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STUDY MATERIAL FOR INTERNAL

CIRCULATION
COURSE & SEMESTER: 5 YEAR B.COM. LL.B. VI SEM

SUBJECT: COMPANY LAW

Prepared By
Ms. Sahana Florence
Asst. Prof.
BMSCL
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COMPANY LAW

COURSE CONTENT

UNIT-I

Introduction and Concept:

Company – historical development- nature and characteristics of Company- kinds of Company-

Corporate personality- limited liability- lifting of corporate veil- Promoters- duties and liability
of promoters.

UNIT-II

Incorporation:

Procedure of incorporation – Certificate of incorporation- MOA- AOA- Doctrine of indoor

management- Prospectus.

UNIT-III

Management and Control of Companies:

Board of Directors- Powers and functions: Distribution of Powers between Board of Directors
and general meeting.

Directors: appointment- qualifications- position of directors- types of directors- powers and

duties of directors- remuneration- removal.

Meetings: Meetings of Board and Committees- kinds of meetings- procedure relating to

Convening and proceedings at General and other meetings- Resolutions- Prevention of
Oppression and Mismanagement.

Corporate Social Responsibility.

UNIT-IV

Financial Structure of Company:

Sources of capital: shares - types- allotment- transfer of shares- rights and privileges of
shareholders- dividends- declaration and payment of dividends, prohibition of buy back-
private placement.

Debentures – floating charge- appointment of debenture trustees and their duties- kinds-
remedies of debenture holders- redemption.

Acceptance of Deposit by Companies, charge on assets.

UNIT – V

Reconstruction and amalgamation and winding up:

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Reconstruction, rehabilitation and amalgamation: concept- Jurisdiction and powers of Court

and NCLT- vesting of rights and transfer of obligations- takeover and acquisition of minority
interest.

Winding up: Concept- modes of winding up- who can apply- procedure under different modes.

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UNIT- I
Introduction and Concept:

Company – historical development- nature and characteristics of Company- kinds of Company-

Corporate personality- limited liability- lifting of corporate veil- Promoters- duties and liability
of promoters.

Evolution of Company Law In India

Before the advent of industrial revolution, the sole traders and the partnership
firms were the most common forms of business organisations, but after the advent of industrial
revolution new forms of business organisations took place in India.

The heavy employment and expensive machinery necessitating the investment

of huge capital cannot be provided only by sole traders and the partnership firms. They suffered
from various drawbacks such as unlimited liability, limited capital resources, limited
managerial ability and absence of continuity etc, But the company form of business
organisation eliminated all these drawbacks and made possible to raise the necessary capital
for the purpose of carrying business. In modern times the company has been unanimously
recognised as the best form of organisation for trade, commerce and industry.

The Company Law is a gift of England to Indians. The Company Law in India
has drawn its inspiration from the various enactments of Company Law in England. In India
the first Co. Law was passed in the year 1850 on the model of British law. This Act was
amended various times and was replaced by Act of 1882; again this was replaced by the
Companies Act of 1913. Again 1913 Act was replaced in the year 1936 to remove the various
defects, but still it was found that this Act was defective in several aspects and therefore a
new Act was passed in the year 1956. It was a largest piece of legislation containing 658
Sections and 15 schedule ever passed by the Indian Parliament. It was aimed to achieve the
socialistic pattern of the society as enshrined in our Constitution. However this Act is also
subjected to amendment more than dozen times since it was codified. Major amendments to
the Act were made in 2002 which brought many changes in the in the various fields.

Presently, in India Company Law is in the form of Companies Act of 2013 as

the Companies Act of 1956 has now been replaced by The Companies Act, 2013 after receiving
the assent of the President of India on Thursday, 29 August 2013. The Companies Act, 2013 is
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divided into 29 chapters containing 470 clauses as against 658 Sections in the Companies Act,
1956.

➢ Companies Act 2013

The new law has been passed and is considered as trend changer in Indian
Corporate law the new law has been rewritten extensively with several new provisions for
investor protection, better corporate governance and corporate social responsibility etc. It
defines a number of new terms that have come into vogue in recent times.
The Act provides for class action suit, which is key weapon for individual
shareholders to take collective action against mis-leading companies. Better disclosure
requirements in financial statements and disclosure of interests of directors etc. It has also
streamlined procedures relating to disclosure of transactions with parties related to directors,
promoters etc.
It provides for new concepts such as a single person company. Cap on
number of persons in a private company raised to 200. E-voting has been recognized. This new
Act is one of the major achievements in Indian Parliamentary History

➢ The Scope and Object of the Companies Act of 2013:

The objects of this Act are to –

(a) Promote the development of the economy by encouraging entrepreneurship and enterprise
efficiency and creating flexibility and simplicity in the formation and maintenance of
companies;

(b) Encourage transparency and high standards of corporate governance by providing for the
functions and obligations of company secretaries and directors;

(c) Provide for the incorporation, categorization, management and administration of different
types of companies;

(d) Provide for mergers, amalgamations, and takeovers;

(e) Provide for the registration of foreign companies;

(f) Provide for co-operatives to operate under the style of companies and be registered;

(g) Provide for the colour coding of certificates of incorporation and of the registration
certificates of foreign companies;

(h) Incorporate financial reporting provisions;

(i) Provide for the responsibilities of public companies;

(j) Provide for the start up and functioning of small companies;

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(k) Repeal and replace the Companies Act, 1994; and

(l) Provide for matters connected with or incidental to the foregoing.

Nature, Meaning and Definition of the term Company

• Nature of Company:

Basically, company is formed by the association of persons to do business

and share the profits and losses equally. In other words company is a voluntary association of
number of individuals formed for some common purpose. Company is also has its own legal
entity and legal personality, company is combined of political, social, economic and legal
institutions. In modern days the company has become the most dominant form of business
organisation. A company being a legal person capable of purchasing, enjoying and disposing
of the property in its own name.

Company being a body corporate can sue and be sued in its own name; criminal complaints
can also be file by the company. A company has right to protect its fair name and it can also
sue for any defamatory statement against it or anyone who likely to damage its business or
property company has right to seek remedy before the court of law by way of damages.

• Meaning and Definition of the Term Company:

The word ‘Company ’is derived from the Latin word ‘Com’ and ‘Panies’.
‘Com’ means with or together; and ‘Panies’ means bread. The words referred to an association
of persons, who took their meals together. In Smith vs. Anderson, A company in broad sense
may mean an association of individuals formed for some common purpose.

According to section 2(20) of the Companies Act of 2013: “company

means a company formed and registered under this Act or under any previous company law”.
The Companies Act fails to define company in terms of its features. Therefore, it is necessary
to depend on the definitions given by different authorities.
According to ‘Lindley’: “Company is 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
people who contribute to it or to whom it belongs are the members. The proportion to which
each member is entitled is his share”.

According to Justice James: “A company is an association of persons united

for common object”.

According to ‘Haney’: “A company is an incorporated association, which is an

artificial person created by law, having common seal and perpetual succession, a capital
comprised of transferable of shares and carrying limited liability”.

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CHARACTERISTICS OF A COMPANY
On the basis of definitions given by the above authorities the important characteristics features
of a company has been analysed. The followings are the characteristic features of a company.

1. It is an Incorporated Association:
A company has to be incorporated or registered under the Companies
Act of 2013. Registration creates a company and it is compulsory for all the
associations of more than 10 persons doing the business of banking and of more
than 20 persons doing any other business which is legally approved must be
incorporated. If it is not incorporated it becomes illegal association and the
members of such association are personally liable for the debts of its business.
2. It is an Artificial Person:
Company is created by law so it is called as an artificial person. It has
neither body nor soul but still it is in existence. It has no physical existence but
it has legal existence. It does not take birth like natural persons but company
enjoys all the rights of a natural persons like it has a right to enter into contract,
purchase the property, enjoy the property and it can dispose the property in its
own name. As it is an artificial person it cannot sign, it cannot be presented in
court and it cannot be marry and divorced.
3. It has Separate Legal Entity:
Company has a legal entity quite distinct from its members, being
separate legal entity it bears its own name, it has seal of its own and its assets
are separate from those of its members, its members are its shareholders and
they are the owners of the company. As it has its separate legal entity
shareholders cannot be held liable for the acts of the company even it holds the
entire share capital.
4. It has Perpetual Succession:
Company has perpetual succession. The life of the company is not
related with the life of its members. Its continuity therefore not affected by
death, insolvency, transfer of shares, lunacy (unsound mind), retirement of any
of the members. According to ‘Tennyson’, “for men may come and men may
go but I go on forever”. I.e. in the case of a company it may be said that the
members may come and members may come but company goes on forever. It
is the legal person created by law, only law can bring its end no one else.
5. It has Common Seal of its own:
Since a company is an artificial person it cannot sign like individuals.
Its name is engraved on a common seal and the seal is used for its signature. It
is therefore authenticates documents, letters, notices, circulars etc,. the common
seal of the company is of great importance therefore this seal is kept in the
custody of company secretary.
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6. Limited Liability:
The limited liability is another important feature of the company. If
anything goes wrong with the company the risk of the members is limited only
to the extent of the amount of his share and nothing more. The creditors of the
company cannot get their claims satisfied beyond the company.

7. Transferability of Shares:
The shareholders can transfer his share to any person without the
consent of any other person under the Articles of Association, company can put
certain restrictions on transfer of shares but it cannot altogether stop it. A private
company can put more restrictions on the transferability of shares.
8. Limitation of Work:
The field of work of a company is fixed by its memorandum of
association of a company. It cannot do anything beyond the powers defined in
MOA.
9. Voluntary Association for Profit:
Company is a voluntary association of persons to earn profit and
it is formed for the accomplishment of some public good and what so ever the
profit is should be divided among its shareholders of a company. It cannot be
form to carryon any activity against public policy and having no profit motive.
10. Representative Management:
Shareholders are the real owners of the company but, they are
scattered widely it is not possible to all the shareholders to participate in the
Management of the company; therefore they leave this to the representatives.
The Board of Directors are the representatives of the shareholders and the
company is managed by the BOD.
11. Capacity to Sue and be Sued:
A company has a distinct legal personality. Being a legal
personality, a company can sue and be sued in its own name. unlike the
partnership an action against a company does not mean an action against its
members.

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TYPES OF COMPANY/ KINDS OF COMPANY

Types of companies that can be formed under 2013 Act has remained same as in 1956 Act
except one more class of company has been added. The new class of company is OPC (One
Person Company). Companies may be classified into various types on the following basis:

1. On the basis of Incorporation:

An incorporated company is one, which is formed for the purpose of
carrying business to earn profit. These companies are incorporated either by the
Companies Act of 1956 or some of them are incorporated before passing the
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Companies Act of 1956. On the basis of incorporation, the companies may be

classified into following three categories namely.
a) Charted Company:
Charted company is created by the charter or special permission
granted by the head of the state or countries King or Queen. Giving certain
exclusive privileges, rights and powers to a particular body of persons for
undertaking commercial activities in specified geographical areas. The British
East India Company formed in England in 1600, Dutch East India Company
formed in Holland in1602, Eastern Bank of England in 1690 are the best
examples of the charted companies. Since India attended independence this type
of companies does not exist in India.
b) Statutory Company:
A statutory company is also known as a corporation. It is a
company which is incorporated under special Act of the legislature of the
country or the state. The powers, responsibilities, liabilities, objects, scope etc
of such companies are clearly defined under the provisions of the particular
legislation. Usually these companies are established to run enterprise of social
or national importance. The RBI, SBI, the Industrial finance corporation of
India, LIC, Indian Airlines Corporations, UTI, the Food Corporation of India,
Transportation, water supply, Electricity supply are the best examples of
statutory companies.
c) Registered Company:
It is a company which is organised by getting it registered with the
registrar of the companies under the provisions of Companies Act of the country
concerned the formation, working and continuity of such companies are
controlled by the Companies Act of 2013.most of the companies in India in the
field of trade. Commerce and industry are the registered companies.
2. On the Basis of Liability:

On the basis of liability companies may be classified into 2 categories

namely:

a) Limited Liability Companies:

Where the liability of a company is limited, such companies are
called as limited liability companies. Every limited liability companies
should properly mention the word ‘limited’. It is further divided into two
i) Companies Limited by Shares:
Company limited by shares are the companies in which the
liability of the members is limited to the extent of nominal or face
value of the shares held by him. In case of winding up of the
company limited by shares the members cannot be asked to pay
more than the amount unpaid on the shares held by them. The
company limited by shares may be a public company or a private
company.
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ii) Company Limited by Guarantee:

Where the liability of the members of a company is limited
to a fixed amount which the members undertake to contribute to the
assets of the company in the event of its being wound up, the
company is called as company limited by guarantee. These are the
companies established without having share capital and their main
intention is not to make profit and to provide services in promoting
arts, culture, sports, charity, science, education, literature etc. the
guaranteed members are required to pay the guaranteed amount not
during the life of the company but only when the company is
liquidated.
b) Unlimited Liability Companies (section 2(92)):
“a company not having any limit on the liability is called as
unlimited liability companies”
Where the liabilities of the members in a company are not
limited such companies are known as unlimited liability companies. In case
of such a company every member is liable for the debts of the company.
3. On the Basis of Number of Members:
On the basis of number of members company may be classified into 3 categories
namely:
a) Private Company:
According to section 2(68), “A private company is that company
which has minimum paid-up capital of rupees 1,00,000 or much higher capital
as may be prescribed by the Articles of Association.
According to section 12 of the companies Act 1956, the minimum
number of members to form a private company is 2 and the maximum is 50. But
now the new Companies Act of 2013 provides with that the maximum number
of members in a private company is increased from 50 to 200. Every private
company must add the word ‘pvt’ after its name, in the common seal of the
company, in the company’s name board and also in the companies’ important
documents.
➢ Characteristics of Private Company:
i) A private company restricts the rights of transfer of shares. The shares of a
private company are not freely transferable as those public companies.
ii) Earlier its membership are limited 50 but presently the membership of private
company is increased to200
iii) The condition of 1956 Act to have a restriction in the AOA of a private
company prohibiting invitation or acceptance of deposits has been
removed by the new 2013 companies Act.
iv) A private company is easy to form than the public company only 2 members are
sufficient to form the private company.
v) It can start its business immediately after its incorporation.
vi) There is a great flexibility in regard to the management and conduct of the
business than in the case of public company.
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b) Public Company:
According to section 2(71) of the Act, a public company means a
company which is not a private company, which has a minimum paid- up capital
of rupees 5,00,000 or such higher paid- up capital, as may be prescribed.
➢ Characteristics of Public Company:
i) The minimum number of members in a public company is 7 and the maximum
number of members is unlimited.
ii) It does not restrict the transfer of shares in a company.
iii) It invites the general public to shares and debentures of the company.
iv) It does not prohibit any invitations or acceptance of deposits other than its
members, directors, relatives and friends

c) One Man Company or One Person Company:

• Introduction

The revolutionary new concept of 'One Person Company' (OPC) has been
introduced by the Companies Act, 2013. This concept of OPC was first recommended
by the expert committee of Dr. JJ Irani in 2005. OPC provides a new opportunity for
those who look forward to start their own ventures with a structure of organized
business. OPC will give the young businessman all benefits of a private limited
company which categorically means they will have access to credits, bank loans,
limited liability, legal protection for business, access to market etc all in the name of a
separate legal entity.

Though the concept of OPC is new in India but it is a very successful form of
business in UK and several European countries since a very long time.

• Definition of One Person Company

One Person Company is defined in Sub- Section 62 of Section 2 of The

Companies Act, 2013, which reads as follows:

'One Person Company means a company which has only one member'

It shall also be important to note that Section 3 classifies OPC as a Private

Company for all the legal purposes with only one member. All the provisions related to
the private company are applicable to an OPC.

The only exception provided by the Act to an OPC is that according to the rules
only "NATURALLY-BORN" Indian who is also a resident of India is eligible to
incorporate an OPC. It means the advantages of an OPC can only be obtained by those
Indians who are naturally born and also a resident of India. At the same, it shall also be
worth mentioning that a person cannot form more than 5 OPC's.

• Formation of OPC:
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An OPC is incorporated as a private limited company, where there is only one

member and prohibition in regard to invitation to the public for subscription of the
securities of the company.

The Salient features of an OPC include the following:

• An OPC can be formed under any of below categories :

o Company limited by guarantee.
o Company limited by shares
• An OPC limited by shares shall comply with following requirements :
o Shall have minimum [paid up capital of Rs. 1 Lac
o Restricts the right to transfer its shares
o Prohibits any invitations to public to subscribe for the securities of
the company.
• An OPC is required to give a legal identity by specifying a name under
which the activities of the business could be carried on. The words 'One
Person Company' should be mentioned below the name of the company,
wherever the name is affixed, used or engraved.
• The member of an OPC has to nominate a nominee with the nominees
written consent, and file it with the Registrar of Companies. This nominee
in the event of death or in event of any other incapacity, shall become a
member of an OPC. The member of an OPC at any time can change the
name of the nominee providing a notice to the Registrar of Companies in
such manner as prescribed. On account of Death of a member, the nominee
is automatically entitled for all shares and liabilities of OPC.

• Exemptions or Some Relaxation to OPC:

An OPC has certain privileges and exemptions which are not available to private
companies. Such exemptions are as follows:

• Signatures on Annual Returns – Section 92 of the Companies Act,2013:

It is provided in section 92 of The Companies Act, 2013, that the annual

returns in the case of One Person Company shall be signed by the company
secretary or where there is no company secretary, then by the director of the
company.

• Holding Annual General Meetings – Section 122 of the Companies

Act,2013:

provisions relating to General Meetings, Extra Ordinary General Meeting

and Notice Convening to General Meeting are not applicable to One Person
Company. However, where any business is required to be transacted at an
Annual General Meeting, or other General Meeting of the company by
means of an ordinary or special resolution, it shall be sufficient if the
resolution is communicated by the member of the company and entered in
the minutes book which is required to be maintained and signed and dated
by the member and such date shall be deemed to be the date of meeting
under the purposes of Companies Act,2013.
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• Board Meetings and Directors – Section149, 152 & 173 of the Act:
One Person Company needs to have one director. It can have maximum of
15 directors for the purposes of holding board meetings, in case of a OPC
which has only One director, it shall be sufficient compliance if all
resolutions required to be passed by such a company at a board meeting are
entered in a minute book – signed and dated by the member and such date
shall be deemed to have the date of the board meeting for all the purposes
under Companies Act, 2013.
• Signatures on Financial Statements:

The OPC shall file with the Registrar of COmpanies a copy of financial
statements duly adopted by its members along with all the documents which
are required to be attached to such financial statement, within 180 days from
the closure of the financial year along with cash flow statements. The
financial statement shall be signed by only one director and the annual return
shall be signed by the company secretary and the director, and in case if
there is no company secretary then only by the director.

• Contracts by One Person Company – Section 193 of the Act.

The new Companies Act, 2013 gives special attention to the contracts
which will be entered by One Person Company.

If the company fails to comply with the provisions as to providing the information to
the Registrar of companies then it shall be liable for punishment of fine which will be not less
than twenty thousand rupees and extend to one lakh rupees and the imprisonment for a term
which may extend upto 6 months.

d) On the Basis of Control:

On the basis of control, the company can be classified into 2 categories
they are:
a) Holding Company:
According to section 2(46), Where the relationship between two
companies is such that, one company controls the other, the controlling
company is called as holding company.
A holding company is a company which controlling the other
company. Where a company holds 50% of the share capital of another company
or which controls the Board of Directors of another company is called as holding
company.
b) Subsidiary Company:

According to section 2(87) “a subsidiary company is a company which

is controlled by holding company”. A company is said to be the subsidiary of another company
in the following 3 cases:

i) Company controlling the Board of Directors.

ii) Holding of majority of shares.
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iii) Subsidiary of another subsidiary.

e) On the Basis of Ownership:

On the basis of ownership company may be classified into two:
a) Government Company:
According to section 2(45) government company means any
company in which not less than 51% of the paid-up capital is held by central
government or by the state government. Government Company may be public
or private company. Hindustan Aeronautics ltd (HAL), HMT, Hindustan steel
ltd, BEL, Ashoka Hotels, Bharath Petroleum, BSNL, MTNL, BEML etc are the
best examples for government companies.
• Rules relating to Government Company (section-394):
1. Appointment of Auditors:
The auditors shall be appointed by the central government on
the advice given by the Auditor General of India. The Auditor General of India
will have the power to direct the manner in which the accounts of the
government company shall be audited by the auditors.
2. Audit Report:
The Auditor of a government company will submit copy of
the audit report to the Auditor General of India, who shall make comment upon
the audit report in such a manner as he thinks fit. Such audit report shall be
placed on annual general meeting of a Government company.
3. Annual Report:
Where the central government is a member of the
government company it shall send an annual report on the working affairs of
the company and laid before both the houses of parliament. Where the State
government is a member of government company the report shall also be laid
before the State legislature.
b) Non-Government Companies:
It means company which is not a government company. A
non- Government Company is a company which is owned and controlled or
managed by private investors. The majority companies in India belong to this
category.
f) Foreign Company:
According to section 2 (42), Foreign Company means a
company which is incorporated outside India but establishes business inside India.
A company which is incorporated outside India is employed by agents in India but
if it does not establish a place of business in India it will not be a foreign company.
EX: Nokia, Pepsi, Microsoft, Samsung, Sony, Ranbaxy, Honda, Reebok, Vodafone,
Benz etc are the best examples of foreign companies in India.
• Some rules regarding Foreign Companies(sections 379- 389):
i) Document: every foreign company within 30 days of the establishment of
business in India must submit with the registrar for registration with the
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necessary certified copies of the MOA,AOA, the full address of the main
office of the company, the list of Directors and Secretary of the company
and the name and address of the person who authorises the foreign company
in India.
ii) Accounts: once in every calendar year a foreign company has to get prepare
its balance sheet, profit and loss accounts. It shall file with the registrar every
year.
iii) Name: every foreign company shall exhibit on outside of every office or
place of business its name and the country of incorporation in English and
in any one of the local language.
iv) Penalty: if any foreign company fails to comply with the rules the company
and its officers are liable upto the fine of rupees 10,000, and in continuance
of an offence additional fine of rupees 1000 may be imposed everyday
during which the default continues.
v) Registration Charges: every foreign company has to pay a registration
charges created on any property in India and also they have to pay annual
returns.
vi) Winding Up: all foreign companies carrying business in India may be closed
by an order of the court, it can also be closed if it has been resolve or
otherwise cease to exist according to its own laws of incorporation.

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CORPORATE PERSONALITY
Human beings are the real beneficiaries of the corporate advantage. Company shall
have a residence, it has a purpose and business aim, and civil and criminal liabilities are
imposed upon the company. Company is a juristic person it has a separate legal entity. The
company is an association of persons formed for the purpose of some business carried in the
name of company, but at the same time it has its own independent corporate existence which
is called as corporate personality of a company. In other words corporate personality means
company having separate legal personality which is quite distinct from its members. It also
known as ‘Rule of Salomon v/s Salomon’.

The concept of corporate personality was recognised in the leading case- Salomon v/s
Salomon Co. Ltd. [1895-99, All ER 33(HL)]

Brief facts of the case: Salomon was a shoe manufacturer; he had good reputation and
profitability in the society. He formed Salomon company Ltd. with the share capital of 30000
pounds. There were totally 7 members to this company viz, Salomon himself, his wife, his
daughter, and his 4 sons. Salomon took 20000 shares and debentures worth of 10000 pounds.
His wife and children owned one share each. After some years the company went into heavy
loss and it was liquidated. At the time of winding up the company had left the property worth
of 6,000 pounds and the liability was worth of 17,000 pounds (10,000 pounds towards
debentures of Salomon and 7,000 pounds towards unsecured creditors).
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An unsecured creditor claimed their importance over the property of 6000 pounds.
Salomon claimed that he had charge over the company and he was the secured creditor because,
he was the owner of debenture holder worth of 10000 pounds. The unsecured creditors
contained that the company created by Salomon and his family members and in fact the
Salomon and the company were one at the same and that the company was a mere agent for
Salomon and therefore they should be paid in priority.

Judgement: The court gave the judgement in favour of Salomon treating his debentures being
secured debt, and also declared that company in the eyes of law separate, independent person
from Salomon, company being an artificial person created by law therefore it is different from
its individuals who are its members. It own its property and debts, it can be sue and be sued in
its own corporate name because its having its own corporate personality.

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LIFTING OF THE CORPORATE VEIL

Company is a legal person quite distinct from its members. This principle is regarded
as a curtain or veil or shield between the company and its members. This principle may be
referred to as the veil of incorporation through which the identity of the members can be
revealed. The veil of incorporation is not a wall between the company and its members but
sometimes persons creates the company for their selfishness with fraud intention under such
circumstances the court will lift the veil and withdraw the corporate personality from such
company stating that the company and its members are one and the same, and this principle is
known as ‘lifting of corporate veil’.

Exception to the rule of corporate personality/ Instances of lifting the corporate veil:

Corporate veil may be lifted under the following instances:

1. To prevent fraud or improper conduct

Some persons create a company with an intention to cheat the opposite parties
and to avoid legal obligation. When the fraud is appeared on the face of the company,
the court will interfere and decide the company as improper and it will apply the
principle of lifting of corporate veil.

In Jones v/s Lipmann, [ All ER 442 1962]: L agreed to sell certain land to J.
he subsequently changed his mind and to avoid the specific performance of the contract,
he sold it to a company, which was formed especially for the purpose. The company
had L and a clerk of his solicitors as the only members. J brought an action for the
specific performance against L and the company. The court looked to the reality of the
situation, ignored the transfer and ordered that the company should convey the land to
J.
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2. Enemy Character

Sometimes it becomes necessary to determine the character of a company. To see

whether the company is real and companies affairs are properly controlled or not it is
essential to determine the nature of a company. The function of company should be in
accordance with nation’s interest. If any signs of enemy character are shown in the
company then the court can interfere and can lift the corporate veil and can say
company and its members are one and the same.

In Dailmer Co. Ltd v/s Continental Tyre & Rubber Co. Ltd (1916): A
company was incorporated in England for the purpose of selling in England tyres
made by Germany, by a German company. All the Directors of this company were
German resident in Germany. During the First World War, the English Company
commenced an action for the recovery of a debt. The Court held that the company was
an alien company and the payment of debt to it would amount to trading with the
enemy and therefore the company was not allowed to proceed with the action.

3. To prevent Tax Evasion

In fact registration of company is intended for the tax benefits, every country
gives certain tax benefits to the companies. However, some persons in a company try
to evade from paying taxes therefore to prevent tax evasion the corporate veil may be
lifted by the court.

In Sir Dishaw Maneckjee (AIR 1927. Bom, 371): D an assessee, who was
receiving huge dividend and interest income, transferred his investments to 4 Pvt
Companies formed for the purpose of reducing his tax liability. These companies
transferred the income to “D” as a pretended loan. The Court held that the companies
were nothing more than the assessee himself. They did no business but were created
simply as legal entity to receive dividends and interest and hand them over to “D” as
pretended loan.

4. When the Company is a mere sham or fake (unlawful act)

The corporate veil may be lifted by the courts, where corporate personality is
being used as a fake or sham for doing an unlawful act.

5. Protection of Public Policy

The court may interfere with the fake companies whose objects and functions
are against the public interest then the court may lift the corporate veil of such
companies.

6. Company avoiding legal obligation

Where the use of an incorporated company is being made to avoid legal obligation,
the court may disregard the legal personality of the company and proceed on the
assumption as if no company existed.
 P a g e | 17

7. Company acting as agent or trustee of the shareholders

Where company is acting as agent for its shareholders, the shareholders will
be liable for the acts of the company.

8. Amalgamation

Compromise or arrangement between the companies and its creditors or any

members of them leads to amalgamation of one company with another company. In that
circumstance the amalgamated company loses its separate legal entity.

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PROMOTERS
Meaning and Definition of Promoter

A promoter is a person who does the necessary preliminary work incidental to the
formation of a company. He is a person who brings the company into existence. In other words,
he is the person who takes the necessary steps for formation of a company. The persons, who
assume the primary responsibility of matters relating to promotion of a company, are called
‘promoters.

It is the promoters who conceive the ideas of forming the company. Promoters are the
persons who give a proper shape to a company in this commercial world. They may be called
as the parents of a company to whom a company is born. The role of promoter is vital in the
formation of a companies.

According to section 2 (69) “promoter” means a person—

(a) Who has been named as such in a prospectus or is identified by the Company in
the annual return; 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 nothing in sub-clause (c) shall apply to a person who is acting merely in a
professional capacity;

The first persons, who control a company’s affairs, are its promoters.

Functions / Duties of a Promoters:

The followings are the functions of a promoter

 P a g e | 18

i) He conceives the idea of formation of company after a thorough study of

the business world.
ii) He draws up the scheme and determines the object of a future company
iii) The promoter of a company decides its name and ascertains that it will be
accepted by the Registrar of Companies.
iv) He prepares the MOA, AOA and Prospectus of the company.
v) He takes necessary permission from the appropriate Government.
vi) He finds out suitable financiers to back up the company.
vii) He makes arrangements with vendors, directors, legal advisors, bankers,
auditors and secretary of the company.
viii) He takes the pain for filing necessary documents with the Registrar of
Companies for the Certificate of Incorporation.
ix) He bears all the preliminary expenses of the company.
x) He cannot make either directly or indirectly any profits at the expense of the
company.
xi) He is not allowed to make any profit by sale of his own property to the
company, unless all material facts are disclosed.
In brief, a promoter shows the way for a company to stand on
its own feet. When all these things have been done they handover the control
of the company to Directors, who are often the Promoters under a different
name.

Rights of Promoters:

The promoters being in a fiduciary relation with the company they form, have certain rights
and liabilities of the company. The rights of a promoter of the company are: -

1. Right to Receive Preliminary Expenses

The promoters are entitled to receive all the expenses incurred in setting up and
registering the company from the Board of Directors. The articles may provide for the
payment of preliminary expenses to the promoters. The company may pay the expenses to
the promoters even after its formation but such payment should not be ultra-virus the
articles of the company.

The articles may contain a provision regarding payment of a fixed sum to the
promoters. But such a provision has no contractual effect and the promoter cannot sue the
company for enforcement of payment on the strength of the provision in the articles. The
relevant case on the point is that of Malhado V. Porto Alegre Railway Co. in this case, the
article of the company contained a provision that the company may make payment of the
expenses incurred for setting up the company to the promoters. The quantum of expenses
to be paid depended on the decision of the Board of Directors but it was not to exceed 2000
pounds in any case. The plaintiffs were the promoters of the company who sued it for
enforcement of payment on the basis of the articles. The Court ruled that the promoters
 P a g e | 19

could not sue the company for preliminary expenses as the company is not bound by any
provision in the articles except to members in their capacity as members.

