KAMKUS COLLEGE OF LAW

LL.B. IVTH SEMESTER
COMPANY LAW
Code (K-4001)

UNIT-01

DETAILED ANSWER QUESTIONS

Q.1. What do you mean by the company? What are the advantages of
incorporation of a company?
ANS:- INTRODUCTION
The word ‘company’ is derived from the combination of two Latin words, namely ‘com’
and ‘panis’. The word ‘com’ means ‘together’ and ‘panis’ means ‘bread’ Thus initially
the word ‘company’ referred to an association of persons who took their meals together.
The merchants in the leisurely past took advantage of these festive gatherings to discuss
their business matters. Initially, the word ‘Company’ did not have strictly technical or
legal meaning.

Broadly speaking, the word company connotes two ideas in a legal sense:-
1. The members of the association are so numerous that it cannot aptly be described as
a firm or a partnership; and
2. A Member may transfer his interest in the association without the consent of other
members. Such an association may be incorporated according to law; thereupon, it
becomes a body corporate or what is usually called a corporation with perpetual
succession and a common seal. It is then regarded as a legal person separate and
distinct from its members.

MEANING AND DEFINITION OF COMPANY

In its wider and general sense the expression 'company' means any association or
collection of individuals having some object in common which is required to stamp the
individuals animated by a common purpose with the charter of a company and it is -
1- Carrying on of a business, and
2- For the acquisition of gain.

So, company means an association of a number of persons formed for the purpose of
some lawful commercial enterprise with a view to gain profits out of it.

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In a practical way, a company 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.

Before the inception of company as a device for business enterprise, two modes of
coming out business activities were commonly prevalent namely, (1) monopoly, and (2)
partnership, With the advance of time and impact of industrial revolution during 18th
Century, the business activities expanded tremendously bringing about a radical change
in the pattern of commercial activities. The monopolistic device involved great risk as it
required investment of capital by a single person who in the event of loss, had to bear the
entire burden himself. 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 mobilisation of capital which the resources of a few person cannot provide,
the formation of a company is the only choice. But both these devices were unsuited to
large scale business organizations which involved greater mobilization of capital
resources. Therefore, a new device in the form of company has now become the most
dominant mode of carrying out business activities. It provides the structural framework
for the modern industrial society.

Even for a small scale business, the choice of a company would be better because this is
the only form of business organisation which offers the privilege of limiting personal
liability for business debts. Accordingly, the company has become the most dominant
form of business organisation. Companies abound in the National economy, ranging from
the small family or partnership concern to the faceless multinational corporation. They
provide the structural framework of the modern industrial society. Corporations are not
novelties. They are institutions of very ancient age. But the large partnerships from which
the modern business companies evolved appeared on the English scene during the
commercial revolution.

Lord Justice Lindley has given a very befitting definition. According to him, "By a
company is meant an association of many persons who contribute money or money's
worth to a common stock and employ it for a common purpose. The common stock so
contributed is denoted in money and is the capital of the company. The persons who
contribute it or to whom it belongs are members. The proportion of capital to which each
member is entitled is his share".

Section 2(20) of the Companies Act, 2013, a “company” means a company

incorporated under this Act or under any previous company law.

According to Graf Evans, “In common law, a company is a ‘legal person or legal entity;
separate from and capable of surviving beyond the lives of its members.”

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In Halsbury’s Law of England the term ‘Company’ has been defined as “a collection of
many individuals united into one body under a special domination, having perpetual
succession under an artificial form, and vested by the policy of Law with the capacity of
acting in several respects as an individual, particularly of taking and granting property, of
contracting obligations, and of suing and being sued of enjoying privileges and
immunities in common, and of exercising a variety of political rights, more or less
extensive, according to the designs of its institution, or the power upon it, either at the
time of its Creation or at any subsequent period of its existence.

According to Justice James, a company means, “an association of persons united for a
common object. Such association may be in the form of an ordinary firm or a Hindu
Joint family business or a society registered under the Societies Registration Act or
Provident Fund Society, or a Trade Union or company incorporated by Royal Charter or
by an Act of parliament or by some Indian Law or it may be a Company incorporated
under Act relating to Companies.”

A more comprehensive legal definition of a company giving its main essentials has been
given by Haney, "A company is an incorporated association, which is an artificial person
created by law, having a separate entity, with a perpetual succession and a common seal."

NATURE OF COMPANY
A company is an artificial legal person. It does not take its birth like a natural person but
is created by the process of law alone. It is invisible, intangible and amoral because it has
no body, no soul and no conscience. Still some rights of a natural person have been given
to it.

As a rule, a company may acquire and dispose of property, it may enter into contracts,
may be fined for the contravention of the provisions of Company Act. So, for most legal
purposes a company is a legal person just like a natural person, who has rights and duties
at law.

CHARACTERISTICS/ADVANTAGES OF A COMPANY
In fact, a thorough examination of the essential features of a company will make the
nature of it clearly understandable which are as follows:

1. SEPARATE LEGAL ENTITY

On incorporation under law, a company becomes a separate legal entity entirely
distinct from its members. It means the assets of the company are not the assets of the
members. Conversely, the assets of the members are not the assets of the company. It
has its own name and its own seal, its assets and liabilities are separate and distinct
from those of its members. It is capable of owning property, incurring debt borrowing

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money, having a bank account employing people, entering into contracts and suing
and being sued separately and independently.

The leading case on the point is Salomon Vs Salomon & Co. Ltd, (1897) A.C. 22.
The brief facts and principles laid down in this classical case are as follows:

Aron Salomon was a prosperous leather merchant and was running a boot business as
a sole trader. Afterwards he formed a company and sold the carrying business to it
which was formed by the name of 'Salomon & Co. Ltd. There were seven members
as required by law, namely his wife, daughter, four sons and he himself. All members
took £ 1 share each, and he himself took £ 20,000 shares of the value of £ 1 each.
The price paid by the company to Mr. Salomon was £ 30,000; but instead of paying
him in cash, the company gave 20000 fully paid £ 1 shares and £ 10000 in
debentures. Owing to strikes in the boot trade the company amounted to only £ 6000
out of which to pay the sum of £ 10000 due to Salomon secured by debentures, and a
further £ 7,000 due to unsecured creditors. The unsecured creditors claimed that as
'Salomon & Co. Ltd.' was the same person as 'Salomon', he could not owe money to
himself and that they should be paid their £ 7,000 first. Vanghan Williams, J., and the
court of Appeal held that the company was mere agent of Salomon and he must
indemnify his agent against the losses it had sustained, by paying the £ 7,000
himself; but the House of Lords reversed the decision and held that once a company
is formed and registered under the Act. It is a separate legal person distinct from its
members, and the motives of those who promoted it are irrelevant. It is to be noted
that it is a very famous and popular judgment which was delivered by five judges.
While deciding this case, Lord Halsbury and Lord Macnaghten observed as follows -

'The Act does not say that members of a family should not form a company. The Act
does not say that a member should have more than one share. The members need not
have an independent mind and will of their own. There is no such thing as balance of
power in the constitution of a company. Hence, Salomon forming a company with
the members of his family was not an abuse of the companies Act'.

Lord Macnathten specifically stated that 'The company is at law a different person
altogether from the subscribers to the memorandum of association; and, though it
may be that after incorporation the business 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 as members liable, in any shape or form, except to the extent and in the
manner provided by the Act."

Lee v. Lee’s Air Farming Ltd, (1961) A.C. 12 (P.C.).

In this case, a company was formed for the purpose of aerial top-dressing. Lee, a
qualified pilot, held all but one of the shares in the company. He voted himself the
managing director and got himself appointed by the articles as chief pilot at a salary.
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He was killed in an air crash while working for the company. His widow claimed
compensation for the death of her husband in the course of his employment. The
company opposed the claim on the ground that Lee was not a worker as the same
person could not be the employer and the employee. The Privy Council held that Lee
and his company were distinct legal persons which had entered into contractual
relationships under which he became the chief pilot, a servant of the company. In his
capacity of managing director he could, on behalf of the company, give himself
orders in his other capacity of pilot, and the relationship between himself, as pilot
and the company, was that of servant and master. Lee was a separate person from the
company he formed and his widow was held entitled to get the compensation. In
effect the magic of corporate personality enabled him (Lee) to be the master and
servant at the same time and enjoy the advantages of both.

The decision of the Calcutta High Court in Re. Kondoli Tea Co. Ltd., (1886) ILR 13
Cal. 43, recognised the principle of separate legal entity even much earlier than the
decision in Salomon v. Salomon & Co. Ltd. case. Certain persons transferred a Tea
Estate to a company and claimed exemptions from ad valorem duty on the ground
that since they themselves were also the shareholders in the company, it was nothing
but a transfer from them in one name to themselves under another name. While
rejecting this Calcutta High Court observed: “The company was a separate person, a
separate body altogether from the shareholders and the transfer was as much a
conveyance, a transfer of the property, as if the shareholders had been totally
different persons.
2. LIMITED LIABILITY
In an incorporated company, the liability of the members of the company is limited to
contribution to the assets of the company up to the face value of shares held by him.
A member is liable to pay only the uncalled money due on shares held by him when
called upon to pay and nothing more, even if liabilities of the company are up to the
face value of shares held by him. A member is liable to pay only the uncalled money
due on shares held by him when called upon to pay and nothing more, even if
liabilities of the company for exceeds its assets. On the other hand, partners of a
partnership firm have unlimited liability i.e. if the assets of the firm are not adequate
to pay the liabilities of the firm, the creditors can force the partners to make good the
deficit from their personal assets. This cannot be done in case of a company once the
members have paid all their dues towards the shares held by them in the company.

3. PERPETUAL SUCCESSION
A company does not die or cease to exist unless it is specifically wound up or the task
for which it was formed has been completed. Membership of a company may keep on
changing from time to time but that does not affect life of the company. Death or
insolvency of member does not affect the existence of the company.

4. SEPARATE PROPERTY
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A company is a distinct legal entity. The company's property is its own. A member
cannot claim to be owner of the company's property during the existence of the
company.

5. TRANSFERABILITY OF SHARES
Shares in a company are freely transferable, subject to certain conditions, as such no
shareholder is permanently or necessarily wedded to a company. When a member
transfers his shares to another person, the transferee steps into the shoes of the
transferor and acquires all the rights of the transferor in respect of those shares.
Although, you cannot do it in a private company. Section 44 of the Companies Act,
2013 enunciates the principle by providing that the shares held by the members are
movable property and can be transferred from one person to another in the manner
provided by the articles.

6. COMMON SEAL
A company being an artificial person has no body or any physical presence and as
such it cannot sign documents for itself. Therefore, it acts through its Board of
Directors for carrying out its activities and entering into various agreements. Such
contracts must be under the seal of the company. The common seal is the official
signature of the company. The name of the company must be engraved on the
common seal. Any document not bearing the seal of the company may not be
accepted as authentic and may not have any legal force.

7. CAPACITY TO SUE AND BEING SUED

A company can sue or be sued in its own name and distinct from its members.

8. SEPARATE MANAGEMENT
A company is administered and managed by its managerial personnel i.e. the Board of
Directors. The shareholders are simply the holders of the shares in the company and
need not be necessarily the managers of the company.

9. ONE SHARE-ONE VOTE

The principle of voting in a company is one share-one vote i.e. if a person has 10
shares, he has 10 votes in the company. This is in direct contrast to the voting
principle of a co-operative society where the "one member-one vote" principle applies
i.e. irrespective of the number of shares held, one member has only one vote.

CONCLUSION
Thus, a company may be defined as an association of individuals formed generally for the
purpose of some business or undertaking carried on in the name of the association each
member having the right of assigning his share to any other person, Subject to the
regulation of the company. It can also be said that a company is an incorporated
association which is an artificial person, having a separate legal entity. Hence in brief it
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may be stated that a company is an incorporated association which is an artificial person,

having a separate legal entity, with a perpetual succession, a common seal and a common
capital comprised of transferable shares and carrying limited liability.

In short, it may be said that a company being an artificial legal person can do everything
like a natural person, except of course that, it cannot take oath, can not appear in its own
person in the court, cannot be sent to jail, cannot practice a learned profession like law or
medicine, nor can it marry or divorce like a natural person.

Q.2. State the circumstances under which the corporate veil of a company is
lifted and separate legal existence of it is ignored.
ANS:- INTRODUCTION
Once a company is formed and registered as per law, it is a separate legal entity from its
members. Further it has been established by the judiciary also that a company is a quite
distinct legal personality from the persons who have formed it. House of Lords has also
observed it in a very famous case namely Solomon Vs Solomon and Company Ltd. But
there are certain exceptions to this fundamental principle of separate corporate
personality, where the veil is lifted or pierced and the identity of the members is revealed.
It means that where the law disregards the corporate entity and pays regard instead to the
individual members behind the legal facade due to certain situations or circumstances, it
is known as lifting the veil of corporate personality.

This simply means that there are circumstances when the members, directors or certain
persons can be made personally liable for the debts or acts of the company.

CIRCUMSTANCES TO LIFT THE CORPORATE VEIL

The corporate veil can be lifted either under the
• Statutory provisions or
• Judicial interpretations

The statutory provisions are provided under the Companies Act, 2013. The other
circumstances are decided through Judicial interpretations, which are based on facts of
each case as per the decisions of the court.

STATUTORY RECOGNITION OF LIFTING OF CORPORATE VEIL

The Companies Act, 2013 itself contains some provisions which lift the corporate veil to
reach the real forces of action.

Section 7(7) deals with punishment for incorporation of company by furnishing false
information;

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Section 251(1) deals with liability for making fraudulent application for removal of name
of company from the register of companies and

Section 339 deals with liability for fraudulent conduct of business during the course of
winding up.

It should be noted here that lifting the corporate veil can be done in two different ways:
1. By keeping the company intact and making the members liable. This happens when
the corporate veil is lifted by an express provision in an enactment.
2. By destroying the company itself as a sham. This happens when the court holds that
the corporate device is used as camouflage (Cover).

WHEN CAN CORPORATE VEIL OF A COMPANY BE LIFTED

For all purposes of law a company is regarded as a separate entity from its shareholders.
But sometimes it is sometimes necessary to look at the persons behind the corporate veil.
The separate entity of the company is disregarded and the schemes and intentions of the
persons behind are exposed to full view which is known as lifting or piercing the
corporate veil. This is usually done in the following cases

1. DETERMINATION OF REAL CHARACTER OF A COMPANY

In times of war, it may become necessary to lift the corporate veil of a company to
determine whether the company has an enemy character. In Daimler Co Ltd. v.
Continental Tyre and Rubber Co, (1916) 2 A.C. 307, a company was incorporated in
England for the purpose of selling tyres manufactured in Germany by a German
company. The German company held the bulk of the shares in the English company
and all the directors of the company were Germans, resident in Germany. During the
First World War the English company commenced an action to recover a trade debt.
And the question was whether the company had become an enemy company and
should therefore be barred from maintaining the action.

The House of Lords held that though the company was registered in England it is not a
natural person with a mind or conscience. It is neither loyal nor disloyal; neither friend
nor enemy. But it would assume an enemy character if the persons in de facto control
of the company are residents of an enemy country.

2. TO PREVENT EVASION OF TAXATION

The separate existence of a company may be disregarded when the only purpose for
which it appears to have been formed is the evasion of taxes. In Sir Dinshaw
Maneckjee, Re, A.I.R. 1927 Bombay 371, the assessee was a wealthy man enjoying
large dividend and interest income. He formed four private companies and agreed with
each to hold a block of investment as an agent for it. Income received was credited in
the company accounts but company handed the amount to him as pretended loan. Thus

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he divided his income in four parts to reduce his tax liability. The Court disregarded
corporate entity as it was formed only to evade taxes.

In Bacha F Guzdar v. CIT, Bombay, the SC rejected the plea of the plaintiff, a
member of a tea company, who claimed that the dividend held by her in respect of her
shares should be treated as agricultural income(as it was exempted from tax) and not
income from manufacture and sale of tea.

3. AVOIDANCE OF WELFARE LEGISLATION

where it was found that the sole purpose of formation of new company was to use it as
a device to reduce the amount to be paid by way of bonus to workmen, the SC pierced
its corporate veil. –The Workmen Employed in Associated Rubber Industries Ltd. v.
The Associated Rubber Industries Ltd, Bhavnagar, A.I.R. 1986 SC 1.

4. PREVENTION OF FRAUD OR IMPROPER CONDUCT

In Gilford Motor Co v. Horne, H was appointed at the managing director of the
plaintiff company on the condition that he shall not solicit the customers of the
company. He formed a new company which undertook solicitation of plaintiff’s
customers. The company was restrained by the Court.

5. WHERE A CORPORATE FAÇADE IS REALLY AN AGENCY OR

TRUST
The separate existence of a company may be ignored when it is being used as an agent
or trustee. In State of UP v. Renusagar Power Co, it was held that a power generating
unit created by a company for its exclusive supply was not regarded as a separate
entity for the purpose of excise.

In Re R.G.Films Ltd. (1953) 1 All E.R. 615, an American company produced film in
India technically in the name of a British company, 90% of whose share was held by
the President of the American company. Board of Trade refused to register the film as
the English company acted merely as the agent of the American company.

