Legal Aspect Companies Act

Unit 9: Legal Aspects of Business
The Companies Act, 2013: Nature and kinds of companies; Company formation; Management, meetings
and winding up of a joint stock company
Meaning of business:
An organization or enterprising entity may be engaged in commercial, industrial or professional

activities. A business can be a for-profit entity, such as a publicly-traded corporation, or a non-profit
organization engaged in business activities, such as an agricultural cooperative. L.R. Dickson has defined
‘business’ as a form of activity pursued primarily with the object of earning profit for the benefit of
those on whose behalf the activity is conducted. “Business involves production and/or exchange of
goods and services to earn profits or in a broader sense, to earn a living. Profit is not the sole objective
of the business. It may have other objectives like promotion of welfare of the workers and the general
public. Business activities include production and distribution of goods and services which can satisfy
human wants.
The term ‘business’ should be used to convey the same meaning as the term ‘trade’ simply denotes
purchase and sale of goods whereas ‘business’ includes all activities from production to distribution of
goods and services. It embraces industry, trade and other activities like banking, transport, insurance
and warehousing which facilitates production and distribution of goods and services. According to F.C.
Hopper, “The whole complex field of commerce and industry which includes the basic industries,
processing and manufacturing industries, and the network of ancillary services: distribution, banking,
insurance transport and so on, which serve and inter penetrate the world of business as a whole” are
called Business activities.
Nature of Business:
A business enterprise has the following characteristics:
(i) Dealing in Goods and Services:
The first basic characteristic of a business is that it deals in goods and services. Goods
produced or exchanged may be consumer goods such as bread, rice, cloth, etc., or capital
goods such as machines, tools, etc.
(ii) Production and Exchange:

Every business is concerned with production and exchange of goods and services for value.
Thus, goods produced or purchased for personal consumption (or) for presenting to others as
gifts do not constitute business because there is no sale or transfer for value involved.
(iii) Regularity and Continuity in Dealings:

One single sale transaction cannot strictly constitute a business. A sale of a product can be
called a business if it is undertaken frequently.
(iv) Uncertainty or Risk:

It is true that the element of risk is present in almost all economic activities. But it is
undoubtedly more significantly present in business activities. 1
(v) Profit Motive:

Everyone engages in business primarily with a view to earn profits and acquire wealth. Profit
motive is also accepted as a desirable objective even for the Government enterprises engaged
in business. In case of government enterprise profit is termed as surplus.
1
<http://www.ibbusinessandmanagement.com/11-the-nature-of-business-activity.html >accessed on August6, 2014
Functions of Business2 :
Production Marketing Finance

Function Function Function
Personnel
Function
To achieve its objectives, a business endeavor performs many functions which may be broadly grouped
under the following headings: Production, Marketing, Finance and Personnel.
(i) Production Function:
Under this function a business organization transforms its inputs like manpower, material,
machinery, capital, information and energy into particular outputs as demanded by the
society.
(ii) Marketing Function:
This is concerned with distribution of goods and services produced by the production
department. As we all know that in order to make a business successful how important is
marketing, the marketing department guides the production department in product planning,
development and prices of various products produced by the business, it also promotes the
sale of goods through advertisement and sales promotion.
(iii) Finance Function:
Money is an important factor in any business, thus arrangement of sufficient capital for the
smooth running of business is an important function for a business organization to undertake.
Many important decisions such as sources of finance, investment of funds in productive
ventures, and levels of inventory of various items are undertaken.
(iv) Personnel Function:
As we know that if you want to make your business successful, then you need to have people
who can help you in making it successful and achieving the business objectives, hence, this
function is concerned with finding suitable employees, giving them training, fixing their
remuneration and motivating them.
COMPANY
2
A company is an incorporated voluntary association of persons in business having joint capital divided
into transferable shares of a fixed value, along with the features of limited liability, common seal and
perpetual succession.3It may be a public, private, foreign, small, associate, holding or subsidiary
company. Companies may be incorporated with limited liability of its members or with unlimited
liability. Liability of members may be limited by shares or by guarantee.
Features:
(i) A company is an artificial person created by law to achieve the objectives for which it is
formed. A company exists only in the contemplation of law. It is an artificial person in the
sense that it is created by a process other than natural birth and does not possess the physical
attributes of a natural person.
(ii) This form of business organization has a continuous existence and its life is not affected by
the death, lunacy, insolvency or retirement of its members. Members may come and go,
however, the company continues its operations so long as it fulfills the requirements of the
law under which it has been formed.
Merits of a Company:
This form of business organization has become very popular not only in India but also outside India
mainly for industrial and trading operations of a large scale.
Advantages/merits enjoyed by the company form of organization are follows:
(i) By issuing shares and debentures to the public, a public company can raise large amount of
money.
(ii) Under this form of business organization, shareholders have limited liability for the shares
they hold in the company and their private property is not attachable to recover the dues of
the company. As a consequence, the people who don’t want to take big risk in the industries
they find this kind of business organization really attractive.
(iii) This form of business organization has a continuous existence and its life is not affected by
the death, lunacy, insolvency or retirement of its members. Members may come and go,
3
<http://prezi.com/rk0bq8khmre4/joint-stock-company/ >accessed August11,2014
however, the company continues its operations so long as it fulfills the requirements of the
law under which it has been formed.
(iv) Transferability of Shares: Shares of a public company are freely transferable whereas
restrictions are placed in case of transfer of shares in case of private companies.
(v) As we know that a company can raise large amount of capital this allows the company to take
large scale operations.
(vi) Scope for Expansion and Growth is much higher.
Demerits of a Company:
(i) Large number of legal formalities has to be fulfilled by this form of a company, for which
provisions of a Companies Act are to be complied.
(ii) There is a divorce between ownership and management of the company.
(iii)
Under this form of business organization it has been seen that though every shareholder has a
right to participate in the Annual General Meeting, but in practice, companies are managed
by a small number of persons who are able to perpetuate their reign over the company from
year to year. This is because of a number of factors like lack of interest on the part of the
shareholders, low literacy level among the shareholders, and lack of sufficient information
about the working of the company.
CORPORATE PERSONALITY
Corporate Personality is the creation of law. Both English and Indian law recognized legal personality of
a corporation.4A corporation has a legal personality of its own and it can sue and can be sued in its own
name. It does not come to end with the death of its individual members and therefore, has a perpetual
existence. However, unlike natural persons, a corporation can act only through its agents. Law provides
procedure for winding up of a corporate body. Besides, corporations the banks, railways, universities,
colleges, church, temple, hospitals etc. are also conferred legal personality. Union of India and States are
also recognized as legal or juristic persons.5
Corporations are of two kinds:
Corporation Aggregate: This is an association of human beings united for the purpose of forwarding their
certain interest. A limited company is one of the best examples of corporate aggregate. This kind of a
corporation is formed by the members who are in agreement to contribute to the capital of the company in
furtherance of a common object. Thus, their liability is limited to the extent of their share-holding in the
company. The shareholders have a right to receive dividends from the profits of the company and exercise
voting rights in the general meeting of the company. The principle of corporate personality of a company
was recognized in the case of Saloman v. Saloman& Co6.
4
<http://www.studymode.com/subjects/in-what-circumstances-can-the-separate-corporate-personality-be-
disregarded-page1.html>accessed September25, 2014
5
Art 300 of Constitution of India
6
[1895 – 99] All ER Rep 33
Corporation Sole: This kind of a corporation is stated by a single person who is personified and regarded
by law as a legal person, these single person exercises of some office function, deals in legal capacity and
has legal rights and duties towards the same.The object of a corporation sole is similar to that of a
corporation aggregate.7
PART D
Advantages of Incorporation:
1) Independent Corporate Existence: A corporate person have an independent corporate existence, it has
distinct and legal personality independent of its members.
2) Limited Liability: One of the principal advantages of an incorporated company is the privilege of
limited liability. This is the main feature of registered companies which attracts investors.
3) Perpetual Succession: An incorporated company has continuous succession that means the company
shall retain its estate and possessions as the same entity with the same privileges and immunities,
notwithstanding any change in its members. Corporate existence of a company is not affected by the
death or insolvency of its members. The death or insolvency of individual member does not in any way,
affect its corporate existence.
7
<http://www.legalservicesindia.com/article/article/corporate-personality-173-1.html> accessed September25, 2014
In Gopalpur Tea Co. Ltd. v. Penhok Tea Co, Ltd., the court while applying the doctrine of company's
perpetual succession observed that though the whole undertaking of a company was taken over under an
Act which purported to extinguish all rights of action against the company, neither the company was
thereby extinguished nor any body's claim against it8.
4) Transferability of shares: Section 82 of the Companies Act, 1956, specifically provides that the
shares or other interest of any member in a company shall be movable property, transferable in the
manner provided by the articles of association of the company. Thus, the member of an incorporated
company can dispose of his share by selling them in the open market and get back the amount so
invested. The transferability of shares has two main advantages, namely, it provides liquidity to investors
and at the same time ensures stability of the company. Similar position regarding the transferability of
shares applies in the Companies Act, 2013.
5) Separate Property: Incorporation helps the property of the company to be clearly distinguished from
that of its members. The property is vested in the company as a body corporate, and no changes of
individual membership affect the title. In case of a company, it being a legal person is capable of owning,
enjoying and disposing of property in its own name. The company becomes the owner of its capital and
assets. The shareholders are not the several or joint owners of company’s property. 9In R.T. Perumal v.
John Deavin10, it has been observed that a company is a real person in which all its property is vested, and
by which it is controlled, managed and disposed of. Their Lordships further observed that "no member
can claim himself to be the owner of the company's property during its existence or in its winding up."
6) Corporate Finances: The shares of an incorporated company being transferable, it can raise maximum
capital in minimum possible time. That apart, an incorporated public company has the privilege of raising
its capital by public subscriptions either by way of shares or debentures.
7) Centralized Management: The shareholders have no direct concern with the management of the
company. They exercise, only a formative control. Thus, the management of the company is altogether
different from its ownership. Independent functioning of managerial personnel attracts talented
professional persons to work for the company in an atmosphere of independence thus enabling them to
achieve highest targets of production and management leading to company's overall prosperity.
8) Capacity to sue and to be sued: A company being a body corporate can sue and can be sued in its
own name. A criminal complaint can be filed by a company, but the company has to be represented by a
natural person. In TVS Employees Federation v. TVS & Sons Ltd 11 it was held that the preparation of a
video cassette by the workmen of a company showing their struggle against the company's management
and exhibition could be restrained only on showing that the matter would be defamatory. In R v.
Broadcasting Standards Commission, the court of appeal held that a company can complain under the
Broadcasting Act, 1996 about unwarranted infringement of its privacy. In this case, the complaint was
about the secret filming of transactions in shops by the BBC and the allegation was that this constituted
an infringement of the company’s privacy.12
8
(1982) 52 Comp. Out. 238
9
(1955) 1 SCR 876
10
AIR 1960 Mad. 43
11
(1996) 1 WLR 132 (CA)
12
[2000]3 All ER 989
Disadvantages of Incorporation
1) Far more compliance and regulation to deal with increasing the risk of penalties. 13
2) A company is more complicated and costly to wind up.
3) Directors are personally subject to regulations and can be fined or found guilty of a
criminal offence for failing to comply. Director shall be held personally liable if he/she acts
beyond the provisions of the Companies Act, Memorandum and Articles of Association as it
being ultra vires the company or the directors.
4) Lifting the Corporate veil-Corporate personality is considered to be the most fundamental
principle of Company law. When a company is incorporated it is considered as a separate entity
from its shareholders and directors, for this reason the concept of lifting of corporate veil has
come up. Lifting or piercing the veil is corporate law’s most widely used doctrine to decide when
a shareholder or shareholders or directors will be held liable for obligations of the corporation. In
the case of Salomon v. Salomon & Company 14 passed by the House of Lords in 1897, it was laid
down that a company is a distinct legal person, entirely different from the members or the
shareholders of that company. The courts have come up with some ground on which veil can be
lifted and they are firstly, where fraud is intended to be prevented, the veil of a corporation is
lifted by judicial decisions and the shareholders are held to be “persons who actually work for the
13
http://www.accountingweb.co.uk/anyanswers/question/disadvantages-incorporation-including-practical-issues
accessed on September25,2014
14
[1897] A.C. 22
corporation”; secondly, In the case of group enterprises, the veil may be lifted to look at the
economic realities of the group; thirdly, in order to look at the characteristics of the shareholder,
the corporate veil may be lifted by the courts and lastly, the lifting of the corporate veil has at
times been warranted by the tax legislations also. Courts have struggled for years to develop and
refine their analysis of these claims. However, each new action brings a different set of facts and
circumstances into the equation and a separate determination must be made as to whether the
plaintiff has adduced sufficient evidence of control and domination, improper purpose, or use and
resulting damage.15
5) Company is not given citizenship rights.
6) In today’s day and age, we see that there is an exponential mushrooming of start-ups in India.
Many of them fail while some of them end up becoming successful ventures. One of the most
important factors to be taken into consideration is the legal entity. In the foregoing portions of the
chapter, we have gone through different forms of business. Let us try to figure out as to which
form would be the most suitable for a start-up.
A private limited company is perhaps the most sought after entity form that startups (and most
companies in India) use. It is a distinct legal entity, different from its shareholders and key managers,
unlike a partnership firm described in point two above. Incorporating it requires a minimum of two
shareholders and two directors and the shareholders and directors are not personally liable for the acts of
the company but can be fined and/or imprisoned in their official capacity. Therefore, it is important to
understand the role, duties as well as the liabilities that are associated with being a director. Further, the
minimum authorized and subscribed capital of a private limited company had to be Rs. 1,00,000. For a lot
of early stage startups, this was a hurdle because they have to put in their own money. In addition to Rs.
1,00,000 that had to be transferred in the company’s bank account for share subscription, there are also
costs associated with incorporating the company and paying stamp duty. This requirement of minimum
capital has now been done away with. No company whether public or private is required to have any
capital for incorporation of the company.
A company requires substantial compliances as well. For instance, there have to be quarterly board
meetings, various registers have to be maintained (register of assets, share transfers, etc.), accounts have
to be adopted within six months from the closing of the financial year and filed with the ROC, etc. In
15
<http://corporatelawreporter.com/2013/06/12/lifting-of-corporate-veil-with-reference-to-leading-cases/ >accessed
September28 ,2014
short, laws are drafted in a manner that they keep a check on how the company is being managed. Since
the manner in which a company has to operate is streamlined by regulations, it is possible for investors to
conduct a due diligence and evaluate potential risks associated with their investment.
Unlike a sole proprietorship or a partnership firm, in case the co-founders decide to shut shop because the
venture did not work, winding up a company is not easy. It is a completely court driven process and can
take anywhere between one to two years. No founder is happy about spending (more) money just to wind-
up a company, especially since the company is being wound up because it did not make enough money.
So clearly, if the founders are only experimenting with their idea or don’t want to invest too much money
in the entity but use it towards their business, a private limited company may not the best option. From an
investor’s perspective, a private company is a stable structure because not only is their investment
relatively secure (due to the ongoing monitoring by regulatory authorities), it also demonstrates the
seriousness of founders to do business.
One Person Company is a very recent concept introduced through the new Companies Act, 2013. As the
name suggests, the Companies Act allows one shareholder to incorporate a private limited company with
only one director. This gives operational ease and comfort to proprietors looking to give a more stable
and independent structure to their business. Of course, since OPC is a legally incorporated entity, it has to
ensure compliance with the Companies Act, 2013. However, it has been given some operational freedom.
For instance, OPC does not have to include a cash flow statement in its financials, it is required to hold
only two board meetings in a calendar year (one in each half with more than 90 days gap between two
meetings), etc.
In terms of capital, an OPC, like a private limited company, also requires a minimum authorized and
subscribed capital of Rs. 1,00,000. In case the subscribed capital goes beyond Rs. 50,00,000 or the
turnover exceeds Rs. 2,00,00,000, OPC has to file the requisite forms with the ROC to get its status
converted into a private limited. Winding up of OPC follows the same process as that of a private limited
company. It takes time and can be fairly expensive.
Based on the above characteristics, OPC is best suited for a single founder who wishes to launch
his/her/its product/service in a more structured manner and get a taste of how to run a private limited
company. However, like a private limited company, it is not meant for a founder who is still looking to
‘experiment’ with the venture.
One Person Company in other jurisdiction: China introduced One Person Company in 2005, in
which the promoting individual is both the director and the shareholder. Only one person is allowed to
apply for opening a limited company with a minimum capital of 1,00,000 Yuan. The amended law of
China allows the owner to pay the investment capital at one time which bars him from opening a second
company of the same kind. Where as in Pakistan the amended company law permits one person to form a
single-member company by filing with registrar at the time of incorporation, where a nomination in the
prescribed form indicating at least two individuals to act as nominee director and alternate director. Laws
dealing with same in other countries are in Singapore Company Amendment Act of 2004 deals with it, in
United States, several state permit the formation and operation of single-member Limited Liability
Company.
In most of the countries, the law governing companies enable a single-member company to have
more that one director and grants exemptions to such companies from holding AGMs, though records
and documents are to be maintained.
LLP was introduced and regulated by the Indian government from December 2008 through the
Limited Liability Partnership Act, 2008. It is an entity structure that is a fusion of a private limited
company and a partnership firm. Unlike the latter, LLP is a separate legal entity and limits the liability of
its partners. Two designated partners are required to incorporate a LLP. The incorporation process is
similar to that of a private limited company and OPC and is entirely online. There is also no minimum
capital requirement.
In terms of compliance, a LLP does not have obligations similar to that of a company. There is no
requirement to maintain registers, minutes, etc. However, it is required to file its accounts and annual
return with the ROC. Even in terms of taxation, the profit after tax from a LLP’s operation is reflected in
the personal income of partners. Finally, with respect to winding up, the process is not complex and can
be done by filing the requisite forms with the ROC.
Based on the above, LLP does appear like an ideal entity structure. It gives operational ease to
partners to manage the business and creates a system of accountability through the mandatory ROC
filings. However, conversion of a LLP into a private limited company is still a grey area. Therefore, if the
founders wish to convert their LLP into a company, they will have to independently incorporate a
company and have that company acquire the LLP.
Thus, as seen above – the start-ups can pick any of the business forms depending upon the goal that the
start-up seeks to achieve.
REGISTRATION OF COMPANIES
Doing business in a company form of organization gives its promoters all the advantages of a corporate
personality which include separate corporate existence. Besides, the promoters get many advantages for
instance, tax benefits, and safe guarding the name of business etc. Another benefit of registration is
receiving some legal liability protection. If you incorporate a company, you will not be held personally
responsible for certain accidents and other liabilities. Consequently, you may find it easier to obtain
business insurance, or attract investors, since they will know you are not personally responsible for the
company’s well-being. Following the above reasons registration of a company is an important part of
starting a business. Therefore, before registering a company one needs to fulfill some legal formalities for
which promoters must make a decision regarding the type of company they want to start i.e a public
company or a private company or limited or an unlimited company and accordingly prepare the
documents for incorporation of the company. In this connection the Memorandum and Articles of
Association (now known as Memorandum and Articles respectively) are fundamental documents to be
prepared.
Benefits of Registration:
3. 4. Easier to
1. Legal
Safeguarding obtain
liability 2. Tax benifits
the name of business
protection
the business insurenace
FORMA
TION OF A COMPANY
Section 3 of the Companies Act, 2013 lays down the process for forming a company. The section states
that a company can be formed for any lawful purpose by seven or more persons in case of public
company and two or more persons in case of private company and by one person in the case of One
Person Company which is regarding as a private company by the Act by subscribing their names to a
memorandum and complying with the requirements of the Act of 2013 in respect of registration. Section
also states that the companies formed under sub-section (1) may be either- a company limited by shares;
or a company limited by guarantee; or an unlimited company. Provided that memorandum of One Person
Company. Shall indicate the name of the other person with his prior consent for the same for the purpose
of becoming a member of the company, in the event of the subscriber’s death or his incapacity to
contract. It is also laid down in the Act that a written consent should be filed with the Registrar at the time
of incorporation of the One Person Company along with it memorandum and articles by the said other
person nominated. It is further provided by the Act that if such other person wants to withdraw his
consent he can do the same in the prescribed manner only. In case of One Person Company if some
changes are brought in, in regards of change in the name of the person or any other change, then the
company shall intimate this to the Registrar in the manner prescribed. 16
The declaration must be submitted with the following annexure:17
16
Section 3 of the Companies Act,2013
17
Ibid
Document evidencing payment of fee
Memorandum and Articles
Copy of agreement, if any, which the proposed company wishes

to enter into with any individual for appointment as its managing
or whole-time director or manager
Form 18
Form 32 (except for companies for charitable purposes)
Form 29 (only in case of public companies)
Power of Attorney from subscribers
Letter from Registrar of Companies making names available
No objection letters from directors/promoters
Requisite fees either in cash or demand draft
PART B
Memorandum and Articles18
For the purpose of incorporation Memorandum and Articles the most important documents to be
submitted to the ROC. Memorandum is a document that sets out the foundation of the company. It
contains the objectives and the scope of activity of the company as well also defines the relationship of
the company with the outside world.19
Articles contain the rules and regulations of the company for the management of its internal affairs.
Objectives and purposes for which the company has been formed are contained in Memorandum of
Association, and the rules and the regulations for achieving the objectives of the company are laid down
in the Articles.
After the required documents have been presented to the ROC along with the required registration fees,
he will give the certificate of incorporation to the company if all formalities are complied with.
18
<http://www.legalserviceindia.com/company%20law/company_formation_procedure.htm >accessed 8 August
2014
19
<http://www.registerinindia.com/procedure-for-incorporating-a-company-in-india.html >accessed 8 August 2014
Approval of the name by the Central Government is the first step towards the formation of a company.
Registrar of the company who is authorized to do this legal formality should be in the State/Union
Territory in which the company has their registered office. This approval is provided subject to certain
conditions: for instance-
 There should not be an existing company by the same name.