2. Right to Remuneration

A promoter having made proper disclosure, has a right to be paid remuneration for
his efforts. The payment of remuneration to a promoter in consideration of his services
may be in the form of fully or partly paid-up shares, debentures or commission or it can
even be in the form of a lump sum-amount.

It must, however, be pointed out that in absence of any express agreement with the
company after its incorporation, a promoter is not entitled to claim from the company
any remuneration for his services. Company is also not liable in absence of an
agreement to reimburse a promoter in respect of registration fee or stamp duty paid by
him for the registration of the company. Whatever be the remuneration or benefit paid
to the promoter, it must be disclosed in the prospectus if it is paid within two years
preceding the date of the prospectus.

3. Right to receive Commission:

He can get the commission from vendors of property.

4. He can recover the price of the property he has purchased for the company

Position of Promoters:

Promoter occupies significant position in formation of a company. However, it is very

difficult to determine his accurate legal position, because the company is not in existence. He
is neither trustee nor agent of the company. His position may be described with reference to
his legal status, duties and liabilities.

• Legal Status of a Promoters: As to the exact legal status of a promoter, the

statutory provisions are silent in most part, except for a couple of Sections in the
Specific Relief Act, 1963. His legal status is incapable of precise statements, but in
Lyndney & Wigpool Iron Ore Co. v/s Bird, the court described the position of a
promoters as follows: “although not an agent for the company, nor a trustee for it
before its formation, the old familiar principles of the law of agency and trusteeship
have been extended and very properly extended, to meet such cases.”
• Promoter as Agent or Trustees:
Promoters are neither agents nor trustees of a company
because no one can act as an agent for a person who is not in existence. Therefore,
the promoters are not the agents or trustees of a company.
• Fiduciary position of Promoters:
In many respects a promoter stands in a fiduciary relationship
towards a company (confidence/trust/ faith)
a) Not to make any profit at the expenses of the company:
 P a g e | 20

The promoters must not make either any profit at the expenses of the
company which he is going to start. If any secret is made the promoter is
liable for the loss.
b) To give benefit of Contracts to the company:
The promoter must, when once he has began to act in the promotion of a
company, give to the company the benefit of any contracts into which he
enters in respect of the company. Thus where he purchases any property for
the company he cannot sell that property to the company at a price higher
than he gave for it.
c) To make a full disclosure of interest or profit:
If the promoter fails to make a full disclosure of all relevant facts, including
any profit and his personal interest in a transaction with the company, the
company may sue him for the damages.
d) Not to make unfair use of position:
The promoter must not make an unfair or unreasonable use of his position
and must take care to avoid anything which has the appearance of undue
influence/fraud.

Liabilities of Promoters:
A promoter is subject to certain liabilities under the Companies Act, 2013. Some of
these liabilities are as follows: -

i) He is liable for non- compliance of Companies Act:

Section 26 of the Act, 2013 lays down matters to be stated and reports to be set out in
the prospectus. The promoter may be held liable for the non-compliance of the
provision of this section.
ii) He is liable for mis- statements in prospectus:
A promoter is liable for any untrue statement in the prospectus to a person who has
subscribed any shares or debentures on the faith of the prospectus. The aggrieved
person may sue the promoter for compensation for any loss or damage sustained by
him. Any false statement in the prospectus may lead to the following consequences:-
a. The allotment of shares or debentures may be set aside.
b. The promoter may be sued for damages and also for compensation.
c. The promoter may incur criminal liability and criminal proceedings
may be instituted against him.
iii) He is personally liable for breach of preliminary contracts:
If a person contracted on behalf of a company which was non-existent, he himself
would be personally liable, just as a man signs a contract for and on behalf of his
‘horses’, he is personally liable.
iv) The Court may restrain a promoter from taking part in the management of the
company for a period of five years if it appears that he has been guilty of any offence
punishable under Section 339 or while being an officer of the company has otherwise
 P a g e | 21

been guilty of any fraud in relation to the company or committed any breach of duty
in respect of the company of which he is a promoter.
v) If a company is being wound up by the order of the Court and the Liquidators report
alleges any fraud in the promotion and formation of the company, the promoter or
promoters shall be liable to public examination like any other officer or director of a
company.
vi) Where a promoter has misapplied or retained any property of the company or is guilty
of breach of trust in relation to the company, he can be sued by the company for breach
of duty or deceit, as the case may be.
vii) In the event of the death of the promoter, the company may recover the damages or
compensation from the property of the deceased promoter.

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STUDY MATERIAL FOR INTERNAL CIRCULATION

COURSE & SEMESTER: 5 YEARS B.COM. LL.B. VI SEM

SUBJECT: COMPANY LAW

UNIT-II
INCORPORATION.

Procedure of incorporation – Certificate of incorporation- MOA- AOA- Doctrine of indoor

management- Prospectus.

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FORMATION OF COMPANY

(REGISTRATION AND INCORPORATION)

A company is said to be form when it is incorporated or registered under the provisions

of companies Act. Before the company is formed lot of preliminary works are to be performed
such as whether it should be a public or private company, what its capital should be concerned.
All these decisions are taken by the certain persons known as promoters. They do all the
necessary preliminary work, incidental to the formation of a company. N

Mode of forming incorporated company (section3):

Section 3 (1) of the Companies Act, 2013 provides that a company may be formed for
any lawful purpose by—
(a) Seven or more persons, where the company to be formed is to be a public company;
(b) Two or more persons, where the company is to be formed as a private company; or
(c) One person where the company is to be formed as One Person Company (OPC), that is to
say, a private company:
 Page |2

As per Section 3 (2), A company so formed under sub-section 1 may be either:

(a) a company limited by shares, or
(b) a company limited by guarantee, or
(c) an unlimited company.

Members severally liable in certain Cases. — (A new Section 3-A inserted by the Companies
9Amendment) Act, 2017.) if at any time the number of members of a company is reduced, in
case of a public company, below seven, in the case pf a private company, below two, and the
company carries on business for more than six months while the number of members is so
reduced, every person who is a member od the company during the time that it is carrying on
business with less than Seven members or two members, as the case may be, shall be severally
liable for the payment of the whole debts of the company contracted during that time, and may
be severally sued therefor.

Incorporation of Companies:

A company gets legal recognition only after its incorporation, namely, gets certificate of
incorporation of the company from the Registrar of Companies. Incorporation is the second
important stage of the formation of a company. The company gets perpetual existence soon
after it is incorporated or registered. A company is incorporated by registering certain
documents with the Registrar of Companies, and paying certain fees and stamp duties. Unless
these formalities are complied with, a company does not have a legal existence of its own.
Therefore, mere adding of the word ‘company’ in a firm’s name would not convert it into an
incorporated company as it would depend on the number of members of the firm whether the
firm could be incorporated as a company or not.

➢ Documents to be filed with the Registrar (section 7):

Before a company is registered, it is essential to ascertain from the Registrar of

Companies (for the State in which the registered office of the company is to be situate)
if the proposed name of the company is approved. Then the following documents duly
stamped together with the necessary fees are to be filed with the Registrar:
i) An application in the prescribed form along with prescribed fees as required
shall be filed to Registrar of Companies of the State. The application must
specify the name of the company proposed to be incorporated as its name and
the kind of company, namely, whether it is a public or a private company.
ii) The Memorandum of Association and Articles of Association should be
prepared to and printed and a copy of each of them has got to be stamped,
according to the Stamp Act.
iii) The Memorandum and Articles are to be duly signed by at least seven
subscribers in case of a public company and two in case of a private company;
and each subscriber should give his address, description and occupation etc.
and number of shares subscribed by him. The subscribers must sign these
documents in the presence of at least one witness who shall attest the signature.
 Page |3

iv) The agreement, if any, which the company proposes to enter into with any
individual for appointment as its managing or whole- time director or manager.
v) A list of the directors who have agreed to become the first directors of the
company (this applies to a public company limited by shares) and their written
consent to act as directors and take up qualification shares.
vi) A declaration stating that all the requirements of the Companies Act and other
formalities relating to registration have been complied with. Such declaration
shall be signed by any of the following persons: viz., an Advocate of the
Supreme Court or of a High Court; or an Attorney or a pleader entitled to
appear before a High Court; or a secretary or a Charted accountant in whole-
time practice in India, who is engaged in the formation of a company; a person
named in the Articles as a director, manager or secretary of the company.
vii) The address of correspondence till the registration office is established. Then
within 30 days of the date of incorporation of the company, a notice of the
situation of the registered office of the company shall be given to the Registrar
who shall records the same in the Register book of Companies.

The Registrar of Companies on being satisfied that all the requirements have been duly
complied with will enter the name of the company in the Registrar of Companies maintained
by him and issue a certificate of incorporation to the company under his signature under Section
9 of the Companies Act, 2013. The company becomes a body corporate with perpetual
succession and a common seal from the date on the certificate even if that is not in fact the date
when it was issued. It must be stated that if the documents are in order and the object of the
company is legal, the Registrar has no discretion in the matter and he must grant the certificate
of incorporation. A writ of mandamus can therefore, be issued by the High Court to any of the
subscribers ordering the Registrar to issue the certificate of incorporation to the company since
he is acting as a quasi- judicial authority in the matter. If the documents produced before the
Registrar are returned for rectification of certain defects and the applicant instead of rectifying
the defects, drops the matter, he cannot claim refund of fees paid for registration.

➢ Procedure for Incorporation of A Company Under Companies Act, 2013:

1. Select a Name of the Company
In order of preference, at least one suitable name up to a maximum of six names,
indicative of the main objects of the company. Apply to the concerned RoC to ascertain
the availability of name in eForm1 A by logging in to the portal. A fee of Rs. 500/- has
to be paid alongside and the digital signature of the applicant proposing the company
has to be attached in the form. If proposed name is not available, the user has apply for
a fresh name on the same application.
2. Obtain Digital Signatures
Nowadays various document prescribed under the Companies Act, 2013, are required
to be filed with the digital signature of the Managing Director or Director or Manager
or Secretary of the Company, therefore, it is compulsorily required to Obtain a Digital
Signature Certificate from authorized DSC issuing authority for at least one director to
sign the E-forms related to incorporate like form INC.1 and other documents.
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3. Obtain Director Identification Number [Section 153]

As per section153 of the Companies Act, 2013, every individual intending to be
appointed as director of a company shall make an application for allotment of Director
Identification Number in form DIR- 3 to the Central Government in such form and
manner and along with such fees as may be prescribed. Therefore, before submission
of e-Form INC.1 for availability of name, all the directors of the proposed company
must ensure that they are having DIN and if they are not having DIN, it should be first
obtained.

➢ Procedure for Registration Made Easy

Prior to May 1, 2015 registration of a company took around 30 days’ time, but
introduction of new registration Form INC-29 by the Government has brought down
this period of seven days and even less. As a measure to ease the process of company’s
registration and streamlining the procedure by reducing instances of manual
interventions, the Government introduced a new registration Form INC-29 which has
clubbed all the seven forms into one. Earlier, the procedure of registration started from
getting a digital signature and ending up with getting a certificate for commencement
of business. In between the entrepreneur had to fill the different forms, each serving a
specific purpose.
With the introduction of single Form-29, it should not take more than a week to
get the company registered. In fact, after submitting the INC-29 form, entrepreneurs
should get Director Identification Number (DIN), Permanent Account Number (PAN)
and Tax Deduction Account Number (TAN) at their door steps. The main object of
introducing single Form for registration of company to eliminate manual interventions
so as to ensure speedy registration of companies and make starting of business easy by
reducing instances of manual interventions.

➢ CERTIFICATE OF INCORPORATION:

When the requisite documents are filed with the Registrar, the Registrar shall satisfy
himself that the statutory requirements regarding registration have been duly complied with, in
exercising this duty, the Registrar is not required to carry out any investigation. If the Registrar
is satisfied as to the compliance of statutory requirements, he retains and registers the
Memorandum, the Articles and other documents filed with him and issues a ‘certificate of
incorporation, i.e., of the formation of the company. (Sections 3, 7, 9) By issuing certificate of
incorporation, the Registrar certifies under his hand that the company is incorporated and in
the case of a limited company, that the company is limited.

Conclusiveness of certificate of incorporation:

A certificate of incorporation given by the Registrar in respect of a company is conclusive

evidence that all the requirements of the Companies Act have been complied with in respect of
registration. The certificate of incorporation has been held to be conclusive on the following
points:
 Page |5

1. That requirement of the Act in respect of registration of matters precedent and incidental
thereto has been complied with.
2. That the association is a company authorised to be registered under the Act, and has been
duly registered.
3. That the date borne by the certificate of incorporation is the date of birth of the company,
i.e., the date on which the company comes into existence.

Effects of registration (sec-9)

Certificate of Incorporation brings the company into existence as a legal person. Upon its issue
the company is said to be born. The companies’ life commences from the date mentioned in
the certificate of incorporation. A private company can commence its business immediately as
soon as which is registered, but in case of public company it has to obtained further certificate
for commencement of business. Unless and until it obtains such certificate fit cannot commence
its business.

When a company is registered and a certificate of incorporation is issued by the Registrar, three
important consequences follow:

1. The company becomes a distinct legal entity, its life commences from the date mentioned
in the certificate of incorporation.
2. The company acquires a perpetual succession.
3. The company’s property is not the property of the shareholders
4. The liability of the company is not the liability of the shareholders.

➢ Commencement of Business [Section 11]

A private company or a public company not having share capital, may commence its
business and exercise borrowings powers immediately after it has received the certificate
of incorporation. But a public company having share capital cannot commence business or
exercise borrowings powers even after its incorporation unless it obtains a certificate to
commence business. The is to protect persons against non-fulfilment of obligation by the
company which has reached a stage of formation. A public company which has share
capital must comply with the requirements of Section 11 in order to get the certificate of
commencement of business.

MEMORANDUM OF ASSOCIATION
An important step in the formation of a company is to prepare a document called the
‘Memorandum of Association’. MOA is a primary document of a company it directs all the
matters relating to the company. It regulates the external affairs of the company and it gives a
name of the company, it is the foundation on which the structure of the company is built, it is
the charter of the company. Its purpose is to enable the shareholders, creditors and outsiders to
 Page |6

know what their permitted range of activities is. In other words, it defines the relationship of
the company with the outside world. It shows the aims and objects of the formation of the
company. MOA is a very important document. It is compulsory for every company and
therefore it is called as the life-giving document to the company.

Definitions of MOA:

According to section 2(56) of the companies Act of 2013, Memorandum means “the
Memorandum of Association of a company as originally framed or as altered from time to time
in pursuance of any provisions of this Act or previous Act.

According to Palmer, “It is a document of great importance in relation to the proposed

company”

Nature of MOA:

The company cannot deviate from the provisions contained in the memorandum. If the
company does in any activities not authorised in the memorandum, they would be ultra-virus
and therefore null-void. After the incorporation the company is confined to conduct its business
within the territory of its MOA. It should not exceed its boundary line. If it exceeds it is treated
as ultra-virus, i.e., beyond the power. Once the MOA is registered, it becomes the public
document any person can inspect this document and can have certified copy of it. The object
of this is to protect its shareholders, creditors and outsiders who came forward to have contract
with the companies.

Importance of MOA:

1. It is the life giving document of a company because it is necessary for the registration of
a company. No one can register without this document.
2. It is the foundation on which the structure of the company is built.
3. It is the charter containing fundamental conditions upon which the company is registered.
4. It is the constitution of a company in relation to the outside world.
5. It shows the name of the company.
6. It shows the place of a company.
7. By stating the objects and powers it fixes the area of operations of a company.
8. It gives the information about the capital of a company.
9. It shows the liabilities of a member of a company.
10. It is a public document open for public inspection.
11. It controls the Articles of Association of a company.

Form and Procedure for filing MOA [section 4]:

Form of MOA: The MOA of a company shall be in such one of the Forms in Tables A,B, C,
D, and E in Schedule- I to the Companies Act, 2013, as may be applicable to the case of the
company or in a Form as near thereto as circumstances admit.

Procedure for filing MOA: The following are the procedures for filing MOA:
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a) That the MOA should be in printed or type written format.

b) It must be divided into paragraphs, numbered consecutively.
c) The appropriate stamp should be attached on the MOA.
d) Registration fee must be paid.
e) MOA should be registered only with the Registrar of the company.

On the registration of MOA of the company Registrar will be certified under his hand and
issues certificate of incorporation.

CONTENTS/ CLAUSES OF MOA [sec-4]:

Section 4 of the Companies Act deals with important contents or clauses of MOA.
There are 6 clauses in the MOA.
(a) Name Clause
(b) Registered Office Clause
(c) Objects Clause
(d) Limited Liability Clause
(e) Capital Clause
(f) Association Clause/ Declaration Clause.

1. NAME CLAUSE [Section 4 (a)]

This is the first clause in the MOA. It describes the name of a company. A company being
a legal person, must have a name on its own. As pointed by Johnson J. in Osborn Vs. Bank of
U.S., “the name of an incorporation is the symbol of its personal existence”. The company can
adopt any name it likes, any suitable name can be selected for the companies.

At the time of selecting the names to the company, the company has to follow certain legal
rules such as:

➢ Undesirable names to be avoided:

A company cannot be registered by a name in the opinion of the Central Government,
is undesirable. Although a company is free to adopt a name of its choice but it cannot
be registered with a name which, in the opinion of the Central Government is
undesirable. It should not contravene the provisions of the Emblems and Names
(Prevention of Improper Use) Act, 1950 nor it should it be suggestive of any
Government’s patronage or protection to the Company. It should not include the word
‘Co-operative’ in it. More recently, the non- Government Companies or enterprises are
prohibited to include the word ‘national’ within its name.
Broadly speaking, a name is undesirable and therefore rejected if it is either-
(a) Too similar to the name of another company; or
(b) Misleading, i.e., suggesting that the company is connected with a particular
business or that it is an association of a particular type.

➢ Injunction if identical name adopted:

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A company may not adopt a name which is identical, with or too nearly resembles
the name by which a company in existence has been previously registered. If a company
adopts such a name, it may be declared undesirable by the Central Government, and
may be restrained from, adopting such an identical name may be misleading and
injurious to an already existing company.
If a company gets registered with a name which resembles the name of an existing
company, the other company with whom the name resembles can apply to the court for
an injunction to restrain the new company from adopting the identical name. An
injunction will not be granted to prevent the use of a purely descriptive word with a
definite meaning and in common use, where the name of the two companies contains a
word which is in common use, its use cannot be restrained and even a very trifling
distinction between their names will suffice to make them acceptable.
In order to avoid the possibility of an identical name being adopted by a new-comer
company, the promoters have to seek advance approval of the name through an
application made to the Registrar of Companies. The Registrar shall inform the
company about the approval of the name of a company or otherwise, within fourteen
days of the receipt of the application.

A newly formed company cannot be registered by a name which is similar to or

resembles the name of an already incorporated company as the same may be
misleading to the public. Explaining the reasons for not allowing an identical name to
a new-comer company Lord Lawrence J. in Asiatic Govt. Security Life Insurance CO.
Ltd. v/s New Asiatic Insurance CO. Ltd. Observed that “no other company can be
registered under 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”.

In Asiatic Government Security Life Insurance Co,Ltd. V. New Asiatic Life

Insurance Co. Ltd., the suit of the plaintiff company for an injunction against the use
of the defendant’s name was dismissed on the ground that the word ‘New’ and absence
of the words ‘ Government Security’ was sufficient to establish different identity of the
two companies.
In this case, although the name of the two companies, Asiatic Govt. Security
Life Insurance CO. Ltd. and New Asiatic Insurance CO. Ltd resembled to a large extent,
it was held by the Court that the names were not identical and therefore the defendants
were not restrained from using their name.
In Ewing v/s Butter Cup Margarine Co. ltd (1917), the plaintiff was an
unincorporated firm carrying on substantial business under the trade name of Buttercup
Dairy Company. The defendant company was registered to trade name in similar
commodities and selected the name bona fide believing that there was no other
company is in existence with a similar name. the plaintiff alleged that the name of the
new company would lead to confusion and was detrimental to the plaintiff’s business.
The Court granted injunction in favour of plaintiff, which was carrying an business
under the trade name ‘Butter Cup Diary Co. Ltd. the new company was intending to
 Page |9

register was Butter Cup Margarine Co. ltd. On the ground that the public might think
that the two business were inter-connected.
➢ ‘Limited’ or ‘Private Limited’ as the last words of the name: The Memorandum
shall state the name of the company with ‘Limited’ as the last word of the name in case
of a public limited company. In case the company has been formed for the promotion
of art, science, religion etc., the Central Government may permit, by a licence, the
omission of the word ‘Limited’ or the words ‘Private Limited’ from accidental.
➢ Publication of name: Every company shall-
(a) Paint or affix its name and the address of its registered office, on the outside of
every office or place in which its business is carried on,
(b) Have it engraved in legible characters on its seal, and
(c) Have its name and the address of its registered office mentioned in legible
characters in all business letters, bill-heads, negotiable instruments, invoices,
receipts, etc., of the company.

2. THE REGISTERED OFFICE CLAUSE [Sec-12]:

This is the second important clause in the MOA. Registered office clause must specify the
State in which the registered office of the company is to be situate. The company must have a
registered office where all the communications and notices shall be address to it. Registered
office of a company is the most important organ of the company. The company may have
several branches all over the country even in foreign but it must have one registered office. The
promoter takes into several consideration such as availability of electricity, water, labour, raw
materials, transportation, communication etc.
Within 30 days of incorporation or commencement of business whichever is earlier the
exact place where the registered office is to be located must be given to the registrar who will
record the same in the register of companies. If default is made in complying with these
requirements, the company and every officer of the company who is in default shall be
punishable with fine which may extend to Rs.50 for every day during which the default
continues.

3. THE OBJECT CLAUSE:

The object clause is the third clause of MOA. The object clause is the most
important clause among all the clauses of MOA. The object clause is very significant one.
The function of company is depended on this object clause for which purpose the company
is to be established. The object clause reveals the nature, purpose, motto, aim, intention and
object of the company. The companies object must be lawful object therefore the object
clause prohibits illegal objects or business such as gambling, lotteries, wagering etc.
The object of a company is very essential for the publics to purchase shares in a
company. The object of company should be very clear and exact. The object clause
functions in three folds:
a) It protects the shareholders by assuring that their invested amount shall be safeguarded
and shall be used in proper manner.
b) It protects the creditors who lend money to the company in good faith and trust.
 P a g e | 10

c) It also protects the outsiders who came to have contract with the company.

4. THE CAPITAL CLAUSE:

This is the fourth clause of MOA. It states the total amount of capital with which the
company is to be registered. It states the amount of nominal capital of a company, the number
and the value of the shares in which it is divided. The capital of a company is the principal
amount with which the company is formed to carry on business. When the subscribers fix
certain amount as the capital of a company and incorporated in MOA it should not be
decreased later.

5. THE LIABILITY CLAUSE:

It is the fifth clause of MOA. This clause has to state the nature of liability that the
members incur. If the company is to be incorporated with limited liability the clause must
state that the members shall be limited by shares. This means that no member can be called
upon to pay anything more than the nominal value of the shares held by him. The liability
clause is not applicable to unlimited liability companies. The liability clause is of both
practical and legal significant by this clause a member knows the extent of his financial
liability to the company as long as he remains as a member in a company.

6. ASSOCIATION CLAUSE/ DECLARATION CLAUSE:

This clause contains a declaration by the subscribers to the memorandum that they are
desirous of forming themselves into a company of shares in the capital of the company noted
against their names.

➢ ALTERATION OF MOA:

The companies Act provides that company shall not alter the conditions contained in
its MOA except in the rarest case provided in the Companies Act of 2013, it can alter.
According to section 13 a company may, by a special resolution and after complying with the
procedure specified in this section, alter the provisions of its memorandum.

1. Alteration of Name Clause: Company can change or alter its name clause for any
purpose at anytime by following certain procedures like;
a) By passing Special Resolution,
b) It must take the approval of the Central Government in writing,
c) when a company changes its name it become s the duty of the Registrar to delete
the old name and enter the new name in the register book of company, and
d) Issues the new Certificate of Incorporation.
2. Alteration of Registered Office Clause: company can shift its registered office from
one place to another , the change of registered office may involve, change its office
from one place to another place within the same city, change of office from one town
to another town, change of office from one state to another state. For affecting this
change, the company has to fulfil following procedures like;
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a) The special resolution must be passed by the company,

b) Make an application for the purpose of taking the approval of Central
Government,
c) Copy of its must be filed before the Registrar within 30 days,
d) The Registrar will consider primarily the intention of the company, its
shareholders and also whether the changes is in good faith or not against to the
public interest and
e) Issues the new Certificate of Incorporation.
3. Alteration of Object Clause: The object clause is the most important clause in the
MOA. The legal personality of a company exists only for the particular purpose of
incorporation. The object of a company can be altered to carry on the business more
economically and efficiently, to attain the main purpose by new or improved means,
to enlarge the local area of its operations and to carry on its business conveniently. For
affecting this alteration, the company has to fulfil following procedures like;
a. Pass a special resolution in a company meeting,
b. Copy of the special resolution must be filed with the Registrar within 1 month
c. The Registrar shall register the special resolution and certify the registration under
his hand within 1 month from the date of filing the special resolution.
4. Alteration of Capital Clause: The procedures for altering the capital clause are
provided in the AOA. If the procedures are not given in the AOA, the company can
change its capital clause by passing special resolution.
5. Alteration of Liability Clause: It generally cannot be altered so as to make the
liabilities of the members unlimited. The liability of the members once it is fixed it
cannot be alter without their consent. The company if authorised by its articles may
alter that before the Registrar of companies.
6. Alteration of Association Clause: The association clause of MOA of a company
cannot be altered.

➢ DOCTRINEOF ULTRA VIRUS:

A company has the power to do all such things as are permitted by the Companies
Act of 2013, essential attainment of its object mentioned in the MOA and reasonable
and fair play which are incidental to its objects. Company’s activities are regulated or
controlled by the MOA, the company has to work within the framework given in the
MOA, but under certain circumstances the company may exceeds its limit then the act
of the company will be treated as ultra virus.

The word ‘Ultra’ means ‘Beyond’ and the word ‘virus’ means ‘powers’. The term
Ultra Virus for a company means that the doing of the act is beyond the legal power
and authority of the company. The main purpose of these restriction is to protect the
investors in the company so that they may know the objects in which their money is to
be employed and creditors by ensuring that the company’s funds are not wasted in
unauthorised activities.

Ultra-Virus act is void:

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An ultra-virus act in a company is void and cannot be ratified even if all the
members or shareholders wish to ratify it. It is not necessary that an act to be
considered ultra-virus must be illegal; it may or may not be illegal. The Doctrine of
Ultra Virus has been well established in the leading case:

Ashbury Railway Carriage and Iron Ore Co. Ltd. v/s. Riche [1875] LR 7
HR 653.

Brief Facts of the Case: A company was incorporated with the following objects:
a) To make, sell, or lend on hire, railway carriages and wagons
b) To carry on the business of mechanical engineers and general contractors
c) To purchase, lease, work, and sell mines, minerals, land and buildings.

The company entered into a contract with Riche for the financing of the
construction of a railway line in Belgium. The question raised was whether that contract
was covered within the meaning of ‘general contractors. The word ‘general contractors’
was not covered under the Act, because these words to be read with the word
‘mechanical engineer’ for the purpose of companies business. The House of Lords held
that the contract was ultra-virus the company and void so that not even the subsequent
assent of the whole body of shareholders could ratify it.

The main feature and facet of the doctrine of ultra-virus is that a company being
a corporate person should not be punished for its own acts or acts of its agents, if they
are beyond its powers and privileges. Where the company exceeds its authority, the act
is good to the extent of the authority and bad as to the excess. But if the excess cannot
be separated from the authority conferred on the company by the Memorandum, the
whole transaction would be affected by the doctrine of ultra-virus and would be void.

Ultra-Virus of the Directors:

If the Directors use the funds of the Company for the purpose outside the object
clause of the MOA, they will be personally liable to restore such funds to the company.
When the Directors contract with the third party (on behalf of the company) within the
powers of the company and such powers are not contained in the MOA are personally
liable. If an act or transaction is ultra-virus the directors (i.e., beyond their powers, but
within the powers of the company), the shareholders can ratify it by a resolution in a
general meeting or even by acquiescence provided they have knowledge of the facts
relating to the transaction to be ratified. If an act is within the powers of the company,
any irregularities may be cured by the consent of the shareholders.

Ultra-Virus the Articles:

If an act or transaction is ultra-virus the Articles, the company can ratify it by

altering the Articles by a special resolution. Again, if the act is done irregularly, it can
be validated by the consent of the shareholders provided it is within the powers of the
company.
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ARTICLES OF ASSOCIATION
The AOA is the second important document required to be filed with the Registrar for
Registration of the company. The AOA of a company are the rules, regulations, principles,
procedures which governed the internal management of the company. The AOA deals with the
powers of directors, officers and shareholders of the company. The articles will also contain
the mode and the form in which the business of the company is to be carried out and also the
procedures in which the changes in internal regulation can be made. Articles are the binding
on the company and its members thus the AOA controls the relationship between the company
and its members. They have nothing to do with the outsiders. AOA stands next to the MOA.
The MOA lays down what is to be done whereas the AOA lays down how it is to be done.

Definition of AOA:

According to section 2(5) “articles” means the articles of association of a company as

originally framed or as altered from time to time or applied in pursuance of any previous
company law or of this Act.
According to J. Charlesworth “the AOA is a document regulating the rights of
members of a company and a manner in which the business of the company is to be
carried out”.

Forms of AOA:

That every company AOA must be;

a) printed or type written,

b) divided into paragraphs,
c) numbered consecutively.
d) It must be dated,
e) It must be stamped,
f) Signed by each member to the MOA. Who shall add his address, description, occupation
in the presence of at least 2 witnesses.

Contents of AOA [section 5]:

The AOA regulates internal arrangement or internal management of the company. According
to section 5, the following mentioned matters are deals with internal affairs of the company.

1. It defines important definitions of terms,

2. Nature of business of the company,
3. It states the objects of the company,
4. It states the share capital, payment of commissions and issue of shares,
5. Provisions related to transfer of shares,
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6. Procedures for the allotment of shares,

7. Increase and decrease of capital,
8. Voting methods of its members,
9. Maintenance of accounts,
10. General meetings, special meetings of the company,
11. Powers delegated to BOD, Managers etc,
12. Appointment of BOD’s their qualifications, remunerations, removal, liabilities,
13. Borrowing powers of a company,
14. Management of a company,
15. Rules for adopting preliminary contracts,
16. Rules regarding creation of reserves,
17. Rules regarding declaration of dividends,
18. Rules relating to keeping of register of members,
19. Appointments of Auditors, qualifications, remunerations, removal, rights and duties
20. Maintenance of audit report
21. Company’s common seal,
22. Notices and circulars and
23. Matters relating to winding up of a company.