6. TO PUNISH THE REAL PERSON IN QUASI-CRIMINAL CASES

AGAINST THE COMPANY
The Courts have sometimes applied the doctrine of lifting the corporate veil in quasi-
criminal cases relating to companies in order to look behind the legal person and
punish the real persons who have violated the law.

CONCLUSION

SHORT ANSWER QUESTIONS

(Note: Short answer is required not exceed 200 words.)
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Q.3. Discuss briefly the history of Company Law in India.

ANS:- HISTORY OF COMPANY LEGISLATION IN INDIA
Company Law in India, is the cherished child of the English parents. Our various
Companies Acts have been modelled on the English Acts. Following the enactment of the
Joint Stock Companies Act, 1844 in England, the first Companies Act was passed in
India in 1850. It provided for the registration of the companies and transferability of
shares. The Amending Act of 1857 conferred the right of registration with or without
limited liability. Subsequently this right was granted to banking and insurance companies
by an Act of 1860 following the similar principle in Britain. The Companies Act of 1856
repealed all the previous Acts. The Act provided inter alia for incorporation, regulation
and winding up of companies and other associations. This Act was recast in 1882,
embodying the amendments which were made in the Company Law in England upto that
time. In 1913 a consolidating Act was passed, and major amendments were made to the
consolidated Act in 1936. In the meantime England passed a comprehensive Companies
Act in 1948. In 1951, the Indian Government promulgated the Indian Companies
(Amendment) Ordinance under which the Central Government and the Court assumed
extensive powers to intervene directly in the affairs of the company and to take necessary
action in the interest of the company. The ordinance was replaced by an Amending Act of
1951.

THE COMPANIES ACT, 1956

The Companies Act, 1956 was enacted with a view to consolidate and amend the earlier
laws relating to companies and certain other associations. The Act came into force on 1st
April, 1956. This Companies Act was based largely on the recommendations of the
Company Law Committee (Bhabha Committee) which submitted its report in March,
1952. This Act was the longest piece of legislation ever passed by our Parliament.
Amendments have been made in this Act periodically. The Companies Act, 1956
consisted of 658 Sections and 15 Schedules.

The Companies Act, 1956 was enacted with the object to amend and consolidate the law
relating to companies. This Act provided the legal framework for corporate entities in
India and was a mammoth legislation. As the corporate sector grew in numbers and size
of operations, the need for streamlining this Act was felt and as many as 24 amendments
had taken place since then.

Companies (Amendment) Bill, 2003 containing important provisions relating to

Corporate Governance and aimed at achieving competitive advantage was also
introduced.

COMPANIES BILL, 2012

The Government considered the recommendations of Irani Committee and also had
detailed discussions and liberations with various stakeholders viz Industry Chambers,
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Professional Institutes, Government Departments, Legal Experts and Professionals etc.

Thereafter, the Companies Bill, 2009 was introduced in the Lok Sabha on 3rd August,
2009, The Bill laid greater emphasis on self regulation and minimization of regulatory
approvals in managing the affairs of the company. The Bill promised greater shareholder
democracy, vesting the shareholders with greater powers, containing stricter corporate
governance norms and requiring greater disclosures.

The Companies Bill, 2009 after introduction in Parliament was referred to the
Parliamentary Standing Committee on Finance for examination which submitted its
report to Parliament on 31st August, 2010.

Certain amendments were introduced in the Bill in the light of the report of the
Committee and a revised Companies Bill, 2011 was introduced. This version was also
referred to the Hon’ble Committee, which suggested certain further amendments. The
amended Bill was passed by the Lok Sabha on 18th December, 2012 and by the Rajya
Sabha on 8th August, 2013. The Bill was retitled as Companies Bill, 2012.

COMPANIES ACT 2013

The Companies Bill, 2012 was assented to by the President of India on 29.08.2013 and
notified in the Gazette of India on 30.08.2013. It finally became the Companies Act,
2013.

Passed in Lok Sabha December 18, 2012

Passed in Rajya Sabha August 08, 2013
President’s assent August 29, 2013
Total number of sections 470
Total number of chapters 29
Total number of schedules 7

Q.4. What is the Difference between company and partnership?

ANS:- Difference between company and partnership
A partnership may be distinguished from a company in the following particulars -
1. A company, formed and registered under the companies Act, is a distinct legal entity
having its existence distinct from its shareholders (the members constituting it) A
partnership, on the other hand, generally called a ‘firm’ has no separate legal
existence apart from its partners.
2. A partnership firm cannot be formed, with more than ten members in the case of
banking business & twenty members in case of any other business. A company may
consist of any number of persons subject to the minimum requirement as 2 in case of
a private company, 7 in case of a public company and 1 in case of One Person
Company. The maximum number of members of a private company, however, must
not exceed 200 excluding members who are or were in the employment of the

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company. However, there is no limit of maximum number of persons in case of a

public company.
3. A partner cannot transfer his share in the partnership without the consent of the other
partners; whereas a shareholder can transfer his share intact without the consent of
any other person.
4. Each partner is an agent of the firm to make contracts. A shareholder is not an agent
of the company.
5. Partners are the agents of the firm, but members of a company are not its agents.
Therefore, a partner can dispose of the property and incur liabilities so long as he acts
in the course of firm’s business. A member of a company has no such power.
6. A company can engage only in such trade, business or other activities that are
authorised and permitted under its Memorandum, whereas a partnership can do
anything which the partners agree to do.
7. A company being a legal person’ can own and deal with the property that belongs to
it in its corporate name, while in case of partnership, it belongs to the partners
collectively. In a partnership, the property of the firm is the property of the individual
members who are collectively entitled to it. In case of a company the property
belongs to the company and not the members.
8. The liability of partners is unlimited. He is liable for the debt of the ‘firm’ to the
extent of his private property as well, whereas the liability of a shareholder in a
company is limited to the extent of his unpaid value of shares or guarantee.
9. In the absence of any agreement to the contrary, every partner has an equal right in
the conduct of the firm’s business. But in case of a company, the right of
management vests in few members called the Directors, and the rest of the members
do not take any active part in the management of the company, nor do they
necessarily know each other. So in short All partners are entitled to take part in the
management of the partnership business while in case of a company management is
in the hands of few selected persons called the directors.
10. A company has perpetual succession i.e. the death or insolvency of shareholder or all
of them does not affect the life of the company. In case of a partnership, the death or
insolvency or bankruptcy of a partner has, in law, the effect of dissolving the
partnership itself.
11. There are certain obligations imposed upon companies, to comply with, such as, to
get its accounts audited, maintenance of certain books of accounts and registers,
holding of meetings, the filing of the balance-sheets, returns and other documents,
etc. A failure to comply with the statutory obligations under the Act is penalised. In
case of partnership, there are no such statutory obligations to be complied with. In
short a company is legally bound to have its assets audited annually by a Charted
Accountant whereas the accounts of a partnership firm are audited at the discretion of
partners.
12. A company is regulated by the Indian Company Act, 2013, whereas a partnership
firm is governed by the provisions of the Indian Partnership Act, 1932.
13. A partnership firm may or may not be registered but in case of a company
registration is must.
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14. In case of a partnership, 100% consensus is required for any decision. In case of a
company, decision of the majority prevails.
15. The Creditors of a partnership firm are Creditors of individual partners & a decree
against the firm can be executed against the partners jointly and severally. But the
creditors of a company can proceed only against the company and not against its
members.
16. The benefit or secret profit earned, if any by any members of the company does not
belong to be company. But if a partner takes advantage of his position as partner of
the firm. And consequently earns any secret profit it shall be deemed to be profit of
the partnership firm.
17. The partnership firm can be dissolved voluntarily by partners. But the winding up of
the company can only be done by the process of law, even if all the members of the
company want its winding up.
18. The members of the company can enter into or commence competive business in
competition of the company. But the partner cannot enter into or commence any
business in competition with that of the firm.
19. A partner cannot contract with his firm of which he is a partner, whereas a member
of a company can contract with a company of which he is a shareholder.
20. Restrictions on the powers of a particular partner contained in the partnership
agreement shall not avail against outsider, but those contained in the articles of
association of a company are effective against the public because articles of
association of a company being a public document, one can find out what is
contained in them.
21. A company being a creature of law, can only be dissolved as laid down by law, but a
partnership firm is the result of an agreement between the partners and therefore it
can be dissolved any time by agreement.

VERY SHORT ANSWER QUESTIONS

(Note: Very short answer is required not exceeding 75 words.)

Q.5. Is Company a citizen?

ANS:- A company, though a legal person, is not a citizen. This has been the conclusion of a
special bench of the Supreme Court in State Trading Corporation of India v. CTO, AIR
1963 SC 1811. The State Trading Corporation of India is incorporated as a private
company under the Companies Act, 1956. All the shares are held by the President of
India and two secretaries in their official capacities. The question was whether the
corporation was a citizen. One of the contentions put forth on behalf of the corporation
was that “if the corporate veil is pierced, one sees three persons who are admittedly the
citizens of India”, and, therefore, the corporation should also be regarded as a citizen. But
it was held that, “neither the provisions of the Constitution, Part II, nor of the Citizenship
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Act, either confer the right of citizenship on or recognize as citizen, any person other than
a natural person. In striking words the Supreme Court observed, “If all the members are
citizens of India the company does not become a citizen of India any more than, if all are
married the company would not be a married person.”

Q.6. What do you mean by Pre-incorporation contract?

ANS:- The promoter is obligated to bring the company in the legal existence and to ensure its
successful running,; and in order to accomplish his obligation he may enter into some
contract on behalf of prospective company. These types of contract are called ‘Pre-
incorporation Contract’. Nature of Pre-incorporation contract is slightly different to
ordinary contract. Nature of such contract is bilateral, be it has the features of tripartite
contract. In this type of contract, the promoter furnishes the contract with interested
person; and it would be bilateral contract between them. But the remarkable part of this
contract is that, this contract helps the perspective company, who is not a party to the
contract.

One might question that ‘why is company not liable, even if it a beneficiary to contact’ or
one might also question that ‘doesn’t promoter work under Principal-Agent relationship’.
Answer to all those question would be simple. The company does not in legal existence at
time of pre-incorporation contract. If someone is not in legal existence, then he cannot be
a party to contract, and ‘Privity to Contract’ doctrine excludes company from the liability.
In Kelner v Baxter, Phonogram Limited v Lane In pure common law sense, Pre-
incorporation contract does not bind the company. But there are certain exceptions to this
contract, and these exceptions were developed in USA, India and later in England.

Q.7. What are the kinds of companies provided by the Companies Act, 2013?
ANS:- The companies formed under the law may be classified as follows –
1. Incorporated companies
2. Unincorporated companies
1. Companies incorporated by Royal Charter.
2. Companies incorporated by a Special Act of Parliament.
3. Companies registered under the Companies Act, 2013.
(a) Companies limited by shares
(b) Companies limited by guarantee
(c) Unlimited companies

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The Companies Act, 2013 provides for the kinds of companies that can be promoted and
registered under the Act.
1. Private Companies
2. Public Companies
3. One Person Company (to be formed as Private Limited)
4. Small Company
5. Section 08 Companies
6. Government Companies
7. Foreign Companies
8. Holding and Subsidiary Companies

Q.8. Define the term ‘promoters’.

ANS:- The persons who conceive the idea of forming a company and invest the initial funds are
known as the promoters of the company.

Section 2 (69) of the Companies Act, 2013 defines the term ‘promoter’ as under:-
“Promoter” means a person—
(a) who has been named as such in a prospectus or is identified by the company in the
annual return referred to in section 92; or
(b) who has control over the affairs of the company, directly or indirectly whether as a
shareholder, director or otherwise; or
(c) in accordance with whose advice, directions or instructions the Board of Directors of
the company is accustomed to act.
Provided that sub-clause (c) shall not apply to a person who is acting merely in a
professional capacity.

By virtue of above definition, persons in accordance with whose advice, directions or

instructions the Board of Directors of the company is accustomed to act are also treated
as promoters. However, if a person is merely acting in a professional capacity i.e. giving
only professional advice to the Board of directors, he shall not be treated as a promoter.
 

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UNIT-02

DETAILED ANSWER QUESTIONS

Q.9. What do you understand by Memorandom of Association? What are the

contents of the Memorandum of Association of a company? State the
provisions of company law regarding alteration MOA.
ANS: MEANING AND NATURE OF MEMORANDUM OF ASSOCIATION
An important step in the formation of a company is to prepare a document called the
Memorandum of Association. It is a document of great importance in relation to the
proposed company. A Memorandum of Association is the primary document which sets
out the constitution of a company and as such, it is really the foundation on which the
structure of the company is based. It is also called the charter of the company. It defines
its relation with the outside world and the scope of its activities. In the words of Lord
Macmillan, ‘Its purpose is to enable shareholders, creditors and those who deal with the
company to know what its permitted range of enterprise is’.

The first step in the formation of a company is to prepare a document called the
memorandum of association. In fact memorandum is one of the most essential pre-
requisites for incorporating any form of company under the Companies Act, 2013
(hereinafter referred to as ‘Act”). This is evidenced in Section 3 of the Act, which
provides the mode of incorporation of a company and states that a company may be
formed for any lawful purpose by seven or more persons, where the company to be
formed is a public company; two or more persons, where the company to be formed is a
private company; or one person, where the company to be formed is a One Person
Company by subscribing their names or his name to a memorandum and complying with
the requirements of this Act in respect of its registration.

To subscribe means to append one’s signature or mark a document as an approval or

attestation of its contents.

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According to Section 2(56) of the Act “memorandum” means the memorandum of

association of a company as originally framed and altered, from time to time, in
pursuance of any previous company law or this Act.

In a leading case of Ashbury Railway Carriage Co. Vs Riche (1875), L.R. 7 H.L. 653,
Lord Cairns as for back as in 1875 observed that “The memorandum of association of a
company is its charter and defines the limitation of the powers of a company. The
Memorandum contains the fundamental conditions upon which alone the company is
allowed to be incorporated.” So, it may be summed up that memorandum of Association
is a life giving document of a company.

CONTENTS OF THE MEMORANDUM

As per Section 4(1), the memorandum of a limited company must state the following:

1. NAME CLAUSE
A company, being a legal person, must have a name to establish its identity. The
promoters have to seek an advanced approval of the name and once an advance
approval is granted to a particular applicant, the Registrar will not make that name
available to any other person. A company by registering its name gains a monopoly
of the use of that name. The name of a company is a part of its business reputation
and that would definitely be injured if a new company could adopt an allied name.

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The name of the company is mentioned in the name clause. A public limited
company must end with the word ‘Limited’ and a private limited company must end
with the words ‘Private Limited’. One is free to choose any name for the purpose but
the company cannot have the name which in the opinion of the Central Government
is undesirable. A name which is identical with or nearly resembles the name of
another company in existence will not be allowed. A company cannot also use a
name which is prohibited under the names & emblems (Prevention of Misuse Act,
1950) or use a name suggestive of connection of government or state patronage.

So, the memorandum must state the name of the company. No company shall be
registered by a name which, in the opinion of the Central Government, is
undesirable. For instance, a name which is identical with, or too nearly resembles,
the name by which a company in existence has been previously registered, is deemed
to be undesirable.

Use of the Words ‘Limited’/’Private Limited’: It is necessary that the word

“Limited” must be mentioned as the last word of the name in the case of a public
limited company and the word “Private Limited” must be the last words of the name
in the case of a private limited company. The words “Limited” or “Private Limited”
are to be used where the liability of the members of the company is limited, and the
name of the company itself gives an indication to that effect. An “Unlimited
company”, i.e., a company not having any limit on the liability of its members, is not
required to use “Limited” or “Private Limited” as the last words of its name. In case
of One Person Company, the words ‘‘One Person Company’’ shall be mentioned in
brackets below the name of such company, wherever its name is printed, affixed or
engraved.

Publication of Name by Company (Section 12(3)): Every company is required to

paint or affix its name (and the address of its registered office), outside every office
or place in which its business is carried on, shall have its name engraved in legible
characters on its seal, and shall have its name (and address of its registered office)
mentioned in all its business letters and other documents. The company and its
officers who make a default in fulfilling this duty are subject to punishment.

Licence to Drop the Words ‘Limited’/’Private Limited’ (Section 08): The Central
Government may authorise a limited company not to use the words “Limited” or
“Private Limited” at the end of its name.

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2. REGISTERED OFFICE CLAUSE

It is also known as the domicile clause. The state in which the registered office of the
company is to be situated is mentioned in this clause. If it is not possible to state the
exact location of the registered office, the company must state to provide the exact
address either on the day on which it commences to carry on its business or within 30
days from the date of incorporation of the company, whichever is earlier. Notice
must be given to the Registrar of companies within 30 days of the date of
incorporation of the company. The registered office of the company is the official
address of the company where the statutory books and records must normally be
kept. Every company must affix or paint its name and address of its registered office
on the outside of every office or place at which its activities are carried on. The name
must be written in one of the local languages and in English. This clause of the
memorandum must specify the state in which the registered office of the company is
to be situated. All communication to the company must be addressed to it’s
registered office. A company can shift it registered office from one place to another
within the same city, town or village.
Shifting of the registered office from one state to another is a complicated affair
because it involves alteration of the memorandum itself.

So, the Memorandum of every company must also mention the State in which the
registered office of the company is to be situated.

Every company should have registered office, as from the day of commencement of
its business, or within 30 days of its incorporation, whichever date is earlier, to which
all communications and notices may be addressed.