 In the case of private company, the last words of the name of the company should include
“Private Ltd.” And in case of a public company the name of the company should include
“Limited” word at the end of its name in case the company is incorporated with limited liability
of its shareholders.
 In order of preference, the application filed by the company for the allotment of the names should
mention at least four suitable names to be proposed for the company.
Within seven days from the date of submission of the application, the ROC should inform the concerned
company about the availability of names applied for is available or not. Once a name is approved, it is
valid for a period of six months, within which time Memorandum and Articles together with
miscellaneous documents should be filed. If one is unable to do so, an application may be made for
renewal of name by paying additional fees. After obtaining the approval of name, it normally takes
approximately two to three weeks to incorporate a company depending on where the company is
registered.20
Certificate of Incorporation
After the duly stamped Memorandum and Articles, documents and forms are filed and the filing fees are
paid, the ROC examines the documents and, if required, instructs the authorized person to make
necessary corrections. Thereafter, a Certificate of Incorporation is issued by the ROC which brings the
company into existence; it also is “the conclusive evidence that all the requirements of this Act have been
complied with in respect of registration and matters precedent and incidental thereto and the company is
authorized to be registered under this Act”. 21 It takes one to two weeks from the date of filing
Memorandum and Articles to receive a Certificate of Incorporation.
In the case of Moosa Goolam Arif v. Ebrahim Goolam Ariff 22, only two adult persons signed the
memorandum and one of them signed as a guardian of the other five members who were all minors at the
time. Lord Macnaghten in the Privy Council said: “Their Lordships will assume that the conditions of
20
<http://www.registerinindia.com/procedure-for-incorporating-a-company-in-india.html >accessed 8 August 2014
21
S 35 of the Companies Act, 1956
22
ILR (1913) 40 Cal 1 PC
registration prescribed by the Indian Companies Act were not duly complied with; that there were no
seven subscribers to the memorandum and that the Registrar ought not to have granted the certificate. But
the certificate is conclusive for all purposes.”
Pre-Incorporation Contracts
Sometimes contracts are made on behalf of a company even before it is duly incorporated. But no
contract can bind a company before it becomes capable of contracting by incorporation. “Two consenting
parties are necessary to a contract, whereas the company, before incorporation, is a non-entity”. 23A
company has no status prior to incorporation. It can have no income before incorporation for tax
purposes.24 Shares cannot be acquired in the name of the company before incorporation, a transfer form is
liable to be rejected where the name of a proposed company is entered in the column of the transferee,
was held in the case of English & Colonial Produce Co. Re 25. In order to get the benefits of a ‘corporate
personality', it is very necessary for ‘an association of persons' to become incorporated under the
Companies Act.
It would be a matter of inconvenience that ‘an association of persons' cannot perform any official
business operation in the name of company before its incorporation or the issue of certificate of
commencement of business; they may have to make arrangement for office, place of work, workers, etc.
Promoters of a company may enter into the agreements for the benefit of ‘association of persons' or
prospective company; these agreements are known as pre-incorporation contracts.
One might question that ‘why is company not liable, even if it is a beneficiary to contract' or one might
also question that ‘doesn't promoter work under Principal-Agent relationship'?
Answer to such questions is simple. The company is not in legal existence at time of pre-incorporation
contract. A person not in legal existence cannot be a party to contract, and ‘Privity to Contract' doctrine
excludes company from the liability. In Kelner v Baxter26, Phonogram Limited v Lane27 this position was
confirmed.
23
Kelner v Baxter, (1866) LR 2 CP 174
24
CIT v City Mills Distributors (P) Ltd, (1996) 2SCC 375
25
A solicitor, on the instruction of certain gentlemen, prepared the necessary documents and obtained the
registration of a company. He paid the registration fee and incurred the incidental expenses of registration. But the
company was held not bound to pay for those services and expenses because the company was not in existence at
the time of expenses done in its name. (1906) 2 Ch 435
26
(1866) LR 2 CP 174
27
[1982] QB 938
In pure common law sense, pre-incorporation contract does not bind the company. But there are certain
exceptions to this contract, and these exceptions were developed in USA, India and later in England.
Exceptions mentioned above are the following:
1. Under the Specific Relief Act 1963, section 15(h) and 19(e) are the two important sections for
pre-incorporation contract. Section 15 is about stranger's right to sue if he is entitled to a benefit
or has any interest under the contract, although it has certain limitations. Section 15(h) talks about
the company, being a stranger to pre-incorporation contract, has the right to sue to the other
contracting party. But the necessary condition is that the contract should be warranted by the
terms of its incorporation. This provision clearly negates the common law doctrine which says
that the company cannot ratify or adopt the pre-incorporation contract. Under this provision
promoter can give his right to sue to the company. Whereas, the relevant portion of section 19(e)
states that “Except as otherwise provided by this Chapter, specific performance of a contract may
be enforced against, – when promoters of a company have before its incorporation, entered into a
contract warranted by the terms of the incorporation, provided that the company has accepted the
contract and communicated such acceptance to the other party to the contract. Therefore, so far as
the company is concerned, it is neither bound by, nor can have the benefit of, a pre-incorporation
contract. In Vali Pattabhirama Rao v Sri Ramanuja Ginning and Rice Factory Pvt. Ltd 28 this
position was accepted. S. 19(e) is not explained.
2. Novation of contract is defined in Scarf v Jardine29 as, ‘being a contract in existence, some new
contract is substituted for it either between the same parties (for that might be) or different
parties, the consideration mutually being the discharge of the old contract'. In the situation of
novation of contract, the company can replace the promoter from the pre-incorporation contract.
But one might say that such contract would not be called pre-incorporation contract, but it should
be called post-incorporation contract because novation of contract result into a new contract. In
Howard v Patent Ivory Manufacturing30, the English Court accepted the novation of contract.
Commencement of Business31
Provisions relating to ‘commencement of business’ under section 11 of Companies Act, 2013 were
omitted by the Companies (Amendment) Act, 2015. 32 No company is required to obtain the certificate of
28
1986 60 Comp Cas 568 AP
29
(1882) 7 AC 345)
30
[1888] 38 Ch. D. 156
31
<http://www.legalserviceindia.com/company%20law/com_1.htm> accessed 8 August 2014
32
Act 21 of 2015
commencement of business from the Registrar of Companies after registration for commencing its
business.
However, obtaining such a certificate has been an important task for companies earlier both under
Companies Act, 1956 and Companies Act, 2013. Such earlier provisions have been given below in order
to make you understand the stringent requirements of obtaining such a certificate and commence
business.
Under the Companies Act, 1956, a private company had the right to commence its business right from the
date of its incorporation.33 However, in the case of a public company, a certificate for the commencement
of the business had to be obtained. For this purpose, the following additional formalities had to be
complied with:
If a company had share capital and had issued a prospectus, then:
 Shares up to the amount of minimum subscription must be allotted;

 Every director must have paid to the company on each of the shares which he has taken the same
amount as the public have paid on such shares;
33
S 149(7) of the Companies Act, 1956
 No money is or may become payable to the applicants of shares or debentures for failure to apply
for or to obtain permission to deal in those shares or debentures in any recognized stock
exchange;
 A statutory declaration in Form 19 signed by one director or the employee - company secretary or
a company secretary in whole time practice that the above provisions have been complied with
must be filed34.
If a company had share capital but did not issue a prospectus, then:
 It must file a statement in lieu of prospectus with the Registrar of Companies;

 Every director must have paid to the company on each of the shares which he has taken the same
amount as the other members have paid on such shares;
 A statutory declaration in Form 20 signed by one director or the employee - company secretary or
a company secretary in whole time practice that the above provisions have been complied with
must be filed35.
Once the above provisions have been complied with, the Registrar of Companies grants "Certificate of
Commencement of Business" after which the company can commence its activities.
Under the Companies Act, 2013, a company having a share capital was not entitled to commence its
business or exercise borrowing powers unless firstly, a declaration is filed by a director of the company
with the Registrar of the Companies (ROC) that every subscriber to the memorandum has paid the value
of the shares agreed to have been taken by him and that the paid-up share capital of the company is Rs 5,
00, 000/- in case of a public company and Rs 1, 00, 000/- in case of a private company. Secondly, the
company has filed with the Registrar of the Companies (ROC) a verification of its registered office. In
case, no declaration is filed by a director of any company within 180 days of the incorporation of the
company and the ROC has reasonable belief that the company is not carrying on business or is not in
operation, he may initiate action for removal of company’s name from the register of companies.
Insertion of new section S. 10 A for Commencement of Business, etc:
The Companies (Amendment) Act, 2019 has inserted a new section 10-A which provides for
commencement of business. It provides under sub.s.(1) that a company incorporated after the
34
S 149 (1) of the Companies Act, 1956
35
S 149 (2)
commencement of the Companies (Amendment) Act, 2019 and having a share capital shall not
commence any business or exercise any borrowing power unless-
a. a declaration is filed by a director within a period of 182 days of the date of incorporation of the
company with the Registrar that every subscriber has to the memorandum has paid the value of
the shares agreed to be taken by him on the date of making such declaration, and
b. the company has filed with the Registrar a verification of its registered office as provided in s. 12
(2).
The declaration has to be in the prescribed form and verified in the prescribed manner. If any default is
made in compliance of s. 10 A, the company will be liable to a penalty of Rs. 50000/-. Every officer of
the company in default shall also be liable to a penalty of Rs. 1000/- for each day during which such
default continues with the maximum cap of Rs 1, 00, 000/- (sub.s.2).
If no declaration is filed by the company within 182 days of the date of incorporation and the Registrar
has reasonable cause to believe that the company is not carrying on any business or operations, he may
initiate action for removal of the name of the company from the register of companies under Chapter
XVIII. Such an action by the Registrar will be without prejudice to sub.s (2).
Incorporation of Company under the Companies Act, 2013
Under the Companies Act, 1956 for incorporation all the important documents are filed with the Registrar
by the Company, under 2013 Act section 7 talks about the incorporation of company, it states that the
documents shall be filed by the company to the Registrar within whose jurisdiction the registered office
of a company is proposed to be situated.
Sub-section (1) of section 7 lays down the list following documents and information which is required to
be filed by the company for incorporation36:
- Duly signed memorandum and articles of the company by the subscribers of the memorandum in
the manner prescribed.
- A declaration in the prescribed form by an advocate, a charted accountant, company secretary, a
person named in the articles as a director, manager or secretary of the company that all the
requirements have been complied with.
36
- An affidavit from each of the subscriber to the memorandum, that he is not convicted of any
fraud or offence in connection with the promotion, formation or management of the company.
- The particulars of name, surname, residential address, nationality of every subscriber to the
memorandum with an identity proof and in case of a subscriber being a body corporate, such
particulars as may be prescribed
- The particulars of the person mentioned in the articles as the first directors of the company.
On the basis of documents and information filed under the sub-section (1), the Registrar shall issue a
certificate of incorporation in the prescribed form, to this effect the proposed company is incorporated
under this Act. Sub-section (3) of section 7 of this Act states that on and from the date mentioned in the
certificate of incorporation, the Registrar shall allot to the company a corporate identity number, which
will provide a distinct identity to the company and will also be mentioned in the certificate. Under the
present Act of 2013 the company shall also maintain and preserve at its registered office all the
documents and information filed and if any person furnishes any false information, he shall be liable for
action under section 477 of the given Act. Regarding the above penal action, a Tribunal may pass an
order, as it may think fit, for regulation of the management of the company, or may direct to remove the
name of the company from the register of the companies on being satisfied of the situation under sub-
section (7).
After the certificate of incorporation issued, the Registrar shall allot to the company a corporate identity
number. Provided that before passing any order in this regard the Tribunal should give the company a
reasonable opportunity of being heard and the Tribunal shall take into consideration the transaction
entered by the company, including the obligations, if any, contracted or payment of any liability.
PART C
Procedure for formation of a company in India:
1. Obtain directors identification number for the proposed directors of the company.
2. Obtain digital signature certificate for at least one director for the purpose of filing the forms
electronically.
3. File an application for the approval of name for the company.
4. Preparing the Memorandum of Association and Articles of Association of the company.
5. Have the appropriate number of persons to subscribe to the Memorandum of the company
(minimum two in case of private company and minimum seven in the case of public company).
6. Submit all the documents along with the required fees to the ROC.
7. ROC issues a receipt of certificate of incorporation.
8. In case of a public company obtain a certificate of commencement of business from ROC.
9. Introduction to the first and the most important step in forming a company – Incorporation under
the Companies Act, 2013
10. Understanding the basic documents of a company which are memorandum of association and
articles of association and understanding their importance in incorporating a company under the
law.
Companies (Incorporation) Fourth Amendment Rules, 2016 37 and Simplified Process for
Incorporating Company Electronically (SPICe) e-Form.
The Ministry of Corporate Affairs In exercise of the powers conferred by sub-sections (1) and (2) of
section 469 of the Companies Act, 2013 (18 of 2013), vide its notification dated October 01, 2016,
amended the rule and introduced rule 38 in the principal rules. This amendment comes in light of ease of
doing business and government’s initiative in Government Process Re-engineering (GPR). The rule 38
amendment/addition introduced a new measure known as Simplified Process for
Incorporating Company Electronically (SPICe) e-Form38, the objective of which is to provide faster
incorporation and related services within stipulate times frames which are in sync with international best
practices.
The main features of SPICe are as follows: -
1. Simplified and integrated Digital form for Company Incorporation.
2. Introduction of standard format of e-Memorandum of Association as per Companies Act, 2013 39
37
Companies (Incorporation) Fourth Amendment Rules, 2016,
<https://www.mca.gov.in/Ministry/pdf/CompaniesIncorporationFourthAmendmentRules_01102016.pdf> accessed
10 November 2016
38
Form NO. INC 32, <
10 November 2016
3. Standard format of e-Articles of Association as per Companies Act, 201340
4. Memorandum and Articles will now be filed as linked e-forms (except for Section 8 companies)
5. Provision to apply for Company Incorporation with a pre-approved Company Name.
Regulatory Update: Incorporation
MCA vide its notification dated 20 January 2018 has amended the Companies (Incorporation) Rules 2014
and the Companies (Registration Offices and Fees) Rules 2014 notified the Companies (Incorporation)
Amendment Rules 2018 and the Companies (Registration Offices and Fees) Amendment Rules 2018
respectively which shall be effective from 26 January 2018.
Highlights:
1. Form INC-1 (Application for reservation of Name) has been replaced with form RUN (Reserve
Unique Name).
2. Name application can be made without DSC requirement.
3. Form INC-7 (Application for Incorporation of Company) has been done away with.
4. Form INC-3 (One Person Company- Nominee Consent Form), Form INC-12 (Application for
grant of License under Section 8), Form INC-22 (Notice of situation or change of situation of
registered office, Form INC-24(Application for approval of Central Government for change of
name) and Form INC-32 (SPICe) has been amended. 41
RUN Service:
1. RUN is a simple web-based form for reserving the name of the company.
39
Form No. INC 33, <
November 10, 2016
40
Form No. INC 34, <
https://www.mca.gov.in/Ministry/pdf/CompaniesIncorporationFourthAmendmentRules_01102016.pdf> accessed 10
November 2016
41
https://novojuris.com/2018/01/31/regulatory-update-ministry-of-corporate-affairs/ assessed 23 May 2018
2. To apply for a name using RUN web form, the applicant must first create a free MCA account
through which user can choose the type of company and one name choice.
3. Alternatively, if the applicant wants directly incorporate a company without reserving the name
(through RUN), he can file for incorporation forms using SPICe form.
4. If the applicant wants to incorporate a company with a name that could be similar to an existing
Company or LLP or Trademark then prior approval can be obtained from MCA for use of the
name.
5. Further, NOC from such registered trademark user shall be obtained which shall be attached to
the RUN web form.
6. Maximum Attachments size shall not exceed 6 MB.
7. Under RUN service, the fee for name reservation through the RUN form is Rs.1000/- per form
submission, irrespective of whether the name is approved or not.
8. Resubmission option is not available , the proposed name may either be accepted or rejected
directly.
9. Pay later option is not available in RUN service.
10. Processing will be in Non-STP mode.
11. The Central Registration Centre (CRC) may on the basis of information and documents provided,
reserve the name as follows:
20 days from the date of approval (in case name is being reserved for a new company)
60 days from the date of approval (in case of change of name of existing company)
12. After verification by the MCA personnel at the Central Registration Centre (CRC), name
approval/rejection letter would be provided by the MCA subject to the test of similarity and the
applicant will be intimated through the email address registered with MCA.
13. Further, zero fees for incorporation of all the companies with authorized capital up to 10 Lakhs
and registration of company without share capital whose number of members does not exceed 20
members although stamp duty has to be paid for the same as per the applicable state act. 42
INTRODUCTION
Following two documents are required for registration of a company:
42
https://novojuris.com/2018/01/31/regulatory-update-ministry-of-corporate-affairs/ assessed 23 May 2018
(a) Memorandum of Association
(b) Articles of Association
These documents are listed in Companies Act, 1956. As we know, these are the documents which make
up the constitution of the company. In the Companies Act, 2013 memorandum of association and articles
of association are referred as memorandum and articles respectively. The memorandum and articles,
when registered, bind the company and the members to the same extent as if they respectively had been
signed by the company and by each member and contain covenants on its and his part to observe all the
provisions of the memorandum and articles.
MEMORANDUM OF ASSOCIATION
Preparation of Memorandum of Association (now memorandum) is the first step in the formation of a
company. This can be seen in section 12 of the Companies Act, 1956 and section 3 of Companies Act
2013 which provides the mode for forming an incorporated company and states that in the case of public
company, any seven or more persons, and in case of private company, any two or more persons,
associated for any lawful purpose, may by subscribing their names to a memorandum and complying with
other requirements of this Act in respect of registration, may form an incorporated company, with or
without limited liability. According to section 2(28) of the Companies Act," memorandum" means the
memorandum of association of a company as originally framed or as altered from time to time in
pursuance of any previous companies law or of this Act. Although this definition does not state the nature
of this document nor is indicative of its importance, section 13 of the Act lays down the contents of the
important document.
Memorandum of Association enables the parties dealing with the company to know with certainty as to
whether the contractual relation to which they intend to enter with the company is within the objects of
the company. It is the main document of the company which defines its objects and lays down the
fundamental conditions upon which alone the company is allowed to be formed. It governs the
relationship of the company with the outside world and defines the scope of its activities. Memorandum
of Association enables the parties dealing with the company to know with certainty as to whether the
contractual relation to which they intend to enter with the company is within the objects of the company.
In Ashbury Railway Carriage & Iron Co. Ltd v. Riche 43 and Egyptian Salt and Soda Co. Ltd v. Port Said
Salt Association Ltd44, it was held that memorandum of association of a company is the main charter of a
company and it defines the limitation on the powers of a company. It states negatively that nothing shall
be done beyond that ambit which a memorandum of a company prescribes.
CONTENTS OF MEMORANDUM
1. Name clause
The first clause of the memorandum has to state the name of the proposed company, as a company being
a legal person should have a name because the name of a corporation is the symbol of its existence. There
are certain things which should be kept in mind while deciding on a company’s name like no company
can be registered with a name which in the opinion of a Central Government is undesirable and it should
not be identical with the name of another registered company.
Secondly, whatever be the name of the company, if the liability of the members is limited, the last word
of the name must be “Limited” and in the case of a private company “Private Limited”. 45
If a company desires to change its name, then it can be done by passing a special resolution and with the
approval of the Central Government signified in writing.46
43
(1875) L.R. 7 H.L. 653
44
(1931) A.C. 677
45
Section 4(1)(a) of the Companies Act, 2013; Corresponds to Section 13(1)(a) of the Companies Act,1956
46
Section 21 of the Companies Act
A person may make an application to the Registrar for the reservation of a name for his proposed
company or the name to which the company proposes to change its name. Upon receiving such an
application, the Registrar may reserve the name for a period of 20 days from the date of approval or other
prescribed period.47 In case of an application for reservation of name or for change of its name by an
existing company, Registrar may reserve the name for a period of sixty days from the date of approval. 48
If it is found that the name was applied furnishing wrong or incorrect information, then the reserved name
may be cancelled in case the company has not been incorporated. If in such a case, the company has been
incorporated, the Registrar will give an opportunity of hearing to the company and may take any of the
following actions:
a. Either direct the company to change its name within a period of three months after passing an
ordinary resolution;
b. Take action for striking off the name of the company from the register of companies; or
c. Make a petition for winding up of the company.
2. Registered Office
The second clause of the memorandum must specify the State in which the registered office of the
company is to be situated and this should be done within thirty days of incorporation or commencement
of business, whichever is earlier. 49 Registered office should be capable of receiving and acknowledging
all communications and notices as may be addressed to it under sub.s (1).
If a company desires to shift its registered office from one place to another within the same city, town or
village they can do it without passing a special resolution but if they want to shift it from one city to a
different city altogether then a special resolution has to be passed. 50 Section 12(1)(5) states that no
company shall change the place of its registered office from the jurisdiction of one Registrar to the
jurisdiction of another Registrar within the same state unless such changes are confirmed by the Regional
Director on an application made by the company regarding the same in the prescribed manner.
Section 12 of the Companies Act, 2013 lays down the provision regarding registered office of company-
it states that on and from fifteenth day of the incorporation of a company, the company should be capable
of receiving and acknowledging all communication and notices as may be addressed to it. It also lays
47
Section 4(5) as amended by the Companies (Amendment) Act, 2017
48
ibid
49
Section 51 of the Companies Act; Corresponds to section 4(1)(b) of the Companies Act,2013
50
Section 17-A of the Companies Act
down the manner in which the name of the company should be affixed or engraved. Section 12 has been
amended by the Companies (Amendment) Act, 2019 by addition of sub.s (9). This provision gives power
to the Registrar for physical verification of the registered office of the company. It says that if the
Registrar has reasonable cause to believe that the company is not carrying on any business or operations,
he may cause a physical verification of the registered office of the company if any default is found in
compliance of provisions of sub. s.(1).
3. Objects and powers

The third and the most important clause of a memorandum must state the objects for which a company is
proposed to be established. It is essential that the public who subscribes for its shares should know clearly
what the objects are for which they are investing.
In the case of companies which were in existence immediately before the commencement of the
Companies (Amendment) Act. 1965, the object clause had simply to state the objects of the company. But
in the case of a company to be registered after the amendment, the objects clause was required to state
separately:
● Main Objects- under this clause, the company had to state their main objects and objects
incidental to the attainment of the main objects.
● Other Objects- under this, other objects had to be stated by the company which is not included in
the above.
● States to which objects extend- under this, the companies whose objects were not confined to one
State, this clause had to mention the states to whose territories the objects extended.
Under the Companies Act, 2013 section 4(1)(c) states the object clause of the memorandum does not
contain categories of main objects and other objects, it only specifies that the memorandum of a
company should specify the objects for which a company is proposed to be incorporated and any
matter considered necessary in furtherance thereof.
4. Capital Clause
The last clause states the amount of nominal capital of the company and the number and value of the
shares into which it is divided. Section 3 of the Act prescribes the requirement that a public company
must have a minimum paid up share capital of five lakh rupees or such higher amount as may be
prescribed; and a private company is required to have a minimum paid up share capital of one lakh
rupees or such higher amount as may be prescribed by its articles.
Whereas, section 4(1) (e) of the Companies Act, 2013 lays down no amount of minimum paid up
share capital in case of both public or private company, it just says that amount of share capital with
which a company is to be registered and division of the same into shares which the subscribers to the
memorandum agrees to subscribe shall not be less than one share and the number of shares each
subscriber to the memorandum intends to take should be indicated opposite his name. This means no
separate subscription clause is laid down in 2013 Act as it was laid down in 1956 Act.
ALTERATION OF MEMORANDUM
Alteration of Memorandum involves compliance with detailed formalities and prescribed procedure.
Alterations to the extent necessary for simple and fair working of the company would be permitted.
Alterations should not be prejudicial to the members or creditors of the company and should not have the
effect of increasing the liability of the members and the creditors.
Contents of the Memorandum can be altered under the Companies Act, 1956 as under:
● A company may change its name by special resolution and with the approval of the Central
Government signified in writing. However, no such approval shall be required where the only
change in the name of the company is the addition there to or the deletion there from, of the word
“Private”, consequent on the conversion of a public company into a private company or of a
private company into a public company.51
● Change of registered office from one place to another place in the same city, town or village. In
this case, a notice is to be given within 30 days after the date of change to the Registrar who shall
record the same. Whereas, in case of change of registered office from one town to another town
in the same State a special resolution is required to be passed at a general meeting of the
shareholders and a copy of it is to be filed with the Registrar within 30 days of the change of the
office. A notice has to be given to the Registrar of the new location of the office. 52 The alteration
shall not take effect unless the resolution is confirmed by the Central Government.
51
52
● The Company may alter its objects on any of the grounds (i) to (vii) mentioned in Section 17 of
the Act. The alteration shall be effective only after it is approved by special resolution of the
members in the general meeting. The Companies (Amendment) Act, 1996, has dispensed with
sanction of Central Government for alteration of the objects clause in Memorandum of
Associations.
● The procedure for the alteration of share capital and the power to make such alteration are
generally provided in the Articles of Association. If the procedure and power are not given in the
Articles of Association, the company must change the articles of association by passing a special
resolution.
ALTERATION OF MEMORANDUM UNDER THE COMPANIES ACT, 2013
Corresponding to sections 16, 17, 18, 19, 21, 23 and 37 of the Companies Act, 1956, section 13 of the
Companies Act, 2013 lays down the criteria for alteration of memorandum. It states that as provided in
section 61 a company by special resolution and after complying with the procedures specified may alter
their provisions of memorandum. Regarding the alteration of name clause, the company can alter its name
after the approval of the Central Government in writing; therefore, when any change in the name of the
company is made the Registrar shall enter the new name in the register of companies in place of the old
name and issues a fresh certificate of incorporation. The alteration regarding the registered office of the
company as mentioned earlier shall not have any effect unless it is approved by the Central Government.
Regarding any alteration of object clause of the memorandum of company the registrar should certify
registration within a period of thirty days from the date of filing of the special resolution in accordance
with clause (a) of sub-section (6) of this section.
PURPOSE OF MEMORANDUM
Main reasons which make the memorandum such an important document for a company are: firstly,
shareholders before making investment in the company come to know the purpose for which their money
will be used and what risk they are going to face by making an investment; and the second main purpose
of memorandum is that anyone dealing with company will know about the permitted range of activities of
the company.
PART B
ARTICLES OF ASSOCIATION53
Articles of association are the second document which has to be registered along with the memorandum
of articles of a company in case of some companies. Companies which must have articles of association
are:
● Unlimited Companies
● Companies limited by guarantee and
● Private Companies limited by shares
This document contains rules, regulations and bye-laws for the general administration of the company.
They may be described as the internal regulation of the company governing its management and
embodying the powers of the directors and officers of the company as well as the powers of the
shareholders.54 They lay down the mode and the manner in which the business of the company is to be
conducted. In framing Articles of Association care must be taken to see that regulations framed do not go
beyond the powers of the company itself as contemplated by the Memorandum of Association nor should
they be such as would violate any of the requirements of the Companies Act, itself. All clauses in the
Articles ultra vires the Memorandum or the Act shall be null and void.
Contents of Articles of Association
53
54
(1) share capital, different classes of shares of
shareholders and variations of their rights (2)
allotment of shares (3) calls on shares (4) issue
of share certificates (5) issue of share warrants
(6) transfer of shares (7) transmission of

shares(8) alteration of share capital (9)
borrowing power of the company (10) rules
regarding meetings
(11) voting rights of members (12) accounts