Alteration of AOA [section 14]:

The alteration of AOA is very much easier than the alteration of MOA. The alteration of AOA
are made subject to the provisions of Company’s Act 2013 or to the provisions contained in
the MOA of a company. According to section 14, a company can alter its articles at any time
and any number of times, but there are some restrictions to alter the companies AOA:

1. Articles can be altered only by-passing special resolution,

2. Articles can be altered only after the approval of the Tribunal, [NCLT]
3. A copy of the approval order of the Tribunal shall be filed with the Registrar, together
with a printed copy of the altered articles, within a period of 15 days in such manner as
may be prescribed, who shall register the same.

Limitation to alteration of AOA:

1. The alteration of the AOA must not be inconsistent with or go beyond the provisions of
Companies Act of 2013.
2. The alteration of the AOA must not exceed the power given by the MOA.
3. The alteration must not purport to sanction anything which is illegal.
4. The alteration must be made for the benefit of the company with the bona-fide intention.
5. The alteration must not in any way increase the liability of its members.

DOCTRINE OF CONSTRUCTIVE NOTICE:

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Every outsider dealing with a company is deemed to have notice of the contents of the MOA
and AOA. These documents, on registration with the Registrar, assume the character of public
documents. This is known as constructive notice of MOA and AOA. In other words, any person
has the knowledge as to the contents of these documents. Such knowledge or notice is called
‘Constructive Notice’.

• Office of Registrar is a public office: The MOA and AOA are open and accessible to all.
It is the duty of every person dealing with a company to inspect these documents and see
that it is within the powers of the company to enter into the proposed contract.
• Applicability of constructive notice: The doctrine of constructive notice applies not only
to MOA and AOA, but also other documents, which have to be filed with the Registrar,
such as special resolutions, and particulars of changes.

DOCTRINE OF INDOOR MANAGEMENT:

The doctrine of indoor management constitutes as exception to the principle of constructive

notice. The doctrine of constructive notice is based on the fact that the MOA and AOA, being
public documents, their contents are supposed to be known to everyone dealing with the
company. The doctrine of indoor management relates to the internal matters, and an outsider
can presume that the internal working of the company is in consonance with the provisions of
public documents. He need not enquire into the regularity of the internal proceedings.

The outsider dealing with the company are entitled to assume that as far as the internal
proceedings of the company are concerned, everything has been regularly done. They are
presumed to have read these documents and to see that the proposed dealing is not inconsistent
therewith, but they are not bound to do more; they need not inquire into the regularity of the
internal proceedings as required by the MOA and AOA. They can presume that all is being
done regularly. This limitation of doctrine of constructive notice is called as the “doctrine of
indoor management”. or the rule in Royal British Bank v/s Turquand.

Thus, whereas the doctrine of constructive notice protects the company against outsider,
the doctrine of indoor management seeks to protect outsiders against the company.

In Royal British Bank v/s Turquand, (1856). The directors of the defendant company
borrowed money from the plaintiff (Turquand). According to AOA, the Directors have
borrowing power subject to authorisation but shareholders resolution. The Plaintiffs claim was
denied on the ground that there was no resolution by shareholders to that effect. However, the
court denied the contents of the shareholders and held that the company liable and the Plaintiff
could recover the amount from the company on the ground that he was entitled to assume that
the resolution had been passed.

The gist of the rule is that persons dealing with limited liability companies are not bound
to inquire into the regularity of the internal proceedings and will not be affected by irregularities
of which they had no notice.

This rule is based on public convenience and justice:

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Firstly, the MOA and AOA are public documents. They are open to inspection by everybody.
But the details of internal proceedings are not open to public inspection. An outsider is
presumed to know the constitution of a company, but not what may or may not have been taken
place within the doors that are closed to him.

Secondly, the lot of creditors of a limited liability company is not a particularly happy one: it
would be unhappier still if the company could escape liability but denying the authority of the
officers to act on its behalf.

Exceptions to the Doctrine of Indoor Management:

1. Knowledge of irregularity: Where a person dealing with a company has actual or

constructive notice of the irregularity as regards internal management, he cannot claim
the benefit under the rule of indoor management.
2. Negligence: 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 case does not apply where a person relies upon a
document that turns out to be forged since nothing can validate forgery. A company can
never be held bound for forgeries committed by its officers.
4. Acts outside the scope of apparent authority: If an officer of a company enters into a
contract with a third party and if the act of the officer is beyond the scope of his authority,
the company is not bound.

PROSPECTUS
➢ INTRODUCTION:

One of the main advantages of incorporation of company is it invites the public to invest
their money in it by way of shares and debentures or deposits. For this purpose, the company
has to be informed about the various details of the company such as its object and its nature of
business to enable the public to decide whether to contribute or not to contribute. For the
assurance of the public the company will issue a document called Prospectus by which a
company exhibits its repaying capacity, its resources, reasons for the development, profits etc.
Further it is to be noted that every company need not go for borrowing if its promoters are
stronger enough and successful with their own financial arrangements. The prospectus is
needed only when the company wants to procure money from the public in return of shares and
debentures.
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➢ OBJECTS OF PROSPECTUS:

People want to invest their money in sound and profitable company. Prospectus gives
the information about the profitability, soundness and prosperity of the company. The basic
object and fundamental function of the prospectus is to attract the public. Prospectus is an
invitation to offer it is not a direct offer.

➢ MEANING AND DEFINITION OF PROSPECTUS:

In order to finance its activities, a company needs capital which is raised by a company
by the issue of a prospectus inviting deposits or offers for shares and debentures from the
public. The central theme of a prospectus, from the money point of view, is that it sets out the
prospectus of the company and the purpose for which the capital is required. The prospectus is
the basis on which the prospective investors from their opinion and take decisions as to the
worth and prospects of the company.

According to section 2 (70) “prospectus means any document described or issued as a

prospectus and includes 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 other words, any document inviting deposits from the public or inviting offers from
the public for the subscription of shares or debentures of a company is a prospectus.

The Essential Ingredients of a Prospectus

1. There must be an invitation to offer 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.

➢ CONTENTS / SUBJECT MATTER TO BE SPECIFIED IN PROSPECTUS –

(SECTION 26):
Prospectus is the most important document of a company, since the intending investors
take their decisions on anyone of the facts and figures furnished in the prospectus. In order to
protect the interest of investors against the frauds of the promoters the Companies Act requires
every company to issuing a prospectus has to observe large number of regulations failure to
observe them will made to punishable with fine or imprisonment or both and hence at most
care should be taken in drafting prospectus. Section 26 of the Act deals with the contents to be
specified in prospectus.

(i) Names and addresses of the registered office of the company, company secretary,
Chief Financial Officer, auditors, legal advisers, bankers, trustees, if any,
underwriters and such other persons as may be prescribed;
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(ii) Dates of the opening and closing of the issue, and declaration about the issue of
allotment letters and refunds within the prescribed time;

(iii) A statement by the Board of Directors about the separate bank account all monies
received out of the issue are to be transferred and disclosure of details of all monies
including utilised and unutilised monies out of the previous issue in the prescribed manner;

(iv) Details about underwriting of the issue;

(v) Consent of the directors, auditors, bankers to the issue, expert’s opinion, if any, and of
such other persons, as may be prescribed;

(vi) The authority for the issue and the details of the resolution passed there for;

(vii) Procedure and time schedule for allotment and issue of securities;

(viii) Capital structure of the company in the prescribed manner;

(ix) Main objects of public offer, terms of the present issue and such other particulars as
may be prescribed;

(x) Main objects and present business of the company and its location, schedule of
implementation of the project;

(xi) Particulars relating to—

(A) Management perception of risk factors specific to the project;
(B) Gestation period of the project;
(C) Extent of progress made in the project;
(D) Deadlines for completion of the project; and
(E) any litigation or legal action pending or taken by a Government Department or a
statutory body during the last five years immediately preceding the year of the issue of
prospectus against the promoter of the company;

(xii) Minimum subscription, amount payable by way of premium, issue of shares otherwise
than on cash;

(xiii) Details of directors including their appointments and remuneration, and such
particulars of the nature and extent of their interests in the company as may be prescribed;
and

(xiv) Disclosures in such manner as may be prescribed about sources of promoter’s

contribution;

(xv)Reports by the auditors of the company with respect to its profits and losses and assets
and liabilities and such other matters as may be prescribed;

(xvi) Reports relating to profits and losses for each of the five financial years immediately
preceding the financial year of the issue of prospectus including such reports of its
subsidiaries and in such manner as may be prescribed: Provided that in case of a company
with respect to which a period of five years has not elapsed from the date of incorporation,
 P a g e | 19

the prospectus shall set out in such manner as may be prescribed, the reports relating to
profits and losses for each of the financial years immediately preceding the financial year
of the issue of prospectus including such reports of its subsidiaries;

(xvii) Reports made in the prescribed manner by the auditors upon the profits and losses
of the business of the company for each of the five financial years immediately preceding
issue and assets and liabilities of its business on the last date to which the accounts of the
business were made up, being a date not more than one hundred and eighty days before the
issue of the prospectus: Provided that in case of a company with respect to which a period
of five years has not elapsed from the date of incorporation, the prospectus shall set out in
the prescribed manner, the reports made by the auditors upon the profits and losses of the
business of the company for all financial years from the date of its incorporation, and assets
and liabilities of its business on the last date before the issue of prospectus; and

(xvii) Reports about the business or transaction to which the proceeds of the securities are
to be applied directly or indirectly;

(xviii) Make a declaration about the compliance of the provisions of this Act and a statement
to the effect that nothing in the prospectus is contrary to the provisions of this Act, the
Securities Contracts (Regulation) Act, 1956 and the Securities and Exchange Board of India
Act, 1992 and the rules and regulations made there under.

➢ RULES AND REGULATIONS RELATING TO PROSPECTUS:

1. Prospectus must be Issued to the Public:

A document to be a prospectus, must be “issued to the public” and the provisions of the
Act are not attracted unless the prospectus is issued to the public.
In Nash v. Lynde, several copies of a document marked “strictly confidential” and
containing particulars of a proposed issue of shares, were sent accompanied by
application form by the managing directors of a company to a co-director; who sent a
copy to a solicitor who, in turn, gave it to a client who passed it on to a relation. Thus,
the document was passed privately through a small group of friends of the directors.
The House of Lords ruled that there had been no issue to the public and therefore, no
action for compensation of loss caused to the allottees would sustain.
Re South of England Natural Gas & Petroleum Co. Ltd, three thousand copies of a
document in the form of a prospectus were sent out and distributed among the members
of certain gas companies only. It was held that it was a prospectus issued to the public.

2. Every prospectus must be dated:

Every prospectus must be dated. If it is not dated then the Registrar will refuse to
register the prospectus of a company.

3. No prospectus must be issued without its publication:

No prospectus shall be issued by a company in relation to an intended company unless
on or before the date of its publication, there has been delivered to the Registrar for
registration, a copy thereof signed by every person who is named therein as a director
or proposed director of the company or by his duly authorised attorney
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4. Every prospectus must be Registered:

The National Company Law Tribunal (NCLT), SEBI and RBI are the competent
authorities to give permission for the registration of prospectus. According to section
26 of the Act, a prospectus must not be issued unless it is registered. Registration must
be made before the publication of prospectus. The copy of the prospectus must be sent
for the registration should be signed by every Directors. It must be stated on the face of
the prospectus that it is registered.
In order to register the prospectus of a company certain documents should be filed with
the Registrar.
a) Copy of reports of expert opinion
b) A copy of every contract relating to appointment and remuneration of Managers
and BOD’s
c) A copy of every contract
d) A written statement relating to adjustments made by the auditors or accountant
relating to profits and losses, assets and liabilities
e) The consent in writing of the persons named in the prospectus as a auditor, legal
advisor, bankers and brokers of the company.

Prospectus must be issued within 90 days of its registration. If a prospectus is issued in

contravention of the provisions, the company shall be punishable with fine which shall
not be less than fifty thousand rupees but which may extend to three lakh rupees and
every person who is knowingly a party to the issue of such prospectus shall be
punishable with imprisonment for a term which may extend to three years or with fine
which shall not be less than fifty thousand rupees but which may extend to three lakh
rupees, or with both.

5. Consent of expert must be obtained:

At the time of making prospectus, it is necessary to for the companies to obtain experts
opinion and such experts must be independent person competent to give such opinion.

6. Every application must be accompanied with prospectus:

Every form of application for subscribing the shares or debentures shall not be issued
unless it is accompanied by the copy of prospectus. In case any person goes against to
this provision shall be punishable with fine of Rs 50,000 or above. Registrar of
companies may also refuse to register the prospectus in case all the conditions and
formalities are not complied with.

➢ NEWS PARER ADVERTISEMENT OF PROSPECTUS- SECTION-30:

Where any prospectus is published as a newspaper advertisement it is not necessary to
specify the entire contents of the prospectus this is with a view to facilitate wider publicity with
reasonable cost. It is not necessary to publish complete details of the company in the
newspaper. The newspaper advertisement about the company is just an advertisement or an
announcement and not prospectus. The newspaper announcement regarding the companies
must mention the following:
a) Name of the company
b) Address of the company
c) Activities of the company
d) Location of the industry
e) Name of Board of Directors
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f) Opening and closing dates of the subscription list.

This form of newspaper advertisement is not compulsory but most of the companies
follow it.

➢ MISSTATEMENT IN PROSPECTUS AND THEIR COSEQUENCES:

Prospectus constitutes the contract between the company and the person who purchases the
shares or debentures. The persons who are behind the company have all the knowledge as to
the present and future of the company but, the investing public do not know anything about the
company. Therefore the prospectus must describe all the matters very clearly it must not
misrepresent or conceal any facts of the company. The prospectus containing false, misleading,
ambiguous, fraudulent statements of the facts of the company are called as misleading or
misstatement of prospectus. The people who want to purchase shares in a company are entitled
to true and correct facts of the company. The prospectus must therefore tell the truth and
nothing but the truth this is known as ‘golden rule as to the framing of prospectus’.

Liabilities for Mis statement of Prospectus:

If the investor is cheated by the company or by directors, promoters and all experts of the
company, they have both criminal and civil remedies by imposing civil and criminal remedies.

1. Civil Liability [section- 35]:

A company or any officer of the company induces the investors the civil liabilities will be
imposed on such wrong doers. A person who has subscribed for shares on the faith of
misleading prospectus he has certain remedies.
• Remedies against the company: The person who has been induced to subscribe for
shares may
a) Rescind the Contract:
Where the prospectus contains misstatement the contract to purchase
shares is voidable at the option of the aggrieved party. The shareholders
is entitled to rescind the contract to take shares and he will have to return
the shares allotted and his name will be removed from the register of
members and money paid by him to the company shall also be returned
to that person.
b) To Claim Damages:
In case where prospectus contains wrong statements, the injured person
is entitled to claim for damages. This remedy is available even after the
company goes into liquidation and the sufferer in order to claim
damages, he has to prove 3 things:
i) That the person who had issued the prospectus was not
authorised to issue
ii) That the person who had issued the prospectus were known that
the statement was wrong and
iii) That the subscriber had suffered loss on account of fraudulent
mis representation in the prospectus.
• Remedies against the Promoters, BOD and Experts:
Any person who has purchase shares and debentures on the
faith of the prospectus containing wrong statement may sue every directors,
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promoters and experts of the company for claiming any of the following
remedies.
a) Claim Damages:
Directors. Promoters and Experts who is authorised to issue
prospectus are liable to compensate the sufferer. However, it is
immaterial whether this is the prospectus or not it is the director who
supposed to know what is true and what is untrue.
b) Damages for noncompliance of section-26:
If any directors, promoters or experts fail to follow the
provisions of section 26 then the aggrieved person can ask for the
remedy before the court by filing the suit against the wrong doers.
c) Damages under Indian Contract Act 1872:
The aggrieved person can bring an action among directors,
promoters and experts can claim remedies under Indian Contract Act
1872, i.e., the right to rescind the contract for their negligence and the
company may goes into liquidation.

Defences to Civil Liability- Section-35 (2)

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

2. Criminal Liability[section-34]:
A public company generally does the business throughout the country and also beyond
the boundaries of country. All the investors may not have the unity, legal awareness and
time to invest money in legal expenses, therefore the law itself imposes severe criminal
liability upon the directors, promoters and every experts.
Section 34 says that where prospectus includes any untrue statement, every person who
has authorised the issue of the prospectus includes any untrue statement, every person
who has authorised the issue of the prospectus shall be punishable under Section 447 of
the Act, which provides punishment for fraud. Any person found guilty of fraud may be
punished with:
(a) Imprisonment for a term which may not be less than six months but which may extend
to ten years, and
(b) Fine which shall not be less than the amount involved in the fraud, but which may
extend to three times the amount involved in the fraud, or
(c) Both imprisonment and fine.

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STUDY MATERIAL FOR INTERNAL CIRCULATION

COURSE & SEMESTER: 5 YEARS B.COM. LL.B. VI SEM

SUBJECT: COMPANY LAW

UNIT-III
UNIT-III

Management and Control of Companies:

Board of Directors- Powers and functions: Distribution of Powers between Board of Directors and
general meeting.

Directors: appointment- qualifications- position of directors- types of directors- powers and duties
of directors- remuneration- removal.

Meetings: Meetings of Board and Committees- kinds of meetings- procedure relating to

Convening and proceedings at General and other meetings- Resolutions- Prevention of Oppression
and Mismanagement.

Corporate Social Responsibility.

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COMPANY DIRECTORS
The success of the company depends upon its proper management and administration. A company
in the eyes of law is an artificial person, it has no physical existence, it has neither soul nor a body
of its own. As such, it cannot act in its own person or a company is not able to manage its own
affairs. It must act only through human agency, although the real owners of the company are its
shareholders and it is their duty to manage the affairs of the company but, due to the following
reasons it is not possible for them to do so,

1. The number of shareholders in a company is very large and therefore it is not possible for
all the shareholders to participate in the management of a company.
2. The shareholders are scattered over a very wide areas and cannot come together for making
policies of the company.
3. It is therefore decided that the management of the company must be given to some elected
representatives of the shareholders known as the ‘ Directors’.

A company as soon as gets the certificate of incorporation it becomes legal person. It is not
seen to human eyes. It is invisible but it does business, performs several functions through human
instrument who are called as the directors.

Meaning and Definitions of Directors:

The relationship of director and company is very hard to define that is why the companies Act
does not define the term directors completely. But generally “Directors includes any person who
occupying the position of directors by whatever name called”. This meaning is not clear but it
means that the person who performs the duties of the director is called as the directors of a
company.
According to section 2 (34) of the Companies Act 2013, “director” means a director appointed to
the Board of a company.
According to section 2(10) “Board of Directors” or “Board”, in relation to a company, means the
collective body of the directors of the company.
According to Lush “A director is a director or controller of the company’s affairs but he is not a
servant of a company”.
A director may therefore be defined as a person having control over the directors, management
and affairs of the company. They occupy a very important position in the structure of a company
and also they are the brain and heart of the company.

Company to have Board of Directors – Section 149

Section 149 of the Companies Act, 2013 provides that,

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(1) Every company shall have a Board of Directors consisting of individuals as directors and
shall have:
(a) A minimum number of three directors in the case of a public company, two directors
in the case of a private company, and one director in the case of One Person Company;
and
(b) A maximum number of fifteen directors.

Provided that a company may appoint more than 15 directors after passing a special resolution
Provided further that such class or classes of companies as may be prescribed, shall have at least
one woman director.
(2) Section 149 (3) provides that every company shall have atleast one director who stays in
India for a total period of not less than one hundred and eighty-two days during the financial
year.
(3) Section 149(4) provides that every company shall have at least one-third of the total
number of directors as independent directors in case of any class or classes of public
company.

Legal position of the Directors:

1. Directors as an Agents:
An agent is a person who acts for another person. Company is an artificial
person created by law. It cannot act itself therefore it has to act through the human
agencies. The directors are the human agency through which a company acts. As
directors works on behalf of company they are considered as legal agents of the
company. However they should not act beyond the MOA and AOA of the company.
2. Directors as Trustees:
A trustee is a person who holds some property in trust for another and he is
a person who manages some properties of another. The Directors of company are
also act as trustees by managing properties of shareholders in a company. The
shareholders invest the amount in the company and must be used in proper manner.
Therefore all the monitory transactions are kept in the management of the directors
in trust. Almost all the powers of directors are powers in trust viz, to issue capital,
to make calls, to forfeit shares, expenses of the company and the payments etc.
therefore the directors are considered as the trustees of the company but they are
not the trustees of individual shareholders.

QUALIFICATION OF DIRECTORS (Section-149):

The Companies Act 2013 does not laid down any academic, technical or professional
qualifications to become a director of a company. But usually the Companies AOA provides for
certain qualifications to become a directors of a company, they are as follows.

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1. No body corporate, association or a firm can be appointed as a director of a company. It is

essential that the director must be an individual, therefore only individuals can become
directors and nobody else.
2. Every director shall be appointed by the company in general meeting.
3. No person shall be appointed as a director of a company unless he has been allotted the
Director Identification Number.
4. Every person proposed to be appointed as a director by the company in general meeting or
otherwise, shall furnish his Director Identification Number and a declaration that he is not
disqualified to become a director under this Act.
5. Every person proposed as a candidate for the office of a director has to sign and file with
the company his consent to act as a director if he is appointed, Within thirty days of his
appointment in such manner as may be prescribed
6. Every individual intending to be appointed as director of a company shall make an
application for allotment of Director Identification Number to the Central Government in
such form and manner and along with such fees as may be prescribed.
7. The Central Government shall, within one month from the receipt of the application under
section 153, allot a Director Identification Number to an applicant in such manner as may
be prescribed.
8. Every existing director shall, within one month of the receipt of Director Identification
Number from the Central Government, intimate his Director Identification Number to the
company or all companies wherein he is a director.
9. Every company shall, within fifteen days of the receipt of intimation under section 156,
furnish the Director Identification Number of all its directors to the Registrar or any other
officer or authority as may be specified by the Central Government with such fees as may
be prescribed or with such additional fees as may be prescribed within the time specified
under section 403 and every such intimation shall be furnished in such form and manner as
may be prescribed.
10. If a company fails to furnish Director Identification Number before the expiry of the period
with additional fee, the company shall be punishable with fine which shall not be less than
twenty-five thousand rupees but which may extend to one lakh rupees and every officer of
the company who is in default shall be punishable with fine which shall not be less than
twenty-five thousand rupees but which may extend to one lakh rupees.

DISQUALIFICATIONS OF DIRECTORS(Section-164):

A person shall not be eligible for appointment as a director of a company, if

(a) He is of unsound mind and stands so declared by a competent court;

(b) He is an undischarged insolvent;

(c) He has applied to be adjudicated as an insolvent and his application is pending;

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(d) He has been convicted by a court of any offence, whether involving moral turpitude
otherwise, and sentenced in respect thereof to imprisonment for not less than six months
and a period of five years has not elapsed from the date of expiry of the sentence: Provided
that if a person has been convicted of any offence and sentenced in respect thereof to
imprisonment for a period of seven years or more, he shall not be eligible to be appointed
as a director in any company;

(e) An order disqualifying him for appointment as a director has been passed by a court or
Tribunal and the order is in force;

(f) He has not paid any calls in respect of any shares of the company held by him, whether
alone or jointly with others, and six months have elapsed from the last day fixed for the
payment of the call;

(g) He has not obtained Director’s Identification Number

Appointment of Directors:
The success of the company depends upon the selection and appointment of the Board of
Directors. The companies Act 2013 has taken utmost care in this regard. It lays down several
provisions regarding the appointment and removal of directors.
Every company shall have a Board of Directors consisting of individuals as directors and
shall have—(a) a minimum number of three directors in the case of a public company, two
directors in the case of a private company, and one director in the case of a One Person Company;
and (b) a maximum of fifteen directors: Provided that a company may appoint more than fifteen
directors after passing a special resolution: Provided further that such class or classes of companies
as may be prescribed, shall have at least one woman director. Every company shall have at least
one director who has stayed in India for a total period of not less than one hundred and eighty-two
days in the previous calendar year.

The directors in a company can be appointed in the following manner:

1. First Directors [section 152(1)]

At the time of the formation of a company the promoters of the company generally
select some prominent persons to act as the first directors of a company and also mention their
names in the company’s AOA. Where no provision is made in the articles of a company for
the appointment of the first director, the subscribers to the memorandum who are individuals
shall be deemed to be the first directors of the company until the directors are duly appointed
and in case of a One Person Company an individual being member shall be deemed to be its
first director until the director or directors are duly appointed by the member in accordance
with the provisions of this section.

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2. By Annual General Meeting [section 152(2,3, 4, 5 and 6)]

Every subsequent director shall be appointed by the company in annual general

meeting. A person appointed as a director shall not act as a director unless he gives his consent
to hold the office as director and such consent has been filed with the Registrar within thirty
days of his appointment in such manner as may be prescribed.

At every annual general meeting, not less than two-thirds of the total number of
directors of a company shall, be persons whose period of office is liable to determination by
retirement of directors by rotation; and be appointed by the company in general meeting. At
the first annual general meeting of a company held next after the date of the general meeting
at which the first directors are appointed in and at every subsequent annual general meeting,
one-third of such of the directors for the time being as are liable to retire by rotation.

3. By Board of Directors [section 152(7):

The Board of Directors are empowered to appoint the following types of directors:

a) Additional Directors:
The BOD’s may appoint the additional directors from time to time. The number
of additional directors must not exceed the maximum strength fixed for BOD’s. the
additional directors shall hold office only upto the date of next annual general
meeting.
b) Casual Vacancy:
Where the office of any director appointed by the company in general meeting is
vacated before the expiry of his term because of death, resignation,
disqualifications, like insolvency, insanity the directors shall appoint and will hold
the office till the end of the term of directors in whose place he is appointed.
c) Alternate Directors:
The BOD’s may appoint an alternate director to act for the original director during
his absence for a period of more than 3 months from the state. The alternate
directors can hold office either till the expiry of the term of office of the original
directors or till the date of return of the original director to the state.
4. By Third Parties:
With a view to ensuring that the loans advanced by third parties are used by the
company for the purpose for which they are advanced. Under such circumstances the
articles of a company authorise the third parties i. e., the vendors, debenture holders,
banking companies, finance corporations and creditors which have advanced loans to the
company can appoint their nominees as the directors of the company. The idea behind this
appointment is that the money advanced to the company has been utilised for same purpose
for which it was borrowed.

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5. By Central Government:
The central government may appoint such number of persons as a director for the
period not exceeding 3 years. The appointment of directors is made to protect the affairs
of the company which are unfair or harmful to any members or to any public the Central
Government may appoint the directors of the company. The directors so appointed are
required to keep the Central Government inform the affairs of the company.

REMOVAL OF DIRECTORS [section 169]:

A director may be removed from office by the following authorities:-

1. By company in General Meeting.

2. By the Tribunal.

1. Removal by the Company- Section 169

 Section 169 of the Companies Act, 2013 provides that a company may by special notice
and by ordinary resolution, remove a director before the expiration of his period of
office after giving him a reasonable opportunity of being heard. Any contract between
a director and the company by which a director is rendered irremovable by an ordinary
resolution would be void, being contrary to the provisions of the companies Act.
 A special notice of the intention to move a resolution to remove a director should be
given by the members to the company not less than fourteen days before the meeting.
 On receipt of special notice of a resolution to remove a director under this section, the
company shall send a copy thereof to the director concerned, and the director, whether
or not he is a member of the company, shall be entitled to be heard on the resolution at
the meeting.
 If the director makes a representation in writing and requests the company to notify it
to the members, the company will send a copy of the representation to every member
whom the notice of meeting has been sent. If there is no sufficient time to complete this
formality, the representation should be read out to the members at the meeting. The
director is entitled to be heard on the resolution in the meeting which should be a valid
meeting in all its aspects.

2. Removal by the Tribunal- Section 242

If the members or shareholders file a petition under Section 241 before the Tribunal
complaining mismanagement and oppression in the company and the Tribunal deems it
necessary to provide relief to the petitioners it may set-aside any agreement or contract
which the managing director, director or manager has made with the company and if
necessary, may even order removal of the guilty director/manager. The director/manager
so removed by the Tribunal, cannot be appointed as managing director, director or manger

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in any company until the expiry of a period of five years without the consent of Tribunal
nor can he claim damages for loss of office.

Types of Directors:

The Companies Act refers to the following two specific categories of Directors:

1. Managing Directors: A Managing Director is a Director who has substantial powers of

management of the affairs of the company subject to the superintendence, control and direction of
the Board in question

2. Whole-time Directors: A Whole-time Director includes a Director who is in the whole-time

employment of the company, devotes his whole-time of working hours to the company in question
and has a significant personal interest in the company as his source of income.

Further classification of Directors: Based on the circumstances surrounding their appointment,

the Companies Act recognizes the following further types of Directors:

1. First Directors: Subject to any regulations in the Articles of a company, the subscribers to
the Memorandum of Association, or the company's charter or constitution
("Memorandum"), shall be deemed to be the Directors of the company, until such time
when Directors are duly appointed in the annual general meeting ("AGM").
2. Casual vacancies: Where a Director appointed at the AGM vacates office before his or her
term of office expires in the normal course, the resulting vacancy may, subject to the
Articles, be filled by the Board. Such person so appointed shall hold office up to the time
which the Director who vacated office would have held office if he or she had not so vacated
such office.
3. Additional Directors: If the Articles specifically so provide or enable, the Board has the
discretion, where it feels it necessary and expedient, to appoint Additional Directors who
will hold office until the next AGM. However, the number of Directors and Additional
Directors together shall not exceed the maximum strength fixed in the Articles for the
Board.
4. Alternate Director: If so authorized by the Articles or by a resolution passed by the
company in general meeting, the Board may appoint an Alternate Director to act for a
Director ("Original Director"), who is absent for whatever reason for a minimum period
of three months from the State in which the meetings of the Board are ordinarily held. Such
Alternate Director will hold office until such period that the Original Director would have
held his or her office. However, any provision for automatic re-appointment of retiring
Directors applies to the Original Director and not to the Alternate Director.
5. 'Shadow' Director: He is holder of controlling a company who is not a director and does
not openly participate in the governance of a company but whose direction/ instruction are

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complied by other directors. A person, who is not appointed to the Board, but on whose
directions the Board is accustomed to act, is liable as a Director of the company, unless he
or she is giving advice in his or her professional capacity. Thus, such a 'shadow' Director
may be treated as an 'officer in default' under the Companies Act.
6. De facto Director: Where a person who is not actually appointed as a Director, but acts as
a Director and is held out by the company as such, such person is considered as a de
facto Director. Unlike a 'shadow' Director, a de facto Director purports to act, and is seen to
the outside world as acting, as a Director of the company. Such a de facto Director is liable
as a Director under the Companies Act.
7. Rotational Directors: At least two-thirds of the Directors of a public company or of a
private company subsidiary of a public company have to retire by rotation and the term
"rotational Director" refers to such Directors who have to retire (and may, subject to the
Articles, be eligible for re-appointment) at the end of his or her tenure.
8. Nominee Directors: They can be appointed by certain shareholders, third parties through
contracts, lending public financial institutions or banks, or by the Central Government in
case of oppression or mismanagement. The extent of a nominee Director's rights and the
scope of supervision by the shareholders, is contained in the contract that enables such
appointments, or (as appropriate) the relevant statutes applicable to such public financial
institution or bank. However, nominee Directors must be particularly careful not to act only
in the interests of their nominators, but must act in the best interests of the company and its
shareholders as a whole. The fixing of liabilities on nominee Directors in India does not
turn on the circumstances of their appointment or, indeed, who nominated them as
Directors.Whether nominee Directors are required by law to discharge such duties or bear
such liabilities will depend on the application of the legal provisions in question, the
fiduciary duties involved and whether such nominee Director is to be regarded as being in
control or in charge of the company and its activities. This determination ultimately turns
on the specific facts and circumstances involved in each case.
9. An Executive Director: An Executive Director can be either a Whole-time Director of the
company (i.e., one who devotes his whole time of working hours to the company and has a
significant personal interest in the company as his source of income), or a Managing
Director (i.e., one who is employed by the company as such and has substantial powers of
management over the affairs of the company subject to the superintendence, direction and
control of the Board).
10. Independent Directors: An "Independent Director" is also known as outside director or
as a non-executive Director of the company who:
(a) apart from receiving Director's remuneration, he does not have material pecuniary
relationships or transactions with the company, its promoters, its Directors, its senior
management, or its holding company, its subsidiaries, and associates which may
affect independence of the Director;

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(b) is not related to promoters or persons occupying management positions at the board
level or at one level below the board;
(c) has not been an executive of the company in the immediately preceding three (3)
financial years;
(d) is not a partner or an executive or was not a partner or an executive during the
preceding three (3) years, of any of the following:
i. the statutory audit firm or the internal audit firm that is associated
with the company, and
ii. the legal firms and consulting firms that have a material association
with the company;

(e) is not a material supplier, service provider or customer or a lessor or lessee of the
company, which may affect the independence of the Director; or
(f) he is not less than twenty-one (21) years of age.