3. OBJECT CLAUSE
This clause is the most important clause of the company. It specifies the activities
which a company can carry on and which activities it cannot carry on. The company
cannot carry on any activity which is not authorised by its Memorandum. The
memorandum must state the objects for which the proposed company is to be
established. Choice of objects lies with the subscribers to the memorandum and their
freedom in this respect in almost unrestricted. The only obvious restrictions are that
the objects should not go against the law of the land and the provision of the
company’s Act i.e. law prohibited gambling. Obviously, no company can be
incorporated for that purpose. The ownership of the corporate capital is vested in the
company itself. The statement of objects, therefore, gives a very important protection
to the shareholders by ensuring that the funds raised for one undertaking are not

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going to be risked in another. 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. 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. This clause must specify –

a) Main objects of the company to be pursued by the company on its incorporation.

b) Objects incidental or ancillary to the attainment of the main objects.
c) Other objects of the company not included in (1) & (2) above.

It has already been noted that the Memorandum is to contain the main objects and the
objects incidental or ancillary thereto, as well as other objects. Sometimes companies
try to circumvent the ultra vires rule by incorporating numerous clauses in the
Memorandum specifying a large number of “objects”, some of them not having even
a remote relation with the main objects of the company. This defeats the very
purpose of the objects clause. The acts which are neither covered under the main
objects nor are incidental or ancillary thereto are declared by the courts as ultra vires.
Thus, when the County Council had been empowered to run tramways, the act of
running omnibus to feed the tramways was held to be ultra vires as it was not fairly
incidental to the main object. But when the company acquired land for the purpose of
railway, and the railway was erected on arches, the letting of the arches as work-
shops, etc. was held to be fairly incidental to the powers of the company, and thus
valid.

In Lakshmanaswami v. L.I.C. A.I.R. 1963 S.C. 1185, shortly before the business of a
Life Insurance Company was taken over by the L.I.C., at the extraordinary General
Meeting of the shareholders a resolution was passed sanctioning a donation of Rs. 2
lakhs out of shareholders’ Dividend Account to a certain memorial trust. No dividend
was declared for the shareholders for that year. The objects of the trust, to whom the
donation was made, included the promotion of art, science, industrial, technical or
business knowledge including knowledge in banking, insurance, commerce and
industry. On taking over the said insurance company in 1956, the L.I.C. challenged
the vires of the said donation. It was held that the fact the trustees had no obligation
to utilise the amount for promoting education in insurance, and even if that was done,
there was very little chance of the insurance company gaining an advantage
therefore, and thus, the business for which the donation was made was too indirect to

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be regarded as incidental or naturally conducive to the objects of the donor company.

The L.I.C. was, therefore, held entitled to demand the amount from the trustees.

In Evans v. Brunner (1921) 1 Ch. 259, the main object of the company was to carry
on the business as chemical manufacturers, and it was held that the amount spent on
scientific research was fairly incidental to that object. Similarly, when a company
having the business of supplying boats for a ferry, employed the surplus boats, itself
in excursions, or a hotel company temporarily let off a part of the premises, not
required for its business at any particular time, the transactions were held to be intra
vires, and valid.

4. LIABILITY CLAUSE
The fourth particular in a memorandum of association of a limited company is the
mention of the fact that the liability of the company is limited notwithstanding the
fact that the company is limited by guarantee or shares. The Memorandum of a
company limited by shares or by guarantee shall also state that the liability of the
members is limited.

The Memorandum of a company limited by guarantee shall further state the

maximum limit of the amount that each member undertakes to contribute in the event
of the winding up of the company.

When the company is limited by shares, it means that the liability of its members is
limited to the amount, if any, unpaid on the shares respectively held by them. In case
of fully paid shares held by any member, he has no further liability. When the
company is limited by guarantee, the liability of the members becomes limited to
such amount as the members may respectively undertake by the Memorandum to
contribute to the assets of the company in the event of its being wound up.

5. CAPITAL CLAUSE
The amount of share capital with which the company is to be registered divided into
shares must be specified giving details of the number of shares and types of shares. A
company cannot issue share capital greater than the maximum amount of share
capital mentioned in this clause without altering the memorandum.

When the company is limited by shares and thus it has to have a share capital, the
Memorandum shall state the amount of share capital with which the company is to be
registered and the division of the capital into shares of a fixed amount. For instance,

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in this clause, it may be mentioned that the share capital of the company is Rs.
2,00,000/- divided into 1,000 shares of Rs. 200/- each.

6. ASSOCIATION/SUBSCRIPTION CLAUSE
This is the last clause of the memorandum of Association wherein a declaration by
the persons for subscribing to the Memorandum that they desire to form into a
company and agree to take the shares place against their respective name must be
given by the promoters.

The subscribers to the memorandum declare: “We, the several persons whose names
and addresses are subscribed below, 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”.
Then follow the names, addresses, description, occupations of the subscribers, and
the number of shares each subscriber has agreed to take and their signatures attested
by a witness.

The statutory requirements regarding subscription of memorandum are that:

• Each subscriber must take at least one share;
• Each subscriber must write opposite his name the number of shares which he
agrees to take. [Section 4(1)(e))]

Apart from these clauses of the memorandum of association, there are other formal
requirements. These are–
a) The memorandum shall be printed.
b) Divided into paragraphs consecutively numbered.
c) Signed by each subscriber in the presence of at least one witness and shall give
his address, description and occupation, if any.
d) The Shares taken by each subscriber to be mentioned opposite his name etc.

ALTERATIONS IN MEMORANDUM
Section 13 of the Companies Act, 2013 prescribe the mode of affecting alterations in
respect of all the clauses of the memorandum of association as discussed below–

Section 13(1) of the Act provides that save as provided in section 61 (Dealing with
power of limited company to alter its share capital), a company may, by a special
resolution and after complying with the procedure specified in this section, alter the

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provisions of its memorandum. The memorandum of association of a company may

be altered in the following respects:
1. By changing its name [Sections 13(2)]
2. By altering it in regard to the State in which the registered office is to be situated
[Section 13(4) & (7)]
3. By altering its objects [Section 13 (1) & (9)
4. By altering its share capital (Section 61)
5. By reorganising its share capital (Sections 230 to 237).
6. By reducing its capital (Section 66).

CHANGE OF NAME
1. A company may change its name by passing a special resolution to that effect and
having the consent of the Central Government prior to the passing of such resolution.

Provided that no such approval shall be required where the only change in the name
of the company is the addition thereto or, as the case may be, the deletion therefrom,
of the word ‘private’, consequent on the conversion in accordance with the
provisions of this Act of a public company into a private company or of a private
company into a public company.

2. If a company (without obtaining the consent of the other company), is through

inadvertence or otherwise, registered under a name identical with that of a company
in existence, which is already registered or which so nearly resembles it, as to be
calculated to deceive the first company, it may, with the approval of the Central
Government and by passing an ordinary resolution, change its name.

CHANGES OF REGISTERED OFFICE

A company may by passing a special resolution, and obtaining confirmation of the court,
change the place of its registered office from one state to another. The procedure is by
petition to the court, after the special resolution has been passed. The court sees whether
sufficient notice, of the proposed alteration, has been given to all persons likely to be
affected. Certified copy of the court’s order sanctioning the change, and a copy of
memorandum must be filed with the Registrar within three months.

CHANGE OF OBJECTS
The objects of a company can be altered by a special resolution but only to the extent
allowed by the Act. The Act permits the company to make the alteration in the objects in
order to enable the company to –

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a. Carry on its business more economically or more efficiently;

b. Attain its main purpose by new or improved means;
c. Enlarge and change the local area of its operations;
d. Carry on some business which under existing circumstances may conveniently or
advantageously be combined with the business of the company;
e. Restrict or abandon any of the objects specified in the memorandum;
f. Sell or dispose of the whole, or any part of the undertaking, or any of the undertakings,
of the company;
g. Amalgamate with any other company or body of persons.

Before changing the objects, a special resolution is to be passed and then a petition is to
be made to the court to confirm the alterations.

CHANGE OF LIABILITY CLAUSE

According to section 13(1), a company may, by a special resolution and after complying
with the procedure specified in this section, alter the provisions of its memorandum. It
means that a company can change the liability clause of its memorandum of association
by passing a special resolution. Further section 13(6)(a) provides that a company shall, in
relation to any alteration of its memorandum, file with the Registrar the special resolution
passed by the company under section 13(1).

Q.10. Discuss the doctrine of Ultra Vires in company law with reference to cases
decided by the Indian Courts.
ANS:- DOCTRINE OF ULTRA VIRES
The object clause of the Memorandum of the company contains the object for which the
company is formed. An act of the company must not be beyond the objects clause,
otherwise it will be ultra vires and, therefore, void and cannot be ratified even if all the
members wish to ratify it. This is called the doctrine of ultra vires, which has been firmly
established in the case of Ashtray Railway Carriage and Iron Company Ltd v. Riche.
Thus the expression ultra vires means an act beyond the powers. Here the expression ultra
vires is used to indicate an act of the company which is beyond the powers conferred on
the company by the objects clause of its memorandum. An ultra vires act is void and
cannot be ratified even if all the directors wish to ratify it. Sometimes the expression ultra
vires is used to describe the situation when the directors of a company have exceeded the
powers delegated to them. Where a company exceeds its power as conferred on it by the
objects clause of its memorandum, it is not bound by it because it lacks legal capacity to
incur responsibility for the action, but when the directors of a company have exceeded the
powers delegated to them. This use must be avoided for it is apt to cause confusion
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between two entirely distinct legal principles. Consequently, here we restrict the meaning
of ultra vires objects clause of the company’s memorandum.

BASIC PRINCIPLES INCLUDED THE FOLLOWING

1. An ultra vires transaction cannot be ratified by all the shareholders, even if they wish
it to be ratified.
2. The doctrine of estoppel usually precluded reliance on the defence of ultra
vires where the transaction was fully performed by one party
3. A fortiori, a transaction which was fully performed by both parties could not be
attacked.
4. If the contract was fully executory, the defence of ultra vires might be raised by
either party.
5. If the contract was partially performed, and the performance was held to be
insufficient to bring the doctrine of estoppel into play, a suit for quasi contract for
recovery of benefits conferred was available.
6. If an agent of the corporation committed a tort within the scope of his or her
employment, the corporation could not defend on the ground the act was ultra vires.

ORIGIN AND DEVELOPMENT

Doctrine of ultra vires has been developed to protect the investors and creditors of the
company. The doctrine of ultra vires could not be established firmly until 1875 when the
Directors, &C., of the Ashbury Railway Carriage and Iron Company (Limited) v Hector
Riche, (1874-75) L.R. 7 H.L. 653 was decided by the House of Lords. A company called
“The Ashbury Railway Carriage and Iron Company,” was incorporated under the
Companies Act, 1862. Its objects, as stated in the Memorandum of Association, were “to
make, and sell, or lend on hire, railway carriages and waggons, and all kinds of railway
plant, fittings, machinery, and rolling-stock; to carry on the business of mechanical
engineers and general contractors ; to purchase, lease, work, and sell mines, minerals,
land, and buildings; to purchase and sell, as merchants, timber, coal, metals, or other
materials, and to buy and sell any such materials on commission or as agents.” The
directors agreed to purchase a concession for making a railway in a foreign country, and
afterwards (on account of difficulties existing by the law of that country), agreed to
assign the concession to a Societe Anonyme formed in that country, which societe was to
supply the materials for the construction of the railway, and to receive periodical
payments from the English company.
The objects of this company, as stated in the Memorandum of Association, were to
supply and sell the materials required to construct railways, but not to undertake their
construction. The contract here was to construct a railway. That was contrary to the
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memorandum of association; what was done by the directors in entering into that contract
was therefore in direct contravention of the provisions of the Company Act, 1862

It was held that this contract, being of a nature not included in the Memorandum of
Association, was ultra vires not only of the directors but of the whole company, so that
even the subsequent assent of the whole body of shareholders would have no power to
ratify it. The shareholders might have passed a resolution sanctioning the release, or
altering the terms in the articles of association upon which releases might be granted. If
they had sanctioned what had been done without the formality of a resolution, that would
have been perfectly sufficient. Thus, the contract entered into by the company was not a
voidable contract merely, but being in violation of the prohibition contained in the
Companies Act, was absolutely void. It is exactly in the same condition as if no contract
at all had been made, and therefore a ratification of it is not possible. If there had been an
actual ratification, it could not have given life to a contract which had no existence in
itself; but at the utmost it would have amounted to a sanction by the shareholders to the
act of the directors, which, if given before the contract was entered into, would not have
made it valid, as it does not relate to an object within the scope of the memorandum of
association.

Later on, in the case of Attorney General v. Great Eastern Railway Co.4, this doctrine
was made clearer. In this case the House of Lords affirmed the principle laid down
in Ashbury Railway Carriage and Iron Company Ltd v. Riche5 but held that the doctrine
of ultra vires “ought to be reasonable, and not unreasonable understood and applied and
whatever may fairly be regarded as incidental to, or consequential upon, those things
which the legislature has authorized, ought not to be held, by judicial construction, to
be ultra vires.”
The doctrine of ultra vires was recognised in Indian the case of Jahangir R. Modi v.
Shamji Ladhaand has been well established and explained by the Supreme Court in the
case of A. Lakshmanaswami Mudaliarv vs Life Insurance Corporation of India. Even in
India it has been held that the company has power to carry out the objects as set out in the
objects clause of its memorandum, and also everything, which is reasonably necessary to
carry out those objects. For example, a company which has been authorized by its
memorandum to purchase land had implied authority to let it and if necessary, to sell it.
However it has been made clear by the Supreme Court that the company has, no doubt,
the power to carry out the objects stated in the objects clause of its memorandum and also
what is conclusive to or incidental to those objects, but it has no power to travel beyond
the objects or to do any act which has not a reasonable proximate connection with the
object or object which would only bring an indirect or remote benefit to the company.

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To ascertain whether a particular act is ultra vires or not, the main purpose must first be
ascertained, then special powers for effecting that purpose must be looked for, if the act is
neither within the main purpose nor the special powers expressly given by the statute, the
inquiry should be made whether the act is incidental to or consequential upon. An act is
not ultra vires if it is found:
a. Within the main purpose, or
b. Within the special powers expressly given by the statute to effectuate the main
purpose, or
c. Neither within the main purpose nor the special powers expressly given by the statute
but incidental to or consequential upon the main purpose and a thing reasonably done
forneffectuating the main purpose.

The doctrine of ultra vires played an important role in the development of corporate
powers. Though largely obsolete in modern private corporation law, the doctrine remains
in full force for government entities. An ultra vires act is one beyond the purposes or
powers of a corporation. The earliest legal view was that such acts were void. Under this
approach a corporation was formed only for limited purposes and could do only what it
was authorized to do in its corporate charter.

This early view proved unworkable and unfair. It permitted a corporation to accept the
benefits of a contract and then refuse to perform its obligations on the ground that the
contract was ultra vires. The doctrine also impaired the security of title to property in
fully executed transactions in which a corporation participated. Therefore, the courts
adopted the view that such acts were voidable rather than void and that the facts should
dictate whether a corporate act should have effect.

Over time a body of principles developed that prevented the application of the ultra vires
doctrine. These principles included the ability of shareholders to ratify an ultra vires
transaction; the application of the doctrine of estoppel, which prevented the defense of
ultra vires when the transaction was fully performed by one party; and the prohibition
against asserting ultra vires when both parties had fully performed the contract. The law
also held that if an agent of a corporation committed a tort within the scope of the agent’s
employment, the corporation could not defend on the ground that the act was ultra vires.

Despite these principles the ultra vires doctrine was applied inconsistently and erratically.
Accordingly, modern corporation law has sought to remove the possibility that ultra vires
acts may occur. Most importantly, multiple purposes clauses and general clauses that
permit corporations to engage in any lawful business are now included in the articles of

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incorporation. In addition, purposes clauses can now be easily amended if the corporation
seeks to do business in new areas. For example, under traditional ultra vires doctrine, a
corporation that had as its purpose the manufacturing of shoes could not, under its
charter, manufacture motorcycles. Under modern corporate law, the purposes clause
would either be so general as to allow the corporation to go into the motorcycle business,
or the corporation would amend its purposes clause to reflect the new venture.

State laws in almost every jurisdiction have also sharply reduced the importance of the
ultra vires doctrine. For example, section 304(a) of the Revised Model Business
Corporation Act, drafted in 1984, states that “the validity of corporate action may not be
challenged on the ground that the corporation lacks or lacked power to act.” There are
three exceptions to this prohibition: it may be asserted by the corporation or its
shareholders against the present or former officers or directors of the corporation for
exceeding their authority, by the attorney general of the state in a proceeding to dissolve
the corporation or to enjoin it from the transaction of unauthorized business, or by
shareholders against the corporation to enjoin the commission of an ultra vires act or the
ultra vires transfer of real or personal property.

Government entities created by a state are public corporations governed by municipal

charters and other statutorily imposed grants of power. These grants of authority are
analogous to a private corporation’s articles of incorporation. Historically, the ultra vires
concept has been used to construe the powers of a government entity narrowly. Failure to
observe the statutory limits has been characterized as ultra vires.