and audit (13) directors, their appointment
and remuneration (14) payment of interest out
of capital (15) common seal (16) Winding Up.
Articles generally contain provision relating to the following matters: (1) share capital, different classes of
shares of shareholders and variations of their rights (2) allotment of shares (3) calls on shares (4) issue of
share certificates (5) issue of share warrants (6) transfer of shares (7) transmission of shares (8) alteration
of share capital (9) borrowing power of the company (10) rules regarding meetings (11) voting rights of
members (12) accounts and audit (13) directors, their appointment and remuneration (14) payment
of interest out of capital (15) common seal (16) Winding Up.55
According to section 5 of the Companies Act, 2013, articles of a company contain the regulations for
management of a company. They contain prescribed content but additional content may be added if
necessary for management of a company. The articles may provide for entrenchment which means that
entrenched regulations or entrenched clauses of articles can be altered only under conditions which are
more restrictive then the special resolution which is generally required for alteration of articles.
Provisions for entrenchment may be made at the time of formation of a company or later on by an
ordinary resolution in case of a private company and by a special resolution in case of a public company.
55
The Companies Act, 1956
ALTERATION OF ARTICLES56
Section 31 of the Companies Act, 1956 grants power to every company to alter its articles whenever it
desires by passing a special resolution and filing a copy of altered Articles with the Registrar. Alteration
of articles is considered to be much easier than memorandum as they can be altered by special resolution.
In case of conversion of a public company into a private company, alteration in the articles would only be
effective after approval of the Central Government. 57 The power is now vested with the Registrar of
Companies. Alteration of the articles shall not violate provisions of the Memorandum. It must be made
bona fide for the benefit of the company. Alteration must not contain anything illegal and shall not
constitute fraud on the minority. Alteration in the articles increasing the liability of the members can be
done only with the consent of the members.58
After passing a special resolution for altering the articles of a company and the alteration is approved by
the Central Government, the company is required to submit a printed copy of the articles so altered to the
Registrar of Companies within one month of the date of the passing of the special resolution. 59
ALTERATION OF ASSOCIATION UNDER THE COMPANIES ACT, 2013
The Companies Act, 2013 lays down that according to the provisions of this Act and the conditions
contained in the memorandum of a company, a company can alter its articles by special resolution. Such
alterations may include alterations having the effect of conversion of a private company into a public
company or a public company into a private company. The proviso says that if a private company alters
its articles and removes the restrictions and limitations required for a private company, the company from
the date of such alteration ceases to be a private company. The proviso further provides after the
Companies (Amendment) Act, 2019 that any alteration having the effect of conversion of a public
company into a private company will not be valid unless it is approved by an order of the Central
Government on an application made in this respect. It also provides that on the date of commencement of
Companies (Amendment) Act, 2019, any application pending before the National Company Law Tribunal
shall be disposed of by the Tribunal in accordance with the provisions applicable to it before such
commencement.
56
ibid
57
58
<http://www.icra.in/files/content/articlesofassociation.pdf> assessed 2 September 2014
59
Ibid
Every alteration of the articles under section 14 of the Companies Act, 2013 and a copy of the order of the
Central Government approving the alteration shall be filed with the Registrar, together with the printed
copy of the altered articles. The 2013 Act lays down a very important point regarding the alteration of the
articles of a company and that is that any alteration of the articles registered under the sub-section (2) of
the section 14 should be valid as if it were originally present in the articles.
DISTINCTION BETWEEN ARTICLES AND MEMORANDUM
Memorandum Articles
1. It is a charter of a company indicating the 1. Articles are regulations for the internal
nature of its business & capital. It also management of the company and are
defines the company’s relationship with subsidiary to the memorandum.
outside world
2. It defines the scope of the activities of the 2. They are the rules for carrying out the
company, or the area beyond which the objects of the company as set out in the
actions of the company cannot go. Memorandum.
3. It, being the charter of the company, is the 3. They are subordinate to the Memorandum.
supreme document. If there is a conflict between the Articles and
the Memorandum, provisions of
Memorandum will always prevail.
4. Every company must have its own 4. Now under the Companies Act, it is
Memorandum necessary for all types of companies to have
articles.
5. Any act of the company which is ultra 5. Any act of the company which is ultra
vires the Memorandum is wholly void and vires the articles can be confirmed by the
cannot be ratified even by the whole body of shareholders if it is intra vires the
shareholders. memorandum.
Changes brought in by 2013 Act in setting up of a company60
Provision 2013 Act 1956 Act
1. One Person Company

● Section 3(1) of 2013 ● No such concept as
Act- OPC means a One Person
company with only Company under
one person as its 1956 Act.
member. Only a
natural person who is
an Indian citizen and
resident in India can
incorporate an OPC
or be a nominee for
the sole member of
an OPC.
2. Memorandum of
● The only change ● 2013 Act specifies
association
brought in 2013 Act the mandatory
is that it does not content for the
require the objects memorandum of
clause in the association, which
memorandum to be is similar to the
classified as the existing provisions
following: of the 1956 Act,
(i) The main such as name
object of the clause, registered
company office, liability
(ii) (ii) Objects clause.
incidental or
● No procedure given
ancillary to
the for applying for the
attainment of availability of a
the main name for a new
object company.
(iii) (iii) Other
objects of the
60
Companies Act, 2013 Key highlights and analysis < http://www.pwc.in/assets/pdfs/publications/2013/companies-
act-2013-key-highlights-and-analysis.pdf> accessed 1 November 2016
company
● Reservation of name:
The 2013 Act
incorporates the
procedural aspects
for applying for the
availability of a name
for a new company
or an existing
company in sections
4(4) and 4(5) of 2013
Act.
3. Articles of association
● The 2013 Act ● No such concept of
introduces the entrenchment
entrenchment provision in 1956
provisions. An Act.
entrenchment
provision enables a
company to follow a
more restrictive
procedure than
passing a special
resolution for altering
a specific clause of
articles of
association. A private
company can include
entrenchment
provisions only if
agreed by all its
members or, in case
of a public company,
if a special resolution
is passed.
4. Incorporation of ● 2013 Act mandates

company inclusion of declaration
to the effect that all
provisions of the 1956
Act have been complied
with, which is in line
with the existing
requirement of 2013Act.
● An affidavit from the

subscribers to the
memorandum and
from the first
directors has to be
filed with the ROC,
to the effect that they
are not convicted of
any offence in
connection with
promoting, forming
or managing a
company or have not
been found guilty of
any fraud or
misfeasance, etc
● 2013 Act further
prescribes that if a
person furnishes false
information, he or
she, along with the
company will be
subject to
penal provisions as
applicable in respect
of fraud i.e. section
447 of 2013 Act.
5. Formation of a
● A company with ● Under 1956 Act,
company with charitable
objects charitable objects companies
may be incorporated incorporated with
in accordance with charitable objects
the provisions of the did not had to face
2013 Act. New stringent provisions
objects like
environment
protection, education,
research, social
welfare etc., have
been added to the
existing object for
which a charitable
company could be
incorporated.
6. Registered office of
● Where a company ● No such
company
has changed its name requirement to be
in the last two years, done by companies
the company is under 1956 Act.
required to paint,
affix or print its
former names along
with the new name of
the company on
business letters, bill
heads, etc. However,
the 2013 Act is silent
on the time limit for
which the former
name needs to be
kept [section 12 of
2013 Act].
7. Alteration of
● The 2013 Act ● No such restriction
memorandum
imposes additional imposed on the
restriction on the companies
alteration of the
regarding alteration
object clause of the
memorandum for a of object clause of
company which had the memorandum
raised money from of the company.
the public for one or
more objects
mentioned in the
prospectus and has
any unutilized
money.
● The 2013 Act specifies

that along with obtaining
an approval by way of a
special resolution, a
company would be
required to ensure
following if it intends to
alter its object clause:
1. Publishing the notice
of the aforesaid
resolution stating the
justification of
variation in two
newspapers
2. Exit option can be
given to dissenting
shareholders by the
promoters and
shareholders having
control in
accordance with the
regulations to be
specified by the
Securities and
Exchange Board of
India (SEBI)
[section 13 of 2013
Act].
8. Subsidiary company
● Section 42 of the
not to hold shares in its
holding company 1956 Act which
prohibits a subsidiary
company to hold
shares in its holding
company continues
to get acknowledged
in the 2013 Act.
DOCTRINE OF CONSTRUCTIVE NOTICE
As we all know by now that memorandum of association cannot be altered by the sweet will of the
members of a company, it can be altered only by following the procedure prescribed in the Companies
Act. Articles of association contain the rules and regulations which are granted for the internal
management of the company and articles of association can be altered any time by the procedure as
prescribed in the Companies Act. It is generally presumed that every person dealing with the company is
presumed to have read the memorandum and articles of association and understood them in their true
perspective. This is known as doctrine of constructive notice.
LEGAL EFFECT OF MEMORANDUM AND ARTICLES

Memorandum and Articles, when registered bind the company and its members to the same extent as if
they have been signed by the company and by each member to observe and be bound by all the provisions
of the memorandum and of the articles. Also, all moneys payable by any member to the company under
the memorandum or articles shall be a debt due from him to the company. 61
1. Members bound to the company
Each member must observe the provisions of articles and memorandum. In V.B Rangaraj vs V.B
Gopalkrishnan62, it was held that the articles are the regulations of the company binding on the company
and on its shareholders. Shareholders, therefore, cannot among themselves enter into an agreement which
is contrary to or is inconsistent with the articles of the company.
2. Company bound to members
A company is bound to its members by whatever is contained in its articles and memorandum. The
company is bound not only to the “members as a body” but also to the individual members as to their
individual rights.63
3. Members bound to members
The articles bind the members inter se, i.e. one to another as far as rights and duties arising out of the
articles are concerned. After the articles are registered, they not only constitute a contract between the
association or company on the one hand and its members on the other, but also they constitute a contract
between the members inter se- Shiv Omkar Maheshwari vs Bansidhar Jagannath 64.
4. Company and the outsiders
The articles do not constitute any binding contract as between a company and an outsider. An outsider
cannot take advantage of the articles to find a claim against the company. This is based on the general
rule of law that a stranger to a contract cannot acquire any rights under the contract. 65
61
62
[1992], 73 SC
63
Kaushik Dhar, Articles of Association And Alteration of Articles [2012]<
http://www.legalservicesindia.com/article/article/articles-of-association-&-alteration-of-articles-1050-1.html>
accessed 1 November 2016
64
1957 27 CompCas 255 Bom
Doctrine of Indoor Management
The Doctrine of indoor management is a presumption on the part of the people dealing with the company
that the internal requirements with regard to the articles of association and memorandum of association
have been complied with. The outsiders 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 incorporation or public documents of the company which are submitted to ROC
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 Memorandum and the
Articles. They can presume that everything is being done regularly. This limitation of the doctrine of
constructive notice is known as the “doctrine of indoor management”, or the rule in Royal British Bank v.
Turquand66, or just Turquand Rule67. Thus, whereas the doctrine of constructive notice protects the
company against outsiders, the doctrine of indoor management seeks to protect outsiders against the
company.
The basic principle behind this rule is that outsiders 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.
Exceptions to the Doctrine of Indoor Management68
65
Kaushik Dhar, Articles of Association And Alteration of Articles [2012]<
http://www.legalservicesindia.com/article/article/articles-of-association-&-alteration-of-articles-1050-1.html>
accessed 1 November 2016
66
(1856) 6 E&B 327
67
Turquand case served to qualify the harsh implications of the 'constructive notice' doctrine, under which all
persons conducting business with a corporation were deemed (or construed) to have knowledge of any restriction on
the authority of an agent contained in the corporation's articles and by-laws.
68
<http://www.gla.ac.in/glau/Download/Company%20Laws%20BBA%20IVsem.pdf>accessed 25
September 2014
1. Knowledge of irregularity: When a person dealing with a company has actual or constructive notice of
the irregularity as regards internal management, then he cannot claim the benefit under the rule of indoor
management. He may in some cases be himself a part of the internal procedure.
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’s 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.
Introduction:
In Indian context, there exists various business structures which can be opted for running businesses,
depending upon the size, nature, scope and membership of the organisation. A person desirous of having
a business organisation can choose from sole proprietorship, partnership firm, limited liability partnership
or a company. One of the major benefits which accrues upon incorporation of a company, is the separate
legal existence of the company, distinct from its members as against a sole proprietorship or a partnership
firm.69 A company once incorporated becomes a distinct person in the eyes of law, having perpetual
succession, power to acquire, hold and dispose property in its own name and can sue and be sued (section
9, Companies Act, 2013).
The companies in India can be either incorporated under the Companies Act, 2013 or any special
legislation prescribing for the setting up such companies.70
Traditionally, under the Companies Act, 1956, the companies could be incorporated either as a public or a
private company having the liability of its members limited by shares or guarantee or even unlimited. 71
The choice between private and public company is generally based upon the factors like scale of
operations, sources of funds, autonomy needed and flexibility in management. In cases where the persons
incorporating a company want to raise funds from the public, larger scale and size of operations, they
choose to form a public company. On the other hand, a private company arranges funds from its members
only, however enjoy flexibility in management and lesser compliances as compared to a public company.
There are companies in the form of ‘associations not-for profit, which are neither required to affix
‘private limited’ or ‘limited’ after their names and are set up for purposes of social concern. Another type
of companies are the government companies where the government (Central and/or State) has a stake.
Besides, there are other companies like the foreign companies, holding and subsidiary companies,
producer companies and investment companies.
The Companies Act, 2013 has introduced new company structures like the one-person company, small
company, dormant company and associate company. One-person and the small companies are both
private companies, which will further the vision of ease of doing business through start-ups. These
company forms will enable smaller business units to enjoy the privileges of incorporation with lesser
compliances. Further, companies which are inactive or have lesser transactions are now given the status
of a dormant company.
69
Lee v Lee’s Air Farming Ltd. (1960) 3 All ER 420. A sole proprietor, partnership firm and a family business are as
good as their members and have no separate identity in the eyes of law. However, Limited Liability Partnership is a
distinct structure having benefits of both company (limited liability and separate legal existence) and partnership
firm (lesser compliances and tax benefits).
70
Section 1 (4) and 2 (20) of the Companies Act, 2013. The companies incorporated by virtue of a special
legislation are known as the Statutory companies.
71
Section 12 of the Companies Act, 1956. Section 3 is the corresponding provision under the Companies Act, 2013
which says Section 3 (1) of the Act provides 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 to be formed is to be a private company; or
(c) one person, where the company to be formed is to be One Person Company that is to say, a private company,
by subscribing their names or his name to a memorandum and complying with the requirements of this Act in
respect of registration.
Classification of Companies: All such company structures can be classified on one or more criteria like
liability, size, and number of members and nature of operations. Following chart provides the
classification at a glance.72
Statutory Company/ Corporation: These are the kinds of companies or corporations which are
constituted under a Special Act or legislation of the Parliament. This special legislation, sets out the
powers, functions, constitution and other regulations governing the company. These companies per se are
not covered by the provisions of Companies Act, 2013. Corporations like Life Insurance Corporation of
India which is set up under the Life Insurance Corporation of India Act, 1956 and State Bank of India set
up under the State Bank of India Act, 1955 are few examples of statutory companies.
Registered Company: A company which is incorporated and registered under the Companies Act, 2013
or any other previous company legislations like the Companies Act, 1956 are called registered companies.
72
There can be a number of ways of arranging the kinds of companies, the module has followed one such ways.
Such a company gets registered with the Registrar of Companies in compliance with the requirements as
prescribed under the Companies Act.73
As discussed earlier, the 2013 Act provides for the promotion and registration of three kinds companies
namely public company, private company and one-person company.
Private Company [Section 2 (68)] is a company which is formed with a minimum of two persons for
carrying out any lawful activity. As provided under the Act, a private company enjoys a number of
privileges and exemptions from filings and compliances as against public companies. These exemptions
are conferred on the premise that the private companies unlike the public ones are restricted from inviting
and accepting funds and deposits from the public at large, hence the public would not be much interested
in its functioning and affairs as they would be in case of a public company. 74 However, when a private
company no longer include such restrictions on inviting and accepting deposits, they cease to be a private
company and thereby lose all these privileges [section 14(1) Companies Act, 2013].
Few of the privileges/exemptions of a private company include non-requirement of preparing report of
an annual general meeting, need not appoint more than two directors or even an independent director, not
required to retire a ratio of its directors each year.
Every private company must suffix the words ‘Private Company’ to its name. There exists an embargo
only in the maximum number of members of a private company i.e. two hundred. However, this does not
restrict such companies from having debenture holders by issuing debentures. The only condition here
being that the debentures cannot be issued by giving an invitation to the public. Although there is a
restriction upon a private company from inviting public to subscribe to its shares, however they can
accept deposits from its members in accordance to section 73 of the Companies Act, 2013.
Every private company is required to have minimum two directors on its Board [Section 149(1)]. Here the
two members of the company can also act as directors.
73
Section 3 of the Companies Act, 2013 lists down the requirements for the formation of a private and a public
company.
74
Section 2 (68) of the Act, provides a “private company” means a company having a minimum paid-up share
capital as may be prescribed and which by its articles,:
(i) restricts the right to transfer its shares;
(ii) except in case of One Person Company, limits the number of its members to two hundred:
The provision further clarifies that where two or more persons hold one or more shares in a company jointly, they
shall, for the purposes of this clause, be treated as a single member. It has been further provided that while
determining the number of members in a private company for the purposes of this clause following persons shall
not be included:
a. persons who are in the employment of the company; and
b. persons who, having been formerly in the employment of the company,
were members of the company while in that employment and have continued to be members after the
employment ceased.
(iii) prohibits any invitation to the public to subscribe for any securities of the company.
One-person Company has been a new concept introduced vide the Companies Act, 2013 whereby a
small/micro entrepreneur can now be in a position to convert their firm into a corporate entity without
worrying about the complex compliance regime. Many countries like China, Singapore, Australia also
permit the incorporation of a one-person entity.
In India, it was as early as 2005, when the JJ Irani Committee recommended the setting up of a one-
person company requiring simpler legal compliance regime and thereby enabling the small businesses to
acquire a corporate entity without wasting much time and resources on compliances.
Upon a conjoint reading of sections 2(62) and 3(1) (c), it can be deduced that a one-person company is a
type of a private company. Hence a one-person company can be incorporated as a private company
having one member and minimum one director.75
Further, taking into account, section 3(2), a one-person company can either be constituted as an unlimited
company or a company limited by shares or guarantee.
Along with ‘one person’, the memorandum of a One-Person Company shall also indicate the name of one
other person (as a nominee), with his prior (written consent), who shall become the member of the
company in the event of subscriber’s death or his incapacity to contract. 76
Rule 3 of the Companies (Incorporation) Rules, 2014, enumerates the rules governing the one-person
companies. In case where the paid- up share capital of an OPC exceeds fifty lakh rupees and its average
annual turnover during the relevant period is more than two crore rupees, such company would not be
entitled to continue as OPC. Here, the option would lie the company itself to either convert itself into a
private company or a public company within a period of six months.
A number of privileges in terms of procedural relaxations are available to a One-Person company over
other companies like, it is not required to hold an annual general meeting [section 96(1), neither it is
required to prepare cash flow statement as a part of its Financial Statement [section 2(40)], nor it is
required to appoint an independent director on its Board [section 149(4)].
Due to the abovementioned benefits in past three years, i.e. since 2014 this provision has come into place,
thousands of one-person companies have been incorporated.77
Small Company [section 2 (85)] is another new form of a private company introduced by the new Act.
This classification of a private company has been made on the basis of size of the company in terms of its
paid-up capital and turnover. The ideology as stated in the JJ Irani Committee recommendations, behind
75
Section 2(62) provides that a “One Person Company” means a company which has only one person as its Member.
76
See FAQ’s on OPC <http://www.mca.gov.in/MinistryV2/OPCfaq.html> accessed July 27, 2016.
77
The Master data, “Ministry of Corporate website, till March 2016 over 5757 one-person companies have been
incorporated since the new Companies Act came into being from April 2013”.
<http://www.mca.gov.in/MinistryV2/eir.html > accessed July, 2016.
the small company was to give some relief to small sized entities by giving them flexibility in decision
making by simplified procedures and statutory compliances for internal regulation. 78
A small company also enjoys a number of privileges in terms of exemptions as against other companies
like:
i. a small company is not required to appoint more than two directors on its Board,
ii. Not required to appoint independent directors,
iii. The directors are not required to retire each year,
iv. The report of an annual general meeting is not required,
v. Preparation of the cash flow statement as a part of its Financial Statement is also not
required.
Public Company [Section 2 (71)]: A public company can be regarded as an association of seven or more
members who subscribe their names to the memorandum and comply with other requirements of
registration as prescribed under the Act, for any lawful purpose. 79 Earlier there was a requirement of
having minimum paid up share capital of five lakh for incorporation of public companies rupees which
has been dispensed with vide the enforcement of Companies (Amendment) Act, 2015.
The Companies Act, 2013 has undoubtedly raised the standards of transparency and accountability
expected from the corporates. This in turn has increased the number of compliances of companies,
particularly the public company. Few of the compliances for a public company under the Companies Act,
2013 can be:
a. Appointment of an independent director and women director
b. Appointment of wholetime Key Managerial Personnel
c. Formation of various committees like stakeholder committee, nomination committee etc.
d. Requirement of Secretarial Audit
The increased compliance costs plays down heavily upon those public companies which are closely held
by smaller group of shareholders. Thus today, a number of public companies having smaller shareholders
78
Section 2 (85) of the Act provides that a ‘small company’ means a company, other than a public company:
(i) paid-up share capital of which does not exceed fifty lakh rupees or such higher amount as may be prescribed
which shall not be more than five crore rupees; or
(ii) turnover of which as per its last profit and loss account does not exceed two crore rupees or such higher amount
as may be prescribed which shall not be more than twenty crore rupees:
The provision further stipulates that this section shall not apply to a holding company or a subsidiary company, a
company registered under section 8; or a company or body corporate governed by any special Act.
79
“public company” means a company which— (a) is not a private company; Provided that a company which is a
subsidiary of a company, not being a private company, shall be deemed to be public company for the purposes of
this Act even where such subsidiary company continues to be a private company in its articles
base find it feasible to convert themselves into a private company or a limited liability partnership to
enhance their operating efficiency.80
Unlimited Company [Section 2 (92)]: is the one in which the members are personally liable to discharge
the liability of the company even through their personal assets. This liability arises only at the time of
winding up of the company. However, the members cannot be sued in their personal capacity for such
claims. Such kind of companies may or may not have a share capital.
An unlimited company may at any time later, convert to a limited company, where the liability of its
members is either limited by shares or guarantee. Here the only condition for such conversion/re-
registration being that all the contracts, debts and liabilities incurred/entered into of the unlimited
company shall remain unchanged. (section 18)
Company Limited by Guarantee [section 2 (21)]: The members of a guarantee company have a limited
liability to the extent they undertake in the memorandum to contribute towards the assets of the company.
However, this liability arises only in the event of winding up of the company. A guarantee company may
or may not issue share capital. In such companies, the liability of the members only arises in case the
company goes into liquidation, and not before that. Usually clubs and trade associations form such kind
of company structure.
Company Limited by Shares [section 2 (22)]: The members of these companies have a limited liability
to the extent of the amount which remains unpaid on the shares they hold in the company. Where the
shares are fully paid, the members are not required to pay anything further, the liability arises only in case
of partly paid shares.
Foreign Company [section 2(42) Companies Act, 2013] is a company which although is incorporated
outside India, but has a presence in India by having a place of business and conducting any business
activity in India.
80
This deduction for the conversion trend is made from the data available in the Master Data on www.mca.gov.in
where by since April 2013 ( i.e. since the implementation of Companies Act, 2013) till end of year 2015, around
1640 public companies converted themselves into private companies and around 25 public companies were
converted into Limited Liability Partnerships.
Here having place of business in India can be through either of the mentioned modes viz. conducting
business by itself, or through an agent, physically or through electronic mode. Rule 3 of Companies
(Registration Offices & Fees) Rules, 2014 appended to the Act have also defined the term business
activity and Chapter XXII of the Act containing section 379-393 deals with foreign companies. 81
A foreign company which establishes a place of business in India, is required to get registered and file the
applicable form with the Registrar of Companies pursuant to Section 380 of the Act. Further, any change
in the initial registration is also required to be reported with the Registrar of Companies.
81
Rule 3 of Companies (Registration Offices & Fees) Rules, 2014 appended to the Act have also defined the term
business activity as – Every company including foreign company which carries out its business through electronic
mode, whether its main server is installed in India or outside India, which-
(i) Undertakes business to business and business to consumer transactions, data interchange or other digital
supply transactions;
(ii) offers to accept deposits or invites deposits or accepts deposits or subscriptions in securities, in India or
from citizens of India;
(iii) undertakes financial settlements, web based marketing, advisory and transactional services, database
services or products, supply chain management;
(iv) offers online services such as telemarketing, telecommuting, telemedicine, education and information
research; or
(v) undertakes any other related data communication services, whether conducted by e-mail, mobile devices,
social media, cloud computing, document management, voice or data transmission or otherwise, shall be deemed to
have carried out business in India.
Every foreign company which establishes a place of business in India, is required to get registered and file the
applicable form with the Registrar of Companies pursuant to Section 380. The Indian office of such foreign
company is required to prepare the statement of accounts and shall also cause them to be submitted with the
Registrar of Companies in pursuance to Section 381 of the Act.
The Indian office of such foreign company is required to prepare the statement of accounts and shall also
cause them to be submitted with the Registrar of Companies in pursuance to Section 381 of the Act.
As per the provisions of Section 384 of the Act the provisions relating to debentures, annual return,
registration of charges, books of account and their inspection shall apply mutatis mutandis to the Indian
business of a foreign company as they apply to a company incorporated in India.
Government Company (section 2 (45) of the Companies Act, 2013) is a company where the
governments i.e. either Central, State or both Central and State hold at least 51 percent of the paid- share
capital. A company which is a subsidiary of a government company is also a government company.
A number of judicial pronouncements have clarified that a government company, irrespective of the
control and holding of the government, is not in the nature of a ‘State’ (as per Article 12 of the
Constitution of India) and hence cannot be regarded as a government department. On similar lines, the
employees of such cannot be regarded as government employees.82
Holding and Subsidiary Companies [sections 2 (46) and 2 (87)]: Companies share a relationship of
holding and subsidiary, when one of them possesses and exercises control over the other. The company
which possesses and exercises control is called the holding company and upon which the control is
exercised is the subsidiary of the said holding company. The said control may be exercised through the
composition of board of directors or by possessing more than half of the total share capital. 83
In Oriental Industrial Investment Corporation v. Union of India, it was observed that the company that
controls the composition of the Board has to be held as a holding company irrespective of the fact that it
may not be holding any of the share capital of the subsidiary company.84
Associate Company: Associate Company is another new concept introduced by the Companies Act,
2013, whereby more transparency is sought to be brought amongst companies which shared associate
relationship and were not covered in terms of holding-subsidiary. Moreover, as per provisions of the Act,
82
See cases like Hindustan Steel Works Construction Limited v State of Kerala (1998) 2 Co. L. J 383, AK Bindal v
UOI (2003) 5 SCC 163 and PP Vaidya and others v IFCI Ltd. 209 (2014) DLT 628
83
According to section 2 (46) of the Act a “holding company”, in relation to one or more other companies, means a
company of which such companies are subsidiary companies.
Whereas a “subsidiary company” or “subsidiary” according to section 2 (87) of the Act, in relation to any other
company (that is to say the holding company), means a company in which the said holding company—
(i) controls the composition of the Board of Directors; or
(ii) exercises or controls more than one-half of the total share capital
either at its own or together with one or more of its subsidiary companies
84
1981 51 CompCas 487 Delhi
an associate company is also a ‘related party’ for a company in question [section 2 (76) Companies Act,
2013].
A company is an associate of another when it possesses significant influence over that company. A joint
venture can also be an associate company. However, it must not be a subsidiary of the company
exercising such influence [section 2(6) Companies Act, 2013]. The Act, stipulates the exercise of
significant influence in terms of control (by holding at least 26 percent of the total share capital) or
decision making.
Associations not-for profit [section 8]: The Companies Act, 2013 permits certain associations to be
constituted under the Act as limited liability entities, which are constituted not for the purposes of earning
profits but for the furtherance of charitable, religious, educational or social, welfare causes. Such
companies are permitted to register under the provisions of the Act, only after they acquire a licence from
the Central Government to be constituted as an association-not for profit and hence are not required to
affix words ‘Private Limited’ or ‘Limited’ after their name. The members of such companies do not get
dividend as a return.
Such companies are given a number of privileges in terms of flexibility and lesser compliances.
However, they bear the obligations of a public company and any alteration to their memorandum or
articles or their conversion to any other kind of company is subject to approval from the Central
government.
Dormant Company [section 455]: The Companies Act, 2013, has introduced another kind of company
known as a dormant company. The concept of dormant company, was introduced in the regulatory
regime, keeping in mind that there were large number of companies which actually not carrying out any
significant business activity, and were merely holding an asset or an intellectual property or were
incorporated for a project to be carried out in future. Hence, the compliances as against these companies
were relaxed.85
85
The section 455 prescribes that a company may apply to the Registrar of Companies for obtaining the status of a
dormant company, in case it is formed and registered under this Act for:
i. a future project, or
ii. to hold an asset or an intellectual property, or
iii. has no significant accounting transaction, or
iv. is an inactive company
Here ‘inactive company’ implies a company which has not been carrying out any business or operation, or has not
made any significant accounting transaction during the last two financial years, or has not filed financial
statements and annual returns during the last two financial years. For the purposes of dormant and inactive
company, ‘significant accounting transaction’ means any transaction other than the routine transactions like the
fees paid to the Registrar, payments made towards the requirements of this Act, allotment of shares as per this Act
and payments for maintenance of its office and records.
Such inactive companies have to apply to the Registrar of Companies to get the ‘dormant company’
status. The Registrar once satisfied may grant such status and enter the name of such company in the
Register of Dormant Companies. The name of any company can also be entered in such register, in case
the company fails to file its annual returns or the financial statements for two consecutive years.
However, there remains no embargo upon dormant companies from securing an active status later on.
Investment Company [Explanation (a) to section 186] is a company whose principal business is to
acquire shares, debentures and other securities. Such companies usually acquire the securities and deal in
them. Further in most of the cases, they earn by interest income, dividend income and income from
buying-selling of securities.
Start-ups: The notification issued by the Department of Industrial Policy and Promotion provides that an
entity shall be regarded as a Start-up only till the first five years of its incorporation or registration or
when its turnover remains within Rs. 25 crores during any of the financial years. The ‘entity’ refereed can
be either a private company, a partnership firm or a limited liability partnership which is working towards
innovation, development or commercialisation of new products, processes or intellectual property. 86 This
implies that the start-ups usually choose between a private company and a limited liability partnership, in
case they wish to incorporate their entity.
International Financial Services Centre: The entities that have been licensed to operate by the Reserve
Bank of India or Securities Exchange Board of India or Insurance Regulatory and Development Authority
from International Financial Services Centre located in approved multi service SEZ’s. 87
Introduction: The business of a company is conducted through the decisions which are taken by the
members, directors and in certain cases by the creditors or some class of members by exercising their
powers in relation to the company. For taking such decisions, the members or directors, as the case may
86
See Notification G.S.R. 180(E) dated February 17, 2016 issued by Department of Industrial Policy and Promotion,
Ministry of Commerce and Industry.
87
See Notification No. G.S.R. 08(E) dated January 04, 2017 issued by Ministry of Corporate Affairs
be, have to meet, in order to transact valid and binding business. This implies, that a member and/or a
director unilaterally cannot take a decision, there must exist at least two persons for having a meeting
(under certain exceptional circumstances, there can be one-person meetings as well). 88The term ‘meeting’
has not been defined under the Companies Act, 2013 or any previous company legislation like the
Companies Act, 1956. This term has a possibility of having a variety of shades and hues. 89 Hence,
traditionally a meeting constitutes gathering or coming together of two or more persons for any lawful
purpose.
Regulations for a valid meeting: Every meeting or gathering of stakeholders of a company would not be
regarded as a valid meeting for the purpose of taking binding decisions. Only those meetings which are
convened and held in accordance to the provisions of the Companies Act, 2013 and the rules appended
thereto like the Companies (Meetings of Board and its Powers) Rules, 2014 and Companies (Management
and Administration) Rules, 2014 are considered to be valid meetings.
Company Meetings: A number of meetings are convened in a company and are generally classified as
members’ meetings, directors’ meetings and other meetings. Members’ meetings include the annual
general meeting, which is the mandatory meeting of the members that every company is required to
convene each year. However, there exists no embargo on holding more than one general meeting of the
members, which are called the extra-ordinary general meetings. The meetings of the directors are called
the Board meetings and the meetings of the committees of the directors are the Committee meetings.
Other meetings include creditors meetings and class meetings.
The focus of the Companies Act, 2013 has been on enhancing transparency, shareholders’ democracy and
protection of the interest of the investors. It has made few changes for regulating meetings for example,
the requirement of holding a statutory meeting of members at the time of commencement of business of a
company for any public company (required under the Companies Act, 1956) has been done away with,
the concepts of video-conferencing and e-voting have been introduced.
The following chart enumerates the various meetings that can be held in a company and classifies them
into members’ meetings, directors’ meetings and other meetings.
88
Sections 97 and 98, Companies Act, 2013 provide for the statutory exemption to the general rule that one
person constitutes a valid meeting.
89
SP Arora v Roshnara Club (1992) 8 CLA 30 (Delhi); KR Chandratre, Company Meetings: Law, Practice and
Procedures, (Second ed. LexisNexis 2009) 42
Annual General
Members’ Meetings
Meetings Extra-ordinary
General Meetings
Board
Directors’ Meetings
Meetings Committee
Meetings
Class Meetings
Other
Meetings Creditors’
Meetings
1. Members’ meetings
a. Annual General Meeting (Section 96): One of the opportunities annually given to the members
of a company is to take part in the business of the company by exercising their power to make
decisions. For this purpose, each year every company is required to hold at least one meeting of
its members’ which is known as an annual general meeting (AGM). An exemption from holding
an annual general meeting is only given to a one-person company.
The first general meeting of a company must be held within nine months from the date of closing the
financial year of the company, and then the company need not hold any annual general meeting in its year
of incorporation. The subsequent annual general meetings shall take place within six months of the date
of closing of the financial year. The time prescribed for the first annual general meeting cannot be
extended, however, the time period for subsequent annual general meetings may be extended to a
maximum of three months with the leave of the Registrar of companies.
Following chart depicts the date, time and venue for holding an annual general meeting. Here the Central
Government is empowered to exempt, subject to conditions, any company from holding such meeting in
accordance with the date, time and venue as prescribed.
Date Time Venue
any day During Business Hours registered office of the
must not be a National 9 a.m. and 6 p.m. company
Holiday. Here “National at some other place within
Holiday” means and the city, town or village in
includes a day declared as which the registered office
National Holiday by the of the company is situate
Central Government.
When a company defaults in holding an annual general meeting as required, the Tribunal has the power to
call such a meeting upon receipt of an application from any member of the company. The Tribunal may
even direct to hold a one-member meeting. 90 Such meetings shall be deemed as an annual general meeting
as per provisions of this Act. Upon such default, the company and every officer in default would be liable
for punishment as prescribed.91
i. Business to be transacted at an annual general meeting (section 102)