POWERS AND DUTIES OF DIRECTORS[section 166]:

POWERS OF DIRECTORS:
Directors individually cannot take any decision regarding the company’s affairs. But all
the decision must be taken by the directors in the meeting known as ‘Board Meeting’. The board
is responsible to control and supervise the works of the company. The directors get their powers
from the Company’s Act, MOA, and AOA. If the AOA provides for transfer of power the BOD’s
can transfer their powers to the committee of directors like Managing Directors, Assistant
Directors, General Managers, Company Secretary or any other officer of the company. The powers
of directors are as follows:
1. Power to allot the shares
2. Power to make calls on shares
3. Power to forfeit the shares
4. Power to issue debentures
5. Power to borrow money in the name of a company
6. Power to invest the funds of a company
7. Power to fill up the casual vacancies
8. Power to appoint alternative directors
9. Power to appoint additional directors
10. Power to appoint Managing Directors and other managers to the company
11. Power to enter into contract with the third persons
12. Power to recommend the rate of dividends
13. Power to supervise the works of other managerial persons
14. Power to make major policies
15. Power to take the decision of the company
16. Power to issue the share certificates and share warrants
17. Power to call the different types of meetings, namely, annual general meeting, extra
ordinary general meeting, meeting of shareholders, meetings of creditors and meeting of
directors

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18. Power to pass special resolutions in the companies meeting

19. Power to represent the company
20. Power to receive remuneration.

DUTIES OF DIRECTORS- Section- 166

The duties of directors depends upon the nature and size of the company. They are overall
in charge to run the company efficiently and effectively. While performing their duties they are
bound to follow the provisions of Companies Act and AOA. The directors must discharge their
duties with reasonable care, skill and honestly. The duties of directors are numerous.
1. A director of a company shall act in accordance with the articles of the company.
2. A director of a company shall act in good faith in order to promote the objects of the
company for the benefit of its members as a whole, and in the best interests of the
company, its employees, the shareholders, the community and for the protection of
environment.
3. A director of a company shall exercise his duties with due and reasonable care, skill and
diligence and shall exercise independent judgment.
4. A director of a company shall not involve in a situation in which he may have a direct or
indirect interest that conflicts, or possibly may conflict, with the interest of the company.
5. A director of a company shall not achieve or attempt to achieve any undue gain or
advantage either to himself or to his relatives, partners, or associates and if such director
is found guilty of making any undue gain, he shall be liable to pay an amount equal to
that gain to the company.
6. A director of a company shall not assign his office and any assignment so made shall be
void.
7. If a director of the company contravenes the provisions of this section such director shall
be punishable with fine which shall not be less than one lakh rupees but which may extend
to five lakh rupees.

REMUNARATION OF DIRECTORS- Section 197

The total remuneration of the directors and the managers in respect of any financial year shall not
exceed 11% of the net profit of the company for that financial year. The percentage shall be
exclusive of the fees payable to the directors for attending the meetings of the Board of Directors,
or a committee thereof. If in any financial year a company has no profits or its profits are
inadequate, the company shall not pay to its directors, including any managing or whole-time
director or manager by way of remuneration any sum except with the previous permission or
approval of the Central Government.

Rules regarding directors remuneration:

1. The remuneration payable to the directors shall be determined in accordance with AOA or by
resolution passed by the company in general meeting
2. A director may receive remuneration by way of a fee for each meeting of the BOD or a
Committee of the Board. But fees for attending the meetings of the Board cannot be paid on a
monthly basis.

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3. A whole-time or managing director may be paid remuneration either by way of a monthly

payment or at a specified percentage of the net profit of the company, or partly by one way and
partly by the other.
4. A pert- time director may be paid remuneration either-
a) By way of a monthly, quarterly, or annual payment with the approval of the Central
Government. Or
b) By way of commission if the company by a special resolution authorises such payment.
5. The special resolution shall remain in force for a maximum period of 5 years. It may however,
be renewed, from time to time, by a special resolution for further period of 5 years but renewal
can be effected earlier than 1 year from the date on which it is to come into force.
6. The net profits of the company for the purpose of director’s remuneration shall be computed
in the prescribed manner, without deducting the director’s remuneration from the gross profit.
7. If any director receives any sum in excess of remuneration due to him, he shall hold the excess
amount in trust for the company and shall refund it to the company. The company cannot waive
the recovery of any such sum.
8. A whole- time director or a managing director who receive a commission or remuneration from
the company shall not be entitled to receive a commission or remuneration from any subsidiary
of the company.
9. The above rules are not applicable to private companies.
10. Prohibition of tax- free payment: a company shall not pay to any officer or employee
remuneration free of tax.

LIABILITIES OF DIRECTORS:
The liabilities of directors of a company are numerous. The liabilities of the directors
may classified into following categories
1. Civil Liability
A. Liabilities To The Company:
As long as the directors exercise their duties in good faith with reasonable care and
skill the directors do not incur any liability to the company. However in the following cases
they become personally liable to make good the loss caused to the company by their acts.
a) If the directors acts beyond the Companies Act, MOA and AOA.
b) For breach of trust or misconduct
c) For acting dishonestly
d) For gross negligence in the performance of their duties
e) For wilful misconduct
f) For any illegal acts.
B. Liabilities to Outsiders:
As the directors are the agents of the company they will not be liable to the outsiders.
However sometimes they incur personal liability to outsiders on contracts made on behalf of
the company
a) For misstatement or non- disclosure of material facts in the prospectus
b) Borrowing money beyond the borrowing limits of the company
c) When they act in their own name
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d) For acting fraudulently

e) For making irregular allotment of shares.
2. Criminal Liability:
Criminal liabilities of the directors refer to the liabilities which arise for fraud or for
violating various provisions of the Companies Act. The criminal liabilities of directors are
subject to the director’s fine or imprisonment or with both. The criminal liability of the
directors arises in the following cases.
a) For issuing prospectus without registration
b) For issuing prospectus containing mis statements
c) For fraudulently inducing person to invest money in the company
d) For not keeping register of members
e) For failure to place before the company at an AGM an annual accounts and balance
sheet
f) For failure to hold AGM
g) For proceeding with allotment of shares without receiving the minimum subscription
h) For acting as a director after removing by the NCLT
i) For giving false evidence
j) For wrongfully withholding of properties.

COMPANY BOARD OF DIRECTORS

A board of directors is a body of elected or appointed members who jointly oversee the
activities of a company or organisation. Other names include board of governors, board of
managers, board of regents, board of trustees, and board of visitors. It is often simply referred to
as "the board". A board's activities are determined by the powers, duties, and responsibilities
delegated to it or conferred on it by an authority itself. These matters are typically mentioned in
the organization's bylaws. The bylaws commonly also specify the number of members of the
board, how they are to be chosen, and when they are to meet.

In an organization with voting members, the board acts on behalf of, and is subordinate to,
the organization's full group, which usually chooses the members of the board. In a stock
corporation the board is elected by the shareholders and is the highest authority in the management
of the corporation..

Definition of Board of Directors:

According to section 2(10) of the Companies Act 2013“Board of Directors” or “Board”, in

relation to a company, means the collective body of the directors of the company.

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Powers and functions of Board of Directors (section 179):

1. The Board of Directors of a company shall be entitled to exercise all such powers, and to
do all such acts and things, as the company is authorised to exercise and do: Provided that
in exercising such power or doing such act or thing, the Board shall be subject to the
provisions contained in that behalf in this Act, or in the memorandum or articles, or in any
regulations not inconsistent therewith and duly made there under, including regulations
made by the company in general meeting: Provided further that the Board shall not exercise
any power or do any act or thing which is directed or required, whether under this Act or by
the memorandum or articles of the company or otherwise, to be exercised or done by the
company in general meeting.
2. The Board of Directors of a company shall exercise the following powers on behalf of the
company by means of resolutions passed at meetings of the Board, namely:—

(a) to make calls on shareholders in respect of money unpaid on their shares;

(b) to authorise buy-back of securities under section 68;
(c) to issue securities, including debentures, whether in or outside India;
(d) to borrow monies;
(e) to invest the funds of the company;
(f) to grant loans or give guarantee or provide security in respect of loans;
(g) to approve financial statement and the Board’s report;
(h) to diversify the business of the company;
(i) to approve amalgamation, merger or reconstruction;
(j) to take over a company or acquire a controlling or substantial stake in another company;
(k) any other matter which may be prescribed: Provided that the Board may, by a resolution
passed at a meeting, delegate to any committee of directors, the managing director, the
manager or any other principal officer of the company or in the case of a branch office of
the company, the principal officer of the branch office, the powers specified in clauses (d)
to (f) on such conditions as it may specify
----------------------------------------------------------------------

COMPANY MEETINGS:
Meetings are must for every organisation or association to discuss matters and to take
decisions on important issues. Meetings are required to be held by a concerned authority
periodically. The word meeting is not defined anywhere in the Companies Act of 2013. Generally
a meeting may be defined as gathering, assembling or coming together of two or more persons for
discussion and transaction of some lawful business. For proper working of the company it is
necessary to that the shareholders meets as often as possible and discuss the matters and take
important decisions. There must be atleast 2 persons to constitute a meeting.

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Characteristics of a Company Meeting:

Followings are the characteristics of company meeting

1. There must be two or more persons who are the members of the company, must be present
at the meeting.
2. The assembly of persons must be for discussion and transaction of some lawful business.
3. A prior notice must be given for conducting a meeting.
4. The meeting must be held at a particular place, date and time.
5. The meeting must be held as per the provisions of the Companies Act.

Requisites or Essentials of a Valid Meeting:

Followings are the requisites or essentials for valid meeting,

1. Proper Authority:

The meeting must be conducted by a proper authority otherwise the meeting will not
be valid meeting. The proper authority to conduct a meeting of a company is BOD’s. in the
absence of BOD’s the proper authority to conduct the meeting would be the Company
Secretary. If the directors of a company do not call the meeting, then the NCLT shall become
proper authority to call such meetings.

2. Proper Notice[sec-101]:
The second important essentials of a valid meeting is that a proper notice of the
meeting should be given to all those who are entitled to attend the company meeting. The
notice must be given atleast 21 days before the date of meeting. The notice must be in
writing, it must specify the place, date and time of the meeting. The object of the notice is
to make aware the shareholders with the agenda of the meeting so that they may decide the
matters intelligently. Every member of a company, every director, every auditor, every
shareholders, creditors, debenture holders or authorities are entitled to get the notice.
Notice may be sent either personally or through post.
3. Quorum[sec-103]:
The next requirement of a valid meeting is the presence of a quorum in the meeting.
Any business transacted at a meeting without a quorum is invalid. The main purpose of the
quorum is to avoid taking decisions at a meeting by small majority of persons which may
not be accepted by large majority of members.
Quorum means minimum number of members who must be present in a meeting.
it is the AOA of a company which fixes the quorum for different meetings of the company
according to the size and the nature of the company business. But the companies Act fixed
2 members as the minimum to attend the quorum in case of private companies and the 5
members in case of public company

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If the quorum is not present within half-an-hour from the time appointed for
holding a meeting of the company, the meeting shall stand adjourned to the same day in
the next week at the same time and place, or to such other date and such other time and
place as the Board may determine. If at the adjourned meeting also, a quorum is not present
within half-an-hour from the time appointed for holding meeting, the members present
shall be the quorum.

4. Proxy[sec-105]

A proxy is an authorised agent of the member of a company to attend the meeting.

Any member of a company entitled to attend and vote at a meeting of the company shall
be entitled to appoint another person as a proxy to attend and vote at the meeting on his
behalf provided that a proxy shall not have the right to speak at such meeting and shall not
be entitled to vote except on a poll. Proxy need not be a member of a company; a minor
cannot be appointed as proxy. The letter of appointing a proxy must be in writing in proper
form and must be signed by the appointer.

5. Chairman of the Meeting[sec-104]:

Every meeting must have a chairman to presided over and conduct meeting. The
meeting is not considered valid if it not presided by a chairman. The chairman is the person
responsible for smooth conduct of the meeting. He is the chief authority to control the
meeting. The entire responsibility for the smooth conducting of the meeting lies on his
shoulders. Therefore, he must be an efficient and experienced person. The chairman of the
meeting will be appointed by the BOD’s or the members presented at the meeting shall
elect one of them as the chairman of the meeting.
6. Agenda:
The term agenda literally means “things to be done” in relation to the meetings of
a company. It means that the programme of business to be transacted at the meeting. The
preparation of agenda is considered necessary for the conduct of any meetings
systematically without any confusion. The agenda is usually prepared by the company
secretary. All the items included in the agenda must be serially arranged while preparing
the agenda following principles should be clear and exact:
3. It should be clear and exact;
4. It should be in a summary form;
5. The routine items should be put first and other matters later;
6. All the items included in the agenda should be within the scope of the meeting.

7. Voting and polling:

Company meetings are held for discussing specific issues relating to the workings of the
company and for taking decisions on the same matter. The sense of meeting is decided by

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putting questions before the meeting to vote. There are different methods of voting but the
important methods of voting that are adopted in a company meetings are:
1. Voting by show of hands: it is the most common method adopted in a company
meeting for ascertaining the sense of the meeting. Under this method the members
present in the meeting indicate their opinion by raising their hands in favour of the
proposal in a meeting.
2. Voting by Poll: under this method the members present in a meeting shall express
their view by casting their votes, either in favour of or against the proposal. Voting
by poll is nothing but a secret voting. Under this method the decision taken on the
basis of the majority of the votes.
3. Voting through electronic means: The Central Government may prescribe the class or
classes of companies and manner in which a member may exercise his right to vote
by the electronic means [ E-Voting].

8. Resolutions:
Business is transacted at a general meeting by passing resolution. Therefore, the
resolution means it is the decision of a meeting on a particular proposal. The resolution is
nothing but a final decision taken in the meeting. Every item included in the agenda is put
before the meeting for the purpose of taking decisions. When the proposal is approved by
a majority of members, it becomes a resolution. Every resolution must be recorded in the
minutes book word by word.
 Types of Resolutions:
1. Ordinary Resolution:
An Ordinary Resolution is that which is passed by a simple majority at any
general meeting of the shareholders. The resolutions may be passed by a show
of hands or by poll or electronically.
2. Special Resolutions:
A special resolution is one which is passed by atleast 3/4 th majority of the
members voting at the general meeting in which such a resolution is passed.
The votes cast in favour of the resolution, whether on a show of hands, or
electronically or on a poll, as the case may be.

9. Minutes:
Literally minutes refers to a note of preserve the memory of anything. So the
minutes of the meeting are the written records of business transaction and decision arrived
at a meeting. At the close of meeting and as soon as possible the secretary should draft the
minutes of the meeting. Great care has to be taken at the time of preparing the minutes. The
companies Act makes it obligatory on the part of every company to maintain minutes in
every general meeting, meeting of the boards and its committee when the minutes is
prepared, it must be signed by the chairman of the meeting.

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KINDS OF MEETINGS:

1. GENERAL MEETINGS OF SHAREHOLDERS:

The shareholders are real owners of the company but they cannot take part in the
management of company. They leave this to their representatives called directors. For controlling
the BOD’s and their activities shareholders meetings are held from time to time such meetings are
known as ‘General Meetings’ of members which are held to exercise their collective rights.
Meetings of shareholders can be classified into following:

A. ANNUAL GENERAL MEETING:

Annual General Meeting is also called as ‘ordinary meeting’ which is held once in a year. The
AGM is the most important meeting of the shareholders. it is in this meeting that the performance
of the company for the last year is discussed and also to discuss the future prospectus of the
company and to elect its office for the coming year. Every company other than One Person
Company shall in each year hold in addition to any other meetings, a general meeting as its annual
general meeting. The company shall specify the meeting as such in the notices calling Annual
General Meeting (AGM).

Time limit for AGM:

In case of the first AGM, it shall be held within a period of 9 months from the date of
closing of the first financial year of the company. If a company holds its first AGM as above
mentioned it shall not necessary for the company to hold any AGM in the year of its incorporation.
In any case other than the first AGM, it shall be held within a period of 6 months, from the date of
closing of the financial year. Not more than 15 months shall elapse between the date of one AGM
of a company and that of the next. The Registrar may, for any special reason, extend the time
within which any AGM, shall be held by a period not exceeding 3 months. However the Registrar
may not extend the time for first AGM.

Day and Time for AGM:

Every AGM shall be called during business hours, on day that is not a National Holiday
and shall be held either at the registered office of the company or at some other place within the
same city, town or village in which the registered office of the company is situate.

Notice of AGM:

The BOD’s has to call AGM giving 21 days prior notice to all the members of the
company.

B. EXTRA- ORDINARY GENERAL MEETING:

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Extra-ordinary general meeting which is called on request by any member or BOD’s. the
main object to call this meeting is to discuss any special matters or urgent business importance or
in emergency situations to the company. This meeting is called for the consideration of any subject
of which cannot be postponed to the next AGM. This meeting may be called to discuss the
following

a) Alteration of any clause of MOA

b) Changes in the AOA
c) The reduction of capital etc.

C. CLASS MEETING:

Where a company has more than one class or type of shareholders a separate meeting of
the shareholders of a particular class are required to be held this is called as the class meeting, and
such a meeting are to be attended only by that class of shareholders. The class meeting is called
for the purpose of alteration in the rights and privileges of the shareholders and for the purpose of
conversion of one class of shares into another.

2. MEETINGS OF BOARD OF DIRECTORS:

The meetings BOD’s can be classified into two, namely:

A. MEETINGS OF BOARD(section-173 to 175):

The Directors of a company exercise most of their powers jointly by conducting meetings
and such meetings are called Board Meeting. According to section-173. Every company shall
hold the first meeting of the Board of Directors within thirty days of the date of its incorporation
and thereafter hold a minimum number of four meetings of its Board of Directors every year in
such a manner that not more than one hundred and twenty days shall intervene between two
consecutive meetings of the Board.

The participation of directors in a meeting of the Board may be either in person or through
video conferencing or other audio visual means, as may be prescribed, which are capable of
recording and recognising the participation of the directors and of recording and storing the
proceedings of such meetings along with date and time.

A meeting of the Board shall be called by giving not less than seven days’ notice in writing
to every director at his address registered with the company and such notice shall be sent by hand
delivery or by post or by electronic means. Every officer of the company whose duty is to give
notice under this section and who fails to do so shall be liable to a penalty of twenty-five thousand
rupees.

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A One Person Company shall be deemed to have complied with the provisions of this
section if at least one meeting of the Board of Directors has been conducted in each half of a
calendar year and the gap between the two meetings is not less than ninety days.

According to section-174. The quorum for a meeting of the Board of Directors of a

company shall be one third of its total strength or two directors, whichever is higher, and the
participation of the directors by video conferencing or by other audio visual means shall also be
counted for the purposes of quorum under this sub-section.

Where a meeting of the Board could not be held for want of quorum, then, unless the
articles of the company otherwise provide, the meeting shall automatically stand adjourned to the
same day at the same time and place in the next week or if that day is a national holiday, till the
next succeeding day, which is not a national holiday, at the same time and place.

According to section-175, No resolution shall be deemed to have been duly passed by the
Board or by a committee thereof by circulation, unless the resolution has been circulated in draft,
together with the necessary papers, if any, to all the directors, or members of the committee, as the
case may be, at their addresses registered with the company in India by hand delivery or by post
or by courier, or through such electronic means as may be prescribed and has been approved by a
majority of the directors or members, who are entitled to vote on the resolution.

B. MEETINGS OF COMMITTEE OF DIRECTORS:

The BOD’s may form certain committees and transfer some of their powers to them. The
delegation of powers to the committee is to be authorised by the AOA. However committee
meetings are not counted for the purpose of number of board meetings in a year.

3. MEETINGS OF CREDITORS:

The different types of creditors can also call the meetings in a company. The meetings of
the creditors are called when the company proposes to make a scheme for arrangements with its
creditors. The Companies Act has given the powers to the creditors to conduct the companies
meetings for the purpose of discussing their interests and privileges. In few circumstances the
creditors are required to make some sacrifice to save the company from financial difficulties.

4. MEETINGS OF DEBENTURE HOLDERS:

The meetings of debenture holders are held occasionally to consider a matter which affects
the interests of debenture holders. For ex, the rate of interest or terms of security or rights of
debenture holders are to be changed. The rules and procedures for conducting the meetings of
debenture holders are usually provided in the Debenture Trust Deed. These meetings are called
from time to time where the interest of debenture holders is involved at the time of reconstruction,
reorganisation, amalgamation or winding up of the company.

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PREVENTION OF OPPRESSION AND

MISMANAGEMENT

MAJORITY RULE AND RIGHTS OF MINORITY SHAREHOLDERS

A company is an association of individuals working with a common aim to achieve the
purpose of the formation of the company and to earn maximum profit. There are difference of
interests and opinions among individuals which results in forming of majority and minority group.
These groups require proper balancing under strict judicial securitization so that position of any of
the group is not misused or abused. In today’s scenario, this topic has become a significant part
of the company’s law and practice. How do companies run? Who runs them? Whether majority
shareholders or directors run them? How majority oppress the minority? These questions need to
be answered for understanding the concept of Oppression and Mismanagement.

Democratic decisions are made in accordance with the majority decision and are deemed
to be fair and justified while overshadowing the minority concerns. The corporate world has
adopted this majority rule in decision making process and management of the companies. Statutory
provisions in this regard have been provided under the Companies Act, 2013 ("CA 2013"). to
protect the interest of the minority shareholders, the minority has been incapable or unwilling due
to lack of time, recourse or capability- financial or otherwise. This has resulted in the minority to
either let the majority dominate and suppress them or squeeze them out of the decision-making
process of the company. CA 2013 has sought to invariably provide for protection of minority
shareholders rights and can be regarded as a game changer between the majority and minority
shareholders. Various provisions have been introduced in CA 2013 to essentially bridge the gap
towards protection and welfare of the minority shareholders under CA 1956.

Who are minority shareholders?

Presently, 'minority shareholders' are not defined under any law, however, minority shareholders
have been set out as ten percent (10%) of shares or minimum hundred (100) shareholders,
whichever is less, in companies with share capital; and one-fifth (1/5) of the total number of its
members, in case of companies without share capital. In general terms, minority shareholding can
be understood to mean holding such amount of shares which does not confer control over the
company or render the shareholder with having a non-controlling interest in a company. CA 2013,
provides for various provisions dealing with situations wherein rights of minority shareholders are
affected and the same can be divided into two major heads, i.e.,

(a) oppression and mismanagement of the company; and

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(b) reconstruction and amalgamation of companies.

The management of a company is based on the majority rule. Like the will of the any democratic
set-up, the majority has its way in a company though due provision must also be made for the
protection of minority interest. This principle states that the will of the majority should prevail
and bind the minority is known as the principle of majority rule. It was established in the case of
FOSS v. HARBOTTLE.

Meaning of Oppression:

The Oppression of small/minority shareholders takes place by majority shareholders who

controls the company. It is understood as an act or omission on the part of management which
implies majority, who holds or controls the management. The law, however, has not defined what
oppression is but certain prominent case laws have defined the term “Oppression.” The essence of
the matter seems to be that the conduct complained of should at the lowest involve a visible
departure from the standards of fair dealing, and a violation of the conditions of fair play on which
every shareholder who entrusts his money to the company is entitled to rely------- Lord Cooper.

Meaning of Mismanagement:

Similarly, mismanagement is not uncommon in companies. It means mismanagement of

resources by following means:
1. Absence of basic records of the company.
2. Drawing considerable expenses for personal purposes by directors/management of the
company.
3. Not filing documents with The Registrar of Companies relating to compliances under
The Companies Act 2013.
4. Misuse of companies finances/funds Sale of assets at very low prices.
5. Violation of provisions of law and memorandum or article of association of the company.
6. Making Secret Profits.
7. Diverting company funds for personal use of directors
8. Continuation in office by director beyond the specified term and not holding any qualification
shares.
9. The acts of mismanagement may not necessarily be of majority but can be by any person in
the day to day management of the company.
The management of a company is based on the majority rule. Like the will of the any
democratic set-up, the majority has its way in a company though due provision must also be made
for the protection of minority interest. This principle states that the will of the majority should
prevail and bind the minority is known as the principle of majority rule. It was established in
the case of FOSS v. HARBOTTLE.

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Leading Case Law:

Foss v/s Harbottle, [(1843)2 Hare 461]: Two minority shareholders in a company alleged
that its directors were guilty of buying their own land for the company’s use and paying themselves
a price greater than its value. This act of the directors resulted in a loss to the company. The
minority shareholders, therefore, decided to take an action for damages against the directors. The
shareholders in general meeting by majority resolved not to take any action against the directors
alleging that they were not responsible for the loss which had been incurred. The court dismissed
the suit on the ground that the acts of directors were capable of confirmation by the majority of
members and held that the proper plaintiff for wrongs done to the company is the company itself
and not the minority shareholders. It further held that the company can act only through its majority
shareholders. The decision in the above case is the logical result of the principle that a company is
a separate legal entity from the members who compose it. As such if any wrong is done to the
company, it is the company which can bring an action.

Advantage of rule in Foss v/s Harbottle:

1. Recognition of separate legal personality of company: If a company has suffered some injury,
and not the individual members, it is the company itself which can seek redress.
2. Need to preserve right of majority to decide: It helps to decide how the affairs of the
company shall be conducted.
3. Multiplicity of futile suits avoided: if every individual were permitted to sue anyone who
had injured the company through the breach of duty, there could be many actions.
4. Litigation at the suit of a minority do not wish it:: If the irregularity complained of is one which can be
subsequently ratified by the majority, it is futile to have litigation about it except with the consent of the
majority in a general meeting.

Exception to the rule in Foss v/s Harbottle:

1. Where the act done is illegal or ultra virus of the company: Every shareholder has right,
by injunction, to restrain the company from doing any acts which are Ultra Virus of the
company or are illegal. These acts cannot be adopted even by a unanimous vote of the
shareholders.
2. Where the majority are perpetrating a fraud on the minority: Where the majority of a
company’s members use their power to defraud or oppress the minority, the Tribunal will
interfere at the instance of the minority. For example, where the directors decide upon a
course of action which is advantageous to themselves but injurious to the company. A suit by
a minority in such a case as champions of the company's interests would lie.

In Menier v/s Hooper’s Telegraph Works Ltd.,[1874]: The majority of the

members of company ‘A’ were also members of Company ‘B’ and at a meeting of Company
‘A’ they passed a resolution to compromise an action against Company ‘B’ in a manner

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alleged to be favourable to Company ‘B’ but unfavourable to Company ‘A’. The Court held
that the minority shareholders of Company ‘A’ could bring an action to have the compromise
set aside. It was observed that it would be a shocking thing if the majority of shareholders are
allowed to put something into their pockets at the expense of the minority.

3. Where the company is doing an act which is inconsistent with the Articles: The minority
shareholders can restrain the company from doing an act which is inconsistent with the
Articles. They can also bring an action to restrain the alteration of the Articles which is not
made bonafide for the benefit of the company as a whole.
4. Where the act can only be done by a special resolution, but in fact has been done by a
simple majority by passing only an ordinary resolution: Where the act can only be done
by a special resolution, but in fact has been done by a simple majority by passing only an
ordinary resolution in such a case any member or members can bring action and get injunction
restraining the majority. Again, if an insufficiently informative notice is given of a resolution
to be passed at a meeting of members, any member who did not attend the meeting may bring
action to restrain the company and its directors from carrying out the resolution.
5. Where the personal rights of an individual member have been infringed: Every
shareholder has certain rights against the Company. Some of these rights have been conferred
by the Companies Act itself; some arise out of the Articles or general law. If any such right
is in question, single shareholders can defy a majority consisting of all other shareholders.
6. Where there is breach of duty: The minority shareholders may bring an action against the
company where there is a breach of duty by the directors and majority shareholders to the
detriment of the company. The action will be allowed even where there is no fraud.

PREVENTION OF OPPRESSION AND MISMANAGEMENT:

1. APPLICATION TO TRIBUNAL FOR RELIEF IN CASES OF OPPRESSION-

(section241): Any member, who has right to apply, may apply to the Tribunal under this
section-241. An application may be filed for a complaint that:
1. The affairs of the company have been or are being conducted;
a) In a manner prejudicial to the public interest, or
b) In an manner prejudicial or oppressive to him or any other member or members,
or
c) In a manner prejudicial to the interests of the company; or
2. The material change has taken place in the management or control of the company,
whether by;
a) An alteration in the BOD, or
b) Manager, or
c) In the ownership of the company’s share, or
d) If it has no share capital, in its membership, or

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e) In any other manner whatsoever, and

That by reason of such change, it is likely that the affairs of the company will be
conducted in a manner prejudicial to its interests or its members or any class of members.
These changes should not be a change brought about by, or in the interests of, any creditors,
including debenture holders or any class of shareholders of the company.

The Central Government, if it is of the opinion that the affairs of the company are
being conducted in a manner prejudicial to public interest, it may itself apply to the
Tribunal for an order.