In the case of a private business entity, the act of an employee who is not authorized to
act on the entity’s behalf may, nevertheless, bind the entity contractually if such an
employee would normally be expected to have that authority. With a government entity,
however, to prevent a contract from being voided as ultra vires, it is normally necessary
to prove that the employee actually had authority to act. Where a government employee
exceeds her authority, the government entity may seek to rescind the contract based on an
ultra vires claim.

EFFECT OF ULTRA VIRES TRANSACTIONS

A contract beyond the objects clause of the company’s memorandum is an ultra
vires contract and cannot be enforced by or against the company as was decided in the
cases of In Re, Jon Beaufore (London) Ltd ., (1953) Ch. 131, In S. Sivashanmugham And
Others v. Butterfly Marketing PrivateLtd., (2001) 105 Comp. Cas Mad 763,

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A borrowing beyond the power of the company (i.e. beyond the objects clause of the
memorandum of the company) is called ultra vires borrowing.

However, the courts have developed certain principles in the interest of justice to protect
such lenders. Thus, even in a case of ultra vires borrowing, the lender may be allowed by
the courts the following reliefs:
1. INJUNCTION
If the money lent to the company has not been spent the lender can get the injunction
to prevent the company from parting with it.
2. TRACING
The lender can recover his money so long as it is found in the hands of the company in
its original form.

3. SUBROGATION
If the borrowed money is applied in paying off lawful debts of the company, the lender
can claim a right of subrogation and consequently, he will stand in the shoes of the
creditor who has paid off with his money and can sue the company to the extent the
money advanced by him has been so applied but this subrogation does not give the
lender the same priority that the original creditor may have or had over the other
creditors of the company.

EXCEPTIONS TO THE DOCTRINE OF ULTRA VIRES

There are, however, certain exceptions to this doctrine, which are as follows:
1. An act, which is intra vires the company but outside the authority of the directors
may be ratified by the shareholders in proper form.20
2. An act which is intra vires the company but done in an irregular manner, may be
validated by the consent of the shareholders. The law, however, does not require that
the consent of all the shareholders should be obtained at the same place and in the
same meeting.
3. If the company has acquired any property through an investment, which is ultra
vires, the company’s right over such a property shall still be secured.
4. While applying doctrine of ultra vires, the effects which are incidental or
consequential to the act shall not be invalid unless they are expressly prohibited by
the Company’s Act.
5. There are certain acts under the company law, which though not expressly stated in
the memorandum, are deemed impliedly within the authority of the company and
therefore they are not deemed ultra vires. For example, a business company can raise
its capital by borrowing.
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6. If an act of the company is ultra vires the articles of association, the company can
alter its articles in order to validate the act.

Q.11. Discuss the doctrine of Indoor Management with exception.

ANS:- INTRODUCTION
The doctrine of the 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, its follows that these is no notice as to
how the companies 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.

MEANING OF INDOOR MANAGEMENT

Memorandum of Association and Articles of Association, both these documents on
registration assume the character of public documents and every person dealing with the
company is deemed to have the notice of their contents. An outsider dealing with a
company is presumed to have read the contents of the registered documents of a
company. The further presumption is that he has understood them in proper sense. This is
known as rule of constructive notice. So, constructive notice is a presumption operating
in favour of the company against the outsider. There is however, one exception to this
rule of constructive notice. This is known as the doctrine of Indoor management. It is also
popularly known as the Rule in Royal British Bank Vs Turquand or Turquand case
(1856) 6 E & B. 37.

The doctrine of Indoor management means that the outsiders dealing with a company are
entitled to assume that everything has been regularly done, so far as its internal
proceedings are concerned. In this case, a company has powers to borrow money
provided a proper resolution was passed. The company borrowed money and issued
bonds. The resolution was not in fact passed. The court held that company was bound.
The fact that the resolution was not passed did not affect the lender. Same view was again
followed by the court in case of Mahony V/s East Holyford Mining Co. (1875) L.R. 7
H.L. 869.

Hence, doctrine of indoor management is intended to protect an outsider against the

company. But as this is a rule of presumption there are certain exceptions of this rule of
indoor game. These are –

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1. This rule of indoor management does not protect those persons who have the actual
knowledge of the irregularity.
2. This is again inapplicable to the persons who have purported to act as a director in
the transaction.
3. If there is any forgery, indoor management is a rule of presumption. By a
presumption a forgery cannot be converted into a genuine transaction.
4. When your suspicions are aroused, you should investigate. If you fail to investigate,
you can not presume that things are rightly done.

The doctrine of indoor management imposes an important limitation on the doctrine of

constructive notice. According to this doctrine, a person dealing with a company is bound
to read only the public documents. He will not be affected by any irregularity in the
internal management of the company.

EXCEPTIONS TO THE RULE

1. KNOWLEDGE OF IRREGULARITY
A person who has actual knowledge of the internal irregularity cannot claim the
protection of this rule, because he could have taken steps for self-protection. A
person who himself is a party to the inside procedure, such as a director is deemed to
know the irregularities, if any.

T.R Pratt (Bombay) Ltd. V. E.D. Sassoon & Co. Ltd. Company A lent money to
Company B on a mortgage of its assets. The procedure laid down in the articles for
such transactions was not complied with. The directors of the two companies were
the same. Held, the lender had notice of the irregularity and hence the mortgage was
not binding.

2. NEGLIGENCE AND SUSPICION OF IRREGULARITY

Where a person dealing with a company could discover the irregularity if he had
made proper inquiries, he cannot claim the benefit of the rule of indoor management.
The protection of the rule is also not available where the circumstances surrounding
the contract are so suspicious as to invite inquiry, and the outsider dealing with the
company does not make proper inquiry.

3. FORGERY
The rule in Turquand’s case does not apply where a person relies upon a document
that turns out to be forged since nothing can validate forgery. In Ruben v. Great
Fingall Ltd, a co was not held bound by a certificate issued by tit secretary by
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forging the signature of two directions. However, in Official Liquidator v. Commr

of Police, the Madras High Court held the company liable where the Managing
Director had forged the signature of two other directors.

4. REPRESENTATION THROUGH ARTICLES

A person who does not have actual knowledge of the company’s articles cannot
claim as against the company that he was entitled to assume that a power which
could have been delegated to the directors was in fact so delegated. In Rama
Corporation v. Proved Tin and General Investment Co, the plaintiffs contracted
with the defendant co and gave a cheque under the contract. The director could have
been authorized but in fact, was not. The plaintiffs had not read the articles. The
director misappropriated the cheques and plaintiff sued. Held, director not liable as it
was outside his authority.

SHORT ANSWER QUESTIONS

(Note: Short answer is required not exceed 200 words.)

Q.12. Distinguish between Memorandom of Association and Article of
Association.
ANS:- The major differences between memorandum of association and articles of association
are given as under:
1. Memorandum of Association is a document that contains all the condition which is
required for the registration of the company. Article of Association is a document
that contains the rules and regulation for the administration of the company.
2. Memorandum of Association is defined in section 2 (56) while the Articles of
Association is defined in section 2 (5) of the Companies Act 2013.
3. Memorandum of Association is subsidiary to the Companies Act, whereas Articles of
Association is subsidiary to both Memorandum of Association as well as the Act.
4. In any contradiction between the Memorandum and Articles regarding any clause,
Memorandum of Association will prevail over the Articles of Association.
5. Memorandum of Association contains the information about the powers and objects
of the company. Conversely, Articles of Association contain the information about
the rules and regulations of the company.
6. Memorandum of Association must contain the six clauses. On the other hand,
Articles of Association is framed as per the discretion of the company.
7. Memorandum of Association is obligatory to be registered with the ROC at the time
of registration of Company. As opposed to Articles of Association, is not required to
be filed with the registrar, although the company may file it voluntarily.
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8. Memorandum of association defines the relationship between company and external

party. On the contrary, articles of association govern the relationship between the
company and its members and also between the members themselves.
9. When it comes to scope, the acts performed beyond the scope of memorandum are
absolutely null and void. In contrast, the acts done beyond the scope of artciles can
be ratified by unanimous voting of all shareholders.

BASIS FOR MEMORANDUM OF

ARTICLES OF ASSOCIATION
COMPARISON ASSOCIATION

Memorandum of Association (MOA)

is a document that contains all the
Definition
fundamental data which are required
for the company incorporation.
MOA must be registered at the time
Registration of incorporation.
Articles of Association (AOA) is a
document containing all the rules and
regulations that govern the company
The articles may or may not be
registered.

The articles demonstrate obligations,

The Memorandum is the charter,
rights, and powers of individuals, who
which characterizes and limits
Scope are endowed with the responsibility of
powers and constraints of the
running the organization and
organization.
administration.

Status Supreme document. It is subordinate to the memorandum.

The memorandum cannot give the
company power to do anything
Power
opposed to the provision of the
companies act.
The articles are constrained by the act,
but they are also subsidiary to the
memorandum and cannot exceed the
powers contained therein.

A memorandum must contain six The articles can be drafted according

Contents
clauses. to the decision of the Company.

The memorandum contains the The articles provide the regulations by

Objectives objectives and powers of the which those objectives and powers are
company. to be conveyed into impact.

The memorandum is the dominant

Validity Any provision, as opposed to a
instrument and controls articles.
memorandum of association, is

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invalid.

Q.13. What is Prospectus? Who are liable for a misstatement in a prospectus?

ANS:- INTRODUCTION
Any document inviting offers from the public for the subscription of shares or debenture
of a company is called prospects. Where a company intends to issue a public appeal for
subscription of its shares or debentures, it is essential for it to issue a prospectus.

MEANING AND DEFINTION OF PROSPECTS :-

A prospectus is an invitation to an offer to subscribe for shares or debentures.

Section 2(70) of the Companies Act, 2013 defines a prospectus as “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 the public for the subscription or
purchase of any securities of a body corporate.”

In essence, it means that a prospectus is an invitation issued to the public to take shares or
debentures of the company or to deposit money with the company any advertisement
offering to the public shares or debentures of the company for sale is a prospectus.

Application forms for shares or debentures cannot be issued unless they are accompanied
by a memorandum containing such salient features of a prospectus as may be prescribed.
Thus, the effect is that only a document has to be sent alongwith application forms
showing a brief verson of the salient features of the prospectus.

In Pramatha Nath Sanyal vs. Kalikumar Dutt, AIR 1925 Cal., an advertisement was
inserted in a newspaper starting that some shares are still available for sale according to
the terms of the prospectus of the company which can be obtained on application. This
was held to be a prospectus as it invited the public to purchase shares. The Directors were
accordingly convicted for not complying with the requirements of the Act.

ESSENTIALS OF PROSPECTUS
The essential ingredients of a prospectus are:-
1. There must be an invitation offering to the public;
2. The invitation must be made by or on behalf of the company or in relation to an
intended company;
3. The invitation must be “to subscribe or purchase”; and
4. The invitation may relate to shares or debentures.

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CONTENTS OF PROSPECTUS
1. Every Prospectus to be Dated
2. Every Prospectus has to be Registered
3. Experts’ Consent
4. Disclosures to be made

MIS-STATEMENTS IN A PROSPECTUS
To protect the interests of prospective investors in the securities of a company, the law
prescribes a wider meaning to this term. Whether a statement is untrue or not is to be
judged by the context in which it appears and the totality of impression it would create. A
statement included in a prospectus shall be deemed to be untrue, if the statement is
misleading in the form and context in which it is included.

Further, where any inclusion or omission of any matter in a prospectus is likely to

mislead, the prospectus shall be deemed, in respect of such omission, to be a prospectus
in which an untrue statement is included. The expression “Included” with reference to a
prospectus means included in the prospectus itself or contained in any report or
memorandum appearing on the face thereof or by reference incorporated therein or issued
therewith. Even if every word included in the prospectus is true, the suppression of
material facts may cause the prospectus to be fraudulent.

A prospectus must be complete and perfect in all details or in other words nothing should
be omitted and nothing must be untrue in a prospectus. Where an untrue statement occurs
in a prospectus, there may arise (i) civil liability (ii) criminal liability. Every person who
is a director of the company at the time of the issue of the prospectus, every promoter of
the company and every person, including an expert, who has authorised the issue of a
prospectus, shall be liable.

REMEDIES FOR MISREPRESENTATION

1. Damages for Deceit
2. Compensation
3. Rescission for Misrepresentation
4. Liability

Besides damages for deceit and fraud the company may also be sued for damages
provided it is shown that the fraud was committed by the directors within the scope of
their authority i.e. with the authority of the company. The company is also liable if the
prospectus is issued by the Board which adopts the issue, for the prospectus is the basis of
the contract for share.

Thus the first remedy against the company is to rescind a contract and claim the money
back. The allottee, however must act within a reasonable time. He shall lose his right to

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rescind if he attempts to sell the shares or attends a general meeting of the company or
receives dividends from the company.

CIVIL LIABILITY [SECTION 35]

The inadequacy of action for damages for deceit came to light in the house of lords
decision in Derry Vs. Peek [1889] 14 AC 337 and this remedy was found to be
inadequate to protect the interests of investors. It was realized that a common investor is
hardly concerned whether this mis-statement in the prospectus was a deliberate falsehood
or made by the directors in good faith innocently. What he is concerned with is that he
should be compensated for the loss caused to him due to mis-representation. It is for this
reason that within a year of the decision in Deory Vs. Peek, on Act called the Director’s
Liability Act 1980 was passed in England whereby the directors were made liable for
mis-statements in the prospectus although they might have believed that the statement
was substantially true. Sub-sequently this provision was incorporated in section 43 of the
English Companies Act, 1948 and a Corresponding provision to this effect is to be found
in Section 35 of the companies Act, 2013 in India.

The Section Provides that the directors, promoters and every other person who is
authorized to issue the prospectus of a company shall be liable to pay compensation to the
investor for any loss sustained by him due to untrue statement in the prospectus. The
liability of the directors or promoters as the case may be is joint and several and they may
recover contribution from others who are guilty of misrepresentation.

DEFENCES TO CIVIL LIABILITY [SECTION 35 (2)]

Section 35 (2) of the companies Act provides that a person [other than an expert] shall not
be liable to pay compensation for any mis-statement in the prospectus in the following
circumstances :-
1. Withdrawal of consent,
2. Without Knowledge,
3. Ignorance of untrue statement,
4. Has reasonable ground for belief,
5. Reliance on expert’s opinion,
6. Statement based on Public Official document.

CRIMINAL LIABILITY FOR MISREPRESENTATION (SECTION 34)

Apart from civil liability for mis-sttements in the prospectus, the company law also provides for
criminal liability under section 34 of the Act. The section says that where prospectus includes
any untrue statement, every person who has authorized the issue of the prospectus shall be
punishable with :
(a) Imprisonment for a term which shall not be less than 6 months [3 years in case of
involving public interest] but which may extend to 10 years; or
(b) Fine which shall not be less than the amount involved in fraud, but which may extend to
three times the amount involved in the fraud.

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He shall, however, not be criminally liable if he proves that the statement was immaterial or that
he had a reasonable ground to believe that it was true.

To conclude it can be said that prospectus is the window through which an investor can look into
the soundness of a company. Investor therefore be given a complete picture of the activities and
financial position. A statement is deemed to be untrue if it is false in form and context in which it
is included. If any person has been induced to invest money in a company relying on that false
statement, he can sue that person who is responsible for issuing it and claim damages.

Q.14. What are the modes/methods to become or cease as member of a company?

Ans:- MODES OF ACQUISITION OF MEMBERSHIP
A person may become a member of the company in any one of the following ways:

1. BY SUBSCRIBING THE MEMORANDUM

A person becomes a member of a company by subscribing the memorandum before its
registration.

2. BY AGREEING TO TAKE QUALIFICATION SHARES

According to the section 266 directors of the company on delivering to registrar a written
undertaking to take their qualification shares and to pay for them become the members of the
company and they are in same position as if they were subscribers to the Memorandum.

3. BY ALLOTMENT
Here the share application offers to subscribe for shares in the company. By accepting the offer,
the shares are allowed to him. However, he becomes a member when his name is entered into the
register of members.

4. BY TRANSFER
As we all know by virtue of Section 44, shares are easily transferable. Hence the transferee
becomes a member when his name is entered in the register of the members. A transfer may take
place either by sale, gift or otherwise.

5. BY TRANSMISSION
Here, the ownership is transferred by operation of law and not by act of parties. Transmission
takes place in two cases namely, (1) death of the member, or (2) insolvency of the members. In
case of death, his legal representatives will become the members. In case of insolvency, his
assignee will become the member. Under Sec. 72 and 56, every holder of shares may at any time
nominate in the prescribed manner, a person to whom his shares in the company shall vest in the
event of his death. Under Section 101, they are entitled for notice of General Meetings. The
nominee may elect to be registered himself as a holder of the shares, in which case he becomes a
member.

6. BY ESTOPPEL OR BY ACQUIESCENCE

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Estoppel is a rule of evidence. By permitting his name to be entered in the register of members
he is estopped from denying that he is a member. It may be that his name is wrongly or
improperly entered in the said register. When he comes to know of it, he shall take steps to have
his name struck off the register. If he knows and assents to have his name in the register of
member, he becomes a member by acquiescence.

METHODS OF CEASING TO BE A MEMBER

1. By transferring his shares.
2. By forfeiture of his shares.
3. By a valid surrender of his shares.
4. By a sale by the company of his shares under some provisions in the Articles, e.g. in
exercise of its lien over his shares.
5. By death of a member.
6. In case of insolvency, on a disclaimer by the official assignee of his estate.
7. On winding up of a company, and
8. On rescission of the contract of membership on the ground of misrepresentation or
mistake.