The business transacted at the annual general meeting is called the ordinary business (this is the reason a
general meeting is also referred to as an ordinary meeting). Items of ordinary business constitute
consideration of financial statements, Board reports and auditor’s report, declaring dividends,
appointment of directors and appointment and salary fixation of the auditors of the company.
b. Extra-Ordinary general meeting (Section 100): All other general meetings convened and held in a
company besides the annual general meeting are regarded as extraordinary general meetings. All the
90
Section 97: In case any default exists in holding the annual general meeting of a company under section 96, the
Tribunal may, notwithstanding anything contained in this Act or the articles of the company, on the application of
any member of the company, call, or direct the calling of, an annual general meeting of the company and give such
ancillary or consequential directions as the Tribunal thinks expedient. Here such direction by the Tribunal may even
include that one member himself or through proxy shall be deemed to constitute a meeting. The meeting so held
would be deemed as an annual general meeting under the provisions of the Act.
91
Section 99: In case any default is made in holding a meeting of the company in accordance with section 96 or
section 97 or section 98 or in complying with any directions of the Tribunal, the company and every officer of the
company who is in default shall be punishable with fine which may extend to one lakh rupees and in the case of a
continuing default, with a further fine which may extend to five thousand rupees for every day during which such
default continues.
business transacted at an extra-ordinary general meeting is called special business (all other businesses
except ordinary business). The following diagram illustrates, who all can call an extra-ordinary general
meeting:
The Tribunal
The Who
Requisitionists may call The Board
themselves an EGM?
The Board on
requisition of
the
shareholders
The shareholders making a requisition must possess at least one-tenth of the paid up share capital of the
company and where the company is without the share capital, the shareholders must possess at least one-
tenth of the voting powers of the company. Such share-holders, requisitioning a general meeting, must
sign upon the matters required to be addressed at the meeting. The Board upon receipt of such valid
requisition must call a general meeting within 21 days. The date of the meeting in any case must not be
later than 45 days from such requisition.
In case these dead-lines are not met by the Board, the shareholders making requisition may go ahead to
call and hold a general meeting themselves. They can do so within 3 months from th28_oyEW1jIAe
requisition date. All the reasonable expenses incurred by the shareholders on holding such meetings, are
to be reimbursed to them by the company by deducting such amounts from the fees of the defaulting
directors.
In LIC of India v. Escorts Ltd92, the Supreme Court observed that every shareholder of a company
possesses a right to call/requisition an extra-ordinary general meeting, subject to the provisions of the Act.
Once the requisition is made in compliance with the prescribed law, the shareholder cannot be restrained
from calling such a meeting.
92
(1986) 1 SCC 264
In another case, Rathnavelu Chettiar v. M.Chettiar93, the shareholders gave a requisition in compliance of
the provision of the Act for removing the MD of the company. Where the directors failed to call a
meeting within the prescribed time, the shareholders themselves requisitioned the meeting. The venue of
the meeting was decided as the registered office of the company. However, on the day of the meeting, the
registered office was locked, thus the meeting was held at some other place. The court held such a
meeting to be a validly convened meeting.
The Tribunal may also, under certain circumstances, order to hold and convene a meeting (other than an
annual general meeting). Here the Tribunal may on its own motion or upon the application made by any
director or members having voting rights may call such a meeting. The Tribunal may give necessary
directions for conduct of the meeting including the permission for holding one -member meeting in
person or through proxy (section 98).
Notice of the meeting (Section101)94

For calling a general meeting a notice is required to be given to every member of the company or to his
legal representative (in case of a deceased member), every director and auditor of the company. Such
notice must be given to the aforesaid parties at least 21 clear days before the meeting. The notice can be
sent either in writing or through electronic means. 95 The requirement of 21 days’ notice can be done away
with, if at least 95 percent of the members voting at the meeting agree to a shorter notice for such a
meeting.
The notice of a meeting must provide for the date, time and venue of the meeting along with the statement
of the business to be dealt at the meeting. 96 It is necessary to send such notice of the meeting as
prescribed, however inadvertent failure to send notices or in case any member or other persons do not
receive the notice shall not per se affect the validity of the meeting.
Quorum (Section 103)

For holding a valid meeting, a minimum requisite number of members must attend the meeting to transact
the business, which constitutes a quorum of the meeting. Following charts, provides at a glance, the
quorum required to be present at general meetings:
93
AIR 1951 Mad. 542
94
Sections 101 -107 of the Companies Act 2013, as regards the meetings and voting, shall apply to private
companies, unless otherwise is provided by the articles of the company vide Notification No. GSR 464(E) dated
5.6.2015.
95
Rule 18 of the Companies (Management and Administration) Rules, 2014 prescribes for the manner of sending
the notice through the electronic mode.
96
The Statement so annexed contains the items of the special business proposed to be dealt at the meeting. Such
business items constitute the agenda of the meeting (section 102).
Quorum of a
general
meeting
Public Private
Company Company
five members personally fifteen members thirty members

present ( when personally present (when personally present
membership of the the membership of the Co. (when the membership two members
company as on the date of as on the date of meeting is of the Co. as on the date personally present
meeting is upto one more than one thousand
thousand) but up to five thousand)
of the meeting is more
than five thousand)
Adjournment of a meeting
Where the requisite number of members are not present within half an hour of the allotted time of the
meeting, such meeting is adjourned to be held on the same day next week at same time and venue or as
scheduled by the Board. The only exception to the rule is, when the meeting is called by the
requisitionists, in such a case the meeting is not adjourned for the want of quorum and is cancelled. In
other cases, members present within half an hour of the adjourned meeting shall constitute the quorum.
Chairman of a meeting (section 104)

A chairman is elected by the members personally present at a meeting by the show of hands. Such
chairman is required for orderly conduct of the meeting. In case a poll is demanded for electing a
Chairman, the provisions of the Act shall apply and the earlier chairman shall continue unless a new one
is appointed.
Proxies (section 105)

Members entitled to attend and vote at the meeting, may participate in the decision making process by
voting in the meeting, either personally or through a duly appointed proxy 97. The proxy is another
97
A proxy shall be duly appointed when lodged in writing and duly in Form MGT 11, at least 48 hours before the
time allotted for the meeting.
person98, whom a member appoints to attend and vote at the meeting on his behalf. However, such a
proxy does not possess the right to speak at such a meeting on behalf of the member, nor is he entitled to
vote except in case of a voting by poll. Section 105 of the Act, further deliberates upon the provisions for
appointing a proxy. A member can revoke his proxy by a notice in writing.99
A member can appoint more than one proxy for the same meeting, in case he possesses different shares of
that company. But in case, the said member appoints more than one proxies for the same bunch of shares,
then all the proxies shall be jointly and severally liable.100
Voting at a meeting (section106)

A member can participate in the decision making process of the company by voting at the meetings. Such
a right to vote can only be restricted by the articles of a company, where it stipulates that the shares in
respect of which any call money or sums remains due or shares upon which the company has exercised
any lien, such shareholders do not have right to vote.101
Voting by show of hands (Section 107)
When a resolution is to be passed at a general meeting, voting takes place by show of hands unless the
members ask for a poll or voting happens electronically. Such voting is evidenced through the
Chairman’s declaration and an entry to this effect in the minutes of the meeting. 102
Voting through electronic means [Section 108 read with Rule 20 Companies (Management and
Administration) Rules, 2014]
The Central Government may prescribe in accordance with the Rule 20, certain class or classes of
companies and also the manner in which a member may vote by the electronic means.
98
Only in cases of an association not-for profit this another person (i.e. proxy) must be a member only.
99
There exists a principal-agent relationship between a shareholder and his proxy. Narayanan Chettiar v Kaleeswara
Mills Ltd. AIR 1952 Mad. 515; Swadeshi Polytex Ltd. v. VK Goel (1988) 63 Com Cases 688 (Del.)
100
B. Ramachandra Adityan v T.N. Mercantile Bank Shareholders Welfare Association (2010) 96 CLA 580 (Mad).
In cases of any conflict amongst various proxies in relation to voting, the Chairman of the meeting is empowered to
take the final and binding call.
101
Right to vote is a shareholders’ personal right. In Re. Imperial Chemical Industries Ltd. (1938) 8 Com Cases 181.
An aggrieved shareholder is only empowered to question the restriction in relation to his voting rights, no other
member can do so on his behalf. BN Vishwanathan v Tiffin’s Barytes Asbestos and Paints Ltd. (1951) 23 Com
Cases 29 (Mad).
102
Here the Chairman’s declaration is treated as conclusive evidence, meaning thereby that the entry in the minutes
of the meeting is conclusive as between the parties bound by them in the absence of any fraud. In Re, ED Sasoon
United Mills, AIR 1929 Bom. 38. However where a poll is demanded and when the declaration doesn’t take into
account the votes casted in favour or against, the declaration shall not be treated as conclusive. Dhakeshwari Cotton
Mills v NK Chakravorty (1937) 7 Com Cas 417.
Demand for a Poll (Section 109 read with Rule 21 Companies (Management and Administration)
Rules, 2014): A poll may be either ordered by the chairman suo moto or may be demanded by such
number of members prescribed under this section.103
Where a resolution is to be passed through poll, the Chairman shall require the assistance of certain
persons for scrutinising the poll and the votes and to prepare a report in accordance with the Rule 21 of
Companies (Management and Administration) Rules, 2014). The Chairman has the power to regulate the
poll in accordance with the said rules.
Postal Ballot (Section 110 read with Rule 22 Companies (Management and Administration) Rules,
2014): A Central Government notification may declare certain business items (excluding the items of
ordinary business) to be dealt vide the postal ballot. A resolution passed by the required majority by a
postal ballot shall be deemed to be passed at a duly convened general meeting.
Ordinary and Special resolution (Section 114)