2. POWERS OF TRIBUNAL (Sec-242, sub- section 1,3):

On any application made under Section 241, the Tribunal shall frame its opinion on
two points:
1. that the company’s affairs have been or are being conducted in a manner prejudicial
or oppressive to any member or members or prejudicial to public interest or in a
manner prejudicial to the interests of the company; and
2. that to wind up the company would unfairly prejudice such member or members, but
that otherwise the facts would justify the making of a winding-up order on the ground
that it was just and equitable that the company should be wound up, the
Tribunal may with a view to bringing to an end the matters complained
of, make such orders as it thinks fit.
3. A certified copy of the order of the Tribunal under sub-section (1) shall
be filed by the company with the Registrar within 30 days of the order of
the Tribunal.
Details in Order Passed by Tribunal (Section 242, Sub-Section 2):
The order shall provide for:
1. The regulation of conduct of affairs of the company in future;
2. The purchase of shares or interests of any member of the company by other members
thereof or by the company;
3. In the case of a purchase of its shares by the company as aforesaid, the consequent
reduction of its share capital;
4. Restriction on the transfer or allotment of the shares of the company;
5. The termination, setting aside or modification, of any agreement, however arrived at,
between the company and the managing director, any other director or manager, upon such
terms and conditions as may, in the opinion of the Tribunal, be just and equitable in the
circumstances of the case;
6. The termination, setting aside or modification, of any agreement, between the company
and any person other than those referred but no such agreement shall be terminated, set
aside or modified except after due notice and after obtaining the consent of the party
concerned;
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7. The setting aside of any transfer, delivery of goods, payment, execution or other act
relating to property made or done by or against the company within three months before
the date of the application , which could, if made or done by or against an individual, be
deemed in his insolvency to be a fraudulent preference;
8. Removal of the managing director, manager or any of the directors of the company;
9. Recovery of undue gains made by any managing director, manager or director during the
period of his appointment as such and the manner of utilisation of the recovery including
transfer to Investor Education and Protection Fund or repayment to identifiable victims;
10. The manner in which the managing director or manager of the company may be appointed
subsequent to an order removing the existing managing director or manager of the
company;
11. Appointment of such number of persons as directors, who may be required by the Tribunal
to report to the Tribunal on such matters as the Tribunal may direct;
12. Imposition of costs as may be deemed fit by the Tribunal;
13. Any other matter for which, in the opinion of the Tribunal, it is just and equitable that
provision should be made.

Interim Order (Section 242, Sub-Section 4):

The tribunal may, on the application of any party to the proceeding, make any interim order
which it thinks fit for regulating the conduct of the company’s affairs upon such terms and
conditions as appear to it to be just and equitable.

Alteration in Memorandum or Articles (Section-242, Sub-Section5, 6,7):

Where an order of the Tribunal makes any alteration in the Memorandum or Articles of a
company, then, the company shall not have power, except to the extent, if any, permitted in the
order, to make, without the leave of the Tribunal, any alteration whatsoever which is inconsistent
with the order, either in the memorandum or in the articles.

The alterations made by the order in the memorandum or articles of a company shall, in
all respects, have the same effect as if they had been duly made by the company in accordance
with the provisions of this Act and the said provisions shall apply accordingly to the
memorandum or articles so altered.

A certified copy of every order altering, or giving leave to alter, a company’s memorandum
or articles, shall within thirty days after the making thereof, be filed by the company with the
Registrar who shall register the same.

3. RIGHT TO APPLY UNDER SECTION 241 (SECTION-244):

The following members of a company shall have the right to apply namely:—

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 in the case of a company having a share capital, not less than one hundred members
of the company or not less than one-tenth of the total number of its members,
whichever is less, or
 any member or members holding not less than one tenth of the issued share capital of
the company, subject to the condition that the applicant or applicants has or have paid
all calls and other sums due on his or their shares;
 in the case of a company not having a share capital, not less than one-fifth of the total
number of its members
 any one or more of them having obtained the consent in writing of the rest, may make
the application on behalf and for the benefit of all of them.

4. CONSEQUENCES OF TERMINATION OR MODIFICATION OF AGREEMENTS

(Section 243):
Where an order made under section 242 terminates, sets aside or modifies an agreement
(a) such order shall not give rise to any claims whatever against the company by any person
for damages or for compensation for loss of office or in any other respect either in
pursuance of the agreement or otherwise;
(c) no managing director or other director or manager whose agreement is so terminated
or set aside shall, for a period of five years from the date of the order terminating or
setting aside the agreement, without the leave of the Tribunal, be appointed, or act, as
the managing director or other director or manager of the company. Tribunal shall not
grant leave under this clause unless notice of the intention to apply for leave has been
served on the Central Government and that Government has been given a reasonable
opportunity of being heard in the matter.

Any person who knowingly acts as a managing director or other director or manager
of a company in contravention of this section and every other director of the company who
is knowingly a party to such contravention, shall be punishable with imprisonment for a
term which may extend to six months or with fine which may extend to five lakh rupees,
or with both.

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CORPORATE SOCIAL RESPONSIBILITY
Introduction:

Social responsibility is an ethical theory that an entity be it an organisation or individual

has an obligation to act to benefit society at large. Social responsibility is a duty every individual
has to perform so as to maintain a balance between the economy and the ecosystem. Social
responsibility means sustaining the equilibrium between the two. It pertains not only to business

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organizations but also to everyone whose any action impacts the environment. This responsibility
can be passive, by avoiding engaging in socially harmful acts, or active, by performing activities
that directly advance social goals.

Meaning of Corporate Social Responsibility:

Corporate Social Responsibility or CSR has been defined by Lord Holme and Richard Watts in
The World Business Council for Sustainable Development’s publication ‘Making Good Business
Sense’ as “…the continuing commitment by business to behave ethically and contribute to
economic development while improving the quality of life of the workforce and their families as
well as the local community and society at large".

CSR is one of the newest management strategies where companies try to create a positive impact
on society while doing business. There is no clear-cut definition of what CSR comprises. Every
company has different CSR objectives though the main motive is the same. All companies have a
two-point agenda- to improve qualitatively (the management of people and processes) and
quantitatively (the impact on society). The second is as important as the first and stake holders of
every company are increasingly taking an interest in “the outer circle”. The activities of the
company and how these are impacting the environment and society.

Corporate social responsibility (CSR, also called corporate conscience, corporate

citizenship, social performance, or sustainable responsible business/ Responsible Business) is a
form of corporate self-regulation integrated into a business model CSR policy functions as a built-
in, self-regulating mechanism whereby a business monitors and ensures its active compliance with
the spirit of the law, ethical standards, and international norms. In some models, a firm's
implementation of CSR goes beyond compliance and engages in "actions that appear to further
some social good, beyond the interests of the firm and that which is required by law.” CSR is a
process with the aim to embrace responsibility for the company's actions and encourage a positive
impact through its activities on the environment, consumers, employees,
communities, stakeholders and all other members of the public sphere who may also be considered
as stakeholders.

The Evolution of Corporate Social Responsibility in India:

The evolution of corporate social responsibility in India refers to changes over time in India of the
cultural norms of corporations' engagement of corporate social responsibility(CSR), with CSR
referring to way that businesses are managed to bring about an overall positive impact on the
communities, cultures, societies and environments in which they operate. The fundamentals of
CSR rest on the fact that not only public policy but even corporate should be responsible enough
to address social issues. Thus companies should deal with the challenges and issues looked after
to a certain extent by the states.

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Among other countries India has one of the most richest traditions of CSR. Much has been done
in recent years to make Indian Entrepreneurs aware of social responsibility as an important
segment of their business activity but CSR in India has yet to receive widespread recognition. If
this goal has to be realised then the CSR approach of corporate has to be in line with their attitudes
towards mainstream business- companies setting clear objectives, undertaking potential
investments, measuring and reporting performance publicly.

The four phases of CSR development in India:

The history of CSR in India has its four phases which run parallel to India's historical development
and has resulted in different approaches towards CSR.

The First Phase:

In the first phase charity and philanthropy were the main drivers of CSR. Culture, religion, family
values and tradition and industrialization had an influential effect on CSR. In the pre-
industrialization period, which lasted till 1850, wealthy merchants shared a part of their wealth
with the wider society by way of setting up temples for a religious cause. Moreover, these
merchants helped the society in getting over phases of famine and epidemics by providing food
from their godowns and money and thus securing an integral position in the society. With the
arrival of colonial rule in India from 1850s onwards, the approach towards CSR changed. The
industrial families of the 19th century such as Tata, Godrej, Bajaj, Modi Singhania were strongly
inclined towards economic as well as social considerations. However it has been observed that
their efforts towards social as well as industrial development were not only driven by selfless and
religious motives but also influenced by caste groups and political objectives.

The Second Phase:

In the second phase, during the independence movement there was increased stress on Indian
Industrialists to demonstrate their dedication towards the progress of the society. This was when
Mahatma Gandhi introduced the notion of "trusteeship", according to which the industry leaders
had to manage their wealth so as to benefit the common man. Gandhi's influence put pressure on
various Industrialists to act towards building the nation and its socio-economic development.
According to Gandhi, Indian companies were supposed to be the "temples of modern India". Under
his influence businesses established trusts for schools and colleges and also helped in setting up
training and scientific institutions. The operations of the trusts were largely in line with Gandhi's
reforms which sought to abolish untouchability, encourage empowerment of women and rural
development.

The Third Phase:

The third phase of CSR (1960–80) had its relation to the element of "mixed economy, emergence
of Public Sector Undertakings (PSUs) and laws relating labour and environmental standards.

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During this period the private sector was forced to take a backseat. The public sector was seen as
the prime mover of development. Because of the stringent legal rules and regulations surrounding
the activities of the private sector, the period was described as an "era of command and control".
The policy of industrial licensing, high taxes and restrictions on the private sector led to corporate
malpractices. This led to enactment of legislation regarding corporate governance, labour and
environmental issues. PSUs were set up by the state to ensure suitable distribution of resources
(wealth, food etc.) to the needy. However the public sector was effective only to a certain limited
extent. This led to shift of expectation from the public to the private sector and their active
involvement in the socio-economic development of the country became absolutely necessary. In
1965 Indian academicians, politicians and businessmen set up a national workshop on CSR aimed
at reconciliation. They emphasized upon transparency, social accountability and regular
stakeholder dialogues. In spite of such attempts the CSR failed to catch steam.

The Fourth Phase:

In the fourth phase (1980 until the present) Indian companies started abandoning their traditional
engagement with CSR and integrated it into a sustainable business strategy. In 1990s the first
initiation towards globalization and economic liberalization were undertaken. Controls and
licensing system were partly done away with which gave a boost to the economy the signs of which
are very evident today. Increased growth momentum of the economy helped Indian companies
grow rapidly and this made them more willing and able to contribute towards social cause.
Globalization has transformed India into an important destination in terms of production and
manufacturing bases are concerned. As Western markets are becoming more and more concerned
about and labour and environmental standards in the developing countries, Indian companies who
export and produce goods for the developed world need to pay a close attention to compliance
with the international standards.

As discussed above, CSR is not a new concept in India. Ever since their inception, corporates like
the Tata Group, the Aditya Birla Group, and Indian Oil Corporation to name a few, have been
involved in serving the community. Through donations and charity events, many other
organizations have been doing their part for the society. The basic objective of CSR in these days
is to maximize the company's overall impact on the society and stakeholders. CSR policies,
practices and programs are being comprehensively integrated by an increasing number of
companies throughout their business operations and processes. A growing number of corporate
feel that CSR is not just another form of indirect expense but is important for protecting the
goodwill and reputation, defending attacks and increasing business competitiveness.

Companies have specialised CSR teams that formulate policies, strategies and goals for their CSR
programs and set aside budgets to fund them. These programs are often determined by social
philosophy which have clear objectives and are well defined and are aligned with the mainstream
business. The programs are put into practice by the employees who are crucial to this process. CSR

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programs ranges from community development to development in education, environment and

healthcare etc.

For example, a more comprehensive method of development is adopted by some corporations such
as Bharat Petroleum Corporation Limited, Maruti Suzuki India Limited and Hindustan Unilever
Limited Provision of improved medical and sanitation, building schools and houses, and
empowering the villagers and in process making them more self-reliant by providing vocational
training and a knowledge of business operations are the facilities that these corporations focus on.
Many of the companies are helping other peoples by providing them good standard of living.

Corporate Social Responsibility under Company’s Act 2013(Section- 135):

With a view to have greater responsibility towards society by the corporate 2013 Act, provides for
CSR:

1. Provisions applicable to every company having:

 Net worth of rupees five hundred Crore or more, or
 Turnover of rupees 1000 Crore or more.
 Net profit of rupees 5 Crore or more
2. During any financial year shall constitute a Corporate Social Responsibility Committee of
the BOD consisting of three or more directors, out of which at least one director shall be an
independent director.
3. The Corporate Social Responsibility Committee shall,—
(a) Formulate and recommend to the Board, a Corporate Social Responsibility Policy which
shall indicate the activities to be undertaken by the company as specified in Schedule VII;
(b) Recommend the amount of expenditure to be incurred on the activities referred and
(c) Monitor the Corporate Social Responsibility Policy of the company from time to time.

4. The Board of every company shall,—

(a) After taking into account the recommendations made by the Corporate Social
Responsibility Committee, approve the Corporate Social Responsibility Policy for the
company and disclose contents of such Policy in its report and also place it on the
company's website, if any, in such manner as may be prescribed; and

(b) Ensure that the activities as are included in Corporate Social Responsibility Policy of
the company are undertaken by the company.

5. The Board of every company shall ensure that the company spends, in every financial
year, at least two per cent. of the average net profits of the company made during the three
immediately preceding financial years, in pursuance of its Corporate Social Responsibility
Policy that the company shall give preference to the local area and areas around it where it
operates, for spending the amount earmarked for Corporate Social Responsibility activities

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further that if the company fails to spend such amount, the Board shall, in its report specify
the reasons for not spending the amount.

Penalty for Non-Compliance of CSR Provisions of Companies Act 2013

Section 135 does not lay down any penal provision in case a company fails to spend
towards CSR activities. However, Section 135(5) provides that in case the company fails
to spend such amount, the Board shall specify in its report reason for not spending the
amount under Section 134(3)(o).

In case the company does not comply with Section 134, the company shall be punishable
under Section 134(8).

1. Section 134(8): As per Section 134(3)(o) of the Companies Act, companies shall include
in its Board Report the details about the policy developed and implemented by the company
on corporate social responsibility initiatives taken during the year. If the company
contravenes the provisions of Section 134:

The Company shall be punishable with fine which shall not be less than Rs.50,000/- but
which may extend to Rs.25,00,000/-; and

Every officer in default shall be punishable with imprisonment for a term which may
extend to three years OR fine which shall not be less than Rs.50,000/ – but which may
extend to Rs.5,00,000/-; or – Both

2. Section 450: Where no specific penalty is provided, in case of contravention of any such
provision, company, and every officer in default or such other person shall be punishable
with:

Fine which may extend to Rs.10,000/-, and

Where contravention is continuing one, a further fine which may extend to Rs.1,000/- for
every day after the first during which contravention continues.

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32
 STUDY MATERIAL FOR INTERNAL CIRCULATION
COURSE & SEMESTER: 5 YEARS B.COM. LL.B. VI SEM

SUBJECT: COMPANY LAW

UNIT-IV
Financial Structure of Company:

Sources of capital: shares - types- allotment- transfer of shares- rights and privileges of
shareholders- dividends- declaration and payment of dividends, prohibition of buy back-
private placement.

Debentures – floating charge- appointment of debenture trustees and their duties- kinds-
remedies of debenture holders- redemption.

Acceptance of Deposit by Companies, charge on assets.

SHARES
Introduction:

A share is the basis and basic feature of the company. It is a new kind of business
phenomena of 19th century. Share is a part of capital and also it is a small function of huge
investment. A share is limited to its amount only. It does not override the company. The shares
in a company can easily transferable from one person to other. By possessing a share a person
can become a member of a company and can enjoy various rights such as right to vote, right to
claim dividends, right to stand in election for BOD, shares in profit and loss. It is a new kind
of property so it can buy, sell, pledged or mortgaged etc.

Meaning and Definitions of Shares:

Share is the interest of shareholders in a definite portion of capital. It expresses a

proprietary relationship between the company and the shareholders. The expression of ‘share’
in the literal sense means, ‘a part’ or ‘a division’ or ‘a portion’. In other words, the capital of a
company is divided into small units called as ‘shares’.

According to Romer. L. J. “Share is a kind of property which gives various rights and
liabilities and it is an existing bundle of rights”.

According to Dixon, J. “A share in a company is a piece of property conferring rights

in relation to distribution of income and capital”.

A share has also been defined as “an interest having a money value and made up of
diverse rights specified under the AOA.

According to section 2 (84) “share” means a share in the share capital of a company
and includes stock.

Nature of Shares (Section-44):

Man’s movable property is of two kinds viz. choose-in- possession and choose-in
action. Choose- in possession means property, which you have in your control and in your
actual physical possession, but choose-in-action means property of which you do not have
immediate possession but you have a right to it, which can be enforced by a legal action. This
right is generally evidenced by a document, for example, a railway receipt. A share in a
company is also a choose-in-action and the share certificate is the evidence of it.

According to section 44, the shares or debentures or other interest of any member in a
company shall be movable property transferable in the manner provided by the articles of the
company. It means that the shares form basis for capital of a company. It is a movable property
as they are easily transferable from one person to another in an open market. A share entitles
the holder to receive a proportionate part of the profits of the company; to take part in the
management of the company’s business in accordance with the AOA; to receive a proportion
of the assets in the event of winding up and all other benefits of membership. A share also
carries some liabilities i.e., to pay full value in winding up.

Features of Share:
1. Share is a definite part of the authorised capital of a company.
2. Share is a movable property transferable in the manner provided by the articles.
3. It is serially numbered so that the shares held by each member may be easily identified.
4. It carries with it the rights and obligation of the shareholders which shares of the
company during its subsistence; and
5. It is, in fact that interest of the shareholders on the basis of which the shareholder does
not have right over the assets of the company; he merely acquires right to share in the
profits of the company and bear its losses to the extent indicated thereon.

SHARE CAPITAL
The words ‘Capital’ and the ‘Share Capital is synonymous. The term capital usually
means a particular amount of money with which the business is started. ‘Share Capital’ means
the capital raised by a company by the issue of shares. The MOA of a company contains capital
clause contains providing for the amount of capital divided into different shares, with which
the company is to be registered.

Forms of Share Capital:

1. Authorised Capital: Authorised capital is the maximum amount of capital with which
the company is authorised to raise from the public by issue of shares. The MOA of
every company has to specify the amount of capital with which it wants to be registered.
The capital so stated is called as authorised, registered or nominal capital.
2. Issued Capital: The Company usually does not need the whole of authorised capital.
So in the beginning it usually issues only a part of capital to public for subscription it
is called as the issued capital. The issued capital can never exceed the authorised capital.
3. Unissued Capital: The balance of capital remaining to be issued is called as unissued
capital. In other words it is that part of authorised capital of a company which is not
issued to public for subscription.
4. Subscribed Capital: it is that part of issued capital for which applications are received
from the public. In other words it is that part of issued capital which is taken – up by
public is called as subscribed capital.
5. Unsubscribed Capital: It means which is not subscribed by public or not taken by
public is called as unsubscribed capital.
6. Called- Up Capital: Generally a company does not need entire value of shares
subscribed by public immediately. So it calls and demands only part of the shares
subscribed. It is that part of capital which is called- up by the company is called as
called- up capital.
7. Uncalled Capital: The balance of subscribed capital which is not called up or
demanded by company is called uncalled capital.
8. Paid-Up Capital: It is a part of called up capital against the payment has been received
by members on their respective share in response to calls made by the company.
9. Unpaid-Up Capital: the balance of called up capital which has been paid by
shareholders is called as unpaid capital.
10. Reserve Capital: It means that amount which is not callable by the company except in
event of winding up of the company. The company cannot demand the payment of
money on shares to that extent during its lifetime. When once the reserve capital has
been so created the company cannot alter its AOA reserve capital cannot be charged as
security for loans by directors it cannot be turned into an ordinary capital.

KINDS OF SHARES [Section-43]:

In order to raise the capital of a company it may issue different kinds of shares. Under the
Companies Act 2013, a company can issue two types of share namely;

(a) Equity Shares and

(b) Preference Shares.
 A. EQUITY SHARES:

According to Section-43(1), “Equity Share” means all the shares which is not
preference shares. In other words these are the shares which do not enjoy any preferential
right either in respect of payment of dividend or in respect of repayment of capital at the
time of winding up of the company. It is for this reason these shares were known as ordinary
shares. The holder of this shares are the real owners of the company as well as they are the
real risk bearers of the company. The rate of dividends on these shares are not fixed, it
varies depending upon the profits available for distribution of dividends. The holders of
these shares have normal voting rights in a company.

B. PREFERENCE SHARES:

According to section-43(2), “Preference Shares” are shares which have

preferential rights with respect to –

1. Payment of dividend, either as a fixed or an amount calculated at a fixed rate. Which

may be either be free or subject to income tax; and
2. Repayment of amount of share capital or share capital deemed to be paid up, whether
or not, there is preferential right specified in the memorandum or articles of the
company.

The Preference Shareholders may or may not carry such other rights.

a. A preferential right to any arrears of dividend

b. A right to share in surplus profit by way of additional dividend.
c. Right to be paid a fixed premium.
d. Right to share in surplus assets in the event of winding up of after all kinds of capital
have been repaid.
e. The preferential shareholders do not have normal voting rights in the company.

Kinds of Preference Shares:

Preference shares are of the following kinds, namely;

1. Cumulative Preference Shares:

According to Companies Act all Preference Shares are cumulative preference shares. The
holders of cumulative preference shares are entitled to receive a fixed percentage of
dividends before anything is given to other classes of shareholders. Apart from this right
if the company has no profit in any year to declare dividend the arrears of dividend would
accumulate and become payable out of the future profits during the existence of the
company. In other words dividend payable on these shares goes on increasing till it is
fully paid off.
2. Non- Cumulative Preference Shares:
In the case of non- cumulative preference shares the dividend shall be payable only out
of the profits of the current year. If it is not paid in a particular year it is lost and the arrears
of dividends cannot be carried forward.
 3. Participating Preference Shares:
The holder of this shares in addition to the fixed percentage of dividend are also entitled
to participate in the surplus profits of the company during the lifetime of the company and
also they are entitled to surplus assets of the company on its winding up.
4. Non- Participating Preference Shares:
The holder of this share will get only a fixed rate of dividend. But they are not entitled
participate in the surplus profits or surplus assets of the company.
5. Convertible Preference Shares:
The holders of Convertible Preference Shares are given the right to convert their shares
into Equity shares after certain period.
6. Non- Convertible Preference Shares:
The holders of non- convertible preference shares are not given the right to convert their
shares into Equity Shares after a certain period.
7. Redeemable Preference Shares:
Redeemable Preference Shares are those shares which can be redeemed i.e. returned or
paid back even during the existence of a company. These shares can be redeemed as per
the terms of issue at a fixed date after the expiry of fixed period or at the option of the
company that is whenever the company wants.
8. Irredeemable Preference Shares:
Irredeemable Preference Shares constitutes a permanent capital of the company. These
shares cannot be returned before the winding up of the company.

NUMBERING OF SHARES (SECTION-45):

Every share in a company having a share capital shall be distinguished by its distinctive
number. This is not required for shares held by beneficial owner of shares, which are in the
record of a depository.

ALLOTMENT OF SHARES (Section-39)

Whenever the company requires huge amount it issues an advertisement along with
Prospectus and applications. The interested public fill up the application and send to them to
the company along of the company with certain fixed amount. It is up to the BOD’s of the
company to accept the offer or reject it. If the offer is accepted by the company by making
allotment of shares it results in a valid contract between the company and the applicant.

The company may not allot the shares to all applications, for example; if a company
requires 1 Crore whereas the applications received by it may express their willingness upto 3
Crores then it is the duty of the company to select the applications worth of 1 Crore and return
the balance to the applicants. The applicants who are selected shall be issued letters of allotment
and also requiring them to pay the share amount in instalments or at a time. Now a day the
companies are imposing the conditions to pay money in advance along with the application. If
the application is allotted then the company will issue share certificate to the shareholders.
Allotment of shares is the act of allotting or distributing the shares of a company to specific
person in response to their application for shares.
RESTRICTIONS ON ALLOTMENT OF SHARES

General Restrictions on Allotment of Shares: For a valid allotment of shares there are
certain general restrictions imposed on the companies:

1. There must be proper Offer and Acceptance:

As a contract requires an offer by one party to do something in the same way a valid
allotment of shares there must be an offer by one party and acceptance by the other. The
acceptance of the offer by the company means the allotment of shares to the applicant by
the company.
2. Allotment must be made by Proper Authority:
The allotment must be made by proper authority according to the provisions of the AOA.
Proper authority means the BOD’s. Usually an allotment is made by a resolution of the
BOD but in certain circumstances the articles and memorandum may authorise any other
person to allot the shares.
3. Allotment Must be Made Within Reasonable Time:
The allotment must be made within the time specified in the application not exceeding
120 days of issuing the prospectus. If no time is specified then a reasonable time may be
considered. The Supreme Court said that the interval of 5-6 months between application
and allotment is unreasonable. Therefore, the allotment must be made within the
reasonable time.
4. Allotment Must be Communicated:
Allotment must be communicated to the applicant in order to constitute contract. If the
application stipulates a particular way of communication, then the company should
communicate in a stipulated way of communication. Otherwise, the ordinary mode of
communication I.e., post should be followed.
5. Allotment Must be Unconditional:
Allotment should be made on the conditions stated in the application for shares if there is
a variation there is no contract between the company and the applicant. Illegal conditions
should not be imposed on the applicant.

Statutory Restrictions On Allotment Of Shares: There are some statutory restrictions on

allotment of shares:

1.Minimum Subscription

Section-39 of the Companies Act 2013, deals with the provisions relating to minimum
subscription. When a company invites the public to subscribe for shares it cannot allot those
shares until the minimum subscription stated in the prospectus is received. The companies Act
has taken precautionary steps for the protection of investors. The restriction on minimum
subscription is a watch dog upon the directors.

The minimum amount which in the opinion of the directors may raised by the issue of shares
to meet the expenditure on each of the following:
 a) To pay the purchase price of any property.
b) To pay the preliminary expenses.
c) To pay commissions.
d) To pay for money borrowed by the company.
e) To make provisions for the working capital.

The prospectus must mention the amount of minimum subscription. The amount payable on
application on each share shall not be less than 5 % of the nominal value of the shares. All
money should be deposited in a scheduled bank. As soon as the company issues prospectus
within 120 days it should receive the minimum subscription amount. If the company does not
receive the minimum subscription, then within 30 days the company must refund the money to
the subscribers. If the company keeps that amount it has to pay interest at 6% on each share.

2. Opening of Subscription List:

The companies Act provides that shares shall not be allowed immediately after the issue of
prospectus. No allotment shall be made on any shares in pursuance of prospectus issued until
the beginning of 5th day after on which the prospectus is issued.

3.Obtaining Permission from Stock Exchange (Section 46)

Every company making public offer shall make an application to at least one stock exchange
before making the public offer. This is duty of company to obtain permission of stock exchange
or stock exchanges for the dealing of securities there. Prospectus for the public offer shall also
state the name or names of the stock exchange in which application for dealing of the securities
has been made. If a default is made in complying with the provisions of this section, the
company shall be punishable with a fine which shall not be less than five lakh rupees but which
may extend to fifty lakh rupees and every officer of the company who is in default shall be
punishable with imprisonment for a term which may extend to one year or with fine which
shall not be less than fifty thousand rupees but which may extend to three lakh rupees, or with
both.

4.Over Subscription:

If the company receives more applications with money it shall have to return such excess
money within 8 days from the date of completion of the allotment.

5.Return of Allotment:

The company shall have the report within 30days of allotment of shares the entire matters
regarding the allotment to the register of companies. This report is called as return as to
allotment. This returns as to allotment shall state the numbers, nominal value, the name, the
address and occupation of the shareholders and the amount paid on each share. Every officer
who is in default shall be punishable with fine which may extent to 1000 rupees per day during
which the default continues.

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 CERTIFICATE OF SHARES (SECTION 46)
A certificate, issued under the common seal of the company, specifying the shares held by any
person, shall be prima facie evidence of the title of the person to such shares. The object of
such share certificate is to facilitate dealings with the shares whether by way of sale or security
and so on to make them more valuable to their owners

Contents of Share Certificate: The Share Certificate contains the following:

1. Name and address of the company.

2. Title of the document.
3. Serial number of share certificate.
4. Day and date of issue of share certificate.
5. Name and address of the shareholders.
6. No of shares held by shareholders.
7. Class of shares.
8. Nominal value of each share.
9. Amount paid on each shares.
10. Revenue stamp.
11. Impression or common seal of the company
12. Signature of 2 directors and the secretary.

Issue of Share Certificate:

Company may be required to issue share certificate to the parties under the following
circumstances.

1. Against the allotment letter.

2. Against the registration of transfer and transmission of shares.
3. In exchange for torn- out or defaced certificate
4. When it is lost, stolen or destroyed
5. When the transfer is partial.

Time limit to Issue of Share Certificate (section- 56(4)):

Every company shall, unless prohibited by any provision of law or any order of Court,
Tribunal or other authority, deliver the certificates of all securities allotted, transferred or
transmitted—

On incorporation- to subscribers to Within 2 months from the date of

Memorandum incorporation
On allotment- to allotee Within 2 months from the date of
allotment
On transfer or transmission – to Within 1 month from the date of
transferee receipt of instrument of transfer or
intimation of transmission
 Duplicate share certificate Within 3 months of submission of
complete documents and details
with the company.

Issue of Duplicate Certificate of Shares: A duplicate certificate of shares may be issued, if

such certificate:

(a) Is proved to have been lost or destroyed; or

(b) Has been defaced, mutilated or torn and is surrendered to the company.

(A) When the original certificate is lost or destroyed: When the original share certificate is
lost or destroyed the procedure for issuing the duplicate share certificate becomes complicated
and lengthy. The shareholder firstly, is required to give an affidavit in which he has to state the
facts of loss or destruction. He is also required to submit an Indemnity Bond in which he has
to agree to indemnify the company against any loss. A public notice regarding the loss must be
given in some leading newspaper. After the above requirements are fulfilled the applicants for
the issue of duplicate share certificate along with the above papers will be put before the BOD
by paying fees of rupees 50. This certificate shall also duly sign and sealed. The word
‘duplicate’ shall appear across the face of such share certificate after making necessary entries
in the register of members.

(B) When the original share certificate is defaced, mutilated or torn: when the original
share certificate is defaced, mutilated or torn out, the procedures to obtain the duplicate share
certificate is very simple. The shareholder will surrender the original share certificate and
request for the issue of duplicate certificate. The Secretary of a company must see that the
application is in proper form and it is accompanied with fees of rupees 20/.