VERY SHORT ANSWER QUESTIONS

(Note: Very short answer is required not exceeding 75 words.)

Q.14. Explain the Doctrine of constructive notice.

Ans: Every person who enters into any contract with a company will be presumed to know the
contents of the memorandum of association and the articles of association. This is known
as the doctrine of constructive notice. As observed by Lord Hatherley, “…whether a
person actually reads them or not, he is to be in the same position as if he had read them”.
Every person will be presumed to know the contents of the documents.

Another effect of this rule is that a person dealing with the company is taken not only to
have read the documents but also to have understood them according to their proper
meaning. The doctrine of constructive notice applies not only to Memorandum and
Articles, but also other documents which have to be filed with the Registrar, such as
special resolutions, and particulars of charges. But there is no notice of documents which
are filed only for the sake of record, such as returns and account.

Q.15. Who may be a member of a company?

Ans: All persons who are competent to contract may, in general, become members of a
company. There are, however, some special considerations to which reference must be
made.
1. Company.
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2. Hindu undivided family.

3. Firm.
4. Joint holders.
5. Registered society.
6. Insolvent.
7. Minor.

Q.16. What do you mean by Article of Association?

Ans:- The articles of association is a document that specifies the regulations for a company's
operations and defines the company's purpose. The document lays out how tasks are to be
accomplished within the organization, including the process for appointing directors and
handling of financial records. The articles of association are concerned with the internal
management of the company and aims at carrying out the objectives as mentioned in the
memorandum. These define the company’s purpose and lay out the guidelines of how the
task is to be carried out within the organization. The articles of association cover the
information related to the board of directors, general meetings, voting rights, board
proceedings, etc.

Q.17. State the golden rule which must be observed while framing a prospectus?
Ans:- The Golden Rule of Prospectus has a meaning and a moral in it, which says whatever
information comes from the company to the public, through the medium of prospectus,
must be true, fair and accurate. A company issues prospectus to attract general public to
purchase its shares, interested people rely on the information presented in the prospectus
and on the basis of which they desire to make investment in the shares of the issuing
company. The 'Golden Rule' for framing of a prospectus was laid down by Justice
Kindersley in New Brunswick & Canada Rly. & Land Co. v. Muggeridge (1860). Briefly,
the rule is those who issue a prospectus hold out to the public great advantages which will
accrue to the persons who will take shares in the proposed undertaking. Public is invited
to take shares on the faith of the representation contained in the prospectus. The public is
at the mercy of company promoters. Everything must, therefore, be stated with strict and
scrupulous accuracy. Nothing should be stated as fact which is not so and no fact should
be omitted the existence of which might in any degree affect the nature or quality of the
principles and advantages which the prospectus holds out as inducement to take shares. In
a word, the true nature of the company’s venture should be disclosed.

Q.18. Define the term member provided under the Company Act.
Ans:- According to section 2(55), the following are the members of the company –

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1. The subscribers of the memorandum of a company shall be deemed to have agreed

to become members of the company, and on its registration, shall be entered as
members in its register of members.
2. Every other person who agrees to become a member of a company and whose name
is entered in its register of members shall be a member of the company.
3. Every person holding shares of a company and whose name is entered as a
beneficial owner in the records of a depository shall be deemed to be a member of
the concerned company.

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UNIT-03, 04 & 05

DETAILED ANSWER QUESTIONS

Q.19. Define a debenture. Mention its various kinds.

ANS:- DEBENTURE
The most usual form of borrowing by a company is by the issue of debentures. Levy v
Abercorris Slate & Slab Co. explains the term Debenture as a document which either
creates a debt or acknowledges it.

The term debenture is neither a technical, nor a term of Article but it was very commonly
used as early as the time of Henry V, 1414 as observed by Chitty, J., in case of Levy Vs
Abercorris Co. It is a very wide term but now generally used to signify a security for
money, called on the face of it debenture, and providing for the payment of specified sum
at a fixed date. It is an instrument under seal and evidencing a debt, the essence of it
being the admission of indebtedness. The issuance of the debentures by the company is
perhaps the most convenient method of long term borrowings.

Section 2(30) of the Act give statutory definition of the word ‘debenture’. “Debentures
include 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.”

Section 2(30) however does not explain as to what a debenture really is. So, a debenture
is a document acknowledging the loans borrowed by a company issued under its
authority and embodying the terms and conditions as to repayment of money, rate of
interest, etc. In brief, a debenture is a certificate of loan issued by a company and it has
nothing to do with security or lack of it.

KINDS OF DEBENTURES
Debentures in company law may be secured debentures, unsecured, registered
debentures, bearer debentures, redeemable debentures, irredeemable and convertible
debentures.

CLASSIFICATION ACCORDING TO NEGOTIABILITY

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1. BEARER DEBENTURES/UNREGISTERED DEBENTURES

These debentures are payable to the 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.

2. 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.

CLASSIFICATION ACCORDING TO SECURITY

1. 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 floating charge. Section
71(3) of the Companies Act, 2013 provides that secured debentures may be issued by a
company subject to such terms and conditions as may be prescribed by the Central
Government through rules.

2. UNSECURED OR NAKED DEBENTURES

Debentures which do not create any charge on the assets of the company are known as
unsecured debentures. The holders of these debentures like ordinary unsecured
creditors may sue the company for recovery of debt.

CLASSIFICATION ACCORDING TO PERMANENCE

1. 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. They may be re-
issued after redemption in accordance with the provisions of Section 121.

2. IRREDEEMABLE OR PERPETUAL DEBENTURES

When debentures are irredeemable, they are called perpetual debentures. A Debenture,
in which no time is fixed for the company to pay back the money, is an irredeemable
debenture. However, after the commencement of the Companies Act, 2013, now a
company cannot issue perpetual or irredeemable debentures.

CLASSIFICATION ACCORDING TO CONVERTIBILITY

1. CONVERTIBLE DEBENTURES

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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.

2. NON-CONVERTIBLE DEBENTURES
These debentures 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.

Q.20. What do you mean by Share? What are the different kinds of shares?
Discuss.
ANS: INTRODUCTION
A share or the proportion of interest of a shareholder is equal to the proportion of the
amount paid to the total capital payable to the company. Let us look at the various types
of shares a company can issue – equity share and preferential share.

SHARES
A share in the share capital of the company, including stock, is the definition of the term
‘Share’. This is in accordance with Section 2(84) of the Companies Act, 2013.

In other words, a share is a measure of the interest in the company’s assets held by a
shareholder. In this article, we will look at the different types of shares like preferential
and equity shares.

According to Farewell J - The interest of a shareholder in a company measured by a

sum of money, for the purpose of liability in the first place, and of interest in the second,
but also consisting a series of mutual covenants entered in to by all the shareholders
interest.

The Memorandum and Articles of Association of the company prescribe the rights and
obligations of shareholders. Further, a shareholder must have certain contractual and
other rights as per the provisions of the Companies Act, 2013.

The person who is the owner of the shares is called ‘Shareholder’ and the return he gets
on his investment is called ‘Dividend’.

NATURE OF SHARES
The shares of company are movable property and are transferable in the manner provided
in the Articles of Association. A share is undoubtedly a movable property in the same

43 

 
  

way in which a bale of cloth or a bag of wheat is a movable property. Such commodities
are not brought in to existence by legislation but a share in a company belongs to a totally
different category of property. It is incorporeal in nature and it consists merely of a
bundle of rights and obligations.

Section 44 of the Companies Act, 2013, states that shares or debentures or other interests
of any member in a company are movable properties. Also, they are transferable in the
manner prescribed in the Articles of the company. Further, Section 45 of the Act
mandates the numbering of every share. This number is distinctive. However, if a person
is a holder of the beneficial interest in the share, then this rule does not apply (example:
share in the records of a depository).

KINDS OF SHARE CAPITAL

According to Section 43 of the Companies Act, 2013, the share capital of a company is of
two types:
1. Preferential Share Capital
2. Equity Share Capital

PREFERENTIAL SHARE CAPITAL

The preferential share capital is that part of the Issued share capital of the company
carrying a preferential right for:

• Dividend Payment
A fixed amount or amount calculated at a fixed rate. This might/might not be subject
to income tax.
• Repayment

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In case of a winding up or repayment of the amount of paid-up share capital, there is

a preferential right to the payment of any fixed premium or premium on any fixed
scale. The Memorandum or Articles of the company specifies the same.

If any shares carry only one of these two preferential rights, they will be treated as equity
shares. The holder of this type of shares enjoys only preferential rights over the equity
shareholders. The preference shareholders do not enjoy normal voting rights like the
equity shareholders with voting rights. They are, however, entitled to vote only in these
two conditions –
1. When any resolution directly affecting their rights is to be passed; and
2. When the dividend due (whether declared or not) on their preference shares or part
thereof has remained unpaid.

There may be different kinds of preference shares depending upon the terms of issue
which are either defined in the Articles of Association or in the prospectus of the
company. A company may issue the following types of preference shares–

1. CUMULATIVE PREFERENCE SHARES

They carry the right to cumulative dividends if the company fails to pay the dividend
in a particular year. The accumulated arrears of dividends shall be paid, if any
dividend is declared in subsequent years, before any dividend is paid to the equity
share holders. If the company goes into liquidation, no arrears of dividends are
payable unless either the Articles contain an express provision to this effect or such
dividends have been declared. Of course, the arrears of undeclared dividends shall be
payable, even if the Articles are silent, out of any surplus left, after returning in full
the preference and equity share capital. It must be remembered that all preference
shares are always presumed to be cumulative unless the contrary is stated in Articles
or the terms of issue.

2. NON-CUMULATIVE PREFERENCE SHARES

Such shares donot carry the right to receive the arrears of dividend in a particular
year, if the company fails to declare dividend in previous year or years. If no
dividend is paid in any particular year, it lapses.

3. PARTICIPATING PREFERENCE SHARES

These are preference shares which receive their fixed dividends e.g. 11%, in the
normal way, but which then participate further in the distributed profits along with
the equity shares after a certain fixed percentage has been paid on them as well. The

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holder of such shares may also be entitled to get a share in the surplus assets of the
company on its winding up if specific provision exists to that effect in the Articles.

4. NON PARTICIPATING PREFERENCE SHARES

These shares are entitled to only a fixed rate of dividends and do not participate
further in the surplus profits irrespective of the magnitude of such profit. If the
Articles are silent, all preference shares are deemed to be non-participating unless
otherwise stated in the terms of issue.

5. CONVERTIBLE PREFERENCE SHARES

The holder of these shares is given the right of conversion of his shares into equity
shares at a later date.

6. NON-CONVERTIBLE PREFERENCE SHARES

Here, the preference shareholder is not given the right of conversion of his shares
into equity shares. If the Articles are silent, all preference shares are deemed to be
non-convertible unless provided otherwise in the terms of issues.

7. REDEEMABLE PREFERENCE SHARES

Ordinarily capital received on the issue of shares can be returned on the winding up
of the company only, because if the company is allowed to return it any time it so
wished, the creditors could not rely on the company having any money at all. But the
Act authorises a company limited by shares to issue “redeemable preference shares”.
Capital received on such shares can be paid back to the holders of such shares during
the life time of the company. The paying back of the capital is called redemption.

8. IRREDEEMABLE PREFERENCE SHARES

The repayment of such shares is possible on winding up of the company only. After
the commencement of the Companies (Amendment) Act – 1988, issue of any further
irredeemable preference shares is prohibited.

EQUITY SHARE CAPITAL – EQUITY SHARES

All share capital which is NOT preferential share capital is Equity Share Capital.
According to section 43, ‘Equity shares’ means those shares which are not preference
shares’. These shares carry the right to receive the whole of surplus profits after the
preference shares, if any, have received their fixed dividend. If no profits are left after
paying fixed preference dividends, the holders of such shares get no dividends. Same is
the case with regard to the return of capital on winding up of the company. Further,

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directors have the sole right of recommending dividends to such shares and as such they
may not get any dividends in case the directors so choose, in spite of huge profits. It is
why in financial terminology the share capital raised through such shares is called ‘Risk
Capital’. The fortune of equity shareholders is tied up with the ups and downs of the
company. If the company fails, the risks fall mainly on them and if the company is
successful they enjoy great financial rewards.

Equity shares are of two kinds. These are–

1. With voting rights
2. With differential rights to voting, dividends, etc., in accordance with the rules.

1. EQUITY SHARES WITH VOTING RIGHTS

According to section 43, the holders of any such equity shares have normal voting
rights on every resolution placed before the company at any general meeting.
Further, Section 43 provides that his voting right on a poll shall be in proportion to
his shares of the paid up equity capital of the company.

2. EQUITY SHARES WITH DIFFERENTIAL RIGHTS

The holders of any such shares shall have differential rights as to dividend, voting or
otherwise in accordance with such rules and subject to such conditions as may be
prescribed by the Central Government.

Q.21. How directors of a company can be appointed? Discuss the provisions

relating to the removal of the directors.
ANS: APPOINTMENT OF A DIRECTOR
According to the Companies Act, only an individual can be appointed as a member of
the board of directors. Usually, the appointment of directors is done by shareholders. A
company, association, a legal firm with artificial legal personality cannot be appointed as
director. It has to be a real person.

Section 149 of the Companies Act, 2013, makes it obligatory on every public company to
have at least three directors and on every other company to have at least two directors.
The directors may be appointed in the following ways:

1. APPOINTMENT OF FIRST DIRECTORS (SEC. 152)

First directors mean the director of the company who assumes office from the date of
incorporation of the company. The first directors of a company may be named in its
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articles of association and if it is not mentioned, then the subscribers of the

memorandum of association who are individual, shall be deemed to be the first
directors of the company, until the directors are not appointed in accordance with
Section 152.

In case of public company, if the article provides any share qualification, only such
subscribers as possess the necessary share qualification shall be deemed to be
directors. The articles at the time of registration may contain the names of the first
directors until directors are appointed in the first general meeting.

2. APPOINTMENT OF DIRECTORS BY MEMBERS IN THE GENERAL

MEETING (SEC. 152(2)
Except for the first director, the subsequent directors are appointed by the company in
the general meeting. Sec. 152(2) provides that not less than 2/3 of the total number of
directors of a public company, or of a private company which is subsidiary of a public
company must be appointed by the company in general meeting. These directors must
be subject to retirement by rotation. The remaining directors of such a company and a
purely private company are appointed by the company in general meeting

3. APPOINTMENT BY BOARD OF DIRECTORS

The directors are appointed in the general meeting by the members. But, the Board of
Directors may also appoint the directors, in the following way:

a. ADDITIONAL DIRECTORS
Section 161, of the Act, lays down that the Board may appoint additional directors
if the article of association of a company empower the Board of Directors to do
so. Such additional directors shall hold office only up to the date of the next
annual general meeting. If the annual general meeting is not held, then such
additional director vacates his office on the last day on which the annual general
meeting should have been held in terms of Section 166. The additional directors
are exempted from the requirement of filing consent to act as directors.

b. CASUAL VACANCIES
Section 161 empowers the Board of Directors to appoint the directors in the casual
vacancy which may occur due to any reasons like, death, resignation, insanity,
insolvency etc of the directors. Such casual vacancy may be filled according to the
regulations and procedure prescribed by the articles of association. A person

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appointed to fill a casual vacancy will hold office only till the date up to which the
directors in whose place, he is appointed would have held office.

c. ALTERNATE DIRECTORS
The Board Meeting may be held at a time when a director is, absent for a period
of more than three months from the state and in such a situation, an ‘alternate
director’ is appointed. The Board of Directors can appoint the additional director
in the absence of a director if so authorized by articles or by a resolution passed
by the company in general meeting. The alternate director shall work until the
original director return or up to the period permitted to the original director. The
provision of the Act not applicable to the alternate director is as:
• The appointment of an alternate director is not considered as an increase in
the strength of the Board of Directors.
• Alternate Directorship held by a person cannot be counted for the maximum
number of directorship, which a person can hold.
• An alternate director is not required to hold any qualification shares.

4. APPOINTMENT OF DIRECTORS BY CENTRAL GOVERNMENT

At least 100 members of the company or the members of the company who hold at
least one-tenth of the total voting power, approach the Central Government for
appointing a director to safeguard the interest of the company or its members or the
public or to curb the oppressive and mismanagement of company’s affairs.

The term of appointment of the directors by the Central Government should not
exceed 3 years and he may be removed by the Central Government for appointing
another person to hold the office.

5. APPOINTMENT OF DIRECTORS BY THIRD-PARTIES IF THE ARTICLE

PROVIDES (SEC. 152)
A company may have ‘nominee directors’ which is permissible in a company if the
articles of association gives power to such third parties to appoint their nominee on
company’s board. Here the third party may be debenture holders, financial
corporation, banking companies who have advanced loan to the company to safeguard
their interests that the money is only used for the purpose for which it was borrowed.

6. APPOINTMENT OF DIRECTORS BY SMALL SHAREHOLDERS IF THE

ARTICLE PROVIDES
The Small Shareholders, in case of a public company having:
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a. A paid-up capital of five cores rupees or more, and

b. one thousand or more small shareholders.

may have a director elected by such small shareholders in the manner as may be
prescribed.