Decisions in a company are taken by passing resolutions to that regard. The resolutions can be ordinary,
special and resolutions requiring special notice, depending upon the nature of the decision to be taken.
Ordinary resolution is said to be passed when the votes cast by the eligible members in favour exceed
the votes casted against any resolution. Here the members can either vote in person or through proxy. The
Chairman of the meeting possesses a casting vote in case of a tie.
Whereas a special resolution is said to be passed for a resolution when a notice duly given for the
purpose clearly specifies that the resolution to be passed is a special one. Such resolutions require that the
votes by the eligible members must be three times in favour in comparison to the votes cast against the
resolution. . Here the person can either vote in person or through a proxy.
103
Following number of members may demand a poll:
a. in the case a company having a share capital, by the members present in person or by proxy, where allowed, and
having not less than one-tenth of the total voting power or holding shares on which an aggregate sum of not less than
five lakh rupees or such higher amount as may be prescribed has been paid-up; and
b. in the case of any other company, by any member or members present in person or by proxy, where allowed, and
having not less than one-tenth of the total voting power the demand made for the poll may be withdrawn by the
persons making it, anytime.
Resolution
requiring
special notice
Resolutions
Ordinary Special
Resolution Resolution
Resolutions requiring special notice (Section 115 read with Rule 23 Companies (Management and
Administration) Rules, 2014)
There are certain resolutions which require special notice. According to section 115, any such notice
required to be given shall be brought at the instance of member(s) holding not less than one percent of
total voting power (in case of company not having share capital) or member(s) holding shares on which
an aggregate sum of not exceeding five lakh rupees, paid up on the date of notice. Rule 23, further
provides the time and means of sending such special notice.104
Minutes of the meeting (section 118 read with Rule 25 Companies (Management and
Administration) Rules, 2014)
Companies are required to maintain and keep the records of the proceedings of every meeting called the
minutes of the meeting, which are to be prepared according to the provisions of this Act and the
104
Rule 23 Companies (Management and Administration) Rules, 2014 prescribes for Special Notice.- (1) A special
notice required to be given to the company shall be signed, either individually or collectively by such number of
members holding not less than one percent of total voting power or holding shares on which an aggregate sum of
not less than five lakh rupees has been paid up on the date of the notice. (2) The notice referred to in sub-rule (1)
shall be sent by members to the company not earlier than three months but at least fourteen days before the date
of the meeting at which the resolution is to be moved, exclusive of the day on which the notice is given and the
day of the meeting. (3) The company shall immediately after receipt of the notice, give its members notice of the
resolution at least seven days before the meeting , exclusive of the day of dispatch of notice and day of the
meeting , in the same manner as it gives notice of any general meetings. Where it is not practicable to give the
notice in the same manner as it gives notice of any general meetings, the notice shall be published in English
language in English newspaper and in vernacular language in a vernacular newspaper, both having wide circulation
in the State where the registered office of the Company is situated and such notice shall also be posted on the
website, if any, of the Company. (4) The notice shall be published at least seven days before the meeting, exclusive
of the day of publication of the notice and day of the meeting. There appears to be certain contradictions in the
section 115 and the Rule 23 and in such a case the rule shall be interpreted in the light of the section.
Secretarial Standards.105 The minutes of each of the meeting are to be recorded succinctly including all the
details like the new appointments made. The minutes prepared in the loose sheets must be signed by the
Chairman within 30 days of the meeting in the form of a book with pages consecutively numbered. The
minute book of each kind of company viz. the general meetings, creditors’ meetings are to be kept
separately.
The minutes of the meetings shall have an evidentiary value for the proceedings mentioned therein.
2. Directors’ Meetings
a. Board Meetings [Section 173 read with Rules 3 and 4 of the Companies (Meetings of Board and
its Powers), 2014]
The Board of directors of a company are responsible for overseeing the management of the company and
thereby exercise their power of day-to-day decision making by convening and holding Board meetings.
Within 30 days of their incorporation, the companies must hold their first board meeting. Thereafter, the
companies must hold at least four board meetings in a year, where there must not be more than 120 days’
gap between two consecutive meetings.106
One of the striking features of the present legislation is that it allows the directors to take part in the board
meeting through video-conferencing or any other audio-visual means. However, there is an embargo from
dealing with certain matters through the video-conferencing or audio-visual mode. 107
A notice of at least seven days must be given to each of the directors for a board meeting. In case of
urgency a shorter notice may be given where at least one independent director is present at such a
meeting.
The notice of a board meeting must be sent to all the directors, otherwise the proceedings of the meeting
and the resolution passed thereat may be declared as invalid by the Court of law. 108
105
Here secretarial standards concerning the general and Board meetings specified by the Institute of Company
Secretaries of India constituted under section 3 of the Company Secretaries Act, 1980, and approved as such by the
Central Government are referred.
106
These conditions are relaxed in case of a one- person company, small company and a dormant company where in
these companies are required to hold only one board meeting in six months of the calendar year and the consecutive
gap between two meetings must not be less than 90 days.
107
Rule 4 Companies (Meetings of Board and its Powers), 2014, enumerates such matters, they are:
(i) the approval of the annual financial statements;
(ii) the approval of the Board’s report;
(iii) the approval of the prospectus;
(iv) the Audit Committee Meetings for consideration of accounts; and
(v) the approval of the matter relating to amalgamation, merger, demerger, acquisition and takeover
108
Parmeshwari Prasad Gupta v Union of India, 1974 SCR (1) 304
Also, it has been held in the case of Dankha Devi Agarwal v. Tara Properties Private Limited 109 that a
decision taken in a meeting without due notice of such meeting for removal or induction would be an
instance of oppression and mismanagement.
At least two directors or one-third of the total strength (higher of the two) constitutes quorum for a board
meeting. Here the directors, both personally attending or through the audio-video means would be
counted for the purposes of the quorum (section 174).
b. Committee Meetings
The Companies Act, 2013 provides for four mandatory committees of the board of directors under the Act
which are namely, Audit Committee, Nomination & Remuneration Committee, Stakeholders Relationship
Committee and Corporate Social Responsibility Committee. The committees so formulated are not to be
appointed by every company but they get triggered or are required to be formulated based on certain
thresholds.
i. Audit Committee meeting is required to be convened by every listed company and only those public
companies which have a paid up share capital of Rs. 10 crore or more or have a turnover of Rs. 50 crore
or more or have aggregate outstanding loan, debenture and deposit exceeding INR 50 Crore or more. The
terms of reference of such a committee include monitoring the auditor's appointment, remuneration and
his performance etc. Every minute of the meeting of the Audit Committee shall be noted in the ensuing
meeting of the Board of Directors and also, a distinct minutes’ book shall be maintained for the meeting
of the Committee. The Chairman of the Audit Committee is required to address the concerns of the
shareholders at the Annual General Meeting.
ii. Nomination and Remuneration Committee meeting 110 are also a mandate for every listed company
and only those public companies which have a paid-up share capital of Rs. 10 crore or more or have a
turnover of R. 100 crore or more having aggregate outstanding loan, debenture and deposit exceeding
INR 50 Crore or more. The committee is required to ensure that the level and composition of
remuneration is reasonable and sufficient to attract, retain and motivate directors of the quality required to
run the company successfully.
iii. Stakeholders Relationship Committee meetings are required to address the grievances of the
stakeholders of the company. This committee is to be constituted by every company which has the
109
AIR [2006] SC 3068
110
The Rules of the Nomination and Remuneration Committee shall be framed pursuant to Section 178 of the
Companies Act, 2013 read with Rule 6 of Companies (Meeting of Board and its Powers) Rules, 2014.
strength of more than 1000 shareholders, debenture-holders, deposit-holders and any other security
holders at any time during the financial year.
iv. Corporate Social Responsibility Committee meeting shall take all decisions as regards the CSR
policy of the company in its meetings. Such a committee shall consist of at least three directors, of which
at least one director shall be an independent director.
3. Other Meetings
a. Class Meetings: These meetings are generally convened and held for a particular class of
shareholders/members only. For this reason, only the members holding shares of a particular class may
attend and vote at the meeting as the resolution so passed would be binding upon such class of members.
Such meetings are convened and held whenever the rights and privileges of the class of shareholders are
altered or affected. The articles of companies provide for the procedures to be carried out at the class
meeting and a special resolution to be passed for taking any decision. For instance, under section 48 of
the Act dealing with the variation of shareholders’ rights, provides that where share capital of the
company is divided into different classes of shares, the rights attached to the shares of any class may be
varied with the consent in writing of the holders of at least three-fourths of the issued shares of that class
or by means of a special resolution passed at a separate meeting of the holders of the issued shares of that
class. Similarly, at the time of approval of the proposed scheme of merger or arrangement as per section
232 of the Act, the tribunal may, on an application, order a meeting of or the members or class of
members, as the case may be, who may be affected by such arrangement.
b. Creditors’ meetings: Creditors owe claims against the company, and may be secured or unsecured
creditors. Meetings of the creditors are required to be called in a company at two instances. Firstly, at the
time of approval of the proposed scheme of merger or amalgamation, wherein section 232 of the Act, lays
down that the Tribunal may order a meeting of or creditors or any class of creditors in case they are
affected by such merger or arrangement. Secondly, when the company goes in for voluntary winding up,
as per section 306 of the Companies Act, 2013.
Introduction:
In seeking to understand the Corporate Governance structure of a Company, we have to take into
account two basic factors, which would be at work to create the structure. The first factor which would
be there is that wherever there is a divergence between ownership of an asset and control over it,
certain duties will be imputed by law upon the person who is in control of the asset. Further new duties
may be added or the implied duties may be diluted by contract, but there has to be a certainty as to who
is bound and to what extent. Law of trust is a perfect example of this situation where there is distinction
drawn between the legal owner (the person in control) and the beneficial owners (real owners i.e.
property exists to their benefit). Further examples of it may be drawn from law of agency and the law of
partnership. The second factor which works in determining the contours of corporate governance
structure is the fact that whenever the state imparts legal personality upon an entity which is not
natural, it will generally provide for rules of ascription. The statute which will grant recognition to the
legal personality of an artificial person will be the primary source of ascription of action upon the
artificial person, in order to ensure that its own decisions and acts should bind it and there should be
minimal source of discord in future as to the binding nature of the action upon the artificial person.
Statutes or charters which created local bodies, universities etc, follow this principle in laying down the
broad norms for decision making process by which decisions could be ascribed to the body, while giving
it enough discretion to formulate its own bye laws, regulations rules etc. There would not be much of a
difference where the statute instead of creating an artificial person, allows an artificial person to come
into existence provided norms laid in it are followed. Only it may provide for a greater scope for
experimentation and provide for an authority to oversee that the norms for recognition of personality
are followed. Examples of this approach are the cooperatives and companies. If the entity is for a single
purpose; the degree of flexibility allowed will be lower, which we witness in cooperatives. The rules are
there not just for the ascription of decisions but also in doing so, how to reconcile the different interests
which may interact, taking into account the purpose of the entity.
DIFFERENT INTERESTS IN THE COMPANY AND THEIR SAY IN COMPANY’S AFFAIRS
Artificial personality of a company and limited liability of shareholders of most of them brings into focus
the interests of creditors vis a vis that of the shareholders, who happen to be the owners of the
company. The statute will not only have to reconcile it and give a degree of protection or comfort to the
creditors, it also needs to reconcile the varying interests of the shareholders. To do this it will need to
take into account the nature of the company. A private company needs to be given more flexibility as it
is more in the nature of a partnership. At the other end of the spectrum, a listed public company will
have an amorphous mix of persons as shareholders, with bare interaction with each other and few
having a say in the management of the affairs of the company. In such a situation it becomes necessary
to give a greater say to the shareholder of a public company and ensure the existence of structures so
that he is not cheated or deprived of his rights. Unlike the shareholder of a private company, who
usually was a party to the Articles of Association or derived his rights via them and many a times has
management say this may not be so in a public company so such a shareholder may not have
negotiated articles which would protect him from the majority. One needs to also distinguish between a
‘for profit company’ from ‘not for profit company’. The latter is more in the nature of a public trust,
giving the government a greater say in its oversight. While shareholders are broadly categorised as
owners of the company, upon whom the risk, albeit a limited one, resides, there could be classes
amongst them and there may be differences in apportioning of the risk among different classes. Those
who bear the greatest risk also ought to have a major say in the affairs of the company. So generally, a
preference shareholder cannot share the pedestal with an equity shareholder in managing the affairs of
the company. Since preference shares provide the cushion to creditors, such shareholders will have a
greater voice than the creditors, but only so much. He is still a quasi-creditor and his interests are not
aligned with that of the equity shareholder.
SHAREHOLDERS AND BOARD OF DIRECTORS IN CORPORATE GOVERNANCE
Shareholders are the owners of the company. One of the reasons for them preferring a corporate
structure to do business over a partnership is the facility that it affords to the idea of leaving the
management of the business in the hands of someone most capable or well placed to do so. Like a
principal nominating an agent to conduct his business, they would nominate someone to conduct the
business of the company. The difference being that they nominate as the owners of the company and
they themselves are not the company. Ipso facto, the principal is the company itself and the loyalty of
director is primarily to it and not to the shareholders. The structure resembles a trust structure except
that beneficiaries of a trust may have no role in the selection of a trustee. How the shareholders will
choose the directors of a company will be dependent upon the provisions of the enabling statute i.e.
Companies Act and the basic contract amongst the shareholders under it i.e. the Articles of Association.
It is to the board of directors that the day to day working of the company and formulation of its policy is
left to. It may comprise of share holders, but as members of board, their capacity is distinct.
The board of directors is constituted to manage the day to day affairs of the company, formulation of
business plan etc. They have been chosen for their competence and for reflecting the different interests
amongst the shareholders. But one must remember that they, the shareholders, are still the owners of
the company, which has been bought into existence for the purpose of conduct of business, with most
of them usually being businessmen. Unlike a trust, where the benefits to the beneficiaries are usually
handed down, the initial shareholders are active participants in bringing about the company in
existence. Perforce the enabling statute, i.e. Companies Act, has to recognize it and grant them a greater
say in the affairs of the company. In fact in the very act of bringing the company into existence, the very
constituting contract- i.e. Articles of Association, would reserve for shareholders some powers over and
above that which the Companies Act provides for. Since the delegation of powers to the board of
directors is a limited one and rest still remain vested in the shareholders as a body, it follows that the
shareholders and the board are the two organs of the company which can speak for it and have the legal
authority to act for it, as distinct from merely representing it. The company being an artificial person,
there have to be organs comprising of natural persons (though shareholders may themselves he artificial
persons) to which its acts may be ascribed.
Types of rights and powers vested in shareholders

RIGHTS OF SHAREHOLDERS IN CORPORATE GOVERNANCE
Shareholders are the primary stakeholders in a company, them bearing whatever little risk there is to be
borne and the company being essentially for them. Other than protecting the creditors, the statute
(Companies Act) would generally concern itself with what rights be vested in shareholders, which rights
need to be protected in different circumstances, how the different rights need to be protected after
taking into account from whom they need to be protected. There can be three sets of decision making
rights which would vest in shareholders. The first set would relate to rights provided to shareholders by
statute. The rights, as discussed above, would vary according to the nature of the company. These
decision making rights have been devolved on shareholders for various reasons. Them being made
aware of the nature of risk an activity involves and implications of an action taking into account conflict
of interest between management and company and getting their consent where related party
transaction may happen, general affirmation of the board’s all round work or any specific suggestion
received from board, deciding on agents for effective oversight of board i.e. auditors etc. The second set
relates to rights reserved for shareholders to decide by the basic contractual document amongst them
i.e. Articles of Association. Articles may not only reserve certain rights for the shareholders but also
provide for more onerous means of obtaining what may be called a shareholders resolution. This may be
done by various means e.g. provide that certain resolutions in addition to fulfilling the requirements of
Companies Act, will have to pass additional hurdles in form of approval of certain shareholder or block
of shareholders, greater percentage of shareholders approving special requirements of quorum etc.
Thirdly, the shareholders may by voting, reserve certain rights for themselves. They may relate to
uncharted undefined areas which the Articles do not cover or it may relate to a matter which
shareholders delegate to the board but need to maintain final control.
Rights reserved for shareholders by Companies Act-
Rights reserved generally relates to-
LIMITATION ON SHAREHOLDERS GOVERNANCE RIGHTS
Respect for and adherence to division of powers by the Articles between the board and the
shareholders is a contractual obligation upon the shareholders for the shareholders. Till it is there,
unaltered, the division has to be respected by the shareholders even if the resolution had a majority
support large enough to after the Articles. Further, the Articles are public document, and members of
the public having dealings with the company ought to be certain what is within the domain of the board
of directors or the shareholders to decide. If the power is conferred on the board, then only it can
exercise it. In a private company, its extent can be very wide, given the nature of a private company.
Howsoever large the majority of the shareholders, they cannot usurp the powers of the board without
altering the Articles. In case the board acts in a manner contrary to what was decided by the
shareholders, it would be difficult for the courts to decide which action to attribute to the company in
the absence of such a rule. Ipso facto, from this it follows that where the general management of the
company vests in the board, members cannot by ordinary resolution give directions to the board or
overrule it. Board of directors is of the company and not just the majority shareholders. Shareholders as
a body are its owner and not just the majority. In addition to difficulties it would pose for attribution of
decision on the company, it would tantamount to overriding the special rights which may be reserved
for certain shareholders by the Articles. To say that the minority shareholders may exercise other
remedies given by the Companies Act means that the minority to protect its rights can only use the
sledgehammer which may as well harm the company, affecting minorities whose only interest was
having the company avoid acting as per the decision. However one has to remember that these
limitations on the shareholders would be relevant only if the company does possess a board competent
or able to exercise its powers. Articles may have been framed for an active board. A deadlock may
render the board completely unable to act. Since it is the shareholders who will bear the brunt of this
deadlock, action by shareholders to resolve the deadlock even in derogation of directors powers under
Articles to an extent, may not be violative of the compact. But the action needs to be limited to doing
what is necessary for the resolution of the deadlock i.e, nomination of additional directors etc. However
for this, the deadlock has to be severe enough so as to render the company’s board ineffective. Mere
disagreement on an issue between directors may not provide the shareholders an alibi to act.
ELICITING OF SHAREHOLDERS VIEW- SHAREHOLDER MEETINGS
The decision of the shareholders is taken in a meeting of them. The question arises as to what
constitutes a meeting of the shareholders. There are two types of meetings of the shareholders, the
annual general meeting and the extraordinary general meeting. The former, as the very term suggests, is
a compulsory annual ritual to be observed by the company. For the smooth functioning of the company,
certain housekeeping functions have to be voted upon by the shareholders annually at the least. Any
meeting other than the annual general meeting has to be called if certain prerequisites have been
fulfilled. An extraordinary general meeting may be called by the board of directors whenever they like,
or by the Tribunal or by the board on a requisition by members having ten percent of the shares having
voting power.
A meeting in the ordinary sense has two aspects, exchange of views and perspectives and determination
of the majority view. For the purpose of formation of views so as to decide how to vote and what to
speak if allowed, also solicit support of others for one’s own perspective, it is necessary that a
shareholder is aware of the facts in sufficient detail sufficiently in advance. For this reason the notice of
meeting should set all material facts in sufficient detail concerning an item for discussion, including the
interest of managerial personnel, for the shareholder to understand the meaning, scope and
implications of the item of business so that they may decide on it. In addition the notice ought to be
sent to the shareholders at least twenty one days in advance, thus giving them sufficient time to decide,
solicit support and participate. Requirement of minimum notice period can be dispensed with only if
there is a majority which would make solicitation of support irrelevant, i.e shareholder comprising
ninety five percent of the votes dispense with it in writing.
For a meeting to happen, there needs to be a minimum of two people. This is a bare minimum required
in a company which is not a single member company for the quorum of meeting. But the required
numbers would go up in the case of a public company, the requisite minimum for a quorum being
dependent on the number of members the concerned public company has. However as referred to
earlier, the Companies Act sets the floor for quorum. The Articles may prescribe a higher number and
many a times for quorum attendance of a specific shareholder is necessary. In the absence of quorum,
the meeting is adjourned to the same day next week, and if called by requisitioning shareholders, it is
cancelled. Those unable to attend may nominate a proxy, with the limitation that the proxy cannot
express any views in meeting.
If a resolution is not passed by show of hands, wherein only those entitled to express views participate,
it shall be put to vote by the chairman (selected by the members for conducting the meeting). Members
possessing one tenth of the voting power can demand the poll. Once a demand is made, the resolution
has to be passed by the requisite majority for the matter. Matters which require the members consent
may be of differing importance and so different majorities may be required of different matters put to
vote. But what also matters is how widespread the participation in voting is. Public companies with
widespread shareholding may require a wider participation, if not in the expression of views, then in the
poll. Physical presence for voting, by self or proxy may be dampener, unless someone is highly
motivated or votes are solicited by interested parties. To enable the participation of small shareholders,
who are not necessarily passionate about the matter put to vote, postal ballots may be a worthwhile
option. The Government may provide for matters which can be decided only by postal ballot. The
company may go further. Other than matters in which it is necessary to hear the directors or auditors, it
may provide for any matter to be decided by postal ballot.
VOTING VALUE OF SHARES
While in a public company there is equality in the value of votes of each equity share, them having same
value subject to those which have not been paid for, in a private company this may not necessarily be
true. There can be difference in the voting rights of different shares in a private company. Whether a
resolution has been passed or not will therefore depend not just on the face value of the share but the
voting power which it has. Further, as referred to earlier, different resolutions will need different
majorities to be determined by the Act and the Articles. Articles of Association may raise the bar, not
lower it. A general resolution only needs a simple majority of the members present and voting to vote
for it. Most of the matters which require the general resolution usually relate to ordinary everyday
matters. However there may be issues where it would be inequitable to let a matter be passed by the
ordinary simple majority. Though the requirement may not be as onerous as in a trust where all
beneficiaries have to agree, still a sufficiently large majority needs to agree for the special resolution.
The Act provides for a three fourth majority of shareholders present and voting. The matters for which
such a resolution is required are broadly of two categories. The first set of situations are those which go
to the root of the contractual relationship between the shareholders i.e relating to the amendment of
the constitutional documents (Memorandum and Articles of Association). The second set of
circumstances relate to where the interests of shareholders may be affected by the decision of the
board (which will be controlled by the majority) or majority shareholders. The issue does not relate to
the company’s identity (constitutional documents etc) but has the potential to affect the shareholder
value. While the majority would have taken care that its interests are not affected or taken care of,
those who do not control have to have an effective say. Examples of such actions are new share issuance
not on rights basis, merger or amalgamation with another company, actions affecting the earnings
potential (sale of undertaking) or increase risk (leverage by taking debt above a particular level), or may
benefit others(investment outside the company above a particular limit) or a related party transactions.
It is recognised that in related party transactions, it is the shareholders controlling company who will be
usually benefitting from such transactions or the transaction may be having their active consent,
therefore in certain class of related party transactions (according to the size of company or size of
transactions), the beneficiary of the transaction cannot vote for the special resolution as what is needed
is the assent of the rest. While there is a division in the powers of the board of directors and
shareholders as a body, until the company is hurtling towards bankruptcy, the board primarily acts for
its shareholders. The shareholders can therefore as a body, affirm and ratify the acts of the directors or
waive their rights against them subject to of course two qualifications, that the said acts should be
within the powers of the company and if it is not an related party transaction at an arm’s length, then
the directors shall not vote on it as shareholders.
RISE OF THE MINORITY SHAREHOLDER AFTER 2013 ACT
We have scene that usually in company’s democratic decisions, majority rule overshadows the minority
rule but 2013 Company’s Act has overcome this problem. Though minority shareholders are not defined
under any law still under section 235(power to acquire shares of dissenting shareholders) and section
244 (right to apply for oppression and mismanagement) of Companies Act, 2013 have been given 10%
shares or minimum hundred shareholders whichever is less in companies with share capital and 1/3rd of
the total number of its members in case of companies without share capital.
Under section 397 (Application to Company Law Board for relief in cases of oppression) and 398
(Application to Company Law Board for relief in cases of mismanagement), Company’s Act 1956 used to
provide protection to the minority shareholders from the oppression and mismanagement of the
majority, whereas in Company’s Act 2013 this protection against the oppression and mismanagement by
the majority shareholders upon minority shareholders is protected under sections 241-246. Section 241
provides that an application for relief can be made to the Tribunal in case of oppression and
mismanagement. This is a huge departure from the provisions of CA 1956 as the discretion which was
provided to the Central Government to allow any number of shareholders to be considered as minority
is, under the new CA 2013 been given to the Tribunal and therefore is more likely to be exercised.
Objectives:
The main two objectives of this change which is brought in 2013 Act is to protect the rights of the
minority shareholders and keep them updated about their rights from time to time, secondly, to check if
minority shareholders rights are redressed time to time.
Rights of minority shareholder :
1. Right to appoint a director- now small shareholders, upon notice of not less than 1/10th of the total
number of such shareholders or 1000 shareholders, have a small shareholder director elected.
2. Right in decision making and such director appointed shall be considered as independent director.
3. Oppression and mismanagement- now minority shareholders can apply to tribunal for any oppression
and mismanagement issue.
4. Rights with respect to reconstruction and amalgamation-
Now minority shareholders can purchase of shares of dissenting shareholders at a determined value by
the registered valuer. The minority has also been given a right to make an offer to the majority
shareholders
to buy the shares of minority shareholders.
5. Class action suit: the minority shareholders as per the provisions of Companies Act, 2013, may file
Class action suit
Much of the time, minority shareholders of companies tend not to question steps taken by their boards.
But in 2014, seven leading mutual fund (MF) houses - HDFC MF, Reliance MF, UTI, DSP BlackRock, Axis,
SBI MF and ICICI Prudential - wrote a strongly-worded, seven-page letter to the management of car
maker Maruti Suzuki against the proposal to convert the company's Gujarat plant into a wholly-owned
subsidiary of Suzuki. There have a few occasions when India's minority investors have raised their voices
aggressively. In 2008, they protested against the inflated valuations when Satyam Computer Services
announced its plan to acquire Maytas Properties and Maytas Infra. The deal didn't go through. In the
same year, minority shareholders of Sterlite Industries India were adamant that a restructuring proposal
floated by parent Vedanta was against their interests. Earlier this year, some minority shareholders
complained that Siemens AG, the German engineering company, had paid a low price for acquiring
additional shares of its Indian subsidiary. After going through the above briefly listed rights of the
minority shareholders given in the new Company’s Act 2013, it can be said that now minority
shareholders views wouldn’t be suppressed by the majority shareholders of the company.
DUOMATIC PRINCIPLES
While the shareholders’ will is reflected in the resolutions passed by them, insistence on it may be
unjust to the third parties, especially in cases of private companies where the conduct of parties may
show an informal and unanimous agreement among shareholders. However, there has to be a conduct
of the shareholders which does evidence of unanimous agreement among themselves. This recognition
of informal agreement, though not provided by stature, had to be inferred by the courts as tan
amounting to a resolution passed by the shareholders provided it was intra vires.
ARE SHAREHOLDERS UNDER DUTY WHEN VOTING?
Shareholders, when voting for a resolution, are not under any legal obligation to take into account the
company’s interests, contractual or moral obligations. Even a director of the company, when voting as a
shareholder is not under any obligation to vote for the resolution affirming the decision of the board of
which he was a party to as a member of the board. The vote is a property right of the shareholder which
can be exercised as per the shareholder’s perception of its interest and it owes no fiduciary duty to the
company. Being a property right, it can be the subject of contract. Shareholders can agree among
themselves the manner and purpose for which they shall vote and such contractual obligations are
legally enforceable.
VOTING RIGHTS OF PREFERENCE SHAREHOLDERS
Whilst we referred to shareholders voting for resolutions, we limited out reference to equity
shareholders. It is they who take the maximum risk in the corporate venture and it is fair that they
should have the right to decide the direction of the company. However when the issue in question is in
the terms of any other class of securities, i.e. any series of preference shares, it is fair that they should
have the vote on it and the amendment is carried out by the fourth vote. Also, when a company runs
into financial trouble, the directors owe to the duty not just to equity shareholders but creditors too,
who may have also protected their interest by having taken security. It is the quasi creditors, the
preference shareholders who would be left unprotected. In recognition of their unprotected status, the
statute confers certain powers in such an event. The non-payment of preferential dividend to
preference shareholders for two consecutive years would be an indication of brewing financial troubles
and therefore in such a circumstance they get a right to vote on any resolution put for the shareholders
vote.
Powers given to board of directors by Articles-
Decision making by shareholders-
Introduction
The company is legal person which is physically not in existence so it needs limbs and organs which
may mobilize it and make it functional. The organs and limbs of the company are directors. The
directors of the company are like ship of the captain which steer it in right direction to maximize
the profit and make the company beneficial for all its stakeholders. The directors of the company
are the most important persons in corporate governance who do almost everything related with
affairs of the company. If they are best the company shall be the best despite of all its resources but
if they are not so good company cannot perform better in spite of all its resources. The Board of
Directors is an amalgam which includes various types of directors like executive directors,
independent directors, minority directors, deemed directors, first directors, shadow directors,
nominee directors, additional directors, whole-time directors, retirable directors, celebrity
directors, women’s directors, employees’ directors, alternate directors, Managing director, chief
managing director etc. The corporate and securities laws provide detailed provisions regarding
regulating his working pattern in corporate governance. In this module we shall essentially see
definition, meaning, types, appointment, qualifications, removal, powers, liabilities and duties of
directors.
1.2 Learning Outcome