Caution: Duplicate Certificate: If a company with intent to defraud issues a duplicate

certificate of shares, the company shall be punishable with fine which shall not be less than
five times the face value of the shares involved in the issue of the duplicate certificate but which
may extend to ten times the face value of such shares or rupees ten crores whichever is higher
and every officer of the company who is in default shall be liable.

----------------------------------------------------------------------------------------------------------------

TRANSFER OF SHARES (Section-56)

It is one of the characteristic features of companies their shares are treated as movable property
capable of being transferred. The shares of a company are movable property, transferable in
the manner prescribed in the Companies Act, 2013, and the AOA of a company. Section 44 of
the Companies Act, 2013 provides that the share-holders are free to transfer their shares.

In Thenppa Chettiar v/s Indian Overseas Bank Ltd. (1943), it was observed that ‘the right
of a shareholders to transfer his shares in a company is absolute as it is inherent in the ownership
of the shares, but it can be restricted by contract which has to be found in the AOA of the
company. Thus, every shareholder has a right to transfer his shares in an open market without
the consent of other shareholders subject to express restriction if any to that effect by articles.
However, the articles of the company may empower the directors to refuse to register the
transfer. In case, the directions are induced to register the transfer by concealment or fraud,
such transfer is invalid and the transfer cannot avoid liability on the shares.

Rules relating to transfer of shares/ Procedure for Transfer of Shares : Section 56

1. Transfer not to be registered except on production of instrument of transfer:

(i) Instrument of Transfer: A company shall not register a transfer of shares unless
a proper transfer deed duly stamped, executed and signed by both the transferor
and the transferee is delivered to the company. The transfer deed shall specify the
name, address and the occupation, if any, of the transferee. It shall be delivered
to the company along with the share certificate or if no such share certificate is in
existence, then along with the letter of allotment of shares.
(ii) Prescribed Form: Every transfer deed shall be in prescribed form. It shall be
presented to the prescribed authority before it is signed by or on behalf of the
transferor and before any entry is made therein. Normally the prescribed authority
is the registrar of Companies. The prescribed authority shall stamp or otherwise
endorse thereon the date on which the instrument is so presented.
(iii) Period for delivery of transfer deed: The transfer deed shall be delivered to the
company in the case of shares quoted on a recognised stock exchange before the
date on which the register of member is closed for the first time after the date of
presentation, or within 12 months from the date of presentation to the prescribed
authority whichever is later. In any other case, the transfer deed shall be presented
to the company within 2 months of the date of presentation to the prescribed
authority. The Central Government may extend the period for delivery of
instrument of transfer to the company.

2. Transfer by legal representatives:

A transfer executed by the legal representative of a deceased member, although he is
not himself a member, is as valid as the one executed by the member himself.
3. Application for transfer:
An application for the registration of a transfer of shares of a company may be made
either by the transferor or by the transferee. Where the application is made by the
transferor and relates to partly paid shares, the transfer shall not be registered, unless the
company gives notice of the application to the transferee and the transferee makes no
objection to the transfer within 2 weeks from the receipt of the notice.
4. Power to refuse registration and appeal against refusal:
With a view to protect the interest of the investors against the refusal of a company to
register transfer of shares, company is required to give reasons before they refuse any
transfer of shares. It also confers a right on the aggrieved investor to apply for relief to
the NCLT on specified grounds.
 Rights and Privileges of Shareholders
Shareholders are the real owners of the company and are the principal. The management
directly or indirectly selected by the shareholders. with regard to the shareholders rights they
are conferred either by the Companies Act 2013 or MOA or AOA of the company.

Followings are the rights of the shareholders:

1. To obtain the copies of MOA, AOA and copies of certain resolutions and agreements on
request on payment of fees.
2. To get share certificate within 2 months from the date of allotment of shares.
3. The right to transfer of shares in the company.
4. To appeal to the NCLT if the company refuses to register the transfer of shares.
5. Is entitled to receive notices of general meeting and to attend such meeting and vote either
in person or by proxy.
6. Entitled to receive the copy of annual director’s report, annual accounts and auditor’s
report.
7. To participate in the appointment of auditor’s and the election of directors at the AGM of
the company.
8. Has the right to request the NCLT for calling AGM in case the company does not convene
the meeting.
9. Can request the directors to convene the Extra-ordinary General Meetings
10. Can inspect and obtain the copies of minutes of the AGM.
11. Has the right to participate in declaration of dividends and receive dividends duly.
12. To apply for the winding up of the company.

Apart from the above-mentioned rights the shareholders are entitled to very important right
under the provisions of Companies Act 2013 that is;

1. Voting Rights (Section 47):

a) Equity Shareholders Rights ?(section 47(1)):

Every member of a company limited by shares and holding equity share capital therein
shall have a right to vote on every resolution placed before the company. This voting right
on a poll shall be in proportion to member’s share in the paid-up equity share capital of the
company. The right to vote is an individual right in respect of which a member has the right
to say: “Whether I vote with the majority or minority, you should record my vote; that is,
a right of property belonging to my interest in the company and if you will not, I shall
institute legal proceedings to compel you.”

b) Preference Shareholders Right(section 47(2)):

A preference shareholder shall also be a member of the company. Preference
Shareholder shall have a right to vote only on resolution
(a) Which directly affect the right attached to his preference shares;
(b) Resolution for winding up of the company; and
 (c) Resolution for repayment or reduction of its equity or preference share capital.

In these cases his voting right on a poll shall be in proportion to his share in the paid –
up preference share capital of the company. Where the dividend in respect of a class of
preference shares has not been paid for a period of two years or more, such class of preference
shareholders shall have a right to vote on all the resolutions placed before the company. The
proportion of the voting rights of equity shareholders to the voting rights of the preference
shareholders shall be in the same proportion as the paid-up capital in respect of the equity
shares bears to the paid-up capital in respect of the preference shares.

2. VARIATION OF SHAREHOLDERS’ RIGHTS (SECTION 48):

Where share capital of the company is divided into different classes and the company
want to vary the rights attached to shares of that class this section apply. There must be a
provision with respect to such variation is contained in the memorandum or articles of the
company. In absence of any such provision in the memorandum or articles, such variation
should not be prohibited by the terms of issue of the shares of that class. Any variation in the
right attached to a particular class of share may be varied with the written consent of holders
of not less than three – fourth of the issued shares of that class. Alternatively, this consent may
be through a special resolution passed at a separate meeting of the holders of that particular
class. If variation by one class of shareholders affects the rights of any other class of
shareholders, the consent of three-fourths of such other class of shareholders shall also be
obtained in same manner.

3. Right of Dissenting shareholder:

Where, the holders of not less than 10 percent of issued shares of a class did not consent
to such variation or vote in favour of the special resolution for the variation, they may apply
to the tribunal to have the variation cancelled. Where such application is made before
tribunal, the variation shall have no effect unless and until it is confirmed by the tribunal.
Any application before tribunal under this section shall be made within twenty – one days
after the date on which the consent was given or the resolution was passed. This application
may be made by any one or more person as these shareholders may appoint in writing for
this purpose. The decision of the tribunal shall be binding on the shareholders. Is it means,
there will be no appeal against such decision of the tribunal except a special leave petition.
The company shall within thirty days of the date of the order of the Tribunal, file a copy of
the order with the Registrar.

4. Caution for this Section:

Where any default is made in complying with the provisions of this section, the
company shall be punishable with fine which shall not be less than twenty-five thousand
rupees but which may extend to five lakh rupees and every officer of the company who is
in default shall be punishable with imprisonment for a term which may extend to six months
or with fine which shall not be less than twenty-five thousand rupees but which may extend
to five lakh rupees, or with both.
ISSUE OF SWEAT EQUITY SHARES (Section- 54)
Sweat equity shares means such equity shares as are issued by a company to its directors
or employees at a discount or for consideration, other than cash, for providing their know-how
or making available rights in the nature of intellectual property rights or value additions, by
whatever name called.

Employee means –
(a) A permanent employee of the company who has been working in India or outside India, for
at least the last one year; or
(b) A director of the company, whether a whole time director or not; or
(c) An employee or a director as defined in sub-clauses (a) or (b) above of a subsidiary, in India
or outside India, or of a holding company of the company.

CONDITIONS AND PROCEDURE FOR ISSUING SWEAT EQUITY SHARES

[SECTION 54]

Conditions:
A company can issue sweat equity shares only of a class of shares already issued subject
to fulfilment of conditions prescribed below:
General meeting and Special Resolution
o A special resolution should be passed by the members of the company authorizing the issue
of sweat equity shares.
o The special resolution should be acted upon within a period of 12 months from the date of
passing else it will become invalid and a fresh resolution will have to be passed again.
o The explanatory statement to be annexed to the notice calling the general meeting must
contain details as specified in the Checklist and Procedure stated below.
Limit on quantum of issue
o The company shall not issue sweat equity shares for more than 15% of the existing paid up
equity share capital in a year or shares of the issue value of Rs. 5 crores, whichever is higher.
o The issuance of sweat equity shares in the Company shall not exceed 25% of the paid up
equity capital of the Company at any time.
Pricing and valuation
o The sweat equity shares to be issued shall be valued at a price determined by a registered
valuer as the fair price giving justification for such valuation.
o The valuation of intellectual property rights or of know how or value additions for which
sweat equity shares are to be issued, shall be carried out by a registered valuer, who shall
provide a proper report addressed to the Board of directors with justification for such
valuation.
o Copy of both the valuation reports should be sent to the shareholders along with the notice
of the general meeting.
Register of Sweat Equity Shares
o The company shall maintain a Register of Sweat Equity Shares in Form No. 4.3 and shall
forthwith enter therein the particulars of Sweat Equity Shares issued under section 54.
o The Register of Sweat Equity Shares shall be maintained at the registered office of the
company or such other place as the Board may decide.
o Entries in the register shall be authenticated by the Secretary of the company or by any other
person authorized by the Board for the purpose.

Further issue of share capital (Section 62)

Where at any time, a company having a share capital proposes to increase its
subscribed capital by the issue of further shares; such shares shall be offered—
(a) to persons who, at the date of the offer, are holders of equity shares of the company in
proportion, as nearly as circumstances admit, to the paid-up share capital on those shares by
sending a letter of offer subject to the following conditions,
Namely:—
(i) the offer shall be made by notice specifying the number of shares offered and limiting a
time not being less than fifteen days and not exceeding thirty days from the date of the offer
within which the offer, if not accepted, shall be deemed to have been declined;
(ii) after the expiry of the time specified in the notice aforesaid, or on receipt of earlier
intimation from the person to whom such notice is given that he declines to accept the shares
offered, the Board of Directors may dispose of them in such manner which is not dis-
advantageous to the shareholders and the company;
The notice shall be despatched through registered post or speed post or through
electronic mode to all the existing shareholders at least three days before the opening of the
issue. Where any debentures have been issued, or loan has been obtained from any Government
by a company, and if that Government considers it necessary in the public interest so to do, it
may, by order, direct that such debentures or loans or any part thereof shall be converted into
shares in the company on such terms and conditions as appear to the Government to be
reasonable in the circumstances of the case even if terms of the issue of such debentures or the
raising of such loans do not include a term for providing for an option for such conversion.
Provided that where the terms and conditions of such conversion are not acceptable to the
company, it may, within sixty days from the date of communication of such order, appeal to
the Tribunal which shall after hearing the company and the Government pass such order as it
deems fit.

ISSUE OF BONUS SHARES (Section -63)

Bonus issue refers to a further issue of shares made by a company having share capital
to its existing share holders without receipt of any consideration from the shareholders for
issuance of the shares. It is an offer of free additional shares to existing shareholders
in proportion to their holdings. For example, the company may give one bonus share for every
five shares held. These are company’s accumulated earnings which are not given out in the
form of dividends, but are converted into free shares. While the issue of bonus shares increases
the total number of shares issued and owned, it does not change the value of the company.
Although the total number of issued shares increases, the ratio of number of shares held by
each shareholder remains constant. Companies issue bonus shares to encourage retail
participation and increase their equity base. When price per share of a company is high, it
becomes difficult for new investors to buy shares of that particular company. Increase in the
number of shares reduces the price per share. But the overall capital remains the same even if
bonus shares are declared.
Companies Act, 1956, does not prescribe any specific procedure or conditions for issue
of bonus shares except that Table A contains provision relating to capitalization of profits.
Companies Act, 2013 on the other hand has detailed the conditions for issue of bonus shares
and also the sources from which bonus issue can be made. Issue of bonus shares is covered
under Section 63 of the Companies Act, 2013 read with relevant (draft) rules issued there
under.

CONDITIONS AND PROCEDURE FOR BONUS ISSUE

Only fully paid up bonus shares can be issued to the members of the company.
Articles must contain provision for issue of bonus shares
Bonus issue must be authorised by the members of the company on recommendation of Board.
Company should not have defaulted in payment of interest or principal in respect of fixed
deposits or debt securities issued by it.
Company should not have defaulted in respect of the payment of statutory dues of the
employees, such as, contribution to provident fund, gratuity and bonus.
Partly paid-up shares, if any outstanding on the date of allotment, should be made fully paid-
up.
The bonus shares shall not be issued in lieu of dividend.

SURRENDER OF SHARES
When a shareholder of a company voluntarily gives his shares in favour of the company,
he is said to have surrendered them to the company. The Companies Act does not contain any
provision relating to the surrender of shares however the AOA of a company sometimes give
power to the directors to accept the surrender of shares.
The surrender of shares by a member to the company is valid in the following cases:
In case of partly- paid shares where forfeiture is called for: Where the AOA give power to the
directors to accept the surrender of shares and it is accepted in case of partly- paid shares to
save the company from going through the formalities of forfeiture, the surrender is valid.
In case of fully paid shares, which they are exchanged for new shares: Where surrender of
shares is in accordance with the AOA and accepted in case of fully paid shares in exchange for
new shares of the same nominal value and the surrendered shares remain capable of re-issue,
the surrender is valid.

FORFEITURE OF SHARES
If a shareholder having been called upon to pay any call on his shares fails to pay the
call, the company has two remedies against the shareholders, viz.,
1. It may sue him for the amount due.
2. It may forfeit his shares.
 Forfeiture means depriving a person of his property as a penalty for some act or
omission. The company may forfeit the shares of a shareholder for non- payment of some calls
if the following conditions are satisfied:
In accordance with Articles: Forfeiture must be authorised by the Articles of the company.
Forfeiture is in the nature of penal proceedings. It is valid only if the provisions of AOA are
strictly complied with.
Prior Notice to Forfeiture: Before shares can be forfeited, the company must serve a notice
on the defaulting shareholder requiring payment of the unpaid call together with any interest
which may have accrued. The notice must –
Give not less than 14 days time from the date of service of notice for the payment of the amount
due; and
State in the event of non- payment of the amount within the period mentioned in the notice, the
shares in respect of which the call was made will be liable to be forfeited
Resolution of the Board: If the defaulting shareholder does not pay the amount within the
specified time as required by the notice, the directors must pass a resolution forfeiting the share.
If this resolution is not passed, the forfeiture is invalid. If, however, the notice threatening the
forfeiture incorporates as well.
Good faith: The power to forfeit shares must be exercised by the directors in good faith and
for the benefit of the company.

DIVIDENDS
Introduction:
The word “dividend” has origin from the Latin word “dividendum’. It means a thing to be
divided. Every investor is aware that dividend is nothing but profits earned by the company
and dividend amongst the shareholders in proportion to the amount paid up shares held by
them. Simply stated it is a return on investment made by the shareholders. Dividend is paid by
a company to its shareholders on a particular date either out of profits or out of reserves.
Declaration of dividend is usually one of the items of the agenda of every AGM when directors
recommend dividend

Meaning and Definition of Dividend:

One of the main objects of companies is to earn profits which are distributed among
shareholders by way of ‘dividend’. In general sense ‘dividend’ is the share of the Company
profits distributed among the members. According to section 2(35) “dividend” includes any
interim dividend. In Commissioner of Income-Tax v/s Girdhadas & Co. (pvt) Ltd., 1967, it was
observed that the term ‘dividend’ has two meanings:
(1) “As applied to a company which is a going concern, it ordinarily means the portion of the
profits of the company which is allocated to the holders of shares in the company.
(2) In case of a winding up of a company it means a division of the realised assets among the
creditors and contributories according to their respective rights”.
RULES REGARDING DIVIDEND
1. Declaration of Dividend (SECTION 123):
 A company shall declare dividend and pay it, only out of profit of the company for the
financial year or out of undistributed profit of any previous financial year or out of both.
In case, any guarantee given by any Government (Central or State), the company may
dividend out of money provided by that government for payment of dividend. Before
declaration of dividend, a company may transfer a portion from the profit to the reserves
of the company. The company is free to decide the percentage for such transfer to the
reserve. Where a company has no adequate profit or any profit in a financial year or any
accumulated profit to distribute as dividend, it may declare dividend out of reserves in
accordance with the rules made by the government. The company may pay dividend only
from free reserves, not from any other reserves.
2. Interim Dividend:
The Board of Directors may declare interim dividend during financial year out of
surplus in profit and loss account. In case, a company is incurring loss as per financials of
latest quarter, interim dividend shall not be higher than average dividend declared by the
company during last three financial years.
3. Dividend Account in Bank:
The amount of dividend and interim dividend shall be deposited in a separate account
in a scheduled Bank within five days from the date of declaration of such dividend. The
dividend shall be paid to shareholder or to his banker in cash not otherwise. However
issue of bonus shares out of distributable profit or free reserve is permitted and not be
deemed to be a violation of this rule. Making a partly paid share, fully paid through
payment from distributable profit and free reserve is permitted. Any dividend payable in
cash may be paid by cheque or warrant or in any electronic mode to the shareholder.
4. Right of members pending Registration of (SECTION 126):
Where any instrument of transfer of shares has been delivered to any company for
registration and the transfer of such shares has not been registered by the company, it
shall,—
(a) transfer the dividend in relation to such shares to the Unpaid Dividend Account unless
the company is authorised by the registered holder of such shares in writing to pay such
dividend to the transferee specified in such instrument of transfer; and
(b) keep in abeyance in relation to such shares, any offer of rights shares and any issue of
fully paid-up bonus shares.
5. Punishment for failure to distribute Dividend (SECTION 127):
Where a dividend has been declared by a company but has not been paid or the warrant
in respect thereof has not been posted within thirty days from the date of declaration to
any shareholder entitled to the payment of the dividend, every director of the company
shall, if he is knowingly a party to the default, be punishable with imprisonment which
may extend to two years and with fine which shall not be less than one thousand rupees
for every day during which such default continues and the company shall be liable to pay
simple interest at the rate of eighteen percent per annum during the period for which such
default continues.
No offence under this section shall be deemed to have been committed:—
(a) Where the dividend could not be paid by reason of the operation of any law;
(b) Where a shareholder has given directions to the company regarding the payment of
the dividend and those directions cannot be complied with and the same has been
communicated to him;
(c) Where there is a dispute regarding the right to receive the dividend;
(d) Where the dividend has been lawfully adjusted by the company against any sum due
to it from the shareholder; or
 (e) Where, for any other reason, the failure to pay the dividend or to post the warrant
within the period under this section was not due to any default on the part of the company.
6. Unpaid Dividend Account (Section 124):
Where a dividend has been declared by a company but has not been paid or claimed
within thirty days from the date of the declaration to any shareholder entitled to the
payment of the dividend, the company shall, within seven days from the date of expiry of
the said period of thirty days, transfer the total amount of dividend which remains unpaid
or unclaimed to a special account to be opened by the company in that behalf in any
scheduled bank to be called the Unpaid Dividend Account.
Thus number of days to transfer unpaid or unclaimed amount of dividend to unpaid
dividend account comes to 30 + 7 = 37 days. The company shall, within a period of ninety
days of making any transfer of an amount to the Unpaid Dividend Account, prepare a
statement containing the names, their last known addresses and the unpaid dividend to be
paid to each person and place it on the website of the company, if any, and also on any
other website approved by the Central Government for this purpose. This period of ninety
days start form date of transfer to unpaid dividend accounts, not from declaration of
dividend or transfer of the meant for dividend to dividend account. If any default is made
in transferring the total amount referred to the Unpaid Dividend Account of the company,
it shall pay, from the date of such default, interest on so much of the amount as has not
been transferred to the said account, at the rate of twelve per cent per annum and the
interest accruing on such amount shall ensure to the benefit of the members of the
company in proportion to the amount remaining unpaid to them. The Term ensures convey
to take, or have effect or serve to the use, benefit, or advantage of members. Any person
claiming to be entitled to any money transferred to the Unpaid Dividend Account of the
company may apply to the company for payment of the money claimed.
If a company fails to comply with any of the requirements of this section, the company
shall be punishable with fine which shall not be less than five lakh rupees but which may
extend to twenty-five lakh rupees and every officer of the company who is in default shall
be punishable with fine which shall not be less than one lakh rupees but which may extend
to five lakh rupees.

PROHIBITION OF BUY BACK

Companies Act of 2013 permits a company to buy back its own shares. It means
company can purchase its own shares. It is possible only after fulfilling certain legal
restrictions.

Restriction on purchase by company or giving loan for purchase of its shares (Section
67):
A company limited buy shares or a company limited by guarantee and having share
capital shall have no power to by its own shares unless the consequent reduction of share capital
is effected under the provision of this Act. No public company shall give any financial
assistance for the purpose of or in connection with a purchase or subscription made or to be
made by any person of or for any shares in the company or in its holding company. This
financial assistance includes a loan, guarantee, the provision for security or otherwise.
However, this restriction on financial assistance shall not apply to –
(a) The lending of money by a banking company in the ordinary course of its business;
(b) If the purchase of or subscription for the shares held by trustees for the benefit of the
employees or such shares held by the employees of the company; For this purpose, a scheme
should have been approved by company through special resolution and in accordance with the
prescribed requirements
(c) The giving of a loan by a company to its employees other than directors or key managerial
personnel for an amount not exceeding their salary or wages for a period of six months with a
view to enabling them to purchase or subscribe for fully paid – up shares in the company or its
holding company to be held by them by way of beneficial ownership.
.
If a company contravenes the provisions of this section, it shall be punishable with fine
which shall not be less than one lakh rupees but which may extend to twenty-five lakh rupees
and every officer of the company who is in default shall be punishable with imprisonment for
a term which may extend to three years and with fine which shall not be less than one lakh
rupees but which may extend to twenty-five lakh rupees.

POWER OF COMPANY TO PURCHASE ITS OWN SECURITIES (SECTION 68):

This power is called buy – back.
A Company may purchase its own shares or other specified securities out of –
(a) Its free reserve;
(b) The securities premium account; or
(c) The proceeds of the issue of any shares or other specified securities.
No buy – back of any kind of shares or other securities shall be made out of the proceeds of an
earlier issue of the same kind of share or other specified securities.

No company shall buy – back unless –

(a) The buy – back is authorised by its articles;
(b) a special resolution has been passed at a general meeting of the company authorising the
buy – back.
(c) The buy – back is twenty – five percent or less of the aggregate of paid – up capital and
free reserve of the company;
(d) The ratio of the aggregate of secured and unsecured debts owned by the company after buy
– back is not more than twice the paid up capital and its free reserve; this may be such higher
ratio as central government may by order notify;
(e) All the shares or other specified securities for buy – back are fully paid – up;
(f) The buy – back of shares or other specified securities listed on any recognised stock
exchange is in accordance with the regulation made by the Securities and Exchange Board of
India (SEBI);
(g) The buy – back in respect of shares or other specified securities not listed on any recognised
exchange is in accordance with rules as prescribed.

Every buy – back shall be completed within a period of one year from the date of passing of
the special resolution or the resolution, as the case may be.
The buy – back may be –
(a) From the existing shareholders or security – holders on a proportionate basis;
(b) From the open market; or
(c) By purchasing the securities issued to employees of the company pursuant to a scheme of
stock option or sweat equity.
A company proposing to buy – back, before making such buy – back, shall file with the
Registrar a declaration of solvency signed by at least two directors of the company. They shall
also verify by an affidavit that the Board of Directors has made a full inquiry into the affairs of
the company as a result of which they have formed an opinion that it is capable of meeting its
liability and will not be rendered insolvent within a period of one year from the date of
declaration adopted by the board. Where company has a managing director, one of the
signatory shall be managing director.
In case of listed company, this declaration shall also be filed with Securities and
Exchange Board of India. Where a company buys back its own shares or other specified
securities, it shall extinguish and physically destroy the shares or securities so bought back
within seven days of the last date of completion of buy-back.
Where a company completes a buy-back of its shares or other specified securities, it
shall not make a further issue of the same kind of shares or other securities including allotment
of new shares or other specified securities within a period of six months except by way of a
bonus issue or in the discharge of subsisting obligations such as conversion of warrants, stock
option schemes, sweat equity or conversion of preference shares or debentures into equity
shares.
Where a company buys back its shares or other specified securities, it shall maintain a
register of the shares or securities so bought, the consideration paid for the shares or securities
bought back, the date of cancellation of shares or securities, the date of extinguishing and
physically destroying the shares or securities and other particulars.
A company shall, after the completion of the buy-back, file with the Registrar a return
containing such particulars relating to the buy-back within thirty days of such completion. In
case of a listed company, this return shall also be filed with the Securities and Exchange Board
of India.
If a company makes any default in complying with the provisions of this section or any
regulation made by the Securities and Exchange Board, the company shall be punishable with
fine which shall not be less than one lakh rupees but which may extend to three lakh rupees
and every officer of the company who is in default shall be punishable with imprisonment for
a term which may extend to three years or with fine which shall not be less than one lakh rupees
but which may extend to three lakh rupees, or with both.

TRANSFER OF CERTAIN SUM TO CAPITAL REDEMPTION RESERVE

ACCOUNT (SECTION 69):
Where a company purchases its own shares out of free reserves or securities premium
account, a sum equal to the nominal value of the shares so purchased shall be transferred to the
capital redemption reserve account and details of such transfer shall be disclosed in the balance
sheet. The capital redemption reserve account may be applied by the company, in paying up
unissued shares of the company to be issued to members of the company as fully paid bonus
shares.

PROHIBITION FOR BUY – BACK IN CERTAIN CIRCUMSTANCES (SECTION 70):

No company shall directly or indirectly purchase its own shares or other specified
securities—
(a) Through any subsidiary company including its own subsidiary companies;
(b) Through any investment company or group of investment companies; or
(c) If a default, is made by the company, in the repayment of deposits and interest
payment thereon, redemption of debentures or preference shares or payment of
dividend to any shareholder, or repayment of any term loan or interest payable thereon
to any financial institution or banking company
 PRIVATE PLACEMENT (Section-42)
Introduction:
Any business cannot run without funds. In case of an incorporated company, initial
capital always comes from subscribers to the memorandum. As we have discussed in earlier
post Commencement of Business, company should commence its business within 180 days by
filing some documents with Registrar of Companies. This is legal requirement of Section 11,
all subscribers should pay the value of shares agreed to be taken by him and company should
receive that money before filing document for filing for commencement of business. But this
initial capital may not be sufficient for running a business. Public funding is a fundamental
proposition for legal structure called company.
Meaning of Private Placement:

Private placement (or non-public offering) is a funding round of securities which are
sold not through a public offering, but rather through a private offering to a small number of
chosen investors. "Private placement" usually refers to non-public offering of shares in a public
company.
PRIVATE PLACEMENT (SECTION 42):
A company, whether private or public, may make private placement of securities
through issue of a “Private Placement Offer Letter” (PPOL). The offer of securities or invitation
to subscribe securities shall be made to such number of persons not exceeding fifty or such
higher number as may be prescribed in a financial year and on such conditions as may be
prescribed. For this purpose, qualified institutional buyers and employees of the company being
offered securities under a scheme of employees’ stock option shall not be counted. If a
company, listed or unlisted, makes an offer to allot or invites subscription, or allots, or enters
into an agreement to allot, securities to more than the prescribed number of persons, same shall
be deemed to be an offer to the public. There will be no difference on whether, the company
intends to list its securities or not on any recognised stock exchange. There will also be no
difference whether such stock exchange is in or outside India. There shall also be no difference
company has already received any payment or not.

DEBENTURES
Meaning and Definition of Debenture:

Debenture is most important instrument to raise capital for a company. It is a long term
security yielding a fixed rate of interest issued by a company and secured against assets of the
company. A company use debenture to raise debt capital. Popularly, debenture issued by public
sector companies with government approval is called bonds.
 Section 2 (30) of the Companies Act, 2013 define inclusively debenture as “debenture”
includes debenture stock, bonds or any other instrument of a company evidencing a debt,
whether constituting a charge on the assets of the company or not.

In Levy v/s Abercorris Slate & Slab Co., (1887), it has been held that “debenture means
it is a document which either creates a debt or acknowledges it”

According to Topham, “Debenture is a document given by a company as an evidence

of a debt to the holder usually arising out of a loan and most commonly secured by a charge”.

This is clear from definition that debenture may be Secured Debenture or Unsecured
Debenture. According to Section 44, the shares or debentures or other interest of any member
in a company shall be movable property transferable in the manner provided by the articles of
the company. The certificate of debenture shall be issued within a period of six months from
the date of allotment in the case of any allotment of debenture.

Characteristics features of Debenture:

In the light of above definitions, the characteristics features of a debenture are as

follows:

1. It is issued by a company and is usually in the form of a certificate which is an

acknowledgement of indebtedness.

2. It is issued under the company’s seal.

3. It is one of the series issued to a number of lenders. But a single debenture is also not
uncommon. Thus a mortgage of a company’s property to a single individual as security for a
loan is a debenture within the definition.

4. It usually specifies a particular period or date as the date of repayment. It also provides for
the payment of a specified principal and interest at the specified date.

5. It generally creates a charge on the undertaking of the company or some parts of its property;
but there may be debentures without any such charge.