The directors are appointed by ordinary resolution i.e. through the majority of the
shareholders. The minority of the shareholders does not get the opportunity to send
representative in the Board of Directors. But, through proportional representative
voting, the shareholders can get that opportunity.

7. APPOINTMENT OF DIRECTORS BY PROFESSIONAL REPRESENTATION

(SEC. 163)
The Directors of a company are generally appointed by simple majority. As a result
majority shareholders controlling 51% or more votes may elect all directors and a
substantial minority of 49% may not find any representation on the board. This
section gives power to the minority shareholders to elect directors through single
transferable vote and cumulative voting.

REMOVAL OF DIRECTORS
A director of a company can be removed by
1. Shareholders (Sec. 169)
2. The Tribunal (Sec. 242)

REMOVAL BY SHAREHOLDER
Section 169 empowers the company to remove a director by ordinary resolution before
the expiry of his period of office except in the following cases:
1. A director appointed by the tribunal under sec. 242;
2. A nominee director of a public financial institution which is by its charter
empowered to nominate a person as a director or to remove him notwithstanding any
power contained in any other act;
3. Director appointed in accordance with the principal of proportional representation,
under section 163. This is to ensure that the directors appointed by the minority are
not removed by a bare majority.

Special notice is required of any resolution to remove a director or to appoint somebody

in his place at the meeting at which he is removed. On receipt of such notice, the
company will immediately send a copy thereof to the director concerned. He may make
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any representation in writing and the copy of such representation may be sent by the
company to every member. Where the copy of the representation is not sent to the
members, in that case the director concerned may require the representation to be read at
the meeting.

A vacancy created by the removal of a director as aforesaid can be filled up at the

meeting at which he is removed provided special notice of the proposed appointment was
also given. The director so appointed shall hold office till the date the director removed
would otherwise have hold office. If the vacancy is not filled, it shall be filled up as
casual vacancy except that the director removed shall not be re-appointed. The director so
removed is entitled to claim compensation or damages for branch of contract.

REMOVAL BY THE TRIBUNAL

On an application to the Tribunal for prevention of oppression and mismanagement, the
tribunal may terminate or set aside or modify any agreement between the company and
the managing director, or any other director or manager. On such termination, the director
cannot serve the company in a managerial capacity for a period of five years from the
date of the order of termination, without the permission of the tribunal. The director on
removal cannot sue the company for damages or compensation for loss of office (Sec.
243).

REMOVAL OF A NON-ROTATIONAL DIRECTOR OF A GOVERNMENT

COMPANY
Directors appointed by the state government as a nominee director can be removed by
such government. The government is entitled to revoke the nomination as a matter of
right, which flows from the articles of association. Revoking of the appointment by the
government under the articles is not the same thing as removal of a director by the
company under sec. 169. Hence, if the government revokes the nomination, there is no
contravention of section 169.

Q.22. What do you understand by the ‘rule of majority’? Discuss the

circumstances when this rule is discarded for protection of minority of
share holders.
Or
Discuss the rules laid down in the important case of Foss vs. Harbottle.
ANS:- The protection of the minority shareholders within the domain of corporate activity
constitutes one of the most difficult problems of modern company law. The main aim

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must be to strike a balance between the effective control of the company and the interests
of the small individual shareholders. A proper balance of rights of majority and minority
shareholders is essential for the smooth functioning of the company. The modern
Companies Acts, therefore, contain a large number of provisions for the protection of the
interests of investors in companies. The main aim of these provisions is to require from
those, who control the affairs of the company, to exercise their powers according to
certain principles of natural justice and fair play.

The management of a company is based on the majority rule. Like any democratic set up,
the majority has its way in a company though due provision must also be made for the
protection of the interests of minority. This principle that the will of the majority should
prevail and bind the minority is known as the principle of majority rule.

‘Majority must prevail’ is the principle of company management. Except the powers
delegated to the Board of Directors the overall powers of controlling the affairs of a
company rest with the shareholders which they exercise through general meetings. We
also know that the decisions at general meetings are taken by the majority of shareholders
which may consist of either a simple majority or a special majority depending upon the
provisions of the companies Act or the Articles of the company. Under this set up of
management and decision taking, it is evident that in all matters, except those delegated
to the directors, the wish of the majority of shareholders will prevail in the administration
of a company.

THE RULE OF SUPREMACY OF THE MAJORITY

The rule of supremacy of the majority was judicially recognised in the year of 1843 in a
leading case namely Foss vs Harbottle 2 Hare 461.

In this case Foss and Turton, two shareholders of the ‘Victoria Park Company’, brought
an action on behalf of themselves and the other shareholders (except the defendants)
against the five directors, the solicitor and architect of the company, charging them with
“Concerting and effecting various fraudulent and illegal transactions, whereby the
property of the company was misapplied, alienated and wasted.” The plaintiffs prayed
that the defendants might be ordered by the court to make good to the company the losses
caused by the wrongful acts complained of. The court dismissed the action holding that
the conduct with which the defendants are charged is an injury not to the plaintiffs
exclusively, it is an injury to the whole corporation and therefore the corporation alone,
and not the plaintiffs, could bring the action at law. Otherwise, the court might be acting

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vainly, for the alleged breach of duty could be ratified by the company (Majority
shareholders) in general meeting.

The judgement in Foss vs Harbottle case established that on a suit filed by the minority,
the court will not interfere with the internal management of companies acting within their
powers even though negligence and inefficiency on the part of the management is proved.
For, it is pointless to have legal actions based on matters which can be ratified by a
general meeting. It was further expounded in this case that if any injury is done to the
company, it is logical that the company itself should bring an action to get it redressed
and individual members cannot assume to themselves the right of suing in the name of
the company, because in law a company is separate legal person from the members who
compose it. Moreover, there will be no use in permitting the minority to bring a suit for
any injury done to the company, if the majority of shareholders do not object to that, for,
in such a case a meeting can be called and the injury be authorised by a majority vote.

The rule laid down in Foss vs Harbottle, has been followed in many other cases since
then. For instance –
1. Mac Dougall Vs Gardiner, (1875) 1 Ch. D 13
2. Parlides Vs Jenson, (1956) Ch. 565 and
3. Rajahmundry Electric Supply Corporation Ltd. Vs A. Nageshwara Rao, (1956) AIR,
SC 213.

From the rule in Foss vs Harbottle, it becomes clear that the majority decisions are
binding upon the company and a minority has no voice in the control and management of
company’s affairs. But in the strict application of this rule, suppose the majority is not
acting bonafide for the benefit of the company as a whole, the minority could be
exploited by the majority against which the minority could take no legal action; it would
be shocking thing indeed. Therefore, certain exceptions have been admitted for the
protections of the minority and in the interest of justice to the rule of supremacy of the
majority of shareholders.

EXCEPTIONS TO THE RULE OF SUPREMACY OF THE

MAJORITY OF SHAREHOLDERS
In the below mentioned situation, the ‘will’ of the majority shall not prevail and
individual shareholders or minority shareholders may bring an action against the
company to protect their interest.

1. WHERE THE ACT DONE IS ULTRAVIRES THE COMPANY OR ILLEGAL

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The rule in Foss s Harbottle case does not apply to acts which are ultra vires the
company or which are illegal because no majority of shareholders can ratify such
acts. As such every shareholder has a right of preventing the company from doing
such acts by filing a suit of injunction [Bharat Insurance Company Ltd. Vs Kanhaya
Lal, 1935 AIR Lah. 792].

2. WHERE THE ACT DONE IS SUPPORTED BY A RESOLUTION PASSED

BY INSUFFICIENT MAJORITY
The Act itself modifies the above primary principle in certain cases by requiring two-
thirds or three-fourths majority for the validity of the resolution. In such cases a bare
majority is insufficient. Certain resolutions, e.g., to alter the objects clause in the
memorandum require a three fourth majority. If any such resolution has been passed
by the simple majority, any shareholder may institute an action to restrain the
company from acting on the resolution [Nagappa Chettiar Vs Madras Race Club,
1949, 1 M.L.J. 662].

3. FRAUD ON THE MINORITY

Where the act complained of constitutes a fraud on the minority and those
responsible for it are in control of the company, in such situation any member of the
minority can file a suit and the rule in Foss Vs Harbottle does not apply in such
situation.

4. WHERE THE PERSONAL MEMBERSHIP RIGHTS OF AN INDIVIDUAL

SHAREHOLDER HAVE BEEN INFRINGED
No majority of votes can deprive a shareholder of his individual membership rights,
which have been conferred upon him either by the companies Act or by the Articles
of the company (Nagappa Chettar Vs Madras Race Club). Any individual
shareholder can, therefore, sue the company in his own name where for instance, he
is prevented from exercising his right to vote or his name has been removed illegally
from the register of members.

5. WHERE THE PROVISIONS OF SECTION 241 TO 246 OF THE

COMPANIES ACT, 2013 APPLY
The Companies Act itself contains provisions which protect minority in the case of
oppression and mismanagement. These provisions are discussed in detail in the next
topic namely prevention of oppression and mismanagement.

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Q.23. What is winding up of a company? Discuss briefly the different modes of

winding up of a company.
ANS:- WINDING UP OF A COMPANY
Winding up is the process by which the like of a company is over 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 may be wound up.

Winding up is a term commonly associated with the ending of a company’s existence. In

fact winding up or liquidation is a process by which the assets of the company are
collected in and realised, its liabilities are discharged and the net surplus, if there is any
distributed in accordance with the company, articles of association.

Winding up is a method of putting an end to the life of a company. According to Gower,

winding up a company is the process whereby its life is ended and its property
administered for the benefit of its creditors and members. An administrator, called a
liquidator, is appointed and he takes control of the company, collects its assets, pays its
debts and finally distributes any surplus among the members in accordance with their
rights. Winding up of a company differs from insolvency of an individual in as much as a
company cannot be made insolvent under the insolvency laws. Moreover, a perfectly
solvent company may be wound up. The company is not dissolved immediately at the
commencement of winding up. Its corporate status and powers continue. Winding up
precedes dissolution.

Winding up is the process by which the assets of the company are salvaged and the affairs
of the company are wound up. During winding up, the company continues to be a legal
person. When the affairs of the company are completely wound up, the company is killed
with surprisingly little ceremony. The legal status comes to an end. This is called
dissolution. Since a company is created by the process of law, it can only be destroyed by
the process of law. When the affairs of a company are completely wound up, there is no
purpose in keeping it alive. It shall be dissolved. However, a company may be dissolved
without being wound up. In other words, there can be dissolution without winding up. As
we have seen earlier, this can happen in the case of amalgamation. The transferor
company is dissolved without being wound up.

MODES OF WINDING UP OF A COMPANY

As per section 270 of the Companies Act 2013, the procedure for winding up of a
company can be initiated either:
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a) By the tribunal or,

b) Voluntary.

WINDING UP BY THE TRIBUNAL

As per new Companies Act 2013, a company can be wound up by a tribunal in the below
mentioned circumstances:
1. When the company is unable to pay its debts
2. If the company has by special resolution resolved that the company be wound up by
the tribunal.
3. If the company has acted against the interest of the integrity or morality of India,
security of the state, or has spoiled any kind of friendly relations with foreign or
neighboring countries.
4. If the company has not filled its financial statements or annual returns for preceding
5 consecutive financial years.
5. If the tribunal by any means finds that it is just & equitable that the company should
be wound up.
6. If the company in any way is indulged in fraudulent activities or any other unlawful
business, or any person or management connected with the formation of company is
found guilty of fraud, or any kind of misconduct.

FILLING UP WINDING UP PETITION

Section 272 provides that a winding up petition is to be filed in the prescribed form no 1,
2 or 3 whichever is applicable and it is to be submitted in 3 sets. The petition for
compulsory winding up can be presented by the following persons:
1. The company
2. The creditors ; or
3. Any contributory or contributories
4. By the central or state govt.
5. By the registrar of any person authorized by central govt. for that purpose

FINAL ORDER AND ITS CONTENTS

The tribunal after hearing the petition has the power to dismiss it or to make an interim
order as it think appropriate or it can appoint the provisional liquidator of the company
till the passing of winding up order. An order for winding up is given in form 11.

VOLUNTARY WINDING UP OF A COMPANY

The company can be wound up voluntarily by the mutual decision of members of the
company, if:
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1. The company passes a Special Resolution stating about the winding up of the
company.
2. The company in its general meeting passes a ordinary resolution for winding up as a
result of expiry of the period of its duration as fixed by its Articles of Association or
at the occurrence of any such event where the articles provide for dissolution of
company.

PROCEDURE FOR VOLUNTARY WINDING UP:

1. Conduct a board meeting with 2 Directors and thereby pass a resolution with a
declaration given by directors that they are of the opinion that company has no debt
or it will be able to pay its debt after utilizing all the proceeds from sale of its assets.
2. Issues notices in writing for calling of a General Meeting proposing the resolution
along with the explanatory statement.
3. In General Meeting pass the ordinary resolution for the purpose of winding up by
ordinary majority or special resolution by 3/4th majority. The winding up shall be
started from the date of passing the resolution.
4. Conduct a meeting of creditors after passing the resolution, if majority creditors are
of the opinion that winding up of the company is beneficial for all parties then
company can be wound up voluntarily.
5. Within 10 days of passing the resolution, file a notice with the registrar for
appointment of liquidator.
6. Within 14 days of passing such resolution, give a notice of the resolution in the
official gazette and also advertise in a newspaper.
7. Within 30 days of General meeting, file certified copies of ordinary or special
resolution passed in general meeting.
8. Wind up the affairs of the company and prepare the liquidators account and get the
same audited.
9. Conduct a General Meeting of the company.
10. In that General Meeting pass a special resolution for disposal of books and all
necessary documents of the company, when the affairs of the company are totally
wound up and it is about to dissolve.
11. Within 15 days of final General Meeting of the company, submit a copy of accounts
and file an application to the tribunal for passing an order for dissolution.
12. If the tribunal is of the opinion that the accounts are in order and all the necessary
compliances have been fulfilled, the tribunal shall pass an order for dissolving the
company within 60 days of receiving such application.
13. The appointed liquidator would then file a copy of order with the registrar.

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14. After receiving the order passed by tribunal, the registrar then publish a notice in the
official Gazette declaring that the company is dissolved.

EFFECT OF WINDING UP BY TRIBUNAL (SEC. 279)

According to this section, the order for winding up of a company shall operate in favour
of all the creditors and all contributories of the company as if it had been made out or the
joint petition of creditors and contributories.

EFFECT OF VOLUNTARY WINDING UP (SEC. 309)

In the case of a voluntary winding up, the company shall from the commencement of the
winding up cease to carry on its business except as far as required for the beneficial
winding up of its business. The corporate state and corporate powers of the company
shall continue until it is dissolved.

SHORT ANSWER QUESTIONS

(Note: Short answer is required not exceed 200 words.)

Q.24. What is the difference between a shareholder and a debenture holder?

Explain.
ANS:- The following are the major differences between Shares and Debentures:
1. The holder of shares is known as a shareholder while the holder of debentures is
known as debenture holder.
2. Share is the capital of the company, but Debenture is the debt of the company.
3. The shares represent ownership of the shareholders in the company. On the other hand,
debentures represent indebtedness of the company.
4. The income earned on shares is the dividend, but the income earned on debentures is
interest.
5. The payment of dividend can be made only out of current profits of the business and
not otherwise. Unlike the interest on debentures which has to be paid by the company
to debenture holders, no matter company has earned profit or not.
6. Dividend is not a business expense and so is not allowed as deduction. On the
contrary, interest on debentures is a expense and so allowed as a deduction.
7. In the event of winding up, debentures get priority of repayment over shares.
8. Shares cannot be converted as opposed to debentures are convertible.
9. There is no security charge created for payment of shares. Conversely, security charge
is created for the payment of debentures.
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10. A trust deed is not executed in case of shares whereas trust deed is executed when the
debentures are issued to the public.
11. Unlike debenture holders, shareholders have voting rights.
12. Shares are issued at a discount subject to some legal compliance. Debentures can be
issued at a discount without any legal compliance.

Q.25. What is the procedure of issuance and allotment of shares as well as

forfeiture of shares?
ANS:- PROCEDURE OF ISSUANCE AND ALLOTMENT OF SHARES
Companies issue shares as a means of raising additional capital to fund business
operations or take up new investments. A share issuance requires issuing a prospectus,
receiving application of shares, allotment of shares and a call on shares.

ISSUING PROSPECTUS
A prospectus is a document used by a public company as an open invitation to the public
to buy shares of a company. A company must submit a copy of its prospectus to the
Securities and Exchange Commission before the publication date. The prospectus gives
brief information about the issuing company: names of directors, past performance, terms
of issue and the investment for which the company is raising capital. It also gives opening
and closing dates of the share issue, application fees, allotment and on-call dates, and
bank details for deposit and minimum shares for application.

APPLICATION OF SHARES
After getting an invitation, interested investor prospects can submit their application
through a prescribed form, along with an application fee before the closing date given in
the prospectus. When the number of shares applied for exceeds the number of shares
issued, there is an oversubscription, but when applications are less than expected, there is
an under-subscription. Applications occur at a designated bank where a receipt is issued.
The issuing company does not withdraw the application money until completion of the
allotment procedure. The application fee collected for share issue should be at least 5
percent of the nominal share amount.

