities of an LLP shall be
met out of the property of the LLP. ----------------------
----------------------

Notes – Section 33(2) of the LLP Act provides that a creditor may enforce
against a partner his original obligation to contribute. The obligation
---------------------- undertaken by a partner to contribute is a debt due to the LLP and
the LLP may recover the same. Partners of an LLP do not incur any
---------------------- personal liability. In the ordinary course of its business or when the
---------------------- affairs of an LLP is in winding up, a creditor of an LLP cannot have
recourse to the personal wealth of the partners of an LLP except to
---------------------- the extent of the obligation of the partners of the LLP to contribute.
---------------------- – Partners may invite personal liability only in certain special
circumstances. One such special situation is contained in sub-
---------------------- section (1) of Section 30. So far as an LLP is concerned, its liability
is always unlimited whether its debts, obligations and liabilities
----------------------
have arisen in the ordinary course of its business or otherwise.
---------------------- So is the case of any individual or person for his personal debts,
obligations and liabilities. In other words, a person is liable to meet
---------------------- his liabilities out of his personal wealth and creditor or any person to
whom he owes money or any other obligation could always enforce
----------------------
the same until all his assets have been sold completely without any
---------------------- prospect of realizing anything more. This applies to an LLP also.
Therefore there is nothing known as limited liability to an LLP.
---------------------- However in the case of its partners, if the circumstances mentioned
in this sub-section exist, the partner concerned exposes himself to
----------------------
unlimited liability.
---------------------- – The proviso under sub-section (1) of Section 30 of the LLP Act
provides that in cases involving fraudulent acts, the LLP incurs
----------------------
liability to the same extent as the partner or partners who are
---------------------- responsible for the commission of the fraudulent act. In order to
establish liability upon the LLP, with the knowledge and authority
---------------------- of the LLP.
---------------------- – The proviso under sub-section (1) of Section 30 of the LLP Act
provides a gateway. If the LLP is able to establish that the impugned
---------------------- fraudulent activity by one or more of its partners had taken place
without the knowledge or authority of the LLP, the LLP does not
----------------------
incur any liability arising from such fraudulent act.
---------------------- 1. If any business is carried on by the LLP with an intention
---------------------- to defraud its creditors or other persons or for a fraudulent
purpose, every person who was knowingly a party to the
---------------------- carrying on of the business in the manner aforesaid is
punishable with imprisonment for a term which may extend
---------------------- to two years and with fine which shall not be less than fifty
---------------------- thousand rupees but which may extend to five lakh rupees.
2. Carrying on the business with an intention to defraud its
---------------------- creditors or for a fraudulent purpose is punishable offence. It
---------------------- is a question of fact.
276 Corporate Law

o If the affairs of an LLP are conducted in a fraudulent Notes
manner, without prejudice to any criminal proceedings
which may arise under any law for the time being in ----------------------
force, the LLP or the partner or designated partner
or employee who is responsible for conducting the ----------------------
affairs of the LLP in such manner shall be liable to pay ----------------------
compensation to any person who has suffered any loss
or damage by reason of such conduct. ----------------------
o The proviso under sub-section (3) of Section 30 of the ----------------------
LLP Act provides a gateway. If the V is able to establish
that the impugned partner or designated partner or ----------------------
employee who had acted fraudulently had acted so
----------------------
without the knowledge of the LLP, the LLP does not
incur any liability arising from such fraudulent act. ----------------------
o The object of the law contained in this section is to
----------------------
prevent the beneficial provision of limited liability from
being misused by the LLP or its Partners. LLP or its ----------------------
Partners. LLP is an artificial person. Therefore fraud
being an act requiring application of mind could be ----------------------
perpetrated by an LLP only by the act of its partners.
----------------------
When fraud takes place the LLP is also liable unless it is
shown that the LLP had no knowledge about the same ----------------------
or the person who did the fraud had no authority to do
the same? In case the affairs of the LLP are being carried ----------------------
on with a view to defraud its creditors or other persons
----------------------
or in a fraudulent manner, the LLP and the partners
responsible for the same are liable. The liability of the ----------------------
partner is personal besides the liability of the LLP. The
LLP does not incur any liability only of it could be ----------------------
established that the LLP had no knowledge about the
----------------------
same or it had been perpetrated without the authority of
the LLP. In addition to this liability, fraud invites penal ----------------------
liability and further the defrauded is entitled to bring
an action in a court of law for recovery of damagers in ----------------------
respect of the fraud.
----------------------
Activity 2 ----------------------
----------------------
Find out the latest case law on LLP decided by the Supreme Court.
----------------------
----------------------
----------------------
----------------------