6. A debenture-holder does not have any right to vote in the company meetings, but their claims
rank prior to preferential and equity shareholders and their exact rights depends upon the nature
of debenture they hold

Kinds of Debentures:

Debentures may be the following kinds:

1. Bearer Debenture: These debentures, also known as ‘unregistered debentures’ are

payable to its bearer. Bearer Debentures are transferable by mere delivery without any
notice to the company. Company keeps no record for such debenture holders.
Debenture Coupons are attached with the Debenture Certificate and interest can be
claimed by the Coupon holder. The holder of this debenture names will not appear in
 the Register of Debenture Holders and also in the Debenture Certificate. These are
regarded as negotiable instruments and are transferable by delivery, and a bonafide
transferee for value is not affected by the defect in the title of the prior holder.
In Bechuanaland Exploration Co. v/s London Trading bank Ltd.,(1898): ‘B’ company
held debentures of an English Company, payable to bearer. It kept them in a safe of
which the secretary had the key. The secretary pledged the debentures with a bank as
securities for a loan taken by him. The bank took the debentures bonafide. The Court
held that the bank was entitled to the debentures as against the company.
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. The registered holder of the debentures can
transfer them like shares, but the transfer to be complete has to be registered with the
company.
3. Secured Debentures: Debentures which create some charge on the property of the
company are known as secured debentures. The charge may be a fixed charge or a
floating charge.
4. Unsecured 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 the debt.
5. 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.
6. Irredeemable or Perpetual Debentures: When debentures are irredeemable, they are
called perpetual debentures. A debenture will be treated as irredeemable where either
there is no period fixed for repayment of the principal amount or repayment of it is
made conditional on the happening of an event which may not happen for an identified
period or may happen only in certain specified and contingent events, e.g., the winding
up of the company. They are not invalid because of the condition that they are made
irredeemable or redeemable only on the happening of some contingency, or on the
expiration of a period, however long, it may be for 100 years after the issue of
debentures.
7. Convertible Debentures: These debentures give an option to the holders to convert
them into preference or equity shares at stated rates of exchange, after a certain period.
If the holders exercise the right of conversion, they cease to be lenders to the company
and become members instead.
8. 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.

Debenture Trust Deed

Section 71(7) of the Companies Act, 2013, provides for a debenture trust deed for securing any
issue of debentures which shall be open for inspection to any member or debenture-holder of
the company and he shall be entitled to obtain copies of such trust deed on payment of
prescribed fee.

Debenture Trustee

Section 71(5) provides for the appointment of debenture trustees and enumerates the duties of
such trustees. It provides that no company shall issue a prospectus or a letter of offer toa public
for subscription of its debentures, unless the company has, before such issue, appointed one or
more debenture trustees for such debentures and the trustees have given their consent to the
company to be so appointed. Thus, a Debenture Trustee enjoys a unique position of being an
independent entity unconnected with the issuer of security but none- the- less appointed to
protect the interest of holders of debentures.

Functional Role of Debenture Trustee:

The Debenture Trustee is an intermediary between the issuer of debentures and the
holders of debentures. Accordingly, the main responsibility of debenture trustee is to protect
the interest of holders of debentures including creation of adequate security by the company
issuing the debentures and to redress their grievances. He may also take such steps as he deems
fit to:

Under the Companies Act 2013:

a. ensure on a continuous basis that the assets of the company issuing debentures and each
of the guarantors are sufficient to discharge the principal amount and the interest at all
times;
b. to satisfy himself that the prospectus or the letter of offer does not contain any matter
which is inconsistent with the terms of debentures or with the trust deed;
c. to ensure that the company does not commit any breach of covenants and provisions of
the trust deed;
d. to take such reasonable steps to remedy any breach of the covenants of the trust deed
or the terms of issue of the debentures;
e. to take steps to call a meeting of holders of debentures as and when such meeting is
required to be held.

Issue of Debentures

Section 71 extensively deals with debentures. The power to issue debentures is usually set out
in the memorandum. The debentures can be issued in the same manner as shares in a company.
But unlike shares they can be issued at a discount if the articles so authorise, they reason being
that they do not form a part of capital of a company. Debentures can be issued at premium also.
The interest payable on the debentures is debt and can therefore be paid out of capital.

Where debentures are issued by a company, the company shall create a debenture
redemption reserve account out of the profits of the company available for payment of dividend
and the amount credited to such account shall not be utilised by the company except for the
redemption of debentures. No company shall issue a prospectus or make an offer or invitation
to the public or to its members exceeding five hundred for the subscription of its debentures,
unless the company has, before such issue or offer, appointed one or more debenture trustees
and the conditions governing the appointment of such trustees shall be such as may be
prescribed.

An issue of debenture for more than five hundred members or any number of public
(this is subject to clarification from government) without creating a debenture trust is
prohibited. A debenture trustee shall take steps to protect the interests of the debenture holders
and redress their grievances. Any provision of trust deed or contract secured by trust deed,
exempting a trustee or indemnifying him against any liability for breach of trust shall be void.
However, trustee may be indemnified where he show the degree of care and due diligence
required of him as trustee.

The liability of the debenture trustee shall be subject to such exemptions as may be
agreed upon by a majority of debenture-holders holding not less than three – fourths in value
of the total debentures at a meeting held for the purpose. A company shall pay interest and
redeem the debentures in accordance with the terms and conditions of their issue.

Where at any time the debenture trustee comes to a conclusion that the assets of the
company are insufficient or are likely to become insufficient to discharge the principal amount
as and when it becomes due, the debenture trustee may file a petition before the Tribunal. The
Tribunal may, after hearing the company and any other person interested in the matter, by
order, impose such restrictions on the incurring of any further liabilities by the company as the
Tribunal may consider necessary in the interests of the debenture-holders.

If any default is made in complying with the order of the Tribunal under this section,
every officer of the company who is in default shall be punishable with imprisonment for a
term which may extend to three years or with fine which shall not be less than two lakh rupees
but which may extend to five lakh rupees, or with both.

A contract with the company to take up and pay for any debentures of the company
may be enforced by a decree for specific performance. The Central Government may prescribe
the procedure, for securing the issue of debentures, the form of debenture trust deed, the
procedure for the debenture-holders to inspect the trust deed and to obtain copies thereof,
quantum of debenture redemption reserve required to be created and such other matters.

Register of Debenture-holders [Section 88(5)]

A company issuing debentures has to maintain a register a of debenture-holders just as it

maintains a register of members of the company. The register contains the following
particulars;

1. the name, address and occupation of each debenture-holder;

2. the debentures held by each holder, showing numbers and the amount actually paid or
deemed to be paid;
3. the date of which a persons name was entered in the register as a debenture-holders;
and
4. the date when a person cease to be a debenture-holder.
Remedies of Debenture- Holders:

The remedies of a debenture holder of a company vary according to whether he is

secured or unsecured. An unsecured debenture-holder is in exactly the same position as an
ordinary creditor. Like any other unsecured creditor, he has two remedies.

1. He may sue for his principal and interest

2. He may, if he wishes, file a petition for the winding up of a company by the Tribunal
that the company is unable to pay its debts.

A secured debenture-holder has both the above mentioned remedies; but in addition he has
also the following courses open to him:

1. Debenture-Holders Action: he may sue on behalf of himself and all other debenture-
holders of the same class to obtain payment and enforce his security by sale. This is
known as debenture-holders action, and if several debenture-holders sue separately, the
Court can consolidate their suits into one.
2. Appointment of Receiver: He may appoint a receiver if the conditions which give him
power to do so are fulfilled or apply to the Court in a debenture-holders action to appoint
one. On the appointment of a receiver, the assets become specially charged in favour
the debenture-holders and the power of the company to deal in them in the ordinary
course of business cease although the company continues to exist until it is wound up.
3. Foreclosure: He may apply to the court for foreclosure of the company’s right to
redeem the debentures. Foreclosure is a process by which the mortgagor, failing to
repay the money lent on the security of a property, is compelled to forfeit his right to
redeem the property.
4. Sale: He may sell the property charged as security if an express power to do so is
contained in the terms of issue of debentures. He may also have the property sold
through trustees if such power is given by the debenture trust deed.
5. Proof for the Balance: If the company is insolvent and his security is insufficient, he
may value his security and prove for the balance. In the alternative, he may surrender
his security and prove for the whole amount of his debt.

----------------------------------------------------------------------------------------------------------------

FIXED AND FLOATING CHARGES

Fixed and floating charges are used to secure borrowing by a company. Such borrowing
is often done under the terms of a debenture issued by the company. Charges on a company's
assets must be registered and may also need to be registered in some other way, e.g. a charge
on land and buildings must also be registered at the Land Registry. A fixed charge is a charge
or mortgage secured on particular property, e.g. land and buildings, a ship, piece of machinery,
shares, intellectual property such as copyrights, patents, trademarks, etc.

A floating charge is a particular type of security, available only to companies. It is an

equitable charge on (usually) all the company's assets both present and future, on terms that the
company may deal with the assets in the ordinary course of business. Very occasionally the
charge is over just a class of the company's assets, such as its stock.

The floating charge is useful for many companies, allowing them to borrow even
though they have no specific assets, such as freehold premises, which they can use as security.
A floating charge allows all the company's assets, such as stock in trade, plant and machinery,
vehicles, etc., to be charged.

The special nature of the floating charge is that the company can continue to use the
assets and can buy and sell them in the ordinary course of business. It can thus trade with its
stock and sell and replace plant and machinery, etc. without needing fresh consent from the
mortgagee. The charge is said to float over the assets charged, rather than fixing on any of them
specifically. This continues until the charge 'crystallizes', which occurs when the debenture
specifies. This will include any failure to meet the terms of the loan (non-payment, etc.), or if
the company goes into liquidation, ceases to trade, etc.

Most borrowing comes from the High Street banks, whose standard practice is to take
an all-monies debenture, secured by fixed charges on any assets the company may have which
will carry a fixed charge, and a floating charge on all other assets. This is the best security
which can be created over the assets of any particular company. The bank may require other
security from the directors and may want their personal guarantees.

----------------------------------------------------------------------------------------------------------------

ACCEPTANCE OF DEPOSITS BY COMPANIES

After the commencement of present Act of 2013, or more correctly, on issue of
Notification by Government of India making Section 73 effective; no company shall invite,
accept or renew deposits from the public except in a manner provided under Chapter V of the
Act. The chapter V has total four Sections i.e. Section 73 to 76 (both inclusive). This prohibition
does not apply to a banking company, a non – banking financial company as well as any other
class of company as specified by the Central government. The Central government may specify
any company after consultation with the Reserve Bank of India.

DEPOSIT FROM MEMBERS (SECTION 73): A company may after passing a resolution
in general meeting accept deposit from its members subject to agreed terms and conditions and
on following conditions, namely: –

(a) Issue of a circular to its members, which includes statement of financial position, credit
rating, total number of depositors, amount due and other prescribed particulars;

(b) Filing a copy of the circular along with statement with the Registrar within thirty days
before the issue of the circular;

(c) Depositing and kept a sum not less than fifteen percent of the amount of its deposits
maturing during the current and next following financial year in a schedule bank in a separate
bank account to be called as deposit repayment reserve account;
(d) Providing a deposit insurance as prescribed;

(e) Certifying that the company has not committed any default in repayment of deposits
accepted before or after the commencement of this Act or payment of interest on such deposit;
and

(f) Providing security including the creation of charge on the property or assets of the
company. However security is not required where deposit is termed as “unsecured deposits” in
every circular, form, advertisement and other documents.

Every deposit accepted by the company shall be repaid with interest in accordance with
the terms and conditions of the agreement.

Where a company fails to repay the deposit or part thereof or any interest thereon, the
depositor concerned may apply to the Tribunal for an order directing the company to pay the
sum due or any loss or damage incurred by him as a result of such non – payment and such
other order as the tribunal may deem fit.

The deposit repayment reserve account (DRRA) shall be utilised by the company for
repayment of deposits.

DEPOSIT FROM PUBLIC (SECTION 76):

A public company, with a specified net worth or turnover, may accept deposits from
persons other than its members. The company shall make compliance of requirements of
Section 73, this chapter and any rule made by the government for this purpose. Every company
accepting secured deposits from the public shall within thirty days of such acceptance, create
a charge on its assets of an amount not less than the amount of deposits accepted in favour of
the deposit holders in accordance with such rules as may be prescribed.

REPAYMENT OF DEPOSITS ACCEPTED UNDER OLD ACT (SECTION 74):

In case company has accepted any deposit and any such deposit or its part or any interest
thereon is due at the time when this Section come into force, the company shall –

(a) File a statement of all deposits and sum remaining unpaid with interest payable thereon,
arrangement for repayment with the Registrar within three months from the date of
commencement of this provision or from the date on which such deposit become due; and

(b) Repay within one year all such sums from commencement of this provision or form the
date on which such payment become due.

However, the Tribunal (NCLT) may, on application made by the company, allow further
time as considered reasonable to the company to repay the deposit. The tribunal shall consider
financial position of the company, amount of deposit and the interest thereon. Any failure on
part of company within specified time or such further time shall be punishable with fine which
shall not be less than one Crore rupees but which may extend to ten Crore rupees and every
officer of the company who is in default shall be punishable with imprisonment which may
extend to seven years or with fine which shall not be less than twenty-five lakh rupees but
which may extend to two Crore rupees, or with both.

DAMAGES FOR FRAUD (SECTION 75)

Any person, group of persons or any association of persons (that means anyone) who
has incurred any loss as a result of the failure of the company to repay the deposit or part thereof
or any interest thereon may initiate a suit, proceedings or any other suitable action against the
company and every officer of the company.

This recourse is available to against the company in addition to recourse available under
Section 74.

If, it is proved that the deposits had been accepted with intent to defraud the depositors
or for any fraudulent purpose, every officer of the company who was responsible for the
acceptance of such deposit shall be personally responsible, without any limitation of liability,
for all or any of the losses or damages that may have been incurred by the depositors. This is
also clear from this Section, the company and every officer of the company shall also be liable
for punishment for fraud under Section 447 of the Act.

This is very stringent punishment in case of fraudulent failure to repay the deposit or
interest. There is provision for imprisonment for up to seven year under Section 74 and up to
ten year under Section 447. Financial penalty goes as high as two Crore rupees under Section
74, unlimited amount of loss or damages under Section 75 and any amount up to three times
of amount involved in fraud. Most important thing is any person suffering from loss may file
complaint.

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CHARGES ON ASSETS
The right of people who are owed money by a company to receive money from the company's
assets if the debt is not paid on time. A Charge under the Companies Act, 2013 means an
interest or lien created on the property and assets of the company or any of its undertakings or
both as security and includes mortgage.

REGISTRATION OF CHARGES (SECTION 77):

Every company creating a charge shall register the particulars of charge signed by the company
and its charge – holder together with the instruments creating such charge with the Registrar
within thirty days of its creation. It shall be the duty of every company creating the charges on
assets of the company which are within or outside India, Whether tangible or otherwise shall
be registered. The Registrar may allow registration of charge within three hundred days of
creation of charge on payment of additional fee. If company fail to register the charge even
within this period of three hundred days, it may seek extension of time.

Certificate of Registration of Charge:

 Where a charge is registered with the Registrar, Registrar shall issue a certificate of
registration of charge to the person in whose favour the charge is created. This means charge –
certificate shall be issued to the charge – holder. No charge created by the company shall be
taken into account by the liquidator or any other creditor unless it is duly registered and a
certificate of registration is given by the Registrar.

APPLICATION FOR REGISTRATION OF CHARGE (SECTION 78):

Where a company fails to register the charge within the period specified, the person
in whose favour the charge is created may apply to the Registrar for registration of the charge
along with the instrument created for the charge. The registrar shall give notice to the company
about such application. The company may either itself register the charge or shows sufficient
cause why such charge should not be registered. On failure of the company, The Registrar on
such application within fourteen days shall allow such registration. Before registration such
permission, the Registrar shall give notice to the company. Where registration is affected on
application of the person in whose favour the charge is created, that person shall be entitled to
recover from the company, the amount of any fee or additional fees paid by him to the Registrar
for the purpose of registration of charge.

DATE OF NOTICE OF CHARGE (SECTION 80):

Where any charge on any property or assets of a company or any of its undertakings is
registered under section 77, any person acquiring such property, assets, undertakings or part
thereof or any share or interest therein shall be deemed to have notice of the charge from the
date of such registration.
REGISTER OF CHARGE (SECTION 81):
The Registrar of Companies shall keep a register containing particulars of the charges
registered in respect of every company. This charge register shall be open to inspection by any
person on payment of fee for each inspection.

INTIMATION OF APPOINTMENT OF RECEIVER OR MANAGER (SECTION 84):

If any person obtains an order for the appointment of a receiver of, or of a person to
manage, the property, subject to a charge, of a company or if any person appoints such receiver
or person under any power contained in any instrument, he shall, within a period of thirty days
from the date of the passing of the order or of the making of the appointment, give notice of
such appointment to the company and the Registrar along with a copy of the order or instrument
and the Registrar shall, on payment of the prescribed fees, register particulars of the receiver,
person or instrument in the register of charges. Any person appointed shall, on ceasing to hold
such appointment, give to the company and the Registrar a notice to that effect and the Registrar
shall register such notice.

***************************************
 STUDY MATERIAL FOR INTERNAL CIRCULATION
COURSE & SEMESTER: 5 YEARS B.COM. LL.B. VI SEM

SUBJECT: COMPANY LAW

UNIT-V
Reconstruction and amalgamation and winding up:

Reconstruction, rehabilitation and amalgamation: concept- Jurisdiction and powers of Court

and NCLT- vesting of rights and transfer of obligations- takeover and acquisition of minority
interest.

Winding up: Concept- modes of winding up- who can apply- procedure under different modes.

RECONSTRUCTION AND AMALGAMATION

It may become necessary for companies to reorganise their capital structure for the progress
and development of their business activities. It has already been stated that a company may
effect a compromise or arrangement with its members or creditors.

Reconstruction: ‘Reconstruction’ occurs when a company transfers the whole of its

undertaking and property to a new company under an arrangement by which the shareholders
of the old company are entitled to receive some shares or other similar interests in the new
company. A reconstruction is affected, for example, to bring about material alteration of the
rights of a class of shareholders or creditors.

‘Reconstruction’ of a company implies reconstruction of a company’s financial structure with

or without its dissolution. It may include the reduction of claims of both the shareholders and
the creditors against the company. The underlying objects of reconstruction may be:

1. Simplification of the capital structure;

1
 2. Reduction of fixed charges;
3. Elimination of past losses;
4. Adjustment of arrears of cumulative dividends; and
5. Raising of company’s working capital.

Thus, reconstruction generally becomes necessary on account of deterioration in the financial

position of the company.

Merger or Amalgamation: ‘Amalgamation’ takes place when two or more companies into
one company, the shareholders in the amalgamation companies becoming substantially the
shareholders in the amalgamated company. There may be amalgamation either by the transfer
of one or more undertakings to a new company or by the transfer of one or more undertakings
to an existing company.

Merger and amalgamation of companies (Section-232):

1. Approval of Scheme by holders of Shares: where a company decides to amalgamate with

the other company, it has to prepare a scheme and same thing has to be approved by the
shareholders of a company. Where an application is made to the Tribunal for the sanctioning
of a compromise or an arrangement proposed between a company and any such persons as it
is shown to the Tribunal.

2. Tribunals Sanction: The scheme shall then be sanctioned by the Tribunal. The tribunal may
sanction the reconstruction and amalgamation and pass orders. The Tribunal, after satisfying
itself that the procedure has been complied with, may, by order, sanction the compromise or
arrangement or by a subsequent order, make provision for the following matters, namely:

(a) The transfer to the transferee company of the whole or any part of the undertaking, property
or liabilities of the transferor company from a date to be determined by the parties unless the
Tribunal, for reasons to be recorded by it in writing, decides otherwise;

(b) The allotment or appropriation by the transferee company of any shares, debentures,
policies or other like instruments in the company which, under the compromise or arrangement,
are to be allotted or appropriated by that company to or for any person

(c) The continuation by or against the transferee company of any legal proceedings pending by
or against any transferor company on the date of transfer;

(d) Dissolution, without winding-up, of any transferor company;

(e) Where share capital is held by any non-resident shareholder under the foreign direct
investment norms or guidelines specified by the Central Government or in accordance with any
law for the time being in force, the allotment of shares of the transferee company to such
shareholder shall be in the manner specified in the order;

(f) The transfer of the employees of the transferor company to the transferee company; by the
Securities and Exchange Board under any regulations framed by it;

2
3. Certified Copy of Tribunal to be filed with the Registrar:
Where an order has been made by the Tribunal for merging companies or the companies in
respect of which a division is proposed, shall also be required to circulate the following for the
meeting so ordered by the Tribunal, namely:—
(a) The draft of the proposed terms of the scheme drawn up and adopted by the directors of the
merging company;
(b) Confirmation that a copy of the draft scheme has been filed with the Registrar;
(c) A report adopted by the directors of the merging companies explaining effect of
compromise on each class of shareholders, key managerial personnel, promoters and non-
promoter shareholders laying out in particular the share exchange ratio, specifying any special
valuation difficulties;
(d) The report of the expert with regard to valuation, if any;
(e) A supplementary accounting statement if the last annual accounts of any of the merging
company relate to a financial year ending more than six months before the first meeting of the
company summoned for the purposes of approving the scheme.
Where an order made for the transfer of any property or liabilities, then, by virtue of the order,
that property shall be transferred to the transferee company and the liabilities shall be
transferred to and become the liabilities of the transferee company and any property may, if the
order so directs, be freed from any charge which shall by virtue of the compromise or
arrangement, cease to have effect.
Every company in relation to which the order is made shall cause a certified copy of the order
to be filed with the Registrar for registration within thirty days of the receipt of certified copy
of the order.
If a transferor company or a transferee company contravenes the provisions of this section, the
transferor company or the transferee company, as the case may be, shall be punishable with
fine which shall not be less than one lakh rupees but which may extend to twenty-five lakh
rupees and every officer of such transferor or transferee company who is in default, shall be
punishable with imprisonment for a term which may extend to one year or with fine which
shall not be less than one lakh rupees but which may extend to three lakh rupees, or with both.

AMALGAMATION BY GOVERNMENT ORDER (SECTION 237):

The Central Government may by order notified in the Official Gazette provide for the
amalgamation of two or more companies into a single company with such property, powers,
rights, interests, authorities, privileges, liabilities, duties, and obligations as specified in the
order. The order may also provide for continuation by or against the transferee company of any
legal proceedings pending by or against any transferor company. The order may also provide
for necessary consequential, incidental and supplemental provisions. Every member or creditor
of each transferor companies before amalgamation shall have almost same interest in or against
the transferee company. In case, the interest in or right against the transferee company is less
than his interest in or right against the original company, he shall be entitled to compensation
assessed by an authority. Every such assessment shall published in the Official Gazette. The
compensation so assessed shall be paid to the member or creditor concerned by the transferee
company.
Any person aggrieved by any assessment of compensation may within a period of thirty
days from the date of publication in the Official Gazette, prefer an appeal to the tribunal.

3
 REHABILITATION OF COMPANIES

Where on a demand by the secured creditors of a company representing fifty percent or more
of its outstanding amount of debt, the company has failed to pay the debt within a period of
thirty days of the service of the notice of demand or to secure or compound it to the reasonable
satisfaction of the creditors, any secured creditor may file an application to the Tribunal in the
prescribed manner along with the relevant evidence for such default, non-repayment or failure
to offer security or compound it, for a determination that the company be declared as a sick
company. A company which fail to pay or secure a debt, which is fifty percent or more of its
total outstanding debt, within thirty days of demand notice it may be declared as sick company.

DETERMINATION OF SICKNESS (SECTION 253):

The demand for payment or to secure or to compound such debt shall be made by
secured creditors only. On failure of the company to fulfil the demand to pay or to secure to
compound, any secured thereafter may file an application to the Tribunal. The application shall
be accompanied with relevant evidence for such default, non – payment or failure to offer
security or compound the debt.

A company may also file an application before the Tribunal to declare it a sick company
and also for stay of proceedings discussed above. Further, on sufficient reason to believe that
any company become a sick company; the Central Government, or the Reserve Bank of Indian,
or the State Government, or a public financial institution, or a state level institution, or a
schedule bank may also file reference before the Tribunal. A reference shall not be made in
respect of any company. Where an application for determination as a sick company or by the
company for stay of proceedings:

(a) the company shall not dispose of or otherwise enter into any obligation with regard to its
properties or assets;
(b) the Board of directors shall not take any steps likely to prejudice the interest of the creditors.
The tribunal shall, within a period of sixty days of the receipt of any application,
determine whether a company is a sick company or not. The company shall be given a notice
of the application and a reasonable opportunity to reply to the notice within thirty of the receipt
of the notice.

If the Tribunal is satisfied that a company has become a sick company, the Tribunal
shall by an order decide, whether the company may make repayment of its debt within a
reasonable time. Where Tribunal determine that it is practicable for the sick company to pay
its debt within a reasonable time, the Tribunal shall, by order in writing shall give a time period
to make repayment of the debt.

❖ Application for Revival and Rehabilitation (Section 254):

Once a company is determined as a sick company by the Tribunal, any secured

creditor of the company or the company itself may make an application to the Tribunal for
determination of measures for revival and rehabilitation of the company.

4
 An application shall be accompanied by—

(a) audited financial statement of the company relating to the immediately preceding
financial year;
(b) such particulars and documents, duly authenticated in such manner, along with such fee
as prescribed; and
(c) a draft scheme of revival and rehabilitation of the company in prescribed manner.

Where the sick company has no draft scheme of revival and rehabilitation to offer, it
shall file a declaration to that effect along with the application. The application for revival and
rehabilitation shall be made it the Tribunal within a period of sixty days from the date of
determination of the company as a sick company by the Tribunal.

SCHEME OF REVIVAL AND REHABILITATION (SECTION 261):

The company administrator shall prepare or cause to be prepared a scheme of revival

and rehabilitation of the sick company after considering the draft scheme filed along with the
application under Section 254.

The scheme may provide any one or more of following measures, namely –

i. the financial reconstruction of the sick company;

ii. the proper management of the sick company by any change in, or by taking over, the
management of such company;
iii. the amalgamation of –
1. the sick company with any other company; or
2. any other company with the sick company;
iv. takeover of a part or whole of my asset or business of the sick company;
v. the sale or release of a part or whole of any asset or business of the sick company;
vi. the rationalisation of managerial personnel, supervisory staff and workmen in
accordance with law;
vii. such other appropriate preventive, ameliorative and remedial measures;
viii. repayment or rescheduling or restructuring of the debts or obligations of the sick
company to any of its creditors or class of creditors;
ix. such incidental, consequential or supplemental measures as may be necessary or
expedient in connection with or for the purpose of the measures specified in above
clauses.

❖ SANCTION OF SCHEME (SECTION 262):

The scheme prepared by the company administrator shall be place before the creditors of the
company in a meeting for their approval within the period sixty days from his appointment.
This period of sixty days may be extended up to one hundred twenty days.

Approval in Meetings:

5
The company administrator shall separate meetings of secured and unsecured creditors. If the
scheme is approved by (a) unsecured creditors representing one – forth in value of the amount
owed by the company and (b) secured creditors representing three – forth in value of the amount
outstanding against financial assistance disbursed to the company; the company administrator
shall submit the Tribunal for sanctioning the scheme. Where the scheme relates to
amalgamation of the sick company with any other company, the scheme shall also be approved
by a special resolution in general meetings by shareholders of both companies. Only after this
approval, the scheme shall be proceeded with.

Examination by Tribunal:

The scheme prepared by the company administrator shall be examined by the Tribunal. If, there
is any modification, the Tribunal shall send the draft to the sick company and the company
administrator. In case of amalgamation, the scheme shall also be sent to other company under
the amalgamation. The Tribunal may publish or cause to be published the draft scheme in brief
in daily newspapers for suggestions and objections. The complete draft scheme shall be kept
at the place where registered office of the company is situated or at a place mentioned in the
advertisement. In light of suggestions and objections received, the Tribunal may make such
modifications as it may consider necessary. The sick company, company administrator,
amalgamating company, and any shareholder or creditor or employee of these companies may
submit suggestions and objections.

Approved Scheme:

After satisfying that the scheme had been validly approved, the Tribunal shall within sixty days
from the receipt of the scheme, pass an order sanctioning such scheme. Yes, this is practically
a challenge for all parties concerned. The sanction accorded by the Tribunal shall be conclusive
evidence that all the requirements of the scheme relating to the reconstruction or amalgamation
or any other measure specified therein have been complied with. A copy of the sanctioned
scheme certified in writing by an officer of the Tribunal to be a true copy thereof shall in all
legal proceedings be admitted as evidence. A copy of the sanctioned scheme shall be filed with
the Registrar by the sick company within a period of thirty days from the date of receipt of a
copy thereof.

Properties and Liabilities:

Where a sanctioned scheme provides for the transfer of any property or liability of the sick
company to any other company or person or where the scheme provides for the transfer of any
property or liability of any other company or person in favour of the sick company, then, by
virtue of, and to the extent provided in, the scheme, on and from the date of coming into
operation of the sanctioned scheme or any provision thereof, the property shall be transferred
to, and vest in, and the liability shall become the liability of, such other company or person or,
as the case may be, the sick company.

Review of Scheme:

6
The Tribunal may review any sanctioned scheme and make such modifications, as it may deem
fit, or may by order in writing direct company administrator, to prepare a fresh scheme
providing for such measures as the company administrator may consider necessary.

❖ WINDING UP OF COMPANY ON REPORT OF COMPANY ADMINISTRATOR

(SECTION 265):

If the scheme is not approved by the creditors, the company administrator shall
submit a report to the Tribunal within fifteen days and the Tribunal shall order for
winding up of the sick company.

THE NATIONAL COMPANY LAW TRIBUNAL

Introduction:
The new Act proposes constitution of a NATIONAL COMPANY LAW TRIBUNAL (NCLT)
to replace the COMPANY LAW BOARD (CLB) and also assume the jurisdiction of High
Court as the sanctioning authority in relation to reconstruction of companies. The proposed
Tribunal was challenged in Thiru R. Gandhi, President, Madras Bar Association vs. Union
of India, wherein the Madras High Court held that certain aspects of the tribunal were against
the basic structure of the constitution and thus unconstitutional. However, the Supreme Court
of India on 11th May, 2010 ruled that the provisions of Companies (Second Amendment) Act,
2002 pertaining to transfer of several judicial and quasi- judicial powers to NCLT are
constitutionally valid subject to amendments being made to make the Tribunal’s members
independent. With the Supreme Court’s green light, the Companies Act, 2013 now provides
for the constitution of NCLT & National Company Law Appellate Tribunal (NCLAT).

Constitution of National Company Law Tribunal (Section 408):

The Central Government shall, by notification, constitute, a Tribunal to be known as the
National Company Law Tribunal consisting of a President and such number of Judicial and
Technical members, as the Central Government may deem necessary, to be appointed by it by
notification, to exercise and discharge such powers and functions as may be conferred on it by
or under this Act or any other law for the time being in force.

Qualification of President and Members of Tribunal (Section 409):

(1) The President shall be a person who is or has been a Judge of a High Court for five years.
(2) A person shall not be qualified for appointment as a Judicial Member unless he—
(a) is, or has been, a judge of a High Court; or
(b) is, or has been, a District Judge for at least five years; or
(c) has, for at least ten years been an advocate of a court.
(3) A person shall not be qualified for appointment as a Technical Member unless he—
(a) has, for at least fifteen years been a member of the Indian Corporate Law Service or
Indian Legal Service; or
(b) is, or has been, in practice as a chartered accountant for at least fifteen years; or
(c) is, or has been, in practice as a cost accountant for at least fifteen years; or
(d) is, or has been, in practice as a company secretary for at least fifteen years; or
(e) 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,

7
 labour matters, or such other disciplines related to management, conduct of affairs,
revival, rehabilitation and winding up of companies; or
(f) 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.