ALLOTMENT OF SHARES
When the directors of an issuing company with consultation with the stock market
authorities prepare to sell shares to an applicant, they communicate through an allotment
letter. Most people use allotment and issuance of shares interchangeably. However, for a
public company, share allotment strictly involves allocating the right to shares to certain

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applicants. The allotment letter communicates allotment time and date of paying for the
shares. Not all applicants receive allotment letters, unsuccessful applicants receive regret
letters and their application money given back. Share allotment can be pro-rata, in which
all applicants are accepted, but each is given lesser shares than they applied for.

If any applications were rejected, letters of regret are sent to the applicants. After the
allotment, the company can collect the share capital as it wishes, in one go or in
installments.

FORFEITURE OF SHARES
When shares are allotted to an applicant, he and the company enter into a contract
automatically. Then such an applicant is bound to pay the allotment money and all the
various call monies till the shares are fully paid up. But if the shareholder fails to pay any
of the calls (one or more) on the authorization of the board of Directors, the said shares
can be forfeited. Forfeiture essentially means cancellation.

Before such forfeiture is done a notice must be given to the shareholder. The notice must
provide the shareholder with a minimum of 14 days to make the payment due, or his
shares will be forfeited. Even after such notice if the shareholder does not pay, then the
shares will be cancelled.

When the said shares are forfeited the shareholder ceases to be a member of the company.
He loses all his rights and interests that a shareholder might enjoy. And once his name is
removed from the register of shareholders he also losses all the money he has already
paid towards the share capital. Such money will not be refunded.

Q.26. Distinguish between share certificate and share warrant.

ANS:- The following are the major differences between Share Certificate and Share Warrant:
1. A share certificate is the documentary evidence which proves the possession of the
shares. A share warrant is the document of title which states that the holder of the
instrument is entitled to the shares.
2. The issue of share certificate is compulsory for every company limited by shares but
the issue of a share warrant is not compulsory for every company.
3. A Share Certificate is issued against the shares, regardless of the fact that the shares
are fully paid up or partly paid up. Conversely, Share Warrant is issued by the public
company only against fully paid up shares.
4. Share Certificate can be issued by both public and private companies, whereas Share
Warrant is issued only by the public limited company.
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5. Share Certificate is to be issued within 3 months of the allotment of shares, but there
is no such time limit specified in the Companies Act for the issue of Share Warrant.
6. A share certificate is not a negotiable instrument. As opposed to share warrant, is a
negotiable instrument.
7. For the issue of a share warrant, prior approval of Central Government is a must. On
the other hand, Share Certificate does not require such type of approval.
8. Share certificate is a more important document than a share warrant, as it signifies
the ownership of the members on the indicated number of shares in the company, but
a share warrant shows only the entitlement on the shares of the company.

BASIS FOR
SHARE CERTIFICATE SHARE WARRANT
COMPARISON

Meaning A legal document that A document which

indicates the possession of the
shareholder on the specified
number of shares is known as
share certificate.
indicates that the bearer
of the share warrant is
entitled to the specified
number of shares is
share warrant.

Compulsory Yes No

Issued by All the companies limited by Only public limited

shares irrespective of public companies have the
or private. right to issue share
warrant.

Negotiable No Yes
Instrument

Transfer The transfer of share The transfer of share

certificate can be done by warrant can be done by
executing a valid transfer mere hand delivery.
deed.

Original Issue Yes No

Amount paid Issued against fully or partly Issued only against fully
paid up share. paid up shares

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BASIS FOR
SHARE CERTIFICATE SHARE WARRANT
COMPARISON

Approval of Central Not Required at all Prior approval of

Government for Central Government is
issue required for issuing
Share Warrant.

Time Horizon for Within 3 months of the No time limit

issue allotment of shares. prescribed.

Provision in Not Required Required

Articles of
Association

Q.27. Discuss briefly the powers and duties of director in a company.

ANS:- The directors are considered as the head and brain of a company. When the brain
functions, the company is said to function. For the proper functioning, the directors
should be properly entrusted with some powers. The directors generally acquire their
powers from the provisions of the Articles of Association and then from the Companies
Act.

POWERS OF DIRECTORS
The powers which vest in the board can be classified under three different heads:
1. GENERAL POWERS
General powers are those which can be exercised in accordance with the articles.
These powers are laid down in sec. 179 of the Companies Act, 2013. It empowers the
board to exercise all such powers and do all such acts and things, as the company is
authorised to exercise and do. There are, however, two limitations upon their powers:
• First, the Board shall not do any act which is to be done by the company in
general meeting
• Second, the Board shall exercise its powers subject to the provisions contained in
the Companies Act, or in the Memorandum or the Articles of the company or in
any regulations made by the company in general meeting.

2. POWERS TO BE EXERCISED AT BOARD MEETINGS [SEC. 179 (3)]

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The Board of directors of a company shall exercise the following powers on behalf of
the company by means of resolutions passed at the meetings of the Board, viz, the
power to:
(a) Make calls on shareholders in respect of money unpaid on their shares
(b) Issue debentures
(c) Borrow money otherwise than on debentures
(d) Invest the funds of the company
(e) Make loans
(f) To approve financial statement and the board’s report
(g) To diversify the business of the company.

3. POWERS TO BE EXERCISED WITH THE APPROVAL OF COMPANY IN

GENERAL MEETING (SEC. 180)
(a) Sale or lease of the company’s undertaking
(b) Extension of the time for payment of a debt due by a director
(c) Investment of compensation received on acquisition of the company’s assets in
securities other than trust securities
(d) Borrowing of money beyond the paid-up capital of the company
(e) Contributions to any charitable fund beyond Rs.50,000 in one financial year or
5% of the average net profits during the preceding three financial years,
whichever is greater.

4. POWERS UNDER RULE 8

Rule 8 of the Companies rule, 2014 provides that, the following powers shall be
exercised only by means of resolutions passed at meeting of the board, namely:
a) To make political contribution;
b) To appoint or remove key managerial personnel;
c) To appoint internal auditors and secretarial auditors;
d) To take note of the disclosure of director’s interest and shareholding
e) To accept or renew or review the terms and conditions of public deposits.

5. OTHER POWERS
In addition to the items referred above, there are various other matters, as illustrated
below in the routine working of a company which are considered by the board at
board meeting:
(a) Issuance of shares;
(b) Allotment of shares and debentures;
(c) Appointment of directors and managing directors;
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(d) Merger and acquisition of companies;

(e) Capitalisation of reserves and issuance of bonus shares.

DUTIES OF THE DIRECTORS

1. FIDUCIARY DUTIES
As fiduciaries, the directors must:
(a) Exercise their powers honestly and bona fide for the benefit of the company as a
whole; and
(b) Not to place themselves in a position in which there is a conflict between their
duties to the company and their personal interests. They must not make any secret
profit out of their position. If they do, they have to account for it to the company.

2. DUTIES OF CARE, SKILL AND DILIGENCE

Directors should carry out their duties with reasonable care and exercise such degree
of skill and diligence as is reasonably expected of persons of their knowledge and
status. He is not bound to bring any special qualifications to his office.

3. STANDARD OF CARE
The standard of care, skill and diligence depends upon the nature of the company’s
business and circumstances of the case. They are various standards of the care
depending upon:
(a) The type and nature of work
(b) Division of powers between directors and other officers
(c) General usages and customs in that type of business; and
(d) Whether directors work gratuitously or remuneratively

4. 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. An interested director is neither to vote
on the matter of his interest nor his presence shall count for the purposes of quorum.

5. DUTY TO ATTEND BOARD MEETINGS

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 3
months, whichever is longer. Moreover, a director’s habitual absence may become
evidence of negligence.

6. DUTY NOT TO DELEGATE

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A director should not delegate his functions to another person. But delegation of
functions may be made to the extent to which it is authorized by the Act or the
constitution of the company.

Q.28. Explain the composition and powers of National Company Law tribunal.
ANS:- The National Company Law Tribunal (NCLT) is a quasi-judicial body in India that
adjudicates issues relating to Companies in India. The National Company Law Tribunal
was formed or established under the Companies Act, 2013 which was constituted with
effect from 1st June, 2016.

The Ministry of Corporate Affairs (Central Government) constituted National Company

Law Tribunal (NCLT) and National Company Law Appellate Tribunal (NCLAT) under
the provision of section 408 and section 410 of the Companies Act, 2013. It was first
introduced by the Companies (Second Amendment) Act 2002 based on the
recommendations of ERADI committee.

The Company Law Board (CLB) constituted under Section 10E of the Companies Act,
1956 has been dissolved w.e.f. 1st June, 2016 by the introduction of National Company
Law Tribunal. All matters pending before the CLB on or before dissolution have now
been transferred to the NCLT.

CONSTITUTION OF THE TRIBUNAL

The National Company Law Tribunal consists of a President and such number of Judicial
and Technical Members as the Central Government may deems necessary.

The President of the Tribunal is a person who is or has been a Judge of the High Court
for five years.

Judicial Members are appointed as per section 409(2) of the Companies Act, 2013. Such
Judicial Members should have the following qualifications:
• He is, or has been, a judge of a High Court; or
• He is, or has been, a district judge for at least Five years; or
• He has, for at least ten years been an advocate of a Court.

Technical Members are appointed as per section 409(3) of the Companies Act, 2013. A
person can be appointed as a Technical Member if he-

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• has, for at least fifteen years been a member of the Indian Corporate Law Service or
Indian Legal Service out of which at least three years shall be in the pay scale of
Joint Secretary to the Government of India or equivalent or above in that service; or
• is, or has been, in practice as a chartered accountant for at least fifteen years; or
• is, or has been, in practice as a cost accountant for at least fifteen years; or
• is, or has been, in practice as a company secretary for at least fifteen years; or
• is a person of proven ability, integrity and standing having special knowledge and
experience, of not less than fifteen years, in law, industrial finance, industrial
management or administration, industrial reconstruction, investment, accountancy,
labour matters, or such other disciplines related to management, conduct of affairs,
revival, rehabilitation and winding up of companies; or
• is, or has been, for at least five years, a presiding officer of a Labour Court, Tribunal
or National Tribunal constituted under the Industrial Disputes Act, 1947.
POWERS OF NCLT
The National Company Law Tribunal has replaced the existing Company Law Board
(CLB), the Board of Industrial and Financial Reconstruction (BIFR) and its appellate
authority. Thus, the all matters previously handled by the aforesaid authority will be now
handled by the NCLT. The highlights of the matters vested with NCLT are as under:
• Seeking exemption for having Financial Year of a Company which ends on a day
other than 31 March under section 2(41) of the Companies Act, 2013.
• Any offence relating to incorporation of a Company by furnishing false or incorrect
information can invite the investigation of the NCLT which can inter alia order
making the liability of Members unlimited and remove the name of the Company
from the Register of Companies.
• Seeking approval for Conversion of a Public Limited Company into a Private
Company under the provision of section 14 of the Companies Act, 2013.
• Seeking approval for Issue of further redeemable preference shares in lieu of arrears
of dividend or failure to redeem existing preference shares as per the terms of issue
under the provision of section 55(3) of the Companies Act, 2013.
• Consolidation or division of share capital which will result in change of voting
percentage of Shareholders shall take effect only with the approval of NCLT under
the section 61(1) of the Companies Act, 2013.
• Conversion of Debt into equity by the Government if not agreeable or acceptable to a
Company, then such Company can appeal to NCLT within sixty (60) days from the
date of communication of order issued by the Government under the section 62(4) of
the Companies Act, 2013.
• The Company can make application for reduction of share capital according to
provision of section 66 of the Companies Act, 2013.
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• Debenture Trustee may file a petition to the NCLT under the provision of section
71(9) of the Companies Act, 2013 and NCLT may impose further restrictions on a
Company which has issued debentures from incurring liability on the ground of
assets being insufficient assets in the opinion of Debenture Trustee to discharge the
principal amount.
• The Company can make application to NCLT under the section 74(2) of the
Companies Act, 2013 for seeking further time to repay the deposits.
• The NCLT can call Annual General Meeting (AGM) of a Company on the
application of any Member of the Company under the section 97 of the Companies
Act, 2013.
• The NCLT can call Meeting of a Company other than AGM either suo-motu or on
the application of any Director or Member of the Company who would be entitled to
vote at the meeting under the section 98 of the Companies Act, 2013.
• Application by any Member of the Company to NCLT seeking its direction to direct
the Company to permit inspection of Minutes Book of General Meetings, if the same
has been refused by such a Company earlier under the provision of section 119 of the
Companies Act, 2013.
• A Company can re-open its Books of Accounts and recast the Financial Statements
with the approval of NCLT on an application in this regard made by the Central
Government, the Income Tax authorities, the Securities and Exchange Board, any
other statutory regulatory body or authority or any other person concerned, on
ground that the earlier accounts have been prepared in a fraudulent manner or affairs
of the Company is being mismanaged during the relevant period casting a doubt on
reliability of the financial statements under section 130 of the Companies Act, 2013.
• A Company can voluntarily seek the permission of NCLT to revise its Financial
Statements or Boards report for past three (3) financial years, where Board of
Directors believes that they do not comply with the provisions of section 129 and
section 139, under the section 131 of the Companies Act, 2013.
• The NCLT can provide relief to the Company or any aggrieved person under
provision of section 140 (4) and (5) of the Companies Act, 2013, where an auditor
sought to be removed by the Shareholders is using the provisions of sending his
representation against his removal to every Shareholders or reading the same in the
General Meeting is proved to be abused.
• The NCLT can provide relief to the Company or any aggrieved person under the
provision of section 169(4) of the Companies Act, 2013, where an director sought to
be removed by the shareholders is using the provisions of sending his representation
against his removal to every Shareholders or reading the same in the General
Meeting is proved to be abused.

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• The NCLT can investigate the affairs of Company under section 213 of the
Companies Act, 2013 on application.
• Other Important Powers:
1. Power in relation to compromise, arrangement and amalgamations under the
chapter XV of the Companies Act, 2013.
2. Power in relation of prevention of Oppression and Mismanagement under chapter
XVI of the Companies Act, 2013.
3. Power in relation of Revival and Rehabilitation of Sick Companies under chapter
XIX of the Companies Act, 2013.
4. Power in relation to winding-up under chapter XX of the Companies Act, 2013.
5. Power to compound the offences where maximum amount of fine can be imposed
exceed five lakh rupees (Rs. 5,00,000) under the section 441 of the Companies
Act, 2013.

Q.29. What is the legal position of directors in a company?

ANS:- LEGAL POSITION OF DIRECTORS
It is difficult to define the exact legal position of the directors of a company. The
Companies Act makes no effort to define their position. They have at various been
described by judges as agents, trustees or managing partners.

In the words of Bowen, LJ.: “Directors are described sometimes as agents, sometimes as
trustees and sometimes as managing partners. But each of these expressions is used not as
exhaustive oi their powers and responsibilities but as indicating useful points of view
from which they may tor the moment and for the particular purpose be considered.”

DIRECTORS AS AGENTS
Directors may correctly be described as agents of the company. Cairns, LJ. observed:
“The company itself cannot act in its own person; it can only act through directors, and
the case is, as regards those directors, merely the ordinary case of principal and agent”.
The ordinary rules of agency will, therefore apply to any contract or transaction made by
them on behalf of the company. Where the directors contract in the name and on behalf of
the company it is the company which is liable on it and not the directors. Thus, where
chief executive of company executed promissory note and borrowed amount for
company’s sake, it could not be said that amount was borrowed by him in his personal
capacity (Kirlampudi Sugar Mills Ltd. v, G, Venkata Rao (2003) 42 SCI 798)
https://www.lawctopus.com/academike/directors‐company‐appointment‐legal‐relationship/  ‐ 
_edn14But, where surety was furnished by directors in their personal capacities and not
for and on behalf of company, company could not be sued for amount of surety (State
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Electricity Board v. Shivalik Casting (P.) Ltd [2003] 115 Comp. Cas. 310). Directors
as agents make the company liable even for contempt of court [Vineet Kumar Mathur
vs Union of India [1996] 20 CLA 213 (SC)]. However, directors incur a personal
liability in the following circumstances:
1. where they contract in their own names;
2. where they use the company’s name incorrectly, e.g., by omitting the word
‘Limited’;
3. where the contract is signed in such a way that it is not clear whether it is the
principal (the company) or the agent who is signing; and
4. where they exceed their authority, g., where they borrow in excess of the limits
imposed upon them.

DIRECTORS AS TRUSTEES
A trustee is a person in whom the legal ownership of the assets is vested which he
administers for the benefit of another or other. Directors are regarded as trustees of the
company’s assets, and of the powers that in them because they administer those assets
and perform duties in the interest company and not for their own personal advantage.
In Brahnmyya & Co. [ 1966] 1 Comp. LJ 107 (Mad.), the Madras High Court held that
“ The directors of a company are trustee for the company, and with reference to their
power of applying funds of the company and tor misuse of the power they could
rendered liable as trustees and on their death the cause of action survives against their
legal representatives.

Besides, almost all the powers of director e.g. allotting share, making call , forfeiting
share, accepting or rejecting transfers etc are powers in trust. They have been made
liable to make good money which they have misapplied, upon the same footing as if they
were trustees.” fiduciary capacity, within which directors have to act, enjoins upon them a
duty to get on behalf of a company with utmost good faith, utmost care and skill and due
diligence and in interest of company they represent – Dale & Carrington Investment (p
j Ltd v. P.K. Prathapan [2004] 54 SCL 601 (SC).