At the end of this module one shall be able to understand the following:
Who is director?
What is his position in the company?
How a director is appointed in a company?
What are the qualifications of a director?
How a director is removed from his office?
What are the powers of a director?
What are the duties of a director?
What are the liabilities of a director?
1.3 Director: Meaning and Definition
A company is a legal entity and does not have any physical existence. Lord Reid held that, “A living
person has a mind which can have knowledge or intention and he has hands to carry out his intention. A
corporation has none of these it must act through living persons 111.” It can act only through natural
persons. The person, acting on its behalf, is called Director. A Director is any person, occupying the
position of Director, by whatever name called 112. Now there is slight change in the definition and it is
defined in section 2(34)113 as “director” means a director appointed to the Board of a company. They are
professional men, hired by the company to direct its affairs. But, they are not the servants of the company.
They are rather the officers of the company. Only individual can be appointed as directors in company 114.
Supreme Court115 pointed out reason as why it is necessary that a director must be an individual. It said
that office of director is office of trust and in case of failure to carry out this trust someone should be held
responsible. It simply means a firm, company or other legal persons cannot be directors of company but
in earlier days a firm used to direct a company and it was knows as managing partners or managing
trustees. Directors are public institution while companies are social institutions 116.
It is not the name by which a person is called but the position he occupies and the functions and duties
which he discharges that determine whether in fact he is a Director or not. So long as a person is duly,
appointed by the company to control the company's business and, authorized by the Articles to contract in
the company's name and, on its behalf, he functions as a Director. The Articles of a company may,
therefore, designate its Directors as governors, members of the governing council or, the board of
management, or give them any other title, but so far as the law is concerned, they are simple Directors 117.
1.4 Position of Directors
The directors are agents of company. They are trustees of company and they are also officer of company.
They are professional men hired by the company to direct its affairs yet they are not servant of
company118. But by a separate service agreement he can offer his professional services to company as Lee
was doing in his company of which he was sole employee and sole director 119. The Companies Act, 2013
is silent about their position in the company. Bowen LJ clarifies his position in the company and he says
that, “Directors are described sometimes as agents, sometimes as trustees and sometimes as managing
directors. But each of these expressions is used not as exhaustive of their powers and responsibilities, but
111
Tesco Supermarkets Ltd. v. Nattraso, [1977] AC 153 at 170.
112
Section 2(13) of Companies Act, 1956.
113
Companies Act, 2013.
114
Section 149, Companies Act, 2013.
115
Oriental Metal Pressing Works P. Ltd. v. B.K. Thakoor, (1961) 31 Comp Cas 143.
116
Chiranjit Lal v. U.O.I., AIR 1951 SC 41 at 49 quoted in Dr. Avatar Singh, Introduction to Company Law,
(Eastern Book Company, Lucknow, 2006)p. 63
117
Robert R. Penington, Company Law, (Oxford University Press, New Delhi, 2006), p. 646.
118
Moriarty v. Regent’s Garage and Engg. Co., [1921] 1 KB 423.
119
Lee v. Lee’s Air Farming Ltd., (1961) AC 12.
as indicating useful points of view from which they may for the moment and for the particular purpose be
considered120.”
Position of
directors
Agents Trustees Officers
1.4.1 Directors as Agents of Company
Lord Cairns observed that, “What is the position of the directors of a public company? They are merely
agents of a company. The company itself cannot act in its person for it has no person; it act only through
directors and the case is as regards those directors, merely the ordinary case of principal and agent 121.”
In agency a person is employed to establish, maintain and annul a relationship of principal with third
parties and he has necessary authority for the same and directors also enjoy the same authority in terms of
company and third parties. This authority they get from memorandum and articles of the company and if
their act is beyond it, it is ultra vires. Directors can bind the company as agents only when they act
collectively as a Board of directors 122. However, the directors do not fit in the role of agents as they are
selected not employed with authority and powers of directors are wide and independent in comparison to
agents.
1.4.2 Directors as Trustees of Company
In trust an author creates a trust for the beneficiary which is managed by a trustee. Lindley LJ on the basis
of analogy observed that, “Although directors are not properly speaking trustees, yet they have always
been considered and treated as trustees of company which comes to their hand or which is actually under
their control and ever since joint stock companies were invented, directors have been held liable to make
good moneys whey have misapplied upon the same footing as if they were trustees 123.”
120
Imperial Hydropathic Co. v. Hampson, (1882) 23 Ch.D. 1.
121
Ferguson v. Wilson, [1886] LR 2 Ch 77.
122
K.S. Anantharaman, Lectures on Company Law and Competition Act,(LexisNexis, Nagpur, 2009) p. 205
123
Re Land Allotment Co., [1894] 1 Ch 616.
Being trustee of the company, they are custodian of the assets of the company and they should apply the
funds in best interest of company. If they misapply, misappropriate or divert the use of fund for their own
vested interests they must be held liable. In Percival v. Wright 124 the directors were not held liable for
buying shares from shareholders who were not disclosed about a pending transaction of sale of an asset of
the company. But if they would have induced the shareholders to sell their shares to them concealing the
fact that they were going to merge the company to another company at a profit, they would have become
trustees of this profit to the individual shareholders. Supreme Court held that, “The directors of
companies have been variously described as agents, trustees or representatives but one thing is certain
that the director’s action on behalf of a company is in a fiduciary capacity and their acts and deeds have to
be exercised for the benefit of the company. They are agents of the company to the extent they have been
authorized to perform certain acts on behalf of company. In a limited sense they are also trustees for the
shareholders of company125.”
The directors must exercise all his powers in utmost good faith of the company as they stand in fiduciary
capacity to the company. However, the directors are not trustees as strictu senso as there is no author of a
trust all agreements are singed on behalf of company by the directors.
1.4.3 Directors as organ or Officer of Company
Directors are limbs and organs of the company as Calcutta High Court observed that, “We should treat
certain officials as organs of the company, for whose action the company is to be held liable just as a
natural person is for the action of his limbs 126.” The director is a vital organ of company absence of which
may paralyze the company.
The Companies Act 2013 in section 2(59) treats them as officer of company. It says that, “officer”
includes any director, manager or key managerial personnel or any person in accordance with whose
directions or instructions the Board of Directors or any one or more of the directors is or are accustomed
to act”. Section 2 (60) keeps the directors in category of ‘officer in default’ and the Companies Act, 2013
at several places punishes him as ‘officer in default’ for non-compliance of its provisions. Apart from
being officer, they can serve to any post in official capacity so they can also be employee of company 127.
They are also taken as managing partners when they are having personal liabilities and golden shares i.e.
qualification share. In such cases all the good decisions made by them shall fetch them more money in
124
(1902) 2 Ch 421.
125
Dale and Carrington Investment P.Ltd. and Anr. v. P.K. Prathapan and Ors., (2004) 122 Comp Cas 161 SC.
126
Gopal Khaitan v. State, AIR 1969 Cal 132.
127
Lee v. Lee’s Air Farming Ltd., (1961) AC 12.
form of dividends. The directors also can be employees of company. It was held that, “Directors are
elected representatives of the shareholders engaged in directing the affairs of the company in its behalf.
As such directors are agents of the company but they are not employees or servants of company.
However, there is nothing in law to prevent a director from accepting employment under the company
under a special contract which he may enter in to with the company128.”
1.5 Number of Directors and Inter-company Directorship
A public company shall have minimum three and private company shall have minimum two directors and
every company may have maximum 15 directors which can be raised by passing special resolution and
one of such directors shall be a woman 129. Every company has to have at least one Indian resident
director130 and 1/3rd directors must be independent directors who essentially are not connected with
company and officers of company like promoters and directors.
Section 165 provides that no person, after the commencement of this Act, shall hold office as a director,
including any alternate directorship, in more than twenty companies at the same time. The maximum
number of public companies in which a person can be appointed as a director shall not exceed ten. If a
person is appointed as director he may resign from one company or chose his option and intimate the
concerned company. It also explains that for reckoning the limits of public companies in which a person
can be appointed as director, directorship in private companies that are either holding or subsidiary
company of a public company shall be included. Earlier there was no limit for private companies and this
limitation did not apply to subsidiary companies and alternate directorship but now even those are
included. Charitable companies and unlimited companies may exceed this limit.
1.6. Qualification & Disqualification of Directors
128
In Re Lee Brehens & Co., (1932) 2 Comp Cas 588.
129
Supranote 13.
130
Who resides in India for 182 days.
1.6.1 Qualification of Directors
As we know that a director is highly important person in corporate affairs so he must be very qualified but
Companies Act does not lay down any academic qualification for directorship which seems logical being
right to trade as a fundamental right it must be available to everyone. The companies Act in order to weed
out dishonest persons from running companies lays down many requirements. These requirements or
qualifications are following:
1. The people may take help of director database 131 to get the name of people who can work as
independent directors.
2. The person who intends to work as a director shall apply to central government for Director
Identification Number (DIN) which shall be allotted to him once only132.
3. Now the requirement of qualification shares is not there in the new Act under section 270 of the
old Act which provided that a director shall have to acquire the qualification share within two
months otherwise he shall be punished. One must be mindful that this was earlier also not a
provision of companies Act but if company wanted to have this they could have by a provision in
the Articles of Company. But now new Act does not provide anything about qualification shares.
One must be mindful that qualification shares bring sense of responsibility and develops
131
Section 150 as maintained by Bombay Stock Exchange
132
Section 153 to 159 of the Companies Act, 2013.
belongingness to the company of the director. A company even now may have it provided this
does not contravene the provisions of Companies Act, 2013133.
1.6.2 Disqualifications
Besides aforementioned qualifications a director needs following things in negative. These are
disqualifications. Section 164 provides for disqualifications of directors. According to it, “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;
(d) He has been convicted by a court of any offence, whether involving moral turpitude or otherwise, and
sentenced in respect thereof to imprisonment for not less than six months 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 been convicted of the offence dealing with related party transactions under section 188 at any
time during the last preceding five years;
(h) He has not complied with sub-section (3) of section 152 and has not obtained DIN; or
(i) he has not complied with the provisions of sub-section (1) of section 165. 134 S. 165(1) provides that a
person shall not hold office as a director including any additional directorship in more than 20 companies
at the same time. It is provided that a person cannot a director in more than 10 public companies at a time.
133
Section 6 of the Companies Act, 2013.
134
Inserted by the Companies (Amendment) Act, 2019
Apart from these requirements a person must not be director, including the company in which he intends
to be appointed as director, in more than 20 companies 135. Section 164(2) provides for an additional
disqualification which says that no person shall be re-appointed in a company or appointed in another
company as a director if a company of which he has been director has failed to file financial statement or
annual returns for three consecutive financial years or has failed to return the interest on public deposit etc
for one year or more. The newly inserted proviso to this section states that where a person is appointed as
director of a company which is in default of either of the above two, he shall not incur the
disqualification for a period of six months from the date of his appointment. 136
A private company may add additional disqualifications through its articles for disqualifying directors.
The new proviso says that disqualifications referred above in clauses (d), (e) and (g) will continue to
apply even if the appeal or petition has been filed against the order of conviction or disqualification. 137
All these qualification needs a little bit explanation. Unsoundness of mind is related with contractual
capacity which is related with cause-effect theory. If a person is capable to form a rationale judgment
about what is he doing and what is the effect of his doing he is of sound mind. Insolvency again is related
with contractual capacity. Moral turpitude offences are essentially white-collar crimes i.e socio-economic
offences. Punjab High Court held that conviction on a criminal charge is also a moral turpitude offence. It
said that moral turpitude is, “Anything done contrary to justice, honesty, principle or good morals, an act
of baseness, vileness or depravity in the private and social duties which a man owes to his fellow men or
society in general contrary to accepted and customary rule of right and duty between man and man 138.”
In such cases appointment is possible after cooling off period (5 years). But in conviction for serious
offences no appointment is possible and this proviso has been added for first time to keep perpetrators out
of corporate governance. Related party transaction means siphoning off the money of corporation by
related party transaction.
If a person has been a director in company which defaults in filing annual return or does not repay public
deposits, he cannot be appointed as director in another company. It was challenged earlier in Supreme
Court139 which upheld the constitutionality of provision. It held that, “The judgment while dismissing the
petition held that bringing in of section 274(1) (g) of the Act was to serve a larger public interest and did
135
Section 165.
136
As inserted by the Companies (Amendment) Act, 2017.
137
ibid
138
Durga Singh v. State of Punjab, AIR 1957 Punj 97.
139
Snowcem India Ltd. v. U.O.I., (2005) 60 SCL 50.
not violate the fundamental rights or any other rights of the petitioner. The provision is no punishment on
the company, it only renders directors of the defaulting company incapable of acting as directors of the
defaulting company incapable of acting as directors for a certain period.
1.7 Appointment of Directors
There are various methods to appoint various types of directors in various types of companies. Some of
such methods are following:
1.7.1 First Directors/Deemed Directors/Shadow Directors/Promoters as Directors
Generally Articles of the company provides for such directors 140. But if the Articles are silent about it then
subscribers of Memorandum are deemed to be first directors of company. They shall hold office till first
AGM when the directors are finally appointed. As the section 149 requires the directors to be appointed
within one year of incorporation so the same must be done as soon as possible. No person shall be
appointed as a director of a company unless he has been allotted the Director Identification Number under
section 154 or any other number as may be prescribed under section 153 141 and a declaration that he is not
disqualified to become a director under this Act. A person appointed as a director shall not act as a
140
Section 152.
141
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.
1.7.2 By Shareholders in General Meeting
Shareholders in Annual General Meeting appoint minority director, rotational directors, independent
directors. Section 151 provides that a listed company may have one director elected by such small
shareholders. Section 152 provides that every director shall be appointed by the company in general
meeting. In a public company 2/3 rd of such directors shall be persons whose period of office is liable to
determination by retirement of directors by rotation. Others 1/3 rd shall be whole time directors. Section
149(4) provides that every listed public company shall have at least one-third of the total number of
directors as independent directors.
At the subsequent AGM the directors to retire by rotation at every annual general meeting shall be those
who have been longest in office since their last appointment, but as between persons who became
directors on the same day, those who are to retire shall, in default of and subject to any agreement among
themselves, be determined by lot. The maximum size of board is fifteen and in counting the total number
of directors independent directors are not counted. In public company every director is appointed by a
single resolution while in a private company all directors may be appointed by a single resolution.
If the vacancy of the retiring director is not so filled-up and the meeting has not expressly resolved not to
fill the vacancy, the meeting shall stand adjourned till the same day in the next week, at the same time and
place, or if that day is a national holiday, till the next succeeding day which is not a holiday, at the same
time and place.142 If at the adjourned meeting also, the vacancy of the retiring director is not filled up and
that meeting also has not expressly resolved not to fill the vacancy, the retiring director shall be deemed
to have been re-appointed at the adjourned meeting.
1.7.3 By Board of Directors
According to section 161, the articles of a company may confer on its Board of Directors the power to
appoint any person, other than a person who fails to get appointed as a director in a general meeting, as an
‘Additional Director’ at any time who shall hold office up to the date of the next annual general meeting
or the last date on which the annual general meeting should have been held, whichever is earlier.
Likewise for temporary absent of three months of a director from India can be filled by ‘Alternate
142
Section 152(7)
Director’. If the office of any director appointed by the company in general meeting is vacated before his
term of office expires in the normal course, the resulting casual vacancy may, in default of and subject to
any regulations in the articles of the company, be filled by the Board of Directors at a meeting of the
Board. Such directors are termed as ‘Casual Director’. The provision of additional and alternate director
is a periodic arrangement and cannot bypass the general process of appointment by shareholders in
general meetings by remaining on board for years143.
1.7.4 By Central Government/National Company Law Tribunal
Section 161(3) provides that subject to the articles of a company, the Board may appoint any person as a
director nominated by any institution in pursuance of the provisions of any law for the time being in force
or of any agreement or by the Central Government or the State Government by virtue of its shareholding
in a Government company. The power under section 408 of old Act has now been deleted where Central
Government in case of oppression and mismanagement could appoint its nominee directors on the board
now such power has been conferred upon National Company Law Tribunal under section 242.
1.7.5 By Third Parties
The Articles of the company may authorize the third parties to appoint persons on the Board of Directors
as their nominee to protect their interests. They can be directors nominated by debenture holders,
creditors and bankers etc. the idea behind such directors is to ensure meticulous application of money lent
by creditors so the repayment could be secured.
1.8 Vacancy & Removal
1.8.1 Vacancy
Section 167 provides that the office of a director shall become vacant in following cases:
(a) He incurs any of the disqualifications specified in section 164 for example unsoundness of mind,
insolvency, conviction for moral turpitude offences etc. Where he incurs disqualification under s. 164(2),
the office of director shall become vacant in all the companies, other than the company which is in default
under this sub-section.144
143
P. Natrajan v. Central Government, (2004) 51 SCL 76.
144
Proviso inserted by the Companies (Amendment) Act, 2018
(b) He absents himself from all the meetings of the Board of Directors held during a period of twelve
months with or without seeking leave of absence of the Board;
(c) He acts in contravention of the provisions of section 184 relating to entering into contracts or
arrangements in which he is directly or indirectly interested;
(d) He fails to disclose his interest in any contract or arrangement in which he is directly or indirectly
interested, in contravention of the provisions of section 184;
(e) He becomes disqualified by an order of a court or the Tribunal;
(f) He is convicted by a court of any offence, whether involving moral turpitude or otherwise and
sentenced in respect thereof to imprisonment for not less than six months:
Provided that the office shall not be vacated by the director under (e) and (f)-
(i) for 30 days from the date of conviction or order of disqualification;

(ii) if he has filed an appeal or petition within 30 days against the order of such court resulting in
sentence or order, until expiry of 7 days from the date on which appeal or petition is disposed
of145;
(g) He is removed in pursuance of the provisions of this Act;
(h) He, having been appointed a director by virtue of his holding any office or other employment in the
holding, subsidiary or associate company, ceases to hold such office or other employment in that
company.
A private company may, by its articles, provide any other ground for the vacation of the office of a
director in addition to those specified in section 167(1).
If a person, functions as a director even when he knows that the office of director held by him has become
vacant on account of any of the disqualifications specified in 167(1), he 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 five lakh rupees, or with both. All such vacancies on account of
disqualifications shall be filled by promoter or central Government.
1.8.2 Retirement & Resignation
The usual tenure of a rotation director is five years. As we know that 2/3 rd of directors shall retire in each
AGM by rotation after completion of their tenure. Section 168 provides that a director may resign from
145
Substituted by the Companies (Amendment) Act, 2017
his office by giving a notice in writing to the company and the Board. His vacancy shall also be filled by
promoter or central Government.
1.8.3 Removal
According to section 169, National Company Law Tribunal under section 242 and shareholders under
section 169 can remove a director before expiry of his term by giving him opportunity of hearing. It can
be done by ordinary resolution passed in AGM. This section provides for detailed protection to such
person affirming the principles of natural justice and principle of Audi Altrem Partem which means hear
the other side. Such vacancy shall be filled in the same manner as the casual vacancies are filled. Though
no grounds of removal are mentioned in the section however where the shareholders feel the policies
pursued by directors or any of them are not to their liking, they have the option to remove the directors by
passing an ordinary resolution. Directors can be removed on grounds of fraud, misfeasance, persistent
negligence in carrying out the duties, avoidance of sound principles of prudent commercial practices,
serious injury to interest of trade, industry or business, defrauding creditors etc. Sound business principles
include proper business accounts, clear balance sheet, integrity, fair dealings, and efficient services.
Shareholders cannot remove a director who has been appointed by NCLT.
Apart from statutory provision of section 169 the Articles of a company may also provide for removal of
directors. Delhi High Court held that, “Where Articles confer power on Board to remove a director such
power is not affected by provision of section 284(now sec. 169). The Articles are in nature of an
agreement between the shareholders who are the joint owners of the company. If some specific
methodology is devised by consent nothing precludes the members from doing so 146.”
1.9 Powers of Directors
The directors steer the company for maximization of profit. The Board of directors gets its powers from
Articles, Memorandum and provisions of Companies Act, 2013. Certain powers of Board can be
exercised by individual directors to further the routine affairs as per allocation but certain powers shall be
exercised by the board collectively.
146
Ravi Prakash Singh v. Venus Sugar Ltd., (2008) 84 SCL 75 (Delhi).
1.9.1 General Powers of Directors (Routine)
Section 179 says that 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. But 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.
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 as mentioned in section 180.
1.9.2 Collective Powers of Board (Substantial)
The Board of Directors of a company shall exercise the following powers collectively 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:
Out of these powers the powers mentioned under clauses (a) to (c) can be delegated to a committee of
directors but other powers related with borrowing, merger, amalgamation, diversification which are
substantial in nature cannot be delegated.
The aforementioned powers of board shall not be deemed to affect the right of the company in general
meeting to impose restrictions and conditions on the exercise by the Board of any of the powers specified
in this section. Within the limits laid down by the Act, the powers of board of directors are supreme and
the shareholders cannot alter or restrict their powers by passing a unanimous resolution. They can remove
unscrupulous directors.
In following cases shareholders of company can restrict or interfere with powers of board:
i. Where directors are acting mala fide or against the interests of company;
ii. Where the board is interested in a transaction so they shall be incompetent to work;
iii. Where there is complete deadlock in management.
Supreme Court held that, “A company is a juristic person and it acts through its directors who are
collectively referred as Board of directors. An individual director has no power to act on behalf of
company of which he is director unless by some resolution of Board of the company, specific powers are
given to him. Whatever decisions are taken regarding running the affairs of the company, they are taken
by the board of directors147.”
1.9.3 Powers of Board to be Exercised in General Meetings
Certain powers can be exercised by board with sanction in meetings of shareholders only. Section 180
discusses about such powers. It provides that the Board of Directors of a company shall exercise the
following powers only with the consent of the company by a special resolution, namely:
147
Dale and Carrington Investment P.Ltd. and Anr. v. P.K. Prathapan and Ors., (2004) 122 Comp Cas 161 SC.
(a) To sell, lease or otherwise dispose of the whole or substantially the whole of the undertaking of the
company or where the company owns more than one undertaking, of the whole or substantially the whole
of any of such undertakings.
(b) To invest otherwise in trust securities the amount of compensation received by it as a result of any
merger or amalgamation;
(c) To borrow money, where the money to be borrowed, together with the money already borrowed by the
company will exceed aggregate of its paid-up share capital, free reserves and securities premium 148, apart
from temporary loans obtained from the company’s bankers in the ordinary course of business;
(d) To remit, or give time for the repayment of, any debt due from a director.
Restriction in such classes shall not affect the rights of bonafide transferee or such companies where the
ordinary business of the company consists of, or comprises, such selling or leasing.
1.9.4 Managerial Powers of Directors
The directors as are limbs of company so they have all power for better and effective management of
company including the following:
Power to enter in to contractual relationship for mobilization

of stock in trade;
Power to declare dividend;
Power to allot, forfeit and transfer of shares;
Power to appoint director to fill up casual vacancies;
Power to issue debentures or hybrid instruments;
Power to appoint managing director, manager or secretary of

company;
Power to formulate and execute policies related with

corporate affairs of the company;
Power of control and supervisions of other personnel in the