Notes Summary
---------------------- ●● The Limited Liability Partnership is combination of both partnership
and company. It draws heavily from the Indian Partnership Act, 1932 to
----------------------
incorporate partnership principles, duties and liabilities of partner, mutual
---------------------- rights and liabilities of partners, and grants adequate liberty of partners
to organize their role and responsibility as regards their LLP At the same
---------------------- time draws heavily from the provisions of the Companies Act, 1956 in
order to provide built in safeguards to protect not only partners but also
----------------------
third parties who deal with an LLP.
---------------------- ●● An LLP is a body corporate. An LLP is a legal entity separate from that of
its partners. The benefit of being a body corporate lies in the fact that the
----------------------
law accords the status of an independent (legal) personality much similar
---------------------- to a natural person in all respects. An LLP has perpetual succession. Any
individual or a body corporate may be a partner in an LLP. There should
---------------------- be atleast two partners however, LLP Act does not prescribe any ceiling
to the maximum number of partners an LLP may have
----------------------
●● This Act requires the Registrar to retain the incorporation document and
---------------------- after ensuring that all requirements have been satisfactorily complied
with he shall register the incorporation document and issue a certificate
----------------------
of incorporation of the LLP.
----------------------
---------------------- Keywords
---------------------- ●● mutatis mutandis: This is a latin pharse meaning the necessary changes
---------------------- having been made; having substituted new terms; with respective
differences taken into consideration.
---------------------- ●● Registrar [Sec 2(1)(s) LLP Act 2008: ”Registrar” means a Registrar or
---------------------- an Additional, a Joint, a Deputy or an Assistant Registrar having the duty
of registering companies under the Companies Act, 1956
----------------------
---------------------- 1. Describe in short the meaning and nature of Limited Liability Partnership.
2. Who may become the partner of an LLP?
----------------------
3. How could the LLP be incorporated? Elaborate the procedure of
---------------------- incorporation
---------------------- 4. What are the capacities of an LLP once it is incorporated?
---------------------- 5. Enumerate the various rights, duties and liabilities of an LLP.

6. Write a detailed note on conversions of LLP.
----------------------
----------------------
278 Corporate Law


1. The LLP Agreement is essentially an agreement that falls under Section ----------------------
_________ of the Indian Contract Act, 1872.
----------------------
i. 23
2. There are ____ Sections in the LLP Act, 2008. ----------------------
i. 81 ----------------------
----------------------
----------------------
Fill in the blanks.
----------------------
1. An LLP is a legal entity separate from that of its partners.
2. Section 4 of the LLP Act declares that any change in partners does not ----------------------
affect the body corporate status of the LLP.
----------------------
----------------------
1. True ----------------------
2. True ----------------------
3. False ----------------------
----------------------
Suggested Reading ----------------------
1. Kapoor, N.D. 2008. Elements of Company Law. New Delhi: Sultan Chand ----------------------
& Sons.
----------------------
Co. ----------------------
3. Ravichandran, K.S. 2010. The LLP Law in India. Nagpur: All India ----------------------
Reporter.
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Notes
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280 Corporate Law