Constitution of Appellate Tribunal (Section 410):

The Central Government shall, by notification, constitute, an Appellate Tribunal to be known
as the National Company Law Appellate Tribunal consisting of a chairperson and such number
of Judicial and Technical Members, not exceeding eleven, as the Central Government may
deem fit, to be appointed by it by notification, for hearing appeals against the orders of the
Tribunal.

Qualifications of chair(Section 411):

(1) The chairperson shall be a person who is or has been a Judge of the Supreme Court or the
Chief Justice of a High Court.
(2) A Judicial Member shall be a person who is or has been a Judge of a High Court or is a
Judicial Member of the Tribunal for five years.
(3) A Technical Member shall be a person of proven ability, integrity and standing having
special knowledge and experience, of not less than twenty-five 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.

Selection of Members of Tribunal and Appellate Tribunal (Section 412):

(1) The President of the Tribunal and the chairperson and Judicial Members of the Appellate
Tribunal shall be appointed after consultation with the Chief Justice of India.
(2) The Members of the Tribunal and the Technical Members of the Appellate Tribunal shall
be appointed on the recommendation of a Selection Committee consisting of—
(a) Chief Justice of India or his nominee—Chairperson;
(b) a senior Judge of the Supreme Court or a Chief Justice of High Court Member;
(c) Secretary in the Ministry of Corporate Affairs—Member;
(d) Secretary in the Ministry of Law and Justice—Member; and
(e) Secretary in the Department of Financial Services in the Ministry of Finance—
Member.
(3) The Secretary, Ministry of Corporate Affairs shall be the Convener of the Selection
Committee.
(4) The Selection Committee shall determine its procedure for recommending persons under
sub-section (2).
(5) No appointment of the Members of the Tribunal or the Appellate Tribunal shall be invalid
merely by reason of any vacancy or any defect in the constitution of the Selection Committee.

Term of office of President, chairperson and other Members(Section 413):

(1) The President and every other Member of the Tribunal shall hold office as
such for a term of five years from the date on which he enters upon his office, but shall
be eligible for re-appointment for another term of five years.
(2) A Member of the Tribunal shall hold office as such until he attains,—
(a) in the case of the President, the age of sixty-seven years;
(b) in the case of any other Member, the age of sixty-five years:

8
 (3) The chairperson or a Member of the Appellate Tribunal shall hold office as such for a term
of five years from the date on which he enters upon his office, but shall be eligible for re-
appointment for another term of five years.
(4) A Member of the Appellate Tribunal shall hold office as such until he attains,—
(a) in the case of the Chairperson, the age of seventy years;
(b) in the case of any other Member, the age of sixty-seven years

Salary, allowances and other terms and conditions of service of Members(Section 414):
The salary, allowances and other terms and conditions of service of the Members of the
Tribunal and the Appellate Tribunal shall be such as may be prescribed: Provided that neither
the salary and allowances nor the other terms and conditions of service of the Members shall
be varied to their disadvantage after their appointment.

Acting President and Chairperson of Tribunal or Appellate Tribunal(Section 415):

(1) In the event of the occurrence of any vacancy in the office of the President or the
Chairperson by reason of his death, resignation or otherwise, the senior-most Member shall act
as the President or the Chairperson, as the case may be, until the date on which a new President
or Chairperson appointed in accordance with the provisions of this Act to fill such vacancy
enters upon his office.
(2) When the President or the Chairperson is unable to discharge his functions owing to
absence, illness or any other cause, the senior-most Member shall discharge the functions of
the President or the Chairperson, as the case may be, until the date on which the President or
the Chairperson resumes his duties.

Resignation of Members(Section 416):

The President, the Chairperson or any Member may, by notice in writing under his hand
addressed to the Central Government, resign from his office: Provided that the President, the
Chairperson, or the Member shall continue to hold office until the expiry of three months from
the date of receipt of such notice by the Central Government or until a person duly appointed
as his successor enters upon his office or until the expiry of his term of office, whichever is
earliest.

Removal of Members(Section 417):

(1) The Central Government may, after consultation with the Chief Justice of India, remove
from office the President, Chairperson or any Member, who—
(a) has been adjudged an insolvent; or
(b) has been convicted of an offence which, in the opinion of the Central Government,
involves moral turpitude; or
(c) has become physically or mentally incapable of acting as such President, the
Chairperson, or Member; or
(d) has acquired such financial or other interest as is likely to affect prejudicially his
functions as such President, the Chairperson or Member; or Salary, allowances and
other terms and conditions of service of Members.
(e) has so abused his position as to render his continuance in office prejudicial to the
public interest: Provided that the President, the Chairperson or the Member shall not
be removed on any of the grounds specified in clauses (b) to (e) without giving him a
reasonable opportunity of being heard.
(2) The President, the Chairperson or the Member shall not be removed from his office except
by an order made by the Central Government on the ground of proved misbehaviour or
incapacity after an inquiry made by a Judge of the Supreme Court nominated by the Chief
9
Justice of India on a reference made to him by the Central Government in which such President,
the Chairperson or Member had been informed of the charges against him and given a
reasonable opportunity of being heard.
(3) The Central Government may, with the concurrence of the Chief Justice of India, suspend
from office, the President, the Chairperson or Member in respect of whom reference has been
made to the Judge of the Supreme Court until the Central Government has passed orders on
receipt of the report of the Judge of the Supreme Court on such reference.
(4) The Central Government shall, after consultation with the Supreme Court, make rules to
regulate the procedure for the inquiry on the ground of proved misbehaviour or incapacity.

POWERS AND FUNCTIONS OF NCLT:

Orders of Tribunal(Section 420):
(1) The Tribunal may, after giving the parties to any proceeding before it, a reasonable
opportunity of being heard, pass such orders thereon as it thinks fit.
(2) The Tribunal may, at any time within two years from the date of the order, with a view to
rectifying any mistake apparent from the record, amend any order passed by it, and shall make
such amendment, if the mistake is brought to its notice by the parties: Provided that no such
amendment shall be made in respect of any order against which an appeal has been preferred
under this Act.
(3) The Tribunal shall send a copy of every order passed under this section to all the parties
concerned.

Appeal from orders of Tribunal(Section 421):

(1) Any person aggrieved by an order of the Tribunal may prefer an appeal to the Appellate
Tribunal.
(2) No appeal shall lie to the Appellate Tribunal from an order made by the Tribunal with the
consent of parties.
(3) Every appeal under sub-section (1) shall be filed within a period of forty-five days from
the date on which a copy of the order of the Tribunal is made available to the person aggrieved
and shall be in such form, and accompanied by such fees, as may be prescribed: Provided that
the Appellate Tribunal may entertain an appeal after the expiry of the said period of forty-five
days from the date aforesaid, but within a further period not exceeding forty-five days, if it is
satisfied that the appellant was prevented by sufficient cause from filing the appeal within that
period.
(4) On the receipt of an appeal under sub-section (1), the Appellate Tribunal shall, after giving
the parties to the appeal a reasonable opportunity of being heard, pass such orders thereon as it
thinks fit, confirming, modifying or setting aside the order appealed against.
(5) The Appellate Tribunal shall send a copy of every order made by it to the Tribunal and the
parties to appeal.

Appeal to Supreme Court(Section 423):

Any person aggrieved by any order of the Appellate Tribunal may file an appeal to the
Supreme Court within sixty days from the date of receipt of the order of the Appellate
Tribunal to him on any question of law arising out of such order.

Procedure before Tribunal and Appellate Tribunal(Section 424 ):

(1) The Tribunal and the Appellate Tribunal shall not, while disposing of any proceeding before
it or, as the case may be, an appeal before it, be bound by the procedure laid down in the Code
of Civil Procedure, 1908, but shall be guided by the principles of natural justice, and, subject

10
to the other provisions of this Act and of any rules made there under, the Tribunal and the
Appellate Tribunal shall have power to regulate their own procedure.
(2) The Tribunal and the Appellate Tribunal shall have, for the purposes of discharging their
functions under this Act, the same powers as are vested in a civil court under the Code of Civil
Procedure, 1908 while trying a suit in respect of the following matters, namely:—
(a) summoning and enforcing the attendance of any person and examining him on oath;
(b) requiring the discovery and production of documents;
(c) receiving evidence on affidavits;
(d) subject to the provisions of sections 123 and 124 of the Indian Evidence Act, 1872,
requisitioning any public record or document or a copy of such record or document
from any office;
(e) issuing commissions for the examination of witnesses or documents;
(f) dismissing a representation for default or deciding it ex parte;
(g) setting aside any order of dismissal of any representation for default or any order
passed by it ex parte; and
(h) any other matter which may be prescribed.
(3) Any order made by the Tribunal or the Appellate Tribunal may be enforced by that Tribunal
in the same manner as if it were a decree made by a court in a suit pending therein, and it shall
be lawful for the Tribunal or the Appellate Tribunal to send for execution of its orders to the
court within the local limits of whose jurisdiction,—
(a) in the case of an order against a company, the registered office of the company is
situate; or
(b) in the case of an order against any other person, the person concerned voluntarily
resides or carries on business or personally works for gain.
(4) All proceedings before the Tribunal or the Appellate Tribunal shall be deemed to be judicial
proceedings within the meaning of sections 193 and 228, and for the purposes of section 196
of the Indian Penal Code, and the Tribunal and the Appellate Tribunal shall be deemed to be
civil court for the purposes of section 195 and Chapter XXVI of the Code of Criminal
Procedure, 1973.

➢ POWER TO PUNISH CONTEMPT (SECTION 425):

The Tribunal and the Appellate Tribunal shall have same jurisdiction, powers
and authority in respect of Contempt of themselves as the High Court has under the
provision of the Contempt of Courts Act, 1971.

➢ DELEGATION OF POWERS (SECTION 426):

The Tribunal or Appellate Tribunal may by general or special order direct any
of its officers or employee or any other person to inquire into any matter connected with
any proceeding or appeal before it and to report to it.

➢ TRIBUNAL MEMBERS TO BE PUBLIC SERVANTS (SECTION 427):

The President, Members, officers and other employees of the Tribunal and the
Chairperson, Members, officers and other employees of the Appellate Tribunal shall be
deemed to be public servants under Section 21 of the Indian Penal Code.

➢ PROTECTION OF ACTION TAKEN IN GOOD FAITH (SECTION 428):

No suit, prosecution or other legal proceeding shall lie against the Tribunal, the
President, Member, officer or other employee thereof or against the Appellate Tribunal,
the Chairperson, Member, Officer or other employees thereof or liquidator or any other

11
 authorised person for the discharge of any function under this Act in respect of any loss
or damage caused or likely to be caused by any act which is in good faith done in
pursuance of this Act.

➢ POWER TO SEEK ASSISTANCE (SECTION 429):

The Tribunal may in order to take into custody or under its control all property,
books of account or other documents request in writing the Chief Metropolitan
Magistrate, Chief Judicial Magistrate or District Collector within whose jurisdiction
any such property, books of account or other documents of a company are situate or
found to take possession thereof. The magistrate or collector shall –
(a) take possession of such property, books of account or other documents; and
(b) cause the same to be entrusted to the Tribunal or other person authorised by
it.
The Magistrate or Collector may take steps and use force as may be necessary.
No such act shall be called in question on any court or before any authority on any
ground whatsoever.

➢ RIGHT TO LEGAL REPRESENTATION (SECTION 432):

A party to any proceeding or appeal before the Tribunal or the Appellate
Tribunal, as the case may be, may either appear in person or authorise one or more
chartered accountants or company secretaries or cost accountants or legal practitioners
or any other person to present his case before the Tribunal or the Appellate Tribunal.

➢ TRANSFER OF CERTAIN PROCEEDINGS (SECTION 434):

The Central Government may by notification decide date to transfer following proceedings –
(a) All matters, proceedings or cases before the Company Law Board immediately before the
notified date shall transfer to the Tribunal;
(b) All proceedings including arbitration, compromise, arrangement, reconstruction and
winding up, pending before any District Court or High Court shall stand transferred to the
Tribunal from Notified date;
(c) Any reference or inquiry pending before the Board of Industrial and Financial
Reconstruction or any appeal or proceeding before Appellate Authority for Industrial and
financial Reconstruction shall stand abated. The company may make such reference or appeal
before the Tribunal within one hundred and eighty days.

WINDING UP OF A COMPANY

MEANING OF WINDING UP:

Winding up or liquidation of a company represents the last stage in its life. It means a
proceeding by which a company is dissolved. The assets of the company are disposed of, the
debts are paid off out of the released from the assets, and the surplus , if any, is then distributed
among the members in proportion to their holdings in the company.
According to Prof. Gower, winding up of a company is a process whereby its life is
ended and its property administered for the benefit of its creditors and members.
An administrator called liquidator , is appointed and he takes control of the company,
collects its assets, pays its debt and finally distributes any surplus among the members in
accordance with their rights.

MODES OF WINDING – UP (SECTION 270):

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 There are two modes of winding up of a company, namely.,
1. Winding up by the Tribunal; or
2. Voluntary winding up.

I. WINDING UP BY THE TRIBUNAL

Winding up of a company under the order of a Tribunal is also called as “Compulsory Winding
Up”. It is initiated by an application by way of petition to the Tribunal for a winding up order.

CIRCUMSTANCES FOR WINDING UP BY TRIBUNAL (SECTION 271):

A company may be wound up by the Tribunal on a petition filed under Section 272 of
the Act.
The company may be wound up by Tribunal-
1. If the Company is Unable to Pay its Debts (sub – section 2 of Section 271):
A company may be wound up by the Tribunal if it is unable to pay its debts. In this
stage company has reached a stage where it is commercially insolvent, which means that
the company is unable to pay its debts or liabilities as they arise in the ordinary course of
business.
A company shall be deemed to be unable to pay its debts, if the company has to pay
the sum within twenty – one days after the receipt of demand or to provide adequate security
or re – structure or compound the debt to the reasonable satisfaction of the creditor
2. Special Resolution of the Company:
Winding up under this is not common because normally the members of
the company prefer to wind up the company voluntarily for in such a case they
shall have voice in its winding up. If the company has resolved by special
resolution that the company be wound up by the Tribunal.
3. Against the Sovereignty of India:
If the company has acted against the interests of the sovereignty and
integrity of India, its security of the State, friendly relations with foreign States,
public order, decency or morality then the Tribunal may order for the winding
up of a company.
4. If a Company is Sick:
If the Tribunal has ordered the winding up of the company in case of a
sick company.
5. If the Affairs of the Company is Fraudulent:
If, on application by the Registrar or the Government, the Tribunal is of
the opinion that the affairs of the company has been conducted in a fraudulent
manner or the company was formed for fraudulent and unlawful purpose or the
persons concerned in the formation or management of its affairs have been
guilty of fraud, misfeasance or misconduct in connection therewith and that it
is proper that the company be wound up.
6. Default in Submitting the Financial Statements or Annual Returns with the
Registrar:
If the company has made a default in filing with the Registrar its
financial statements or annual returns for immediately preceding five
consecutive financial years.
7. Just and Equitable Grounds:
If the Tribunal is of the opinion that it is just and equitable to wind up
the company then they can do so. The words ‘Just and Equitable’ are of the

13
 widest significance and do not limit the jurisdiction of the Tribunal to any
particular case. The principle of Just and Equity must be rest with the judicial
discretion of the Tribunal depending upon the facts and circumstances of each
case.
The Tribunal may order winding up under the ‘Just and Equitable’
clause in the following circumstances:
2. When the Substratum of the Company is Gone: The main purpose or basis
of a company can be said to have disappeared only when the object for which it
was incorporated has substantially failed, or when it is impossible to carry on
the business of the company except at a loss, or the existing and possible assets
are insufficient to meet the existing liabilities.
3. When the Management is carried on in Such a Way that the Minority
disregarded or Oppressed: Oppression of minority shareholders will be a ‘just
and equitable’ ground where those who control the company abuse their power
to such an extent as to seriously prejudice the interest of minority shareholders.
4. Where there is Deadlock in the Management of the Company: When the
shareholding is more or less equal and there is a case of complete deadlock in
the company on account of lack of probity in the management of the company
and there is no hope or possibility of smooth and efficient continuance of the
company as a commercial concern, there may arise a case for winding up on the
‘just and equitable’ ground.
5. Where the Public Interest is likely to be Prejudiced: Where the concept of
prejudice to public interest is introduced, it would appear that the Tribunal
winding up a company will have to take into consideration not only the interest
of shareholders and creditors but also public interest in the shape of need of the
community, interest of the employees, etc.

PETITION FOR WINDING UP (SECTION 272):

A petition to the Tribunal for the binding up of a company shall be presented by –
a) The company;
b) Any creditor or creditors, including any contingent or prospective creditor or creditors;
c) Any contributory or contributories;
d) All or any of the person in above clauses together;
e) The Registrar;
f) Any person authorised by the Central Government in that behalf; or
g) In case the company has acted against the interests of the sovereignty and integrity of
India, its security of the State, friendly relations with foreign States, public order, decency or
morality , by the Central Government or State Government.
The Registrar shall not be entitle to present a petition for winding up on the grounds
the Registrar shall not present a petition on the ground that the company is unable to pay its
debts unless it appears to him either from the financial condition of the company as disclosed
in its balance sheet or from the report of an inspector appointed under section 210 that the
company is unable to pay its debts. The Registrar shall obtain the previous sanction of the
Central Government to the presentation of a petition. The Central Government shall not accord
its sanction unless the company has been given a reasonable opportunity of making
representations.
A petition presented by the company for winding up before the Tribunal shall be
admitted only if accompanied by a statement of affairs in such form and in such manner as may
be prescribed.

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 A copy of the petition made under this section shall also be filed with the Registrar and
the Registrar shall, without prejudice to any other provisions, submit his views to the Tribunal
within sixty days of receipt of such petition.

POWERS OF TRIBUNAL (SECTION 273):

The Tribunal, on receipt of a petition for winding up, may pass any of the following orders,
namely—
1. dismiss it, with or without costs;
2. make any interim order as it think fit;
3. appoint a provisional liquidator of the company till the making of a winding up order;
4. make an order for the winding up of the company with or without cost; or
5. any other order as it think fit.
The Tribunal shall make the order within ninety days from the date of presentation of the
petition. Before appointing a provisional liquidator, the Tribunal shall give notice to the
company and afford a reasonable opportunity to it to make its representations. However, for
special reasons to be recorded in writing, the Tribunal may dispense with such notice. The
Tribunal shall not refuse to make a winding up order on the ground only that the assets of the
company have been mortgaged for an amount equal to or in excess of those assets, or that the
company has no assets. Where a petition is presented on the ground that it is just and equitable
that the company should be wound up, the Tribunal may refuse to make an order of winding
up, if it is of the opinion that some other remedy is available to the petitioners and that they are
acting unreasonably in seeking to have the company wound up instead of pursuing the other
remedy.

➢ COMPANY LIQUIDATOR AND THEIR APPOINTMENTS (SECTION 275):

For the purposes of winding up of a company by the Tribunal, the Tribunal at the time of
passing of the order of winding up shall appoint an Official Liquidator or a liquidator from
the panel maintained as the Company Liquidator.

Provisional liquidator shall have same powers as a liquidator unless the Tribunal limit
or restrict his power by an order.
The provisional liquidator or the Company Liquidator, shall be appointed from a panel
maintained by the Central Government consisting of the names of chartered accountants,
advocates, company secretaries, cost accountants or firms or bodies corporate having such
chartered accountants, advocates, company secretaries, cost accountants and other
professionals as may be notified by the Central Government or from a firm or a body corporate
of persons having a combination of such professionals and having at least ten years’ experience
in company matters. The Central Government may remove the name of any person or firm or
body corporate form the penal on the grounds of misconduct, fraud, misfeasance, breach of
duties or professional incompetence. The Central Government shall give him or it a reasonable
opportunity of being heard before remove him or it from the panel. The terms and conditions
of appointment of a provisional liquidator or Company Liquidator and the fee payable to him
or it shall be specified by the Tribunal on the basis of task required to be performed, experience,
qualification of such liquidator and size of the company. On appointment as provisional
liquidator or Company Liquidator, as the case may be, such liquidator shall file a declaration
within seven days from the date of appointment in the prescribed form disclosing conflict of
interest or lack of independence in respect of his appointment, if any, with the Tribunal and
such obligation shall continue throughout the term of his appointment. While passing a winding
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up order, the Tribunal may appoint a provisional liquidator, if any, as the Company Liquidator
for the conduct of the proceedings for the winding up of the company.

DUTIES OF LIQUIDATOR:
Followings are the duties of the official liquidator of a company:
1. Conduct Proceedings in Winding Up: The liquidator shall conduct the proceedings
in winding up the company and perform duties imposed by the Tribunal.
2. Report : The official liquidator shall as soon as possible prepare a report of the
statement of affairs of the company. The report shall contain the particulars as to
1. The amount of the capital issued, subscribed and paid up, and the estimated
amount of assets and liabilities.
2. If the company has failed as to the cause of failure; and
3. Whether, in his opinion, further enquiry is desirable as to any matter relating
to the promotion, formation, or failure of the company, or the conduct of
business thereof.
3. Custody of Company Property: Where a winding up order has been made or where
a liquidator has been appointed, shall take into his custody all the property, effect and
actionable claims to which the company is entitled. So long as there is no liquidator,
all the property of the company shall be in the custody of Tribunal.
4. Meetings of Creditors and Contributories: The liquidator may summon general
meetings of the creditors or contributories whenever he thinks fit for the purpose of
ascertaining their wishes.
5. Directions from the Tribunal: The liquidator may apply to the Tribunal for directions
in relation to any particular matter arising in winding up. He shall also use his own
discretion in the administration of the assets of the company and in the distribution
thereof among the creditors.
6. Proper Books: The liquidator shall keep proper books for making entries or recording
minutes of the proceedings at meetings and such other matters as may be prescribed,
any creditor or contributory may, subject to the control of the Tribunal, inspect any
such books personally or by his agent.
7. Audit of Accounts: The liquidator shall at such times as may be prescribed but at least
twice each year during his tenure of office, present to the Tribunal an account of his
receipts and payments as liquidator. The account shall be in the prescribed form and
shall be duly verified.
8. Appointment of Committee of Inspection: The Tribunal may at the time of making
an order for the winding up of a company or at any time thereafter, direct that there
shall be appointed a committee of inspection to act with the liquidator.

POWERS OF LIQUIDATOR:
The liquidator shall exercise the following powers:
1. To institute or defend suits and other proceedings, civil, criminal in the name of a company
2. To carry on the business of the company so far as may be necessary for the beneficial
winding up of the company.
3. To sell the immovable and movable properties with power to transfer the whole or sell the
same.
4. To raise money on the security of the company’s assets
5. To do all acts and to execute documents and deeds on behalf of the company
6. To inspect the records and returns of the company.
7. To take out in his 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.

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8. To appoint an agent to do any business which he is unable to do himself.

REMOVAL AND REPLACEMENT OF LIQUIDATOR (SECTION 276):

The Tribunal may, on a reasonable cause being shown and for reasons to be recorded in writing,
remove the provisional liquidator or the Company Liquidator on any of the following grounds,
namely:—
(a) misconduct;
(b) fraud or misfeasance;
(c) professional incompetence or failure to exercise due care and diligence in
performance of the powers and functions;
(d) inability to act as provisional liquidator or as the case may be, Company Liquidator;
(e) conflict of interest or lack of independence during the term of his appointment that
would justify removal.
In the event of death, resignation or removal of the provisional liquidator or Company
Liquidator, the Tribunal may transfer the work assigned to him or it to another Company
Liquidator for reasons to be recorded in writing. Where the Tribunal is of the opinion that any
liquidator is responsible for causing any loss or damage to the company due to fraud or
misfeasance or failure to exercise due care and diligence in the performance of his or its powers
and functions, the Tribunal may recover or cause to be recovered such loss or damage from the
liquidator and pass such other orders as it may think fit. The Tribunal shall, before passing any
order under this section, provide a reasonable opportunity of being heard to the provisional
liquidator or, as the case may be, Company Liquidator.

II. VOLUNTARY WINDING UP

Voluntary winding up means winding up by the members or creditors of a company
without interference by the Tribunal. The object of voluntary winding up is that the company,
i.e., the members as well as the creditors, are left free to settle their affairs without going to the
Tribunal they may however apply to the Tribunal for any directions, if and when necessary.
The Central Government came out with a comprehensive regulatory legislation titled as “The
Insolvency and Bankruptcy Code, 2016”. The Code is intended to regulate the conduct of the
corporate insolvency resolution process, liquidation process and provides fresh start to the
bankruptcy process. It abolishes Voluntary winding up of companies (Sections 304 to 323 of
Companies Act, 2013) and regulates liquidation process.

The Process of Voluntary Winding up of solvent company is now shifted from the Companies
Act, 2013 to Insolvency and Bankruptcy Code, 2016 w.e.f. 1st April, 2017. Some of the major
differences as compared to earlier regime are as follows:
• Shifting of Powers from Official Liquidator to Insolvency Professional.
• Jurisdictional Authority has been shifted from High Court to National Company Law
Tribunal (NCLT)
• Governing sections and corresponding rules and regulations for Member’s Voluntary
Winding is now shifted to Section 59 of the Insolvency and Bankruptcy Code, 2016
(IBC) read with Insolvency and Bankruptcy Board of India (Voluntary Liquidation
Process) Regulation, 2017.
• Timeline for carrying out the Voluntary Winding up process under the IBC is of 12
months, however in the event of Liquidation process continuing for more than 12
months, the Liquidator has to submit Annual Status Report indicating the progress of
such Liquidation.

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Who may apply for voluntary liquidation?
A corporate person who intends to liquidate itself voluntarily which has not committed any
default may initiate voluntary liquidation proceedings under the provisions of this Chapter.
[Section 59(1)] So, Any Company or LLP which has not defaulted in payment and have a full
capacity to repay debt can apply for voluntary liquidation.
Pre-Liquidation Process
➢ Declaration of Solvency
A declaration from majority of the directors of the company verified by an affidavit stating
that:
• They have made a full inquiry into the affairs of the company and they have formed an
opinion that either the company has no debt or that it will be able to pay its debts in full
from the proceeds of assets to be sold in the voluntary liquidation; and
• The company is not being liquidated to defraud any person;
The above declaration shall be accompanied with the following documents:
•Audited financial statements and record of business operations of the company for the
previous 2 years or for the period since its incorporation, whichever is later;
• A report of the valuation of the assets of the company, if any prepared by a registered
valuer;
➢ Members Approval
A special resolution of the members of the company in a general meeting requiring the
company to be liquidated voluntarily and appointing an insolvency professional to act as the
liquidator must be passed within 4 weeks of declaration of solvency;
➢ Creditors Approval
If the company owes any debt to any person, Creditors representing two thirds in value of the
debt of the company shall approve the resolution passed for voluntary liquidation within seven
days of such resolution.
➢ Intimation to ROC and IBBI
The company shall notify the ROC and the IBBI about the resolution passed to liquidate the
company within 7 days of such resolution or the subsequent approval by the creditors, as the
case may be. [Section 59(4)]
➢ Voluntary Liquidation Commencement Date
The voluntary liquidation proceedings in respect of a company shall be deemed to have
commenced from the date of passing of the special resolution, subject to the approval of the
creditors. [Section 59(5)]
Voluntary Liquidation Process
➢ Public Announcement
Liquidator shall make public announcement within 5 working days of his appointment to
submit claims within 30 days. It must be published in one English daily and one regional daily
newspaper wherein registered office of the corporate person is situated. It must also be posted
in the website of corporate persons, if having. It must be sent to the IBBI via e-
mail public.ann@ibbi.gov.in for posting it in board’s website.

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Public Announcement must contain the following:
•Liquidation commencement date;
•Name, Address, Contact number, Registration number of liquidator;
•Mode of submission of claim;
•Last date of submission of claim;
➢ Opening of Bank Account
A new bank account with scheduled bank must be opened with the word ‘In Liquidation’ at
last after the name of corporate person for receiving and paying settlement amount. Each and
every financial transaction must be settled through this account.
➢ Collection and Verification of Claims
All claims must be made within 30 days of public announcement. Liquidator must verify the
correctness of each claim and prepare a list of stakeholders.
➢ Preparation of Preliminary Report
Based on claims received, liquidator needs to prepare Preliminary Report within 45 days from
the date liquidation commencement date containing capital structure, assets and liabilities,
claims received etc.
➢ Distribution of Proceedings
Liquidator needs to sell all the assets by auction or through direct party, realize amount from
creditor and distribute proceedings among all the stakeholders.
➢ Submission of Final Report
Liquidator must prepare a final report containing liquidation proceedings and submit it to the
ROC, IBBI and NCLT. Based on final report and application for dissolution, NCLT pass an
order for dissolution of corporate entity.
➢ Filing of order with ROC
Copy of order received from NCLT needs to be filled with ROC in e-form INC-28 for
dissolution of a corporate entity.
Role of Adjudicating Authority i.e NCLT in whole Process
The Adjudicating Authority i.e NCLT is competent to declare the corporate person as dissolved
after due liquidation and distribution of its assets. The NCLT comes into the picture only at the
final stage of liquidation after application for Dissolution of Corporate Person is made by
Liquidator after distribution of Liquidation assets of the Corporate Person by following the
procedure stipulated under the Code.
Roles and Responsibilities of Liquidator in whole Process
Liquidator of corporate person is assigned with the following task
• To verify claims of all the creditors;
• To carry on the business of the corporate debtor for its beneficial liquidation as he
considers necessary;
• To value, sell, recover and realize all assets of and monies due to such corporate person
in a time bound manner;
• To open a bank account for the purpose of receiving all moneys due to the corporate
person;

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 • To pay and settle with the creditors of the corporate person;
• To obtain any professional assistance from any person or appoint any professional, in
discharge of his duties, obligations and responsibilities;
• To maintain registers specified under regulation 10 of schedule 2;
• To distribute proceeds to the stakeholders within a period of 6 (six) months of receipt
of the proceeds; and
• To preserve a physical or an electronic copy of the reports, registers and books of
account for at least 8 (eight) years after the dissolution of the corporate person, either
with himself or with an information utility.

Unclaimed Proceeds of Liquidation (Regulation 39)

The liquidator shall apply to the NCLT for an order to transfer into the Companies Liquidation
Account to the Public Account of India, any unclaimed proceeds of liquidation or undistributed
assets or any other balance payable to the stakeholders on the date of the order of dissolution.
A person claiming to be entitled to any money paid into the Companies Liquidation Account
may apply to the Board for an order for payment of the money claimed; which may, if satisfied
that such person is entitled to the whole or any part of the money claimed, make an order for
the payment to that person of the sum due to him, after taking such security from him as it may
think fit.
Any money paid into the Companies Liquidation Account, which remains unclaimed thereafter
for a period of fifteen years shall be transferred to the general revenue account of the Central
Government.

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