DIRECTORS AS MANAGING PARTNERS

The persons holding this view consider a company as large partnership, directors being
charged with the responsibility of managing the affairs. The other shareholders are
virtually dormant partners. By virtue of the various provisions in the Memorandum and
Articles, they enjoy vast powers of management and act as the supreme policy and
decision making body.

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DIRECTOR AS EMPLOYEE
Ordinarily, a director is elected by the shareholders in general meeting, and once so
elected; he enjoys well-defined rights and powers under the Act or the articles. Even the
shareholders who elect them cannot interfere with their rights or powers except under
certain circumstances. An employee appointed by the company under a contract of
service is a servant of the company. He does not enjoy any powers other than those
vested in him by the employer, who can always direct his actions and interfere in his
work.

In Lee Behrens & Co., Re [1932] 2 Comp. Cas. 588, it was observed that directors are
elected representatives of the shareholders engaged in directing the affairs of the
company on its behalf. As such directors are agents of the company but they are not
employees or servants of the company. However, there is nothing in law to prevent a
director from accepting employment under the company under a special contract which
he may enter into with the company – R.R. Kothandaraman v. CIT (1957).

Accordingly, where a director accepts employment under the company under a separate
contract of service, in addition to the directorship, he is also treated as an employee or
servant of the company. He shall, in such a case, be entitled to remuneration and other
benefits admissible to employees, in addition to his remuneration as Director under the
Act. Besides, directors are also treated as officers of the company for certain matters and
are bracketed with the manager, secretary, etc. for this purpose. As ‘officers in default’,
they are liable to certain penalties for failure to comply with the provisions of the Act.

To sum up, we may quote Jessel, M.R., in Forest of Dean Coal Mining Co., Re [1878]
10 Ch. D. 450, who observed : “Directors have sometimes been called as trustees or
commercial trustees, and sometimes they have been called managing partners; it does not
matter much what you call them so long as you understand what their real Position is,
which is that they are really commercial men managing a trading concern for the benefit
of themselves and of all the shareholders in it. They stand in a fiduciary position towards
the company in respect of their powers and capital under their control.”

Q.30. Discuss the powers of official liquidator under compulsory winding up.
ANS:- He can exercise the following powers only with court sanction:
1. To institute or defend any suit, prosecution or other legal proceedings, civil or
criminal in the name of the company.
2. To carry on the business of the company.

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3. To sell the immovable property and actionable claims of the company by public
auction or private contract with power to transfer the whole thereof to any person or
body corporate.
4. To raise the required money as the security of the assets of the company.
5. To appoint an advocate, attorney or pleader entitled to appear before the court to
assist him in the performance of his duties.
6. To compromise call, debts and other pecuniary liabilities with contributories or
debtors and take any security in discharge of any such claim and give a complete
discharge in respect thereof.

He can exercise the following powers without obtaining court sanction:

1. To do all acts and to execute on behalf of the company all deeds, receipts and other
documents and for the purpose to use, when necessary, the company’s seal.
2. To inspect the records and returns of the company on the files of the Registrar
without payment of any dues.
3. To prove rank and claim in the insolvency of any contributory, for any balance
against his estate.
4. To receive dividends in the insolvency, in respect of any balance against his estate, as
a separate debt due from the insolvent and rateable with other creditors.
5. To draw, accept, make and endorse any bill of exchange, hundi or promissory note
on behalf of the company.
6. To take out in his official name, letters of administration to any deceased
contributory, and to do 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.
7. To appoint an agent to do any business which the liquidator is unable to do
himself.

Q.31. Explain the provisions of the Companies Act regarding the investigation of
the affairs of a company by the Central Government.
ANS:- INVESTIGATION INTO AFFAIRS OF COMPANY (SECTION 210)
Where the Central Government is of the opinion, that it is necessary to investigate into
the affairs of a company,—
• on the receipt of a report of the Registrar or inspector;
• on intimation of a special resolution passed by a company that the affairs of the
company ought to be investigated; or
• in public interest,
it may order an investigation into the affairs of the company.
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Where an order is passed by a court or the Tribunal in any proceedings before it that the
affairs of a company ought to be investigated, the Central Government shall order an
investigation into the affairs of that company.

INVESTIGATION BY SERIOUS FRAUDS INVESTIGATION OFFICE (SFIO)

INTO THE AFFAIRS OF A COMPANY (SECTION 212):
• The Central Government may by order assign the investigation into affairs of a
company to the Serious Frauds Investigation Office on the basis of an opinion
formed based on the following:
¾ on receipt of report of the Registrar or Inspector under section 208;
¾ on intimation of a special resolution passed by a company requesting an
investigation into its affairs;
¾ in public interest; or
¾ on the request of any Department of Central Government or a State
Government.
• On receipt of Central Government order, the Director may designate such number of
inspectors as he may consider necessary for the purpose of such investigation.
• The Serious Fraud Investigation Office, shall conduct the investigation in the manner
and follow the procedure provided in this Chapter; and submit its report to the
Central Government within such period as may be specified in the order.

Q.32. What do you mean by meeting? Explain the various kinds of meetings.
Also explain the requisites of a valid meeting.
ANS:- MEETING
A meeting can be defined as a lawful association or assembly of two or more persons by
previous notice for transacting some business. The meeting must be validly summoned
and convened. Such gatherings of the members of companies are known as company
meetings.

The word “meeting” is not defined anywhere in the Companies Act. Ordinarily, a
company may be defined as gathering, assembling or coming together of two or more
persons for discussion and transaction of some lawful business. A company meeting may
be defined as a concurrence or coming together of at least a quorum of members in order
to transact either ordinary or special business of the company.

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In the case of Sharp vs. Dawes (1971), the meeting is defined as an assembly of people
for a lawful purpose” or “the coming together of at least two persons for any lawful
purpose.

According to P.K. Ghosh “Any gathering, assembly or coming together of two or more
persons for the transaction of some lawful business of common concern is called
meeting.”

According to K. Kishore, “A concurrence or coming together of at least a quorum of

members by previous notice or mutual agreement for transaction business for a common
interest is meeting.”
REQUISITES OF VALID MEETING
Following are the requisites for valid meeting:
1. Properly conducted
2. Conducted by authorized persons
3. Proper and also adequate notice
4. Legally constituted.
5. Must have chairperson.
6. Follow rules of quorum
7. Validly transacted business.

KINDS OF COMPANIES
Meetings under the Companies Act, 2013 may be classified as:
1. Shareholders Meetings:
• Annual General Meetings [Section 96]
Section 96 of the companies act provides for the Annual General Meeting. Every
company other than a one person company shall each year hold a general
meeting as annual general meeting other than any other kind of meetings and the
company should make sure that there should not be a gap of more than fifteen
months between two annual general meetings. With respect to first AGM, it
should be held within the time frame of nine months from the date of closing of
the first financial year.

For a general meeting not less than a clear notice of 21 days either in writing or
through electronic mode should be given. But a general meeting may be called
after giving a shorter notice if consent by not less than 95% of the members
entitled to vote at such meeting is given in writing or by electronic mode. The
notice of such meeting should consist of place, day, date and the proper hour of
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the meeting and should also contain a statement stating business which is to be
transacted at such meeting. The notice should be circulated to every member of
the company, legal representative of deceased and assignee of insolvent member,
auditor and every director of the company. Section 101 of the Companies Act
2013 deals with the provision of notice for the annual general meeting

• Extraordinary General Meetings

All other general meetings are called Extraordinary General Meetings. As the
very name suggests, these meetings are convened to deal with all the
extraordinary matters, which fall outside the usual business of the Annual
General Meetings. EOGMs are generally called for transacting some urgent or
special business, which cannot be postponed till the next Annual General
Meeting. Every business transacted at these meetings is called Special Business.

Persons Authorized to Convene the Meeting

The following persons are authorized to convene an extraordinary general
meeting-
• Convened by directors
• Convened by directors on the requisition of the shareholders u/s 100

• Class Meeting of Shareholders

Class meetings are those meetings, which are held by the shareholders of a
particular class of shares e.g. preference shareholders. Class meetings are
generally conducted when it is proposed to alter, vary or affect the rights of a
particular class of shareholders. Thus, for effecting such changes it is necessary
that a separate meeting of the holders of those shares is to be held and the matter
is to be approved at the meeting by a special resolution.

2. Meetings of the Debenture holders

The debenture holders of a particular class conduct these meeting. They are generally
conducted when the company wants to vary the terms of security or to modify their
rights or to vary the rate of interest payable etc. Rules and Regulations regarding the
holding of the meetings of the debenture holders are either entered in the Trust Deed
or endorsed on the Debenture Bond so that they are binding upon the holders of
debentures and upon the company.

3. Meetings of creditors & contributories

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Strictly speaking, these are not meetings of a company. They are held when the
company proposes to make a scheme of arrangements with its creditors. Companies
like individuals may sometimes find it necessary to compromise or make some
arrangements with their creditors. In these circumstances, a meeting of the creditors
is necessary. it may be held for-
• Meetings of creditors for purpose other than winding up.
• Meetings of creditors for winding up.
• Meetings of contributories in winding up.

4. Board Meetings of the Board of Directors

Meetings of directors are called Board Meetings. These are the most important as
well as the most frequently held meetings of the company. It is only at these
meetings that all important matters relating to the company and its policies are
discussed and decided upon. Since the administration of the company lies in the
hands of the Board, it should meet frequently for the proper conduct of the business
of the company. The Companies Act therefore gives wide discretion to the directors
to frame rules and regulations regarding the holding and conduct of Board meetings.
The directors of most companies frame rules concerning how, where and when they
shall meet and how their meetings would be regulated. These rules are commonly
known as Standing Orders.

VERY SHORT ANSWER QUESTIONS

(Note: Very short answer is required not exceeding 75 words.)

Q.33. Write a short note on Dividend.

ANS: A dividend is the distribution of reward from a portion of company's earnings and is paid
to a class of its shareholders. Dividends are decided and managed by the
company’s board of directors, though they must be approved by the shareholders through
their voting rights. Dividends can be issued as cash payments, as shares of stock, or other
property, though cash dividends are the most common. Dividend means the profit that is
divided amongst the members of the company on the basis of the shares held by them. In
brief, a dividend is that portion of the distributable amount of profit to which each
member is entitled when it is formally declared in the Annual General Meeting of
members. It follows from it that if no profits are made or if none are made available for
distribution, no dividend will be declared.

Q.34. What is Reduction of Share Capital?

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ANS: The Reduction of Share Capital means reduction of issued, subscribed and paid up share
capital of the company. Previously, reduction of share capital was governed by section
100 to 104 of the Companies Act, 1956, now it is governed by section 66 of
the Companies Act, 2013. Reduction of share capital is regarded as one of the process of
decreasing company’s share capital (apart from Redemption of preference shares and Buy
Back of shares which are governed by other provisions separately). In simple words it can
be regarded as ‘Cancellation of Uncalled Capital’ i.e. part of subscribed share capital.

Q.35. What do you mean by Share Capital?

ANS:- The term share capital denotes the amount of capital raised or to be raised by the issue of
shares by a company. Company is a big form of business organization. The amount
required by the company for its business activities is raised by the issue of shares. The
amount so raised is called ‘Share Capital’ of the company. It may be noted that a
company limited by shares will have share capital. A company limited by guarantee or an
unlimited company may not have any share capital.

Q.36. What is Transmission of shares?

ANS:- Transmission of shares means transfer of shares on account of operation of law.
Transmission of shares takes place in case of death, insanity or insolvency of a member
or, where the member is a company, on its liquidation. The effect of the transmission is
that the legal representative, administrator or the official assignee or receiver, as the case
may be, shall be entitled to the shares.

Q.37. Explain Pre-Emptive rights.

ANS:- Preemptive rights are a clause in an option, security or merger agreement that gives the
investor the right to maintain his or her percentage ownership of a company by buying a
proportionate number of shares of any future issue of the security. In Pre-emptive rights
shareholders may have to be offered shares in a company before they are made available
to anyone else. They can arise on the allotment, transfer or transmission of shares.

Q.38. Distinguish between a member and a shareholder.

ANS:- The following are the differences between members and shareholders:
1. A member is a person who subscribed the memorandum of the company. A
shareholder is a person who owns the shares of the company.
2. The bearer of a share warrant is not a member, but the bearer of a share warrant can
be a shareholder.
3. All shareholders whose name are entered in the register of members are the
members. On the other hand, all members may not be the shareholders.
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4. In the case of a public company, there must be a minimum of 7 members. There is no

such cap on the maximum number of members. Similarly, a private company can
have a minimum of 2 and maximum of 200 members. As opposed to shareholders,
there is no minimum or maximum limit, in the case of a public company.

Q.39. What is Annual General Meeting?

ANS: An annual general meeting is a meeting of all the members of an incorporated association,
which must be held once during each calendar year. The annual general meeting must be
convened in accordance with law. According to Section 96, every company shall in each
year hold in addition to any other meetings, a general meeting as its annual general
meeting. Every general meeting must be held during the business hours, on a day which
is not a public holiday and at the registered office of the company. Every Company
requires to conduct such a meeting by served a notice of 21 days minimum length prior to
the meeting either at the latest known address or email id of the members. However, a
company may conduct such meeting through the issue of a notice of shorter length with
prior approval of not less than 95 % of the members entitled to vote at such meeting.

Q.40. What do you mean by oppression and Mismanagement?

ANS:- Chapter XVI of the Companies Act, 2013 deals with the provisions relating to prevention
of oppression and mismanagement of a company. Oppression and mismanagement of a
company mean that the affairs of the company are being conducted in a manner that is
oppressive and biased towards the minority shareholders or any member or members of
the company. The word oppression in common parlance refers to a situation or an act or
instance of oppressing or subjecting to cruel or unjust impositions or restraints.
According to Lord Keith,” Oppression means, lack of morality and fair dealings in
the affairs of the company which may be prejudicial to some members of the
company. The term mismanagement refers to the process or practise of managing
ineptly, incompetently, or dishonestly. However it is to be noted that the terms are not
defined under the companies act and is left to the discretion of the court to decide on the
facts of the case whether there is oppression or mismanagement of minority or not.

Instances which can be termed as mismanagement

1. Preventing directors from functioning
2. Violations of statutory provisions
3. Violations of provisions of MOA & AOA of the company
4. Misuse of funds etc

Q.41. What is resolution? What are the kinds of resolution?

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ANS:- In any meeting, the matters which are put for consideration are in the form of proposals
and are called ‘motions’. In a meeting, any such ‘motion’ may be brought for
consideration either by the chairman or by the secretary or by any other member also.
Any such motion, after due discussion, is put to vote or for decision and its decision is
recorded in the form of a ‘Resolution’. So, a resolution means formal recording of the
wishes of the members present as expressed by voting. A resolution is a legally binding
decision made by limited company directors or shareholders. If a majority vote is
achieved in favour of the decision, a resolution is ‘passed’. Resolutions are of three
types:
• Ordinary Resolution
• Special Resolution
• Resolution requiring special notice.

Q.42. Explain the term reconstruction.

ANS:- Reconstruction is a process of the company’s reorganization, concerning legal,
operational, ownership and other structures, by revaluing assets and reassessing the
liabilities. There are two methods of reconstruction which are internal reconstruction and
external reconstruction. The former is the method in which the reconstruction is
undertaken without winding up the company and forming a new one, while the latter, is
one whereby the existing company loses its existence, and a new company is set up to
take over the business of the existing company. Reconstruction is required when the
company is incurring losses for many years, and the statement of account does not reflect
the true and fair position of the business, as a higher net worth is depicted, than that of the
real one.

Q.43. What do you mean by Amalgamation?

ANS:- Amalgamation is a form of combination. Amalgamation is a blending of two or more
existing undertaking into one undertaking, the shareholders of each blending company
becoming substantially the shareholders in the company which is to carry on the blended
undertakings. There may be amalgamation either by transfer of two or more undertakings
to a new company or by transfer of one or more undertakings to an existing company.

Q.44. Explain the difference between internal reconstruction and external

reconstruction.
ANS:- The following points are relevant on account of the differences between internal and
external reconstruction:

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1. Internal reconstruction can be defined as the reorganization of the company,

without liquidating the existing company and forming a new one. On the other hand,
an external reconstruction is a form of corporate restructuring wherein the existing
company is liquidated to give birth to a new company, for continuing the business of
the existing one.
2. No new company is formed in internal reconstruction. Conversely, the new
company is formed in the external reconstruction, to take over the business of the
existing company.
3. In internal reconstruction, the capital of the company is reduced, and external
liabilities such as debenture holders and creditors waive their claims by giving a
discount. On the other hand, in external reconstruction, there is no reduction in the
capital of the company.
4. In internal reconstruction, court’s approval is mandatory, because the reduction in
capital may affect the rights of the shareholders, which requires confirmation from
the court. As against, in external reconstruction, there is no such approval required.
5. In internal reconstruction, since there is no new company is formed, there is no
transfer of assets and liabilities. Unlike, external reconstruction, assets, and liabilities
of the old company are transferred to the new company.

Q.45. What are the duties of a director?

ANS:- The directors have fiduciary obligations and also duties to act reasonably and in the best
interests of the companies where they hold such positions. Their duties emanate due to
holding positions which may be synonymous to agents as well as trustees of their
companies.

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