References Notes
----------------------
1. Avtar Singh, Company Law, 14th Ed. Eastern Law Publication, 2005
2. A. Ramaiya, Guide to Companies Act, 16th Ed. Wadhwa, 2004 ----------------------
3. N.D. Kapoor, Elements of Company Law, Sultan Chand & Sons, 2008 ----------------------
4. Singh, Avtar, Partnership Act, Eastern Book Company, Lucknow, 2005 ----------------------
5. K.S. Ravichandran, The LL.P Law in India, All India Reporter, Nagpur,
----------------------
1st edition, 2010
6. AvtarSingh, Introduction to Company law, Eleventh Edition. Eastern ----------------------
Book Company 2014
----------------------
7. AvtarSingh, Company law, Fifteenth Edition. Eastern Book Company
----------------------
8. Taxxmann, Companies Act with Rules
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References 281
Notes
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282 Corporate Law

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CORPORATE LAW

(FOR PRIVATE CIRCULATION ONLY)

COURSE DESIGN AND REVIEW COMMITTEE

Published by Symbiosis Centre for Distance Learning (SCDL), Pune

Copyright © 2019 Symbiosis Open Education Society

Mrs. Swatee Yogessh

Unit No. TITLE Page No.

Introduction to Company Law 1

---------------------- A company in a practical sense means a company of certain persons

Introduction to Company Law 3

Introduction to Company Law 5

---------------------- Act of 1913 – Following the English Companies (Consolidation) Act,

Introduction to Company Law 7

---------------------- ●● Companies established under Special Acts of Parliament, such as Life

Introduction to Company Law 9

---------------------- – Winding up of unregistered companies

Introduction to Company Law 11

Introduction to Company Law 13

●● Companies limited by guarantee – Where the liability of the members ----------------------

Introduction to Company Law 15

Joint-holders of shares are treated as a single member. ----------------------

Introduction to Company Law 17

---------------------- 2. Maximum number - There is no restriction on maximum number of

---------------------- 3. Number of directors - A public company must have at least 3 directors

“Subsidiary Company” or “Subsidiary”, in relation to any other company ----------------------

(i) controls the composition of the Board of Directors; or ----------------------

Introduction to Company Law 19

According to the document prepared by the Organization for Economic ----------------------

Introduction to Company Law 21

---------------------- Check your Progress 3

---------------------- Multiple Choice Single Response.

●● Act / legislations - In general sense it means an instrument in writing to ----------------------

Introduction to Company Law 23

---------------------- 1. Explain the meaning of term “Company”.

---------------------- 5. Explain the characteristics of the Corporate Personality.

Check your Progress 1 ----------------------

Multiple Choice Single Response. ----------------------

Introduction to Company Law 25

---------------------- 2.1 INTRODUCTION TO COMPANY FORMATION

●● Pre-incorporation contracts - Sometimes contracts are made on behalf ----------------------

Situation Clause ----------------------

---------------------- Doctrine of ultra vires

Following are the Consequences of ultra vires transactions ----------------------

Multiple Choice Single Response. ----------------------

1. The doctrine of indoor management is a ______to the doctrine of ----------------------

iv. None of the above ----------------------

---------------------- 3. Private companies limited by shares

---------------------- The articles of association of a company contained a clause to the effect

Multiple Choice Single Response. ----------------------

4. Singh, Avtar. 2005. Company Law. Eastern Law Publication. ----------------------

---------------------- The Capital for a Company is the foundation of the incorporation of a

---------------------- 3.2 PROMOTERS

---------------------- Multiple Choice Single Response.

●● Invitation to public- A document is not a prospectus unless it is an ----------------------

---------------------- Check your Progress 2

---------------------- Study and compare the prospectus of all types of companies.

---------------------- A preference shareholder has a right to vote on those resolutions which

---------------------- State True or False.

Answers to Check your Progress ----------------------

Check your Progress 1 ----------------------

Multiple Choice Single Response. ----------------------

---------------------- Suggested Reading

---------------------- 4.1 INTRODUCTION TO MEMBERSHIP OF A COMPANY

---------------------- 1. A registered shareholder is a member but a registered member may not be