company.
148
1.9.5 Other Restrictions on Directors
1.9.5.1 Restrictions on Political Contributions
Section 182 provides that a company, other than a Government company and a company which has been
in existence for less than three financial years, may contribute any amount directly or indirectly to any
political party.149
Every company shall disclose in its profit and loss account any amount or amounts contributed by it to
any political party. If a company makes any contribution in contravention of the provisions of this
section, the company shall be punishable with fine which may extend to five times the amount so
contributed and every officer of the company who is in default shall be punishable with imprisonment for
a term which may extend to six months and with fine which may extend to five times the amount so
contributed.
1.9.5.2 Interested Directors
Section 184 provides that an interested director shall disclose his interest to in the first meeting of Board.
If a director of the company contravenes the provisions of 184, such director shall be punishable with
imprisonment for a term which may extend to one year or with fine which may extend to one lakh rupees,
or with both.
1.9.5.3 Restrictions Related with Loan150
Section 185 provides that no company shall, directly or indirectly, advance any loan, including any loan
represented by a book debt to give any guarantee or provide any security in connection with any loan
taken by-
(i) Any director of company, or of its holding company or any partner or relative of such
director; or
(ii) Any firm in which any such director or relative is a partner.
A company may advance any loan including any loan represented by a book debt or give any guarantee or
provide any security in connection with any loan taken by any person in whom any of the director of the
149
(The aggregate of the amount which may be so contributed by the company in any financial year shall
not exceed seven and a half per cent of its average net profits during the three immediately preceding
financial year.)- deleted by Act 7 of 2017
150
Substituted by Act 1 of 2018.
company is interested or such other person subject to the condition that a special resolution is passed by
the company in general meeting or loans are utilized by the borrowing company for its principal business
activities.
But this restriction does not apply to managing and whole time directors who is being extended such loan
being resolved by special resolution in AGM for recognition of his services or to a company the business
of which is financing. If any loan is advanced or a guarantee or security is given or provided in
contravention of the provisions of section 185(1), 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, every officer of the
company in default and the director or the other person to whom any loan is advanced or guarantee or
security is given or provided in connection with any loan taken by him or the other person, shall be
punishable with imprisonment which may extend to six months or with fine which shall not be less than
five lakh rupees but which may extend to twenty-five lakh rupees, or with both.
1.10 Duties of Directors
Duties of
Directors
General statutory
duties duties
1.10.1 General Duties of a Director
The directors are very important persons in the corporate affairs. They derive their duties wowing to the
position and role that they have in the company. Their duties also ooze out from their fiduciary capacity.
Generally, a director is expected to show great amount of skill and care in the all transaction where he is
representing the company to the world. A director has to conduct the affairs of company in such a manner
that all the decisions taken by them may serve the interests of company and all its stakeholders. He should
not run the company in autocratic way. Generally, powers of substantial nature are not exercised by the
directors alone and they are subject to final confirmation of general body of company. Substantial
powers are exercised by board in board’s meetings.
Generally, for better internal management of the corporate affairs, the Articles of the company details out
the role, responsibilities and duties of directors in routine and extraordinary business of company. He
must be meticulous especially in financial transaction, account keeping and auditing of books of account.
Though doctrine of indoor management is a relic of past but on the basis of it the third party may bind the
company for reckless transactions done by reckless directors, therefore in performance of duties, great
amount of care and skill is expected from directors. He in general sense has following duties:
Duty of good faith;
Duty of reasonable care;
Duty not to delegate his powers;
Now these duties have been given statutory recognition categorically under section 166 which provides
that a director of a company shall act in accordance with the articles of the company. 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. A director of a company shall exercise his duties with
due and reasonable care, skill and diligence and shall exercise independent judgment. 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. 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. A director of a company shall not assign his office and any assignment so made
shall be void. 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.
1.10.2 Statutory Duties of Directors
The Companies Act, 2013 at various places describes about so many duties of directors out of which few
may be seen as following:
i. Duty not to mislead by offer document; (sec. 34& 35)
ii. Duty not to induce investors for share subscription; (Sec. 36)
iii. Duty not to issue irredeemable preference shares; (sec. 55)
iv. Duty to file annual return to Registrar; (sec. 92)
v. Duty to hold statutory meetings of company; (sec 96)
vi. Duty to maintain books and auditing of the books, appoint auditors; (sec. 128)
vii. Duty to ensure planning and execution of Corporate Social Responsibility initiatives; (sec. 135)
viii. Duty to get DIN (sec. 156 & 159)
ix. Duty to perform certain things as enumerated in section 166.
x. Duty to attend board’s meetings; (sec. 173)
xi. Duty not to make political contribution in contravention of provision; (sec. 182)
xii. Duty to disclose his interest in transaction; (184)
xiii. Duty not to receive loan from company;(sec. 185)
xiv. Duty to receive remuneration in confirmation of provisions; (sec. 197)
xv. Duty to make declaration of solvency in winding up of the company; (sec. 305).
1.11 Liability of Director
The liability of a Director to the company may arise from his breach of fiduciary duty. He can be made
liable to shareholders, outsiders, company and co-directors. Where a Director acts dishonestly to the
interest of the company, he will be held liable for breach of fiduciary duty. Most of the powers of
Directors are powers in trust and, therefore, should be exercised in the interest of the company and, not in
the interest of the Directors or, any section of members.
1.11.1 Ultra vires Acts
The object clause of memorandum defines as well as confines the powers of company. Any act done
beyond such objects shall be ultra vires 151. Though doctrine of ultra vires has now become diluted
however it is still relevant to save the company from unwarranted reckless transactions done by the
directors for personal and vested interests in the garb of contracts done on account of company by the
directors. For ultra vires acts directors shall be held personally liable. This doctrine aims at protecting the
interests of shareholders of company.
1.11.2 Negligence
151
Ashbury Railway Carriage & Iron Co. Ltd. v. Riche (1875) LR 7 HL 653, A.L. Mudaliar v. LIC, AIR 1963 SC
1185.
The directors as we know various statutory and non-statutory duties to various stakeholders. If they
breach such duty then resultantly they would be held negligent in performance of the duties. For
negligence of such duties directors may be held liable under tortuous liability and they cannot be
exonerated from their liabilities by Articles and general body of the company.
1.11.3 Mala Fide Acts
As we have discussed that directors are agents, trustees and officers of the company and they stand in
fiduciary position in relation to the company, therefore they should utilize the resources, money and
property of the company in the best interests of company with due care and diligence. If want of care is
shown then the acts shall be mala fide acts for which the directors shall be liable for breach of trust and,
may be required to make good the loss or damage, suffered by the company by reason of such mala fide
acts and in such situations shareholders can intervene 152. Since the directors are holding a confidential and
powerful position so they have access to information about the assets of the company and if they apply
the corporate funds for vested interests they can be held liable for torts like malfeasance and misfeasance
and conversion of property. They are equally liable for diversion of money for personal use in criminal
laws as a case of criminal breach of trust, criminal misappropriation of property etc. In such cases the
court may requisition him to return and restore such money personally.
1.11.4 Liability for Co-Directors?
The directors do not act in isolation. They are jointly and severally liable for the acts of company. All the
directors are agents of each other. They sink and swim together. A director owes vicarious liability for
other directors. If a particular act is to be done by the board of directors and the same is done by single
directors on behalf of all such directors, then in case of liabilities he can seek contribution from all his co-
directors.
1.11.5 Criminal Liability of Directors
Directors in so many cases incur criminal liability for their acts and omissions; some of them are
following:
i. Non-compliance of incorporation formalities (sec. 8);

ii. Misstatement in prospectus (sec. 35);
iii. Fraudulent Inducement for share-subscription (sec. 36);
152
Satya Charan Lal v. Rameshwar Prasad Bajoria, AIR 1950 FC 133.
iv. Failure to return application money;
v. Criminal liability regarding issuance of bonus shares, discounted shares, irredeemable preference
share and calling and falsification of share certificates;
vi. Failure to file annual return; (sec. 92)
vii. Failure to hold AGM;
viii. Grant of loan in contravention of Companies Act (sec. 185);
ix. Failure to maintain proper books of accounts;
x. Failure to distribute dividends (sec. 127);
xi. Failure to file annual financial statement (sec. 129)
xii. Failure to get DIN (sec. 159);
xiii. Failure to exceed maxim limit of inter-corporate directorship (sec. 165);
xiv. Failure to comply with statutory duties (sec. 166);
xv. Accepting deposit in contravention of provisions of companies Act;
xvi. Failure to disclose interest (sec. 184);
xvii. Criminal liability for fraud, false evidence etc. (sec. 339, 447, 449 & 450)
1.12. Meetings of Board of Directors
The board often is found to be either an amalgam where people do not meet and if they meet they do not
conduct the affairs of company. Therefore, the companies Act is very much particular of meeting of
directors so the business of the company may be negotiated and furthered. Section 173 provides that
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. Central Government may exempt smaller companies from such
requirements. 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 seven days’ notice is must for such notice by post or electronic
mails.
Section174 provides that 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. 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. It is essential that all business of such board’s meetings should be recorded in a book called minute
book. Minutes of every meeting must be signed as passed in the next meeting.
1.13 Changes brought in by 2013 Act
General
1. Woman director
One of the changes brought in by 2013 Act is the requirement of having at least one women director. This
new requirement is a good way of encouraging gender diversity, though it has been found that only four
percent of the directors of publicly listed Indian companies are women. 153
The companies which need to have women directors according section 149 of Companies Act,2013 are:
(i) Every listed company, within one year from the commencement of second proviso to sub-section (1)
of section 149
(ii) Every other public company that has paid–up share capital of one hundred crore rupees or more, or a
turnover of three hundred crore rupees or more within three years from the commencement of second
proviso to sub-section (1) of section 149 which companies will ensure compliance.
2. Number of directorships
The 2013 Act increases the limit for number of directorships that can be held by an individual from 12 to
154
15. One new requirement introduced by the Companies Act 2013 is that at least one director have to
stay in India for at least 182 days during the financial year.155
4. Independent directors
Change brought in by 2013 Act in regards to independent directors is every listed public company to have
at least one-third of the total number of directors as independent directors. Additionally, according to
153
http://in.reuters.com/article/india-companies-women-idINKBN0G71IV20140807 accessed November 1, 2016
154
[section 149(1) of 2013 Companies Act].
155
[section 149(3) of 2013 Companies Act]
section 149(4), the central government in the draft rules has prescribed the minimum number of
independent directors in case of the following classes of public companies
(i) Public companies having paid up share capital of 100 crore INR or more; or
(ii) Public companies having turnover of 300 crore INR or more
(iii) Public companies which have, in aggregate, outstanding loans or borrowings or debentures or
deposits, exceeding 200 crore INR.156
5. Appointment of an additional director
In relation to an appointment of an additional director 2013 Act states that any person who fails to get
elected as a director in the general meeting can no longer be appointed as an additional director by the
board of directors.157
6. Other observance for private companies
Till now there were certain requirements which were mandatory observed by public companies and
private companies which were subsidiary of public company, but now following requirements are to be
observed by private companies, such as :
 Appointment of director to be voted individually

 Option to adopt principle of proportional representation for appointment of directors
 negligibility on account of non-compliance with section 274(1)) (g) now extended for
appointment or reappointment as a director in a private limited company also. 158
Procedure for appointment and resignation of directors159:
156
[section 149(4) of 2013 Companies Act]
157
[section 161 of 2013 Companies Act]
158
Companies Act, 2013 Key highlights and analysis,
http://www.pwc.in/assets/pdfs/publications/2013/companies-act-2013-key-highlights-and-analysis.pdf accessed
November 1,2016
159
CS. Gunjan Gaur (Managing Partner of Komplett Advisory LLP) with the Assistance of CS. Deepak
Bhardwaj,https://taxguru.in/company-law/change-directors-private-limited-company.html
STEPS PARTICULARS WHAT NEEDS TO BE DATE
DONE
1. Directors Identification Details required for the
Number: individual:
Pursuant to Section 153 of a. Applicant’s full name.
the Act and rule 9(1) of the
Companies (Appointment b. Father’s full name.
and Qualification of
Directors) Rules, 2014, c. Photograph (JPEG
every individual, who is to format only).
be appointed as a director
shall make an application d. Nationality.
electronically in e-form
DIR-3 for the allotment of e. Occupation and
DIN. educational qualification.
f. Date of birth.
g. Passport number.
h. Permanent Residence
proof.
Mandatory attachments:
a. Passport copy (with

date of birth).
b. Proof of residence
(should not be older than 1
year).
c. Photograph (JPEG
format)
Note: In case of proofs

which are in languages
other than Hindi / English,
the translation done by the
notary of the home country
is required.
2. Obtaining consent, a. Consent in writing to
intimation and disclosure act as director in form
from the individuals DIR-2, pursuant to rule 8
proposed to be appointed as of the Companies
a director. (Appointment and
Qualification of Directors)
Rules, 2014.
b. Intimation in form
DIR-8, pursuant to rule 14
of the Companies
(Appointment and
Rules, 2014. To be filed
after appointment.
c. Disclosure of interest in
form MBP-1 pursuant to
section 184(1) read with
rule 9(1) of the Companies
(Meetings of Board and its
Powers) Rules, 2014. To be
filed after appointment.
3. Board meeting a. Call the board meeting.
b. Pass resolution for
appointment of additional
director.
c. Issue letter of
appointment.
4. File e-Form DIR – 12 Pursuant to section 170(2)
of the Act read with rule 8
of the Companies
(Appointment and
Rules, 2014, this e-form is
required to be filed with
the concerned registrar,
within thirty days of the
appointment.
a. Letter of appointment.
b. Board resolution.
c. DIR-2
5. Resignation from resigning Pursuant to section 168(1)
of the Act, a director may
directors.
resign from his office by
giving a notice in writing
to the company.
6. File e-Form DIR – 11 Pursuant to Rule 16 of the
Companies (Appointment
and Qualification of
Directors) Rules, 2014,
where a director resigns
from his office, he shall
within a period of thirty
days from the date of
resignation, forward to the
registrar a copy of his
resignation along with the
reason of resignation in e-
form DIR-11.
a. Notice of resignation
filed with the company.
b. Proof of dispatch.
7. Board meeting a. Call the board meeting.
b. Pass resolution for
acceptance of the
resignations.
8. File e-Form DIR – 12 Pursuant to section 168(1)
of the Act read with rule 15
of the Companies
(Appointment and
Rules, 2014, this e-form is
required to be filed with
the concerned registrar,
within thirty days from the
effective date of
resignation.
a. Notice of resignation.
b. Evidence of cessation
(board resolution).
INTRODUCTION
Director means “a director appointed to the Board of a company 160”. This definition of Director under the
Companies Act 2013 has changed the concept of de facto directorship161 which was based on the position
he holds and the functions and duties which he discharges 162. Thus, the concept of Shadow Director is
done away with under the 2013 Act (except in relation to foreign company 163 as a person in accordance
with whose directions or instructions the Board of Directors of the company is accustomed to acting) 164.
Now, a person may be referred to as Director only after a de jure appointment to the Board.
160
Section 2(34) of the Companies Act, 2013 – compared to Section 2(13) of the 1956 Act – director includes any
person occupying the position of director, by whatever name called.
161
Taxmann’s Company Law, Vol. 1 (2015), pp.130
162
A. Ramaiya, Guide to the Companies Act, (18th Edition, 2015) Vol 1, pp. 144.
163
Section 386 (b) of the Companies Act, 2013
164
A. Ramaiya, id. However, ss. 2(59) and 2(60) dealing with officer and officer in default do include the concept of
shadow director although compliances under the 2013 Act relating to directors is not attracted in case of such
shadow directors.
Company is a separate legal entity and it functions through the instrumentality of its Memorandum of
Association (MOA) and Articles of Association (AOA). Members (shareholders making financial
investment in the company) exercise the right to appoint the Directors to the Board of the Company,
which in turn appoint the managerial personnel (management) of the company that performs day to day
functions of the company. Board of Directors is the brain of the company and they perform key statutory
functions and supervise the management. Shareholders, though the de facto owner of the company
(company itself being the owner de jure), have no rights to involve in company’s management directly.
This relationship is the essence of ‘corporate body’. The aforesaid relationship may be depicted as
follows:
Company through its Shareholders
Board of Directors
Key Managerial Personnel Manager

CEO : CS : WTD : CFO
2. KEY MANAGERIAL PERSONNEL (KMP)

On the recommendations of the J.J. Irani Committee, the Companies Act 2013 has provided for a
definition of KMP identifying the following165:
i. Chief Executive Officer (CEO),
ii. Company Secretary (CS),
iii. Whole Time Director (WTD),
iv. Chief Financial Officer (CFO) and
v. Such Other Officer as may be prescribed by the Central Government.
[Companies Amendment Bill of 2016 which is presently before the Standing Committee on Finance, has
recommended for a further inclusion of a clause before clause (v) i.e. a category of officer who is not
more than one level below the directors in whole-time employment and is designated as KMP by the
board]
165
Section 2(51) of the CA 2013
Companies Act, 1956 did not provide for such classification and statutory recognition. Section 203 (1) of
the CA 2013 prescribes that every company belonging to such class or classes as may be prescribed 166
shall have the following whole time KMP,
 Managing Director (MD) or CEO or Manager and in their absence, a Whole Time Director.
 Company Secretary
 Chief Financial Officer
Let us understand the role of the aforesaid three set of KMPs.
2.1 CEO means an officer of a company, who has been designated as such by it 167. CEO is
sometimes also referred to as Chief Operating Officer (COO) and is basically a designation given to an
officer of a company. This may even be a Manager or a Managing Director as is evident from the
requirement of whole-time KMP.
2.1.1 Manager168
An individual169 who
 Subject to the superintendence, control and director of the Board of Directors
 Has the management of the whole, or substantially the whole, of the affairs of a company.
It is important to note here that what matters is not that a person is described as a manger but whether he
is exercising substantial powers of management170. Accordingly, a shop manager or factory manager
cannot be a ‘manager’ under the Act. There is no need that manager must be an employee of the
company.
Tesco Supermarkets Case171
Tesco Supermarkets Ltd v Nattrass is a leading decision of the House of Lords on the "directing
mind" theory of corporate liability.
Tesco was offering a discount on washing powder which was advertised on posters displayed in
stores. Once they ran out of the lower priced product the stores began to replace it with the
166
Rule 8 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014 prescribes that
every listed company and every other public company having a paid up share capital of ten crore or more shall have
whole-time key managerial personnel.
Further, under Rule 8A, a company not covered above, but has a paid up capital of five crore or more shall have a
whole-time Company Secretary.
167
168
169
Not a firm or body corporate or association of person – section 196 of CA 2013 (384 of CA 1956).
170
CIT Kerala v. Alagappa Textiles (Cochin) Ltd. AIR 1980 SC 235
171
[1971] UKHL 1
regularly priced stock. The manager failed to take the signs down and a customer was charged at
the higher price. Tesco was charged under the Trade Descriptions Act 1968 for falsely
advertising the price of washing powder. In its defence Tesco argued that the company had taken
all reasonable precautions and all due diligence, and that the conduct of the manager could not
attach liability to the corporation.
The House of Lords accepted the defence and found that the manager was not a part of the
“directing mind” of the corporation and therefore his conduct was not attributable to the
corporation. The corporation had done all it could to enforce the rules regarding advertising. n
the House of Lords Tesco were successful with their defence showing that,
 a store manager was classed as ‘another person’, and,

 a system of delegating responsibility to that person was performance of due diligence, not
avoidance of it
The store manager was not the directing mind and will of the company - the company had done
all it could to avoid committing an offence and the offence was the fault of another person (an
employee). The company was acquitted.
2.1.2 Managing Director (MD)

A director who is entrusted with substantial powers of management of the affairs of the company by
virtue of:
 The articles of association of the company or
 An agreement with the company or
 A resolution passed in its general meeting or by its Board of Directors.
It may be noted here that the difference between manager and managing director is that while manager
exercises the management of substantially the whole of the affairs of the company, the managing director
has substantial powers of management. Further, there is no stipulation for the managing director to
exercise his powers subject to superintendence, control and directions of the BOD (as was the case in
1956 Act), while manager is subject to superintendence, control and direction of the BOD. While a
Managing Director essentially has to be a Director before whereas a manager can continue to be a
manager whether or not he holds the office of a director.
2.1.3 Whole Time Director (WTD)

It includes a director in the whole-time employment of the company 172. It may be noted that a director
may be appointed as chief executive officer, manager, company secretary or chief financial officer if so
172
Section 2(94) of CA 2013 – corresponding section 269 of the 1956 Act.
provided in the Articles of the Association of a company and would then be treated as the Whole Time
Director.
2.2 CS is appointed by a company to perform the functions of a CS under the Companies Act 173.
Every listed company and others having a paid up capital of Rs. 5 crores or more will have to appoint a
CS174. Though the secretary’s duties are largely of ministerial or administrative nature 175, it plays a very
important role in corporate governance.
2.3 CFO means a person appointed as the Chief Financial Officer of a company 176. This is a new
definition provided under the 2013 Act and suggests that CFO will be in full charge of all financial and
accounting aspects of a company though not specifically mentioned under the definition 177.
2.4 Senior Management:

The expression ‘‘senior management’’ has been defiled to mean personnel of the company who are
members of its core management team (excluding Board of Directors) comprising all members of
management one level below the executive directors (including the functional heads) 178.
4. Types of Directors
Board of Directors or often referred to as Board means the collective body of the directors of the
company. Generally the composition of the Board includes executive and non-executive directors. This
differentiation stems from the Corporate Governance principles and norms. For example, Clause 49 of
the Listing Agreement provided that the Board of directors of a company shall have an optimum
combination of executive and non-executive directors with not less than 50% of the Board comprising of
non-executive directors179. The following is the minimum and maximum limit of directors in a Board of
various classes of companies180:
173
Section 2(24) of the CA 2013 – means a company secretary as defined in clause (c) of the Company Secretaries
Act, 1980 – i.e. a person who is a member of the the Institute of Company Secretaries of India.
174
Section 203(1) read with Rule 8 of the Companies (Appointment and Remuneration of Managerial Personnel)
Rules 2014.
175
Section 205 which specifies the duties and responsibilities of a CS.
176
177
A. Ramaiya, pp. 75
178
Explanation to Section 178 of CA 2013. See Sections 128, 129 and 137 of CA 2013.
179
Listing Agreement has now been replaced with SEBI (Listing Obligations and Disclosure Requirements)
Regulations, 2015 (Listing Regulations); Reg. 17 provides for Board of Directors.
180
Section 149 of CA 2013 – Company to have Board of Directors
Type of Company Minimum Maximum181
One person Company 1 15
Private Company 2 15
Public Company 3 15
Producer Company 5 15
A person cannot hold more than directorship of more than 20 companies (in case of public company the
maximum number being 10 only)182.
4.1 Executive and Non-Executive Directors

The term executive director has been defined to mean a WTD as per Companies (Specification of
Definition Details) Rules, 2014 . The difference between executive and non-executive director lies in
their being internal and external to the organisation and their involvement in day-to-day management of
the company. As per Kumar Mangalam Birla Committee Report on Corporate Governance:
“…the executive directors (like director finance, director personnel) are involved in the day-to-
day management of the companies. The non-executive directors bring external and wider
perspective and independence to the decision making….”
4.1.1 Chairman of the Board

The Chairman of the Board provides leadership to the Board and also chairs the General Meetings. There
is always a need for better coordination between the Chairman of the Board and CEO of the company
who is responsible for the day to day management of the business (except in cases where the Chairman
and CEO/ MD is the same person – for e.g. Mr. Pawan Munjal is the Chairman, MD and CEO of Hero
MotoCorp).
"The people you bring on board will represent your company, share your vision, and complement
your weaknesses. (This is why you should not get people who resemble you.) They should have
different skills to increase the "human wealth" of the company."
Gilles Babinet, serial entrepreneur183
4.2 Independent Director

A detailed provision has been provided in relation to independent directors under the Companies
Act, 2013. An exhaustive definition has been provided in Section 149(6) of the Act as follows:
181
May appoint more than 15 directors by passing a special resolution in this regard.
182
Section 165: Number of Directorship for details.
183
<https://www.iod.org.nz/FirstBoards/How-to-set-up-a-board/Types-of-directors>
An independent director in relation to a company, means a director other than a managing
director or a whole-time director or a nominee director:
(a) who, in the opinion of the Board, is a person of integrity and possesses relevant expertise
and experience;
(b) (i) who is or was not a promoter of the company or its holding, subsidiary or associate
company;
(ii) who is not related to promoters or directors in the company, its holding, subsidiary or
associate company;
(c) who has or had no pecuniary relationship with the company, its holding, subsidiary or
associate company, or their promoters, or directors, during the two immediately preceding
financial years or during the current financial year;
(d) none of whose relatives has or had pecuniary relationship or transaction with the company, its
holding, subsidiary or associate company, or their promoters, or directors, amounting to two per
cent. or more of its gross turnover or total income or fifty lakh rupees or such higher amount as
may be prescribed, whichever is lower, during the two immediately preceding financial years or
during the current financial year;
(e) who, neither himself nor any of his relatives—
(i) holds or has held the position of a key managerial personnel or is or has been
employee of the company or its holding, subsidiary or associate company in any of the
three financial years immediately preceding the financial year in which he is proposed to
be appointed;
(ii) is or has been an employee or proprietor or a partner, in any of the three financial
years immediately preceding the financial year in which he is proposed to be appointed,
of—
(A) a firm of auditors or company secretaries in practice or cost auditors of the
company or its holding, subsidiary or associate company; or
(B) any legal or a consulting firm that has or had any transaction with the
company, its holding, subsidiary or associate company amounting to ten per cent
or more of the gross turnover of such firm;
(iii) holds together with his relatives two per cent. or more of the total voting power of
the company; or
(iv) is a Chief Executive or director, by whatever name called, of any non-profit
organisation that receives twenty-five per cent. or more of its receipts from the company,
any of its promoters, directors or its holding, subsidiary or associate company or that
holds two per cent. or more of the total voting power of the company; or
(f) who possesses such other qualifications as may be prescribed.
Every independent director is required to give a declaration confirming independence at the first
Board meeting in every financial year or whenever there is any change in circumstances which
may affect his status as an independent director in terms of qualifications noted above. Further,
Schedule IV to the Act contains a detailed code of conduct for independent directors.
4.2.1 Interested Director

Directors are in fiduciary capacity and are under a duty to disclose their interest in a contract or
arrangement or proposed contract or arrangement to be discussed in the Board Meeting 184. Section 2(49)
of CA 2013 defines “interested director” 185. It may be noted here that the Company Law Committee has
suggested that in view of the redundancy, this definition may be omitted (as proposed in the Companies
Bill 2016).
4.3 First Directors

These are named as such in the articles of the company at the time of incorporation 186. When there are no
provisions in AOA regarding first directors, the subscribers to the MOA who are individuals are deemed
to be the first directors of the company until the directors are duly appointed 187.
4.4 Resident Director:

This type of director is introduced under the Companies Act, 2013 which requires every company to have
at least one director who has stayed in India for a total period of not less than 182 days in the previous
calendar year188 (amended now as financial year).
184
Section 184(2) of CA 2013 – Disclosure of interest by Director.
185
Has a director who is in any way, whether by himself or through any of his relatives or firm, body corporate or
other association of individuals in which he or any of his relatives is a partner, director or a member, interested in a
contract or arrangement, or proposed contract or arrangement, entered into or to be entered into by or on behalf of a
company;
186
Section 7 of CA 2013
187
Section 152 (1) of CA 2013
188
Section 149(3) of the Companies Act, 2013.
< http://www.mca.gov.in/Ministry/pdf/General_Circular_25_2014.pdf>
4.5 Nominee Director
It is a director who represents the interests of its appointer, which may be any financial institution, any
Government, or any other person (say for example representing lending institutions/banks, small
shareholders)189. This may be in pursuance of the provisions of law (as in case of small shareholders 190) or
by way of any agreement. It is a good governance practice to have nominee directors. The nominee
director is appointed under Section 161(3).
4.6 Small Shareholders’ Director

This is a director who is elected by (one thousand small shareholders or one-tenth of the total number of
such shareholders) and represents the small shareholders. Small shareholder means a shareholder holding
shares of nominal value of not more than twenty thousand rupees or such other sum as may be
prescribed)191.
4.7 Additional Director

This type of director is appointed by the Board of Directors by virtue of power conferred under the
Articles of Association at any time until the next general meeting or the last date on which the annual
general meeting should have been held, whichever is earlier. However, such person shall not be the one
who fails to get appointed in a general meeting192.
4.8 Alternate Director

As the name suggests, this type of director is in the alternate position of another director (during his
absence for a period not less than 3 months from India) appointed by the Board of Directors (authorised
by AOA or by a resolution passed by the company in general meeting) 193. The appointment of alternate
director is subject to the condition that:
 He must not be holding another alternate directorship.
 He is not appointed as alternate to an Independent Director, unless, he is qualified to be appointed
as independent director under the provisions of the Act.
 He shall not hold office longer than the period permissible for the director whole position he is
holding.
189
See Explanation to Section 149: Company to have Board of Directors
190
Explanation to Section 151 of CA 2013
191
Rule 7 of the Companies (Appointment and Qualification of Directors) Rules, 2014.
192
Section 161(1) of the Companies Act, 2013
193
Section 161(2) of the Companies Act, 2013
 He shall vacate the office if an when the director in whose place he has been appointed returns to
India
4.9 Women Directors

The following categories of companies are required to appoint at least one women director on their
board194:
 Every listed company
 Every other public company having paid up share capital of Rs. 100 crores or more or turnover of
Rs. 300 crore or more as on the last date of latest audited financial statements
Introduction to the concept
If incorporation is the process of bringing the company into existence, then winding up is the process of
bringing an end to the existence of that so called artificial person viz. Company. A company cannot die a
natural death. It has an indefinite life span, but if such reasons have emerged which make it desirable to
bring an end to its corporate life, then necessary legal mechanisms has to be put into operation to get it
done.
This mechanism is the process of winding up. It is a process by which the properties of the company are
administered for the benefit of its members and creditors. The person appointed for administering the
assets and liabilities is called ‘Liquidator’. In case of compulsory winding up, the liquidator is appointed
by the Tribunal under section 275 of the Act; or, in case of voluntary winding up, the liquidator is
appointed by the company itself under section 310 of the Act.
Winding up is also referred as ‘Liquidation’. On liquidation, the company’s name is deleted from the list
of companies by the Registrar of companies and the same is published in the official gazette.
Prof. Gower’s definition of winding up:-
“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 debts and finally distributes the surplus among the
members in accordance with their rights”.
194
See Rule 3 of the Companies (Appointment and Qualification of Directors) Rules, 2014
Modes of Winding Up
Section 270 of the Companies Act, 2013 initially provided for two modes of winding up, i.e.
 Winding up by Tribunal (i.e. compulsory winding up)195; or

 Voluntary winding up.196(The framework stands replaced by Insolvency and
Bankruptcy Board of India (Voluntary Liquidation) Regulations, 2017)
After the enactment of Insolvency and Bankruptcy Code, 2016, section 270 was modified and now it
provides that the provisions of Part I (of Chapter XX-Winding up) shall apply to the winding up of a
company by the Tribunal under the Act.
Modes of Winding up
Compulsory Winding up
Voluntary Winding up
(i.e. By Tribunal)
Members Voluntary
Creditors Voluntary
Winding Up (no voluntary
Winding up (Now with
winding up by members
IBC, 2016)
was possible under 2013
Act; 1956 Act contained
provisions for it.
195
Notification No. 2812 dated 30 November, 2016 made NCLT benches for the purpose of recovery of debt under
Insolvency and Bankruptcy Code, 2016 w.e.f 1 December 2016, available at:
http://164.100.158.181/notification/3591%20e_notification.pdf
, accessed on 20th July 2018.
196
Notification No. IBBI/2016-17/GN/REG010 dated 31st March, 2017 IBBI has notified the Insolvency and
Bankruptcy Board of India (Voluntary Liquidation Process) Regulations, 2017 thereby amending the Voluntary
Winding up regime under the Companies Act, 2013.Available at http://www.ibbi.gov.in/IBBI%20(Voluntary
%20Liquidation)%20Regulations%202017.pdf accessed in 18th June 2018.
Difference between Compulsory winding up and Voluntary winding up
Compulsory winding up Voluntary winding up
1. Petition is filled before the No petition is filled before the

Tribunal either by the company, or Court. In this, the company passes
by contributory, or both company the special resolution in its meeting;
or any contributory or all or it passes a general resolution in
contributories, or by registrar, or case of expiry of the period of its
any person authorised by the duration (Sec. 304). (deleted by
Central Government on that behalf IBC, 2016)
(Sec. 272).
2. In this case the Tribunal, at the In this case the company appoint
time of passing the order of the company liquidator from the
winding up, appoint an official panel prepared by the Central
liquidator or the liquidator from Government for the purpose of
the panel maintained by IBC, 2016 winding up (Sec. 310). (deleted by
as the company liquidator. The IBC, 2016)
Provisional liquidator or company
liquidator is appointed by the
Tribunal from amongst insolvency
professionals registered under the
IBC, Code (Sec. 275).
3. The official liquidator can be The company liquidator can be
removed by the Tribunal on the removed by the company (if it is
grounds mentioned in Sec. 276. appointed by the company), or by
the creditors (if it is appointed by
the creditors) on the grounds
mentioned in Sec. 311. (deleted by
IBC, 2016)
4. The order of winding up of the In this case, the company shall from
company shall operate in favour of the commencement of the winding
all the creditors and all up cease to carry on its business
contributories of the company as if except as far as required for the
it had been made out on the joint beneficial winding up of its
petition of creditors and business. (Sec. 309). (deleted by
contributories. (Sec. 278) IBC, 2016)
The procedure for winding up order in compulsory winding up is as follows:
(1) Petition in Tribunal (2) Appointment of liquidator
(4) Winding up order (3) Hearing of petition by the Tribunal
The procedure for winding up order in voluntary winding up is as follows:
(1) Resolution passed by the company (2) Declaration of solvency
(4) Appointment of Liquidator (3) Notice to Registrar
(5) Final meeting (6) Dissolution
(7) Publication in Official Gazette

Two types of Voluntary winding up: The following information is only for giving you understanding of
the types of winding up that were available under the Companies Act, 1956.
1. Members voluntary winding up; and

2. Creditors voluntary winding up.
Difference between Members voluntary winding up and

Creditors voluntary Winding up
Members voluntary winding up Creditors voluntary winding up
1. Such winding up takes place only Such winding up takes place in case
when the company is in a position when the company is not in a position
to pay its debts. to pay its debts.
2. Declaration of solvency is made by No such declaration is made.
the directors.
3. Only meeting of members is called. Meeting of the members and creditors
is called.
4. The liquidator is appointed and The liquidator in fact is appointed by
remuneration is fixed by the the creditors and remuneration is
company itself. fixed by the committee of inspection.
5. No committee of inspection is Committee of inspection is appointed.
appointed.
6. The liquidator can exercise some The liquidator exercise powers with
powers with the sanction of a the sanction of the Tribunal.
special resolution of the company.
7. Meeting of members is called on Meeting of members and creditors is
completion of proceedings of called when the proceeding for
winding up. winding up has been completed.
Difference between Winding Up and Insolvency.

Criteria Winding Up Insolvency
Definition The process by which company is The process by which the
dissolved under the law. This debtor is unable to pay debts as
process includes, payment of per the due date and this
liabilities, collection of assets and inability leads to insolvency.
if surplus is remaining then to be The court adjudicates the status
distributed amongst the members. of person to be insolvent in the
event of his liabilities
exceeding the assets.
Subject A company in which case cannot An individual can be adjudged
be adjudged insolvent
Financial Status A company can be issued to wound A company can be declared
up even if the company is insolvent only in case if he is
financially sound. unable to pay his debt.
Vesting of Debtor in possession model is Creditor in possession model is
Property followed whereby the property is followed whereby the
vested in the company during the Insolvency Resolution
proceedings. Professional is made in charge
of the company till liquidation.
Final status Post completion of proceedings, Post completion of
the company stands dissolved in proceedings, the insolvency
the eyes of law company stands discharged of
debts and liabilities.
Grounds for winding up by the Tribunal

Inability to
pay debts
(now under
IBC, 2016)
Just & Special

Equitable Resolution
Grounds
Default in
Filling National
Financial Interest
Statements
Failure of
Fraudulent Scheme
and unlawful (Ground
affairs deleted by
IBC, 2016)
Section 271197 of the Companies Act, 2013 provides various grounds on the basis of which a petition can
be filled in the Tribunal for the winding up of the company198:
(a) Inability to pay debts199: Sub-section (2) of section 271 provided that the inability to pay debts
primarily arise under three circumstances:
 Where the company fails to clear the debt of the creditor within three weeks
immediately preceding the date of demand for payment being made;
 Where execution or other process issued on a decree or order of any court in
favour of the company is returned unsatisfied in whole or part; and
 Where it is proved to the satisfaction of the court that the company is unable to
pay its debts.
197
Various grounds stands amended vide Notification S.O. 3677(E) dated 7 th December,2016 from Companies Act,
2013 due to introduction of Insolvency and Bankruptcy Code, 2016, Ministry of Corporate Affairs, available at
http://164.100.158.181/notification/commencementnotif_08122016_S.O._3677.pdf accessed on 12th June 2018.
198
Section 255 read with Schedule XI of Insolvency and Bankruptcy Code, 2016 has modified and deleted certain
grounds.
199
This stand replaced by Insolvency and Bankruptcy Code, 2016; The ground for winding up due to inability to pay
debts has now been covered by the IBC, 2016.
A petition for winding up on the ground of inability to pay debts must contain all the relevant information
about the debt. The petition must disclose the assets of the company and whether they are sufficient to
meet the liabilities including contingent and prospective liabilities. Further, the petition must also disclose
the position of fixed assets as well as valuation of plant and machinery of the company.
Where a debt is bona fide disputed by the company and the court is satisfied with the company's defence a
winding up order will not be made. In K. Appa rao v. Sarkar Chemicals (P) Ltd., the Andhra Pradesh
High Court held that where a company has a prima facie sustainable defence or a bona fide dispute of its
obligations to discharge the alleged debts or liabilities, the court may not entertain proceedings for the
winding up, much less order winding up.
Once there is an admission on part of the respondent company of liability of dues payable, then a petition
under Section 273 cannot be dismissed on technical grounds. Company courts can exercise their
discretionary powers of dismissing the petition even before issuing a show cause notice regarding
admission.
Despite of repeated demands if a company neglects to pay its debts, it will be considered as an inability of
the company to pay its debts and an order of winding up can be passed by the court. By non-payment of
the undisputed debt within the period of statutory demand, the company is deemed unable to pay its debts
and where the company is unable to pay its debts, winding up ought generally to follow in public interest.
(a) Special Resolution: The Company may by special resolution resolve that it be wound up by the
Tribunal. The resolution may be passed for any cause whatsoever. However, the Tribunal must
see that the winding up is not opposed to public interest or the interest of the company as a whole.
Case law: New Kerala Chits & Traders (P.) Ltd. vs. Official Liquidator [1981], it has
been observed in this matter that the Tribunal has discretion in the matter and is under no
obligation to order winding-up merely because the company has so resolved.
(b) Against National interest: If the company has acted against the interest of sovereignty and
integrity of India, the security of the State, friendly relations with foreign States, public order,
decency or morality.
(c) Failure of Scheme200: If the scheme of revival and rehabilitation is not approved by the creditors,
then the company administrator shall submit a report to the Tribunal within 15 days and the
200
Ground deleted by the Act 31 of 2016.
Tribunal shall order for the winding up of the sick company. The Tribunal, on passing the order
of winding up, shall conduct the proceedings for winding up in accordance with the provisions of
Chapter XX [Sec. 271(1) (d)].
(d) Fraudulent and unlawful affairs: If on an application made by the Registrar or any other person
authorised by the Central Government by notification under this Act, the Tribunal is of the
opinion that the affairs of the company have been conducted in a fraudulent manner or the
company was formed for fraudulent and unlawful purposes 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; then in such a situation,
the Tribunal may, on a petition filed by any authorised person, pass an order for the winding up
of the company [Sec. 271(1) (e)].
(e) Default in filling financial statements: If the company has made a default in filling with the
Registrar its financial statements or annual return for immediately preceding five consecutive
financial years [Sec. 271(1) (f)].
(f) Just and Equitable: When the Tribunal is of the opinion that it is just and equitable that the
company should be wound up; then the Tribunal may order the winding up of a company. The
circumstances in which the courts have in the past dissolved companies on this ground are as
follows:
 Deadlock: When there is a deadlock in the management of a company, it is just

and equitable to order winding up.
 Loss of Substratum: When the company has failed to materialise the main objects
of the company. The important illustration here is the case of German Date
Coffee Co, Re [(1882) 20 Ch D 169], where a company was formed for the
purpose of manufacturing coffee from dates under a patent which was to be
granted by the Government of Germany and also for working other patents of
similar kind. The German patent was never granted and the company embarked
upon other patents. But, on the petition of a shareholder, it was held that “the
substratum of the company had failed, and it was impossible to carry out the
objects for which it was formed; and, therefore, it was just and equitable that the
company should be wound up.
 Losses: When a company cannot carry forward its business except bearing the
burden of losses, then it is just and equitable for the company to be wound up.
The Bombay High Court observed in the case of Shah Steamship Navigation
Co, Re [(1901) 10 Bom LR 107] that ‘the Court will not be justified in making a
winding up order merely on the ground that the company has made losses; and is
likely to make further losses.’
 Oppression of Minority: It is just and equitable to wind up a company where the
principle shareholders have adopted an aggressive or oppressive or squeezing
policy towards the minority. It has been observed in Tivoli Free, Re, [(1972) VR
445] that ‘where more than seventy per cent of a company’s funds were being
used for objects wholly removed from anything within the memorandum and
ninety-three per cent of the shareholders wished to dissociate themselves from
the new objects, the company was ordered to be wound up.
 Fraudulent Purpose: If the company has been conceived and brought forth in
fraud or for illegal purposes, then it is just and equitable to wind up the company.
In Universal Mutual Aid and Poor Houses Assn vs. A.D. Thoppa Naidu [AIR
1933 Mad 16] the Madras High Court observed, ‘where the main object of a
company is the conduct of a lottery, the mere fact that some of its objects were
philanthropic will not prevent the company from being ordered to be wound up
as being one formed for an illegal purpose.’
“Public interest” is also another important ground, on the basis of which the court can order the winding
up of the company. On the same ground, an order of winding up passed by the Tribunal can be revoked
also. However, post introduction of Insolvency and Bankruptcy Code, 2016 S.271 was amended to
introduce the following grounds:
(a) By special resolution;
(b) If it is against the interests of the sovereignty and integrity of India;
(c) If on an application made by the Registrar or any other person authorised by the Central Government
conducting affairs of the company in a fraudulent manner;
(d) Default in filing with the Registrar its financial statements or annual returns for immediately
preceding five consecutive financial years; or
(e) Just and equitable that the company ground.
Transfer of Winding up proceedings from the High Court to Tribunal201:
Ministry of Corporate Affairs vide notification dated 07 th December, 2016 issued the Companies
(Transfer of Pending Proceedings) Rules, 2016 which clarified the ambiguities pertaining to transfer of
the matters from a High Court to Tribunal. They can be classified into 3 categories:
a) Winding up proceedings pending before High Court on grounds other than the inability to pay
debts
b) Winding up proceedings pending before High Court pertaining to voluntary winding up.
c) Winding up proceedings pending before High Court on grounds of inability to pay debts
Notification clarified that above mentioned category (a) and (c) will continue to be before High Court
unless the notice has been served to the respondent in their respective case. Further, in case of voluntary
winding up , Bombay High Court in West Hills Realty Private Ltd case202 held that pre admission
petitions i.e. where it has not been served on the respondent, shall be transferred to the tribunal.
Consequences of Winding up order
(a) The Tribunal must, as soon as the winding up order is made, cause intimation thereof to be sent to
the Official Liquidator and the Registrar within a period not exceeding seven days from the date of
passing of the order. [Sec. 277]
(b) The petitioner and the company must also file with the Registrar a certified copy of the order. If
default is made, then every person responsible for default shall be liable to punishment with fine up to Rs.
1000 for every day.
201
Notification GSR 1119(E) dated 7 th December 2016, Ministry of Corporate Affairs, available at <
http://164.100.158.181/notification/G.S.R._1119(E)_172976.pdf> accessed on 18th June 2018.
202
West Hills Realty Private Ltd. And Ors v. Neelkamal Realtors Tower Private Limited, MANU/MH/2785/2016
decided on 26th December, 2016. See also Union Bank of India Vs. Era Infra Engineering Ltd.(IB)-190(PB)/2017
dated 16.02.2018(NCLT Principal bench) , Bombay High Court in Jotun India Private Ltd Vs. PSL Limited , CP No.
434 of 2015, dated 5th January 2018
(c) The order of winding up is deemed to be notice of discharge to the officers, employees and workmen
of the company except when the business of the company is continued for the beneficial winding up of
the company [Sec. 277(3)].
(d) All actions and suits against the company are stayed, unless the Tribunal gives leave to continue or
commence proceedings. Further, any suit or proceeding pending in any other Court shall be transferred to
the Tribunal in which the winding up of the company is proceeding [Sec. 279].
(e) The order operates in the interests of all the creditors and all the contributories, no matter who in fact
asked for it [Sec. 278].
(f) The Tribunal, at the time of passing the order of winding up, appoint an official liquidator or the
liquidator from the panel maintained by IBC, 2016 as the company liquidator. The Provisional liquidator
or company liquidator is appointed by the Tribunal from amongst insolvency professionals registered
under the IBC, Code (Sec. 275). [Sec. 275].
(g) All the powers of the Board of directors cease and the same are then exercisable by the Liquidator.
(h) On the commencement of winding up, the limitation remains suspended in favour of the company till
one year after the winding up order is made [Sec. 358].
(i) Any disposition of the property of the company, and any transfer of shares in the company or alteration
in the status of members made after the commencement of the winding-up shall be void unless the
Tribunal directs otherwise [Sec. 334].
(j) Any attachment, distress or execution put in force, without leave of the Tribunal, against the
estate or effects of the company after the commencement of the winding up shall be void [Sec.
335(1) (a)]; but not for the recovery of any tax or impost or any dues payable to Government
[Sec. 335(2)].
(k) Any sale held, without leave of the Tribunal, of any of the properties or effects of the company
after the commencement of winding up shall be void [sec. 335(1) (b)].
(l) Any floating charge created within 12 months immediately preceding the commencement of
winding up is void unless it is proved that the company after the creation of the charge was
solvent. [Sec. 332].
Consequences of Voluntary winding up

(a) Effect on status of company [Sec. 309] (deleted by the IBC, 2016): The company shall cease to
carry on its business except if it is required to secure a beneficial winding up.
In Wills v. Association of Universities of British Common Wealth [1964], it was observed that
‘beneficial winding up’ is not confined to financial benefit only. It may be for reconstruction and the
business may have to be carried on so as to facilitate the smooth taking over.
(b) Board’s power to cease [Sec. 313] (deleted by the IBC, 2016) : On the appointment of the
Liquidator, all the powers of the Board of directors cease and went into the hands of the
Liquidator.
(c) Avoidance of transfers [Sec.334]: All transfer of shares and alterations in the status of members,
made after the commencement of winding up, are void unless sanctioned by the Liquidator or the
transfer is made to the Liquidator.
(d) Discharge of employees [Sec.334]: A resolution to wind up voluntarily operates as notie of
discharge to the employees of the company.

Legal Aspect Companies Act

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Unit 9: Legal Aspects of Business

An organization or enterprising entity may be engaged in commercial, industrial or professional

(ii) Production and Exchange:

(iii) Regularity and Continuity in Dealings:

(iv) Uncertainty or Risk:

(v) Profit Motive:

Production Marketing Finance

(ii) There is a divorce between ownership and management of the company.

Corporations are of two kinds:

The declaration must be submitted with the following annexure:17

Copy of agreement, if any, which the proposed company wishes

Memorandum and Articles18

 There should not be an existing company by the same name.

Exceptions mentioned above are the following:

If a company had share capital and had issued a prospectus, then:

 Shares up to the amount of minimum subscription must be allotted;

 It must file a statement in lieu of prospectus with the Registrar of Companies;

Insertion of new section S. 10 A for Commencement of Business, etc:

Incorporation of Company under the Companies Act, 2013

Procedure for formation of a company in India:

The main features of SPICe are as follows: -

1. Simplified and integrated Digital form for Company Incorporation.

2. Introduction of standard format of e-Memorandum of Association as per Companies Act, 2013 39

5. Provision to apply for Company Incorporation with a pre-approved Company Name.

Regulatory Update: Incorporation

Following two documents are required for registration of a company:

(b) Articles of Association

3. Objects and powers

incidental to the attainment of the main objects.

ALTERATION OF MEMORANDUM UNDER THE COMPANIES ACT, 2013

● Companies limited by guarantee and

● Private Companies limited by shares

Contents of Articles of Association

(6) transfer of shares (7) transmission of

(11) voting rights of members (12) accounts

of interest out of capital (15) common seal (16) Winding Up.55

ALTERATION OF ASSOCIATION UNDER THE COMPANIES ACT, 2013

DISTINCTION BETWEEN ARTICLES AND MEMORANDUM

Provision 2013 Act 1956 Act

1. One Person Company

4. Incorporation of ● 2013 Act mandates

● An affidavit from the

● The 2013 Act specifies

DOCTRINE OF CONSTRUCTIVE NOTICE

LEGAL EFFECT OF MEMORANDUM AND ARTICLES

1. Members bound to the company

2. Company bound to members

3. Members bound to members

4. Company and the outsiders

Exceptions to the Doctrine of Indoor Management68

i. Business to be transacted at an annual general meeting (section 102)

Notice of the meeting (Section101)94

Quorum (Section 103)

five members personally fifteen members thirty members

Chairman of a meeting (section 104)

Proxies (section 105)

Voting at a meeting (section106)

Voting by show of hands (Section 107)

Ordinary and Special resolution (Section 114)

DIFFERENT INTERESTS IN THE COMPANY AND THEIR SAY IN COMPANY’S AFFAIRS

SHAREHOLDERS AND BOARD OF DIRECTORS IN CORPORATE GOVERNANCE

Types of rights and powers vested in shareholders

Rights reserved for shareholders by Companies